CFPB issues “interpretation rule” treating BNPL providers as card issuers

The result of the CFPB's multi-year study of the BNPL industry is what the CFPB calls the Interpretive Rule, which found that: (1) “Digital User Accounts” (each a “DUA”) that can be used to obtain credit “Credit Card”; (2) The lenders who issue such accounts are “Card Issuers”; (3) As it relates to traditional BNPL loans (loans paid in four or fewer installments without any finance charges), these card issuers are “Creditors” subject to Subpart B of Regulation Z – This provision generally applies to open card credit. Subpart B of Regulation Z imposes requirements on creditors, such as requiring the publication of account opening disclosures, periodic statements, notices of changes in terms, rules relating to payments, and dispute rights. Many BNPL lenders already offer substantial protections similar to those contemplated in Regulation Z.

The core of the Bureau's argument is that DUA is a “credit card.” As contemplated in the Interpretation Rule, a DUA is “a secure profile of a consumer activated by a BNPL provider to enable the consumer to access and use BNPL credit”. In other words, a username and password with personal data. Once logged into DUA, users can “use” DUA to continuously earn credits for additional purchases. In a footnote, the Bureau acknowledged that each extension of credit obtained “through the use” of DUA is generally individually underwritten and that there is no guaranteed credit limit.

CFPB’s interpretation of “credit card”

Under Regulation Z, a “credit card” means “any card, license or other single credit device that may be used from time to time to obtain credit.” 12 CFR 1026.2(a)(15)(i). The bureau's official explanation expands on this and states that the card must be “available for use from time to time” and provides examples of credit card and non-credit card items. One example of an official explanation of a credit card program in China is “Access to a credit account unless the account is accessible open credit line Purchase goods or services. . ”. 12 CFR 1026.2(a)(15), Note 2(a)(15)-2.ii.C (emphasis added).

The interpretive rule correctly states that credit cards under Regulation Z are “not limited to plastic or metal embossed physical cards” and that license plates, coupon books, and account numbers (including virtual cards) can all be “credit cards.” The Bureau then interpreted “other single credit device” (and “other device” under the statutory text of TILA) to include “a consumer’s device that can be purchased through a website, mobile application, browser extension, or in conjunction with a merchant’s website or mobile application.” Integrated to access BNPL” DUA. Credits, to the extent that the User Account is used to withdraw, transfer, or authorize the withdrawal or transfer of credits in authorizing, settling, or otherwise completing a transaction to obtain goods or services. ” The Bureau claims that this interpretation is derived from the ordinary meaning of the word “device,” citing Merriam-Webster and the Oxford English Dictionary as support.

The CFPB also referred to the Federal Reserve's previous comments, asserting that the Federal Reserve adopted a similarly broad interpretation of “other single credit instruments” in 2010 to include account numbers. However, the CFPB acknowledged in a footnote that (1) the “account” contemplated by the Board was different from the BNPL DUA, and (2) “The board only considers open credits.

In the 2010 Commission comments cited by the Bureau, the Commission explicitly recognized the limitations of the “credit card” parameter and limited it to situations where the account uses open credit to purchase goods or services:

Because most, if not all, credit accounts can be accessed in some way through an account number, the Committee does not believe that Congress generally would treat account numbers that access credit accounts as credit cards for purposes of TILA. However, the committee is concerned that when accounts can be used Get an open line of credit Exempting the credit limit from the protection afforded to a credit card account when purchasing goods or services would be inconsistent with the purposes of the Credit Card Act. For example, a creditor may offer an open credit account designed for online purchases that functions like a traditional credit card account but can only be accessed using the account number. In this case, the Board believes that TILA's credit card protections should apply.

76 FR 22949 (2011) (emphasis added).

The board of directors specifically stated that the account number is no A credit card unless it “enables the purchase of goods or services using an open line of credit.” ID. The commission acknowledged consumer groups' concerns about the exclusion and said it “incentivizes creditors to develop new products designed to circumvent credit card laws.” ID. In response to these concerns, the Commission stated that the purpose of the review was to prevent circumvention by clarifying the accounts that were accessed. open credit line Purchasing goods or services is usually treated as a credit card. Of particular note, the Commission appears to acknowledge the limits of its interpretive authority and the scope of Regulation Z's current status, stating: “If additional products arise that raise concerns about circumvention, Further amendments to Regulation Z may be appropriate”. ID.(emphasize).

Nonetheless, the Bureau's position is that it concluded that a BNPL DUA (a user account with biographical information used to log into an online account through which the consumer can then apply for a personal closed credit extension) is a “credit card” is an interpretive rule and does not impose any new or modify any existing disclosure requirements. The FRB apparently felt that such an explanation was necessary, but rather than publish the proposed rule and go through a formal notice and comment period, it gave the industry 60 days after publication in the Federal Register to make a very important decision . Perhaps to avoid a challenge, the Bureau stated that, although it did not see the need to do so, it would accept industry comments and may revise its position after reviewing the feedback; however, the Bureau made clear that it was under no obligation to make any revisions , if no modification is deemed necessary, no further action may be taken.

New compliance obligations

Assuming that DUA is considered a credit card, the BNPL provider that issues such “device” will be considered the “card issuer”. These card issuers will become “creditors” under the open-end credit terms of Regulation Z, as defined generally for so-called travel and entertainment cards that require repayment at the end of each billing cycle. As described, BNPL providers will comply with the open requirements of Regulation Z, which include those related to account opening disclosures, billing statements, changes in terms, payment processing, credit balance processing, card issuance, liability for unauthorized use, merchant Require.

While BNPL products are, at their core, consumer-friendly, and the industry has taken proactive steps to address consumer protection issues, including those related to disputes and returns, the Bureau has raised concerns about the industry that have traditionally applied to open credit Onerous requirements that require careful consideration when implemented—all within 60 days of publication of the interpretive rule in the Federal Register. For example, the Bureau has not provided any guidance on the timing requirements for BNPL account billing, where late fees are assessed for failure to make an individual payment or failure to make a final payment.

While the statutory text of the Truth in Lending Act, specifically Section 105(d), contemplates that the Bureau's interpretation of existing regulations (such as those affecting disputes) requires disclosures that differ from those previously required, that will not be the case for at least six years. Take effect.

We will continue to monitor developments related to this interpretive rule and its impact on BNPL providers. Any business other than BNPL providers that offer consumer accounts that can be used to log in and pay for goods (such as season ticket agreements and annual memberships in arrears) should carefully consider whether this rule also applies to them.

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