CFPB says buy now, pay later program must comply with credit card rules


  • The Consumer Financial Protection Bureau issued a new ruling reclassifying buy now, pay later lenders as credit card lenders for consumer protection purposes.
  • Expanded coverage covers disputed charges, refunds and bills.
  • The ruling is the latest step the CFPB has taken to help protect consumers from potentially predatory lending practices.

All of your buy now, pay later plans may soon be considered credit card purchases — at least when it comes to billing disputes, according to a new ruling from the Consumer Financial Protection Bureau.

Under the new interpretive rule, the CFPB can regulate BNPL programs to help protect consumers, but it also raises questions about how these programs affect people's credit scores. Before this year, BNPL's plans had not been notified by the three major credit bureaus.

That all started to change in December 2021, when the CFPB announced it would begin collecting information from five major BNPL providers, including Affirm, Afterpay, Klarna, PayPal and Zip, to assess “the risks and benefits of these fast-growing loans.” “

However, John Ulzheimer, a credit expert formerly with FICO, Equifax and, said that for the BNPL program to truly be considered a credit card, especially with the credit scoring models we currently use, our credit framework needs to change much more. score.

“This is unlikely to happen because BNPL is definitely not the same as a credit card account. There is not a sufficient amount of BNPL on the credit report,” he said.

In March, Apple Pay Later became the first major BNPL provider to fully share 4-1 installment loan data and payment history directly with credit bureau Experian.

The new regulations will take effect in 60 days. The CFPB will accept public comments until August 1, 2024.

What are the new rules for the BNPL scheme?

Key legal protections and rights required by the CFPB from the BNPL program include the right to dispute fees and the right to request a refund from the lender after returning a product purchased with a BNPL loan.

The CFPB said in a statement that these protections are similar to those offered by traditional credit cards and are in response to consumer complaints about disputed transactions and chargebacks when using BNPL services.

“When consumers check out and choose 'Buy now, pay later,' they don't know whether they will get a refund if they return the product or whether the lender will help them if they don't get what they were promised,” the CFPB director said. . ” Rohit Chopra.

The CFPB found in a 2022 report that more than 13% of BNPL transactions involved returns or disputes.

Under the new rules, BNPL lenders must:

  • Investigate consumer-initiated disputes and suspend payments during investigation
  • When a consumer returns a product or cancels a service, a refund is deposited into the consumer's account
  • Provide regular bills

Many of the best BNPL applications already offer some or all of these services, but the CFPB says the new rules will ensure they are applied consistently. Affirm, one of the leading BNPL providers, supported the ruling.

“We are encouraged that the CFPB is pushing for consistent industry standards, many of which already reflect how Affirm operates,” the company said in a statement after the ruling.

BNPL schemes have become a popular payment method over the past few years. They allow you to make a purchase and spread the cost using a payment plan, typically making four payments over several weeks.

Most BNPL plans currently do not require a strict credit check, making them an attractive alternative to credit cards. However, they also lack the protections credit card users enjoy under federal law.

“I suspect what the CFPB is doing is so that BNPL users can receive protections under the Fair Credit Billing Act,” Ulzheimer said.

The Fair Credit Billing Act is a federal law that requires creditors to respond to billing complaints, fix suspected billing errors and ensure that lenders handle consumer accounts fairly. It also limits consumer fraud liability to $50.

Cardholders are also protected by the Truth in Lending Act, which protects them from unfair billing practices. It ensures that the lender must disclose all costs of the loan, including any fees and interest charges.

This interpretive rule is the CFPB’s latest initiative to help protect consumers from potentially predatory lending practices. In March, the CFPB announced a rule that would limit the late fees credit card issuers can charge and prevent them from raising fees due to inflation. However, the ruling is temporarily suspended.

What should you do if you use the BNPL plan?

While the added protection may give you peace of mind when making your purchase, you should remember that there's a reason why BNPL plans continue to be compared to credit cards. Both payment options allow you to buy immediately and potentially pay off later.

While the BNPL plan can help you afford your purchase through installments, it’s important to keep the following tips in mind:

Plan ahead. When you check out, the first payment seems easy to make. But can you pay the same amount over the next few weeks?

Manage your plan. Putting a big purchase on a BNPL plan might make sense for your budget, but what happens when you go on another plan…and another? Keep track of payment plans by setting reminders, and carefully consider your options before committing to a plan that's beyond you or your budget.

Build your credit in other ways. Even if the BNPL service incorporates credit scores in the future, it may take some time before it is incorporated into your credit. Consider applying for a secured credit card or asking to be an authorized user on someone else's credit card.

bottom line

According to a survey, Millennials and Gen Xers make up the largest portion of BNPL households with incomes below $50,000. Bank of America 2024 Analysis. The report also said households with higher BNPL usage tended to have more credit and debit retail spending.

Reclassifying BNPL as a credit card may help many consumers who use these programs as an alternative financing method, as they offer the protection we have come to expect when using plastic cards.

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