CFPB classifies “buy now, pay later” products as credit cards


Go to guide:
  • In recent years, consumer use of buy now, pay later (BNPL) products in retail transactions has grown rapidly, prompting the CFPB to conduct information collection and market data reviews and continue to consider standards to protect consumers.
  • The CFPB has determined that lenders that issue digital user accounts for access to BNPL products are “card issuers” under Regulation Z because such digital user accounts are “credit cards.”
  • The CFPB also determined that BNPL lenders are “creditors” subject to the requirements of Subpart B of Regulation Z, such as consumer disclosures, billing error resolution procedures and refund rights, and periodic statements.
  • The CFPB said that while the interpretive rule is not subject to the Administrative Procedure Act, it is still accepting public comments on the proposed interpretive rule until August 1, 2024, and “may be” at a later time “depending on the circumstances.” ” to be revised. Feedback received. “

introduce

On May 22, 2024, the Consumer Financial Protection Bureau (CFPB) issued an important interpretive rule and solicitation for comments (the “Rule”), finding that buy now, pay later (BNPL) credit products are subject to Rule Z1 Under the Truth in Lending Act2 (Tila). Specifically, the rule determines that (i) a digital user account used to access BNPL products (an “Account”) constitutes a “credit card” for purposes of Regulation Z; (ii) therefore, the issuer of such an account that provides credit to BNPL (“Lender”) is a “card issuer” for purposes of Regulation Z; (iii) therefore, these lenders are subject to certain provisions of Subpart B of Regulation Z, although Subpart B generally applies to open credit; and finally (iv) ) Although the account to which the BNPL credit is obtained constitutes a “credit card” under Regulation Z, the lender of the BNPL credit generally is no The credit card regulations in Subpart G of Regulation Z are subject to compliance, except that subpart G of 12 CFR 1026.60 may apply.

Generally speaking, BNPL credit products are “closed-ended loans payable in four or fewer installments, without any finance charges, for purchases made on credit.”3 For the purposes of the rule, BNPL refers to “a consumer loan for retail transactions that is repayable in four (or fewer) interest-free installments and with no other finance charges. The loan generally requires a down payment of 25%, followed by three fortnightly installments Payment.4

CFPB rules follow years of study of BNPL credit markets

BNPL product availability and consumer use have exploded in the United States in recent years, leading to a thorough regulatory review by the CFPB and other agencies and industry players. After the CFPB began a review of BNPL credit access products in 2021 and gathered information from multiple BNPL providers, the CFPB issued a report in September 2022, “Buy Now, Pay Later: Market Trends and Consumers Influence”. (“Market Trend Report”). The CFPB subsequently released its March 2023 report, Consumer Usage of Buy Now, Pay Later (the “Consumer Usage Report”), which analyzed BNPL consumers based on data collected in the CFPB's annual Balance of Payments Survey. Financial status was reviewed. Finally, in March 2024, the CFPB released its 2023 Annual Report on Consumer Responses, which, as summarized in the rule, found that “consumers experienced issues with BNPL that merchants faced, such as items not being received and loan cancellations. challenges. To demonstrate the rapid growth of the BNPL market, the 2022 Market Trends Report highlights that it found:

The number of BNPL loans originated in the United States by the five lenders surveyed increased by 970% from 2019 to 2021, from 1.68 billion to 180 million, and the dollar amount of these originations (commonly referred to as gross merchandise volume, or GMV) also Growth increased 1,092% from $2 billion to $24.2 billion.

As BNPL products grow in popularity, other innovations in the payments space have emerged, such as increased fintech partnerships with banks; “neobanks” that operate exclusively online; increased e-banking products and mobile apps; and Use QR codes for payment processing at the point of sale. The CFPB released a report “The Convergence of Payments and Commerce: Impact on Consumers” in August 2022.

In addition to these market studies and reports, the CFPB has published several blog posts specific to BNPL products, warning consumers of the risks of relying on BNPL credit, and outlining policy issues and updates – for example: “You should buy now and pay later ? July 2021; “Know before you shop (now, pay later) this holiday season” in December 2021; “Buy now, pay later and credit reports” in June 2022.

Compared to other forms of consumer credit, BNPL credit is often considered quite “consumer-friendly” because it is easy to use and requires no accrued interest. However, this ease of use has also raised concerns that BNPL products may encourage consumers to take on BNPL debt more frequently, often from different lenders, posing risks to consumers.

Application of Regulation Z to BNPL Products

In the rule, the CFPB concluded that “lenders that issue BNPL digital user accounts are 'card issuers' for purposes of Regulation Z because the digital user accounts they issue constitute 'credit cards' for purposes of Regulation Z.”5 Although credit cards are often understood to consist of traditional physical cards used at retail locations, “[t]The definition of “credit card” under TILA and Regulation Z is no Only plastic or metal embossed physical cards. (Emphasis added later.) In fact, the rule states that the term “credit card” as defined in TILA6 and Z rules7 Included are “other credit devices” or “other single credit devices” used to obtain a credit extension, and “credit card” has been used to include “virtual credit cards where the account number itself is a 'credit card.'”8 Additionally, while a credit device must be available “from time to time” to constitute a “credit card” under Regulation Z, the CFPB has identified “disposable virtual cards.” . . It will not prevent credit equipment from complying with requirements “from time to time”.9

Therefore, the CFPB determined that “lenders issuing bonds [Accounts] is an “issuer” as defined in 12 CFR 1026.2(a)(7), and a “creditor” within the meaning of Subpart B of Regulation Z as defined in 12 CFR 1026.2(a)(17)(iii).10 Although the BNPL credit product would constitute a “credit card” and lenders would be required to comply with certain provisions of Subpart B under the proposed rule, the credit card's Subpart G requirements (such as penalty limits and ability-to-pay determination requirements) would not apply. BNPL Products or BNPL Credit Lenders. The CFPB also stated that BNPL products do not meet certain other definitions applicable to open-end credit, such as 12 CFR 1026.2(a)(20) and 12 CFR 1026.2(a)(15)(ii).

Applicability of Subpart B to BNPL Products

Subpart B of Regulation Z generally applies to “open-end credit” and is titled “Open-End Credit.” In the rule, the CFPB explains why BNPL access products and their lenders still fall under subpart B and some of its requirements, noting that the provisions of subpart B “clearly provide that subpart B also applies to non-open-end credit if BNPL indicates , the credit is free of finance charges and does not need to be paid in more than four installments by written agreement.11 As stated in the rule, TILA requires that “ [CFPB] Should be applied in accordance with regulations [open-end credit] Require [card issuers that extend credit with no finance charge that is payable in four or fewer installments] within appropriate limits, even if required [of the open-end credit provisions] According to its terms, it is only available to creditors offering open-end credit plans.12

While BNPL Credit will be governed by the applicable terms in Subpart B, certain exclusions and sections of Subpart B (such as those relating to home equity plans) will not apply to BNPL products.

As a lender of credit products subject to Subpart B, BNPL companies must comply with applicable requirements, such as:

  • Credit disclosure costs, including account opening disclosures, periodic statements and other required disclosures;13
  • Billing error resolution procedures;14
  • Special credit card terms, including limitations on cardholder liability;15

The rule does not address the applicability of the advertising requirements of Subpart B16, but some parts of it may apply to advertising of BNPL products. As noted above, the rule indicates that subpart G of 12 CFR 1026.60 may apply to BNPL products. Therefore, certain provisions in Subpart B or other subparts that are not addressed in the rules may also apply to BNPL lenders.

Regulatory implications, consultation and implementation

The proposed rule is not surprising given the CFPB's ongoing review of BNPL products since 2021 and the impact of the BNPL industry on the consumer credit market. However, it is unclear whether this interpretation of the rule will trigger an industry backlash. Penny Lee, president and chief executive of the Fintech Association, said in a statement that its members were “committed to strong consumer protections, including disputes and chargebacks,” but noted that “BNPL products are fundamentally different from credit cards.” Ms. Lee go on:

These products have zero interest on outstanding balances, no balance recycling capabilities, and a profit model centered on user success. We look forward to providing additional input to the CFPB and distinguishing BNPL from products whose business models rely on revolving debt and high consumer fees.

The CFPB has determined that BNPL providers are “creditors” under Regulation Z and therefore companies must review their current processes and procedures to ensure compliance with Subpart B and its applicable requirements. In addition, BNPL providers should be aware of any additional complexities involving applicable state consumer credit laws that may be complicated by interpretive rules.

The CFPB included a request for public comment through August 1, 2024, in the proposed rule.


1 12 CFR Part 1026.

2 15 U.S.C. Section 1601 and sequence.

3 Rules, p. 3.

4 Rules, p. 4.

5 Rules, p. 8.

6 TILA defines “credit card” as “any card, card, coupon or other credit instrument used to obtain money, property, labor or services on credit.” 15 United States Code Section 1602(l).

7 Regulation Z defines “credit card” as “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).

8 Rules, p. 10.

9 Rules, page 14, fn. 48.

10 Rules, p. 3.

11 Rules, p. 3.

12 Rules, p. 4 Quote 15 United States Code Section 1602(g).

13 12 CFR § 1026.6 – 1026.9 covers mandatory disclosure.

14 12 CFR § 1026.13 covers billing error disputes and resolution.

15 12 CFR § 1026.12.
16 12 CFR § 1026.16.



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