The comments are in. The battle lines have been drawn.
As the regulatory landscape shifts for buy now, pay later (BNPL) providers, a few key questions have seemingly been yet to be answered: What will the companies have to do to comply with new obligations to consumers — and when? What might the impact be for BNPL users, and providers, too?
Given the fact that the Consumer Financial Protection Bureau’s rule regarding consumer protections will be, arguably, a work in progress, we’d note, too, that the fine-tuning of how BNPL companies operate will have ripple effects throughout the burgeoning industry.
And that poses another question: Will the fine tuning, and mounting costs of new regulatory oversight pose headwinds to innovation?
In a nutshell, the CFPB’s May announcement states that buy now, pay later customers will have a range of federal protections that already apply to credit card holders.
The back and forth ahead of the commentary period’s closing — where all sides had been able to weigh in on why they supported, opposed or wanted to see changes to the rule — focused on the fact that BNPL firms would have to extend new consumer protection measures to borrowers, including new details and disclosures on billing cycles, dispute resolution and other consumer-facing interactions.
Some of the most basic interactions remain, arguably, undefined. In its own commentary letter, Affirm wrote, “It is not clear what content BNPL providers must include in periodic statements, if any.”
Part of the issue, and some of the objections from the BNPL providers center on the fact that the CFPB’s interpretive rule classifies BNPL firms as card issuers, and creditors under federal law, and through Regulation Z. That regulation puts “digital user accounts” under the designation of credit cards, as individuals use websites and apps to apply for and take out BNPL loans.
The same regulation notes that the card firms/creditors are firms that offer “open-end credit or credit that is not subject to a finance charge and is not payable by written agreement in more than four installments.” As noted here, the CFPB said in a footnote its interpretative rule documentation that that, upon the emergence of Regulation Z, “the Board was only considering open-end credit, but the CFPB believes that the logic applies similarly to closed-end credit,” and thus covers BNPL firms.
But in one example of how the move to fit a newer industry into an existing regulatory structure may impact the firms themselves, Affirm wrote in its commentary letter that while “Regulation Z does not address closed-end BNPL products … Regulation Z … provides guidance on the timing of periodic statements for credit card accounts under an open-end … consumer credit plan. Application of these timing requirement provisions to BNPL providers would create absurd results,” the company said.
“For example, BNPL providers cannot comply with the requirement … that mandates delivery of statements 21 days before the payment due date without fundamentally altering their products.” Affirm went on to offer an example of what might happen in this instance:
“Requiring at least 21 days after the sending of a statement to elapse before a payment due date would mean that an eight week BNPL loan would be pending for several months. This would severely disrupt consumers’ experiences with BNPL and would render the economics of the product quite different, perhaps increasing interest charges or decreasing availability.”
Elsewhere, the CFPB’s provisions that disclosing total finance charges “makes little sense for BNPL, where each loan is distinct from the next and has its own interest rate or no interest rate.”
We reported last month that BNPL firms, through industry trade groups, have requested that the rules take effect at the beginning of next year, as they’ve petitioned the CFPB that “an extension is necessary for BNPL lenders to test and responsibly implement necessary changes before civil liability attaches to these additional requirement,” as the letter noted. It’s unclear whether those liabilities, we’d add, would apply only to the period once the rule takes effect or whether they’d be retroactive to some degree.
Klarna, in its commentary, proposed that the CFPB either rescind the interpretive rule and commence a formal rulemaking process specifically for BNPL products or extend the effective date and provide written clarification on raised questions.
The CFPB rule does not require that BNPL firms assess a borrower’s ability to repay (as is the case with the card companies) and we noted this week that consumer groups — for instance, the AARP — have advocated for that assessment to be mandated, while also commenting to the CFPB that the providers should have new processes in place for disputing transactions and getting refunds. Affirm discloses in SEC filings that in its handling of those disputes, “the accrual of interest on a loan is suspended if a formal dispute with the consumer involving either Affirm or the merchant of record is opened … upon the resolution of a dispute with the consumer, the accrual of interest is resumed.”
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