The Consumer Financial Protection Bureau (CFPB)’s continued push for regulation of buy now, pay later (BNPL) firms offers up a dual-edged sword: The agency’s interpretive rule issued last May further legitimizes short-term installment loans as an increasingly mainstream form of credit.
At the same time, the CFPB seeks to set “guardrails” on the offerings that providers claim are ill-suited — and the ultimate arbiter may be the courts. Then again, there’s the possibility that the rule-making may be short circuited altogether.
As PYMNTS reported in May, the CFPB issued an interpretive rule classifying BNPL firms that provide pay-in-four options as credit providers. By extension, consumers using BNPL must be afforded the same legal protections that are tied to credit cards, as covered under Regulation Z. In broad terms, BNPL users can dispute charges or demand refunds, while BNPL lenders pause payments during those disputes.
At the same time, there are new disclosures required of BNPL companies, shaped by the ways credit card providers have interacted with customers. That includes the periodic billing statements that have been hallmarks of the credit card industry.
Per an FAQ page from the CFPB, pay-in-four BNPL loans are subject to Regulation Z “because the covered digital user accounts for the Pay-in-Four BNPL … are credit cards and charge cards” under existing regulations.
The official classification of the lending products comes as PYMNTS Intelligence has found that BNPL has been prized by consumers as a flexible alternative to traditional credit in times when those consumers are facing cash flow pressures — according to the study, “cash flow compromised consumers” are 3.5 times more likely to use BNPL to make purchases than other cohorts of consumers. BNPL also is seeing wide embrace by relatively more financially comfortable consumers, as data shows that a third of higher-income consumers, earning more than $100,000 annually, said they’d used BNPL.
The interpretive rule took effect in July. In August, the CFPB noted in a blog post that it “does not intend to seek penalties for violations of the rules addressed in the interpretive rule against any Buy Now, Pay Later lender while it is transitioning into compliance in a good faith and expeditious manner. We expect that other federal and state regulators will follow the same path.”
Comments received from industry players during the commentary period, which closed in August, took issue with the rule and its structure. PayPal said in its commentary that the interpretive rule “does not account for the unique and varied structure of BNPL loans; does not account for the different ways BNPL loans are provided to consumers; does not provide appropriate guidance regarding providers’ new regulatory obligations.”
Affirm has stated in its commentary that there should be greater clarification on the timing of the periodic statements required of providers.
An October lawsuit from the Financial Technology Association against the CFPB over its final interpretive rule hints at key issues that the agency and the industry will joust over in 2025.
“For years, the CFPB has repeatedly suggested that Regulation Z does not apply to BNPL products,” the association wrote in its suit. “FTA’s members have developed their BNPL products in reliance on the Official Commentary and the CFPB’s representations about its legal obligations. They have spent significant amounts of money, time, and employee resources to develop their BNPL products with the understanding that they are not subject to Regulation Z.
“Now FTA’s members must abruptly change course and refashion their products, disclosures, billing systems, and customer service apparatuses to comply with the New Rule,” the association added.
Among the more onerous requirements, the suit argued, BNPL loans are issued as individual, closed-end loans and that “each BNPL loan typically requires three equal payments in two-week increments after an initial 25% downpayment. So that means it is impossible to send periodic statements for all loans collectively at least 14 days in advance of the next payment as required under Regulation Z.”
We note there is further uncertainty likely to be injected into BNPL oversight, given the fact that rule-making can be scaled back or even rescinded in the case that the CFPB faces significant restructuring during the incoming Trump administration.
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