In 2022, the Consumer Financial Protection Bureau (CFPB) published a report on market trends in the “Buy Now, Pay Later” (BNPL) industry.  Based on a study of the industry from 2019-2021, the report noted a 970% increase in the number of BNPL loans originated in the United States by five large BNPL lenders. Presumably influenced by this staggering growth, the CFPB issued an interpretive rule on May 22, 2024, providing guidance regarding the compliance responsibilities of BNPL lenders (the “BNPL Rule”). In the BNPL Rule, the CFPB analyzed Regulation Z and determined that BNPL digital user accounts should be classified as “credit cards” and that BNPL lenders are “card issuers” and “creditors” under Regulation Z. While the CFPB published BNPL Rule as a final rule, the CFPB is accepting comments on the rule until August 1, 2024.

Davenport Evans lawyer Keith Gauer and Summer Associate Ann Madson

Lawyer Keith Gauer and Summer Associate Ann Madson

Prior to the issuance of the BNPL Rule, it had been generally assumed that BNPL lenders were not considered card issuers/creditors under Regulation Z since they do not charge interest on purchases and require borrowers to repay in four or fewer installments. Therefore, BNPL lenders were not thought to be subject to the same requirements as traditional creditors under Regulation Z (such as requirements regulating credit card disputes, disclosures, and refund rights).

In the BNPL Rule, the CFPB attempted to clarify the obligations owed by BNPL lenders to consumers. According to CFPB Director Rohit Chopra, the BNPL Rule “explains that when borrowers use Buy Now, Pay Later loans, they are entitled to some of the same rights and protections of the Truth in Lending Act that apply to traditional credit cards.” The scope of the word “some” is not entirely clear – the BNPL Rule emphasized that BNPL lenders would be subject to Subpart B of Regulation Z (which governs open-end credit), but also noted that they would “generally” not be subject to the special rules for open-end credit cards under in Subpart G (including the penalty fee limits and ability-to-pay requirements). The BNPL Rule specifically notes, however, that BNPL lenders will be required to comply with the provisions of Subpart B of Regulation Z relating to disclosures and billing dispute resolution.

To justify the application of credit card definitions to BNPL products, the CFPB cited similarities between credit cards and the digital accounts used by BNPL customers. The CFPB noted how BNPL digital user accounts function similarly to credit cards, and that BNPL payment plans are often presented directly alongside credit cards as payment options for retail transactions. In addition to these similarities, the CFPB asserted that Regulation Z’s definition of a credit card was intended to be flexible and was therefore broad enough to encompass BNPL digital accounts. Not surprisingly, BNPL industry leaders have responded by suggesting that there are fundamental differences between BNPL loans and credit cards and that treating them the same is confusing. However, at this point, the BNPL Rule is a “final rule” and unless it is revised or withdrawn, BNPL lenders will likely be compelled to comply with the noted provisions in Regulation Z.

Davenport Evans stands ready to answer questions regarding the Buy Now Pay Later Rule. Contact a lawyer at [email protected], 605-336-2880, or find a specific lawyer here.

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Davenport, Evans, Hurwitz & Smith, LLP, located in Sioux Falls, South Dakota, is one of the state’s largest law firms. The firm’s attorneys provide business and litigation counsel to individuals and corporate clients in a variety of practice areas. For more information about Davenport Evans, visit www.dehs.com