On September 18, the CFPB issued a set of Frequently Asked Questions (FAQs) related to Buy Now, Pay Later (BNPL) products.[1] These FAQs follow the CFPB's release of the 2024 BNPL Interpretive Rule (Interpretive Rule), which subjected BNPL products to certain provisions of Regulation Z that typically apply to conventional credit card providers. The Interpretive Rule became effective on July 30, 2024. However, on August 16, 2024, Director Chopra stated in a BNPL blog post that the CFPB would not enforce the rule right away. Specifically, the blog post stated that "the CFPB 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."
These FAQs are intended to serve as guidance with respect to how to apply Regulation Z requirements to Pay-in-Four BNPL products accessed through digital user accounts (DUAs). The FAQs have three sections: 1) a general description of BNPL products and DUAs, 2) the scope and coverage of Pay-in-Four BNPL loans, and 3) the requirements for periodic statements for Pay-in-Four BNPL loans. Each section is addressed in detail below.
1. General Description of BNPL Products and DUAs
The CFPB defines BNPL products as loans that are 1) structured as installment loans, in which the consumer incurs debt and has the right to defer payment, and 2) made to consumers for the purchase of personal, family, or household goods and services. The CFPB further states that some features of BNPL products may vary from product to product, such as the interest rate, finance charges, other fees, and the number of installments.
A digital user account (DUA) is defined as a secure, personal profile that the BNPL provider activates for a consumer, enabling the consumer to access and use BNPL credit. A DUA permits a consumer to access Pay-in-Four BNPL loans as a form of payment for purchasing goods or services.
2. Scope and Coverage: Pay-in-Four BNPL Loans
In the FAQs, the CFPB defines Pay-in-Four BNPL loans to consumers as made by the BNPL loan provider that 1) are structured as closed-end installment loans, in which the consumer incurs debt and has the right to defer payment, 2) are made for the purchase of goods and services for the consumer's personal, family, or household use, 3) are payable in four installments, and 4) do not incur interest or other finance charges. Moreover, the CFPB explicitly states that the FAQs are only referring to the typical Pay-in-Four BNPL loans accessed through digital user accounts issued by the BNPL loan provider or their agent, as discussed in the Interpretive Rule. The CFPB also states that those BNPL loan providers that assess a finance charge are not the subject of the FAQs but may be otherwise subject to Regulation Z.
The FAQs state that a DUA is not only a "credit card" but also a "charge card." Specifically, the FAQs state that the Pay-in-Four BNPL loans with covered DAUs are charge cards, which are a type of credit card under Regulation Z, because they do not include finance charges calculated using a periodic rate. This represents an expansion of the scope of the Interpretive Rule because the Interpretive Rule did not mention the concept of charge cards with respect to DUAs.
There are also potential inconsistencies in the FAQs as the apply to DUAs. For example, in one section of the FAQs, the CFPB states that requirements for an "open-end consumer credit plans" do not apply to DUAs. However, in another section of the FAQs, the CFPB states that the 14-day rule with respect to periodic statements applies to DUAs, but we note that the text of the requirement seemingly states that it applies only to "open-end consumer credit plans." (See 12 CFR 1026.5(b)(2)(ii)(B)).
The FAQs also interpret Regulation Z in a manner that is inconsistent with the language of the Truth in Lending Act (TILA). TILA states that only certain requirements can be imposed on card issuers, regardless of whether the amount owed is payable in more than four installments or a finance charge is imposed. The FAQs suggest that additional requirements, such as tabular account opening disclosures and a closing date on the statement, are applicable. These requirements go beyond the nine disclosure requirements listed that are required of creditors, which as defined includes card issuers. (See 15 USC 1602(g)).
3. Periodic Statements: Pay-in-Four BNPL Loans
The FAQs state that a Pay-in-Four loan provider is required to provide periodic statements for each billing cycle in which the consumer has a debt or credit balance of more than $1, unless an exception applies. BNPL loan providers are permitted to either 1) treat each BNPL loan as a separate credit account and provide separate periodic statements or 2) create a single, multifeatured credit account where each BNPL loan accessed through the DUA is a feature of the account, for which a single statement covers all BNPL loans accessed through that account. The type of periodic statement selected by the BNPL provider will impact other consumer protections, for example when the BNPL provider may treat the payment as late, report credit as delinquent, or initiate collection actions.
The FAQs also identify specific required periodic statement disclosures when the Pay-in-Four BNPL provider chooses to provide a single periodic statement to the consumer that covers multiple Pay-in-Four loans.
The FAQs also state that a Pay-in-Four loan provider must comply with Regulation Z timing requirements before a payment is treated as late. Treating a payment as late includes "not only assessing late fees, but also other actions, such as delinquent credit reporting, initiating collection activities, or terminating benefits."
Since these FAQs expand the requirements for BNPL products, it is imperative that BNPL providers transition into compliance "in a good faith and expeditious manner," as expected by the CFPB. The FAQs underscore the complexities and difficulties that companies will encounter as they attempt to become compliant. BNPL companies may need to make major changes in their business models to ensure compliant disclosures, periodic statements, dispute investigations, and refund processes.
[1] We note that the FAQs are a "Compliance Aid," and, as such, they are subject to the CFPB's Policy Statement on Compliance Aids.
