The CFPB issues interpretive rules designating BNPL providers as issuers of cards covered by Regulation Z | Cooley limited liability company

On May 22, 2024, the Consumer Financial Protection Bureau (CFPB) issued an interpretive rule providing that “buy now, pay later” (BNPL) providers who create “digital user accounts” to access credit products for purchases goods and services, are ‘card issuers’ within the meaning of Regulation Z. As a result, such BNPL providers will be subject to certain provisions of Regulation Z.

The interpretive rule highlights the CFPB’s broad view of what constitutes a “credit card” under Regulation Z, comparing the “digital user accounts” that consumers use to access BNPL credit products to traditional credit cards.

The CFPB has been expected to cover BNPL providers since the CFPB first declared its interest in the BNPL market in December 2021, when it issued mandatory data collection orders to five large BNPL providers. The CFPB subsequently published several market reports (including one in September 2022 and another in March 2023) on the BNPL industry based on these responses and other research, and the new interpretive rule is an extension of this work.

What BNPL products are covered?

For purposes of the CFPB’s interpretive rule, it defines a BNPL loan as “a closed-end consumer credit for a retail transaction that is repayable in four (or fewer) interest-free installments and does not otherwise impose a finance charge.” Accordingly, the interpretive rule must be read in the context of this particular BNPL product design.

The CFPB does not specify how or whether Regulation Z would apply to other types of BNPL products. Notes that there are other types of BNPL products, such as finance charge loans, and that depending on the product design, other provisions of Regulation Z may apply.

How does the CFPB determine that a “digital user account” is a “credit card”?

The CFPB’s interpretation that BNPL providers are subject to Law Z is based on the finding that a “digital user account” is a “credit card” under Regulation Z.

First, the CFPB notes that “credit card” includes not only physical cards but also nonphysical credit devices such as account numbers and virtual credit cards.

Points out that under Law Z, “credit card” means “any card, tablet or other single credit device which may be used from time to time to obtain credit.”¹ while the definition of “credit” under the Truth in Lending Act (TILA) includes “other credit facility.”²

Although “other credit facility” and “other single credit facility” are not defined in TILA or Regulation Z, the CFPB relies on dictionary definitions, historical context, and interpretations of the Federal Reserve Board to conclude that these terms should be interpreted broadly and are intended to goal, be flexible.

As a result, the CFPB interprets these terms to include “a digital BNPL user account that a consumer can use through websites, mobile applications, browser extensions, or integrations with merchant websites or mobile applications to access BNPL funds, to the extent that which user account is used to take out, transfer or authorize the taking or transfer of a loan…”

Additionally, the CFPB clarifies that for a device to be considered a credit card under Regulation Z, it must be capable of “occasionally obtaining credit,” which “includes the ability to use a single device multiple times,” according to the Regulation Z commentary .

The CFPB notes that “BNPL’s business model is based on repeated use of a user’s digital account to make purchases on credit in real time” and states that “credit cards” include digital credit devices within the meaning of Regulation Z.

Who does the interpretive rule cover?

The CFPB states that BNPL providers issuing “digital user accounts” in the context of BNPL products are “card issuers” subject to Regulation Z because they “issue() a credit card…”.³

Furthermore, because the BNPL product provider is a “card issuer”, it is also a “creditor” for the purposes of Subpart B of Regulation Z – and is therefore subject to the Subpart B credit card requirements.

The CFPB explains that while Subpart B generally covers open-end credit, many of its provisions also apply to card issuers that extend credit without associated finance charges and that is payable in four or fewer installments.⁴ Specifically, the CFPB notes that a “card issuer” that issues this type of closed-end credit is considered a “creditor” for Subpart B purposes – and is therefore subject to the Subpart B requirements.⁵

It is important to note that the CFPB specifies that any credit card issuer – banks and non-banks – may be subject to this rule, and in a situation where a BNPL provider partners with another party to extend credit, it is possible that both parties may be subject to recognized as card issuers.

What compliance requirements apply to BNPL providers?

Under the interpretive rule, providers of BNPL products will be required to comply with various credit card requirements set out in Regulation Z. In particular, BNPL providers will be required to comply with provisions relating to credit cost disclosure and dispute resolution, including investigating consumer-initiated billing and dispute resolution disputes. withholding payments pending investigation and, where appropriate, extending credit. In addition, BNPL providers are required to provide users with periodic statements and comply with regulations regarding consumers’ rights to refunds.

The CFPB notes that BNPL providers “are generally not subject to the credit card provisions of Subpart G of Regulation Z (e.g., penalty fee limits and ability-to-repay requirements),” but points out that disclosure of a credit card application and solicitation applications, the requirements set out in Subpart G “may” apply to such BNPL providers.

What’s next?

Not surprisingly, the timing of the CFPB’s interpretive rule appears to be consistent with the Biden administration’s broader strategy to accelerate implementation of new regulations ahead of a potential change in administration and Congress in 2025. Specifically, the Congressional Review Act (CRA) gives Congress the ability to review and potential repeal of new federal regulations issued by government agencies, including interpretive rules. A key element of a CRA in this context is the 60-day look-back period. The look-back window opens 60 legislative days after the final adjournment of the 118th Congress. During the look-back period, rules finalized by the government agency are subject to review in the next session of Congress, which begins in January 2025. This look-back period allows the new Congress to review and potentially repeal rules adopted at the end of the previous administration to prevent so-called northern regulations that may be unfavorable to the new administration. Under the CRA, Congress can decide to invalidate the regulations by a simple majority vote in both houses in the event of a resolution of disapproval. If Congress passes the resolution and it is signed by the president, the agency is prohibited from issuing “substantially similar” regulations without further action by Congress.

The interpretive rule will become effective 60 days after its publication in the Federal Register. Although the CFPB states that it is not required to provide a deadline for public comment on an interpretive provision under the Administrative Procedure Act, it is accepting comments until August 1, 2024.

It is important to note that the CFPB has indicated that it “may” make changes to the interpretive rule based on public comments. While some BNPL providers may already be compliant with applicable portions of Regulation Z – particularly if they operate in states that have similar requirements – other applicable Regulation Z requirements may create new operational and logistical challenges.

Notes

12 CFR 1026.2(a)(15(i)).
15 USC 1602(l).
12 CFR 1026.2(a)(7).
12 CFR 1026.2(a)(17)(iii).
ID.