CFPB determines that buy now, pay later providers are card issuers under Regulation Z

Yesterday, the Consumer Financial Protection Bureau (CFPB) published an interpretive rule stating that Buy Now, Pay Later (BNPL) providers are “card issuers” and “creditors” under the federal Truth in Lending Act (TILA) and Regulation Z and must comply with Part B (open credit provisions) and other provisions of Regulation Z.

The CFPB made this determination by interpreting the term “credit card” under Law Z to include a digital user account that a consumer can use via a website, mobile application, browser extension, or marketplace integration to access from time to time BNPL loans. time for shopping. According to the CFPB, digital user accounts provided by BNPL providers fall within the definition of a “credit card” because they are “credit devices” issued “under a business model designed for repeated use” to access credit for purchases.

Regulation Z includes a multi-part definition of “creditor” that includes “for purposes of Subpart B, any card issuer that provides 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.” (12 CFR § 1026.2(a)(17)(iii).) Because BNPL providers issue “credit cards” (under the CFPB), the BNPL provider falls within this definition of “creditor” and therefore must comply with Part B of Regulation Z Subpart B Regulations Z includes account opening information, periodic statement requirements, requirement to notify of changes in terms, rights to account disputes, limitations on liability for unauthorized transactions and other requirements. In a footnote, the CFPB also advised that Section 1026.60 may apply to BNPL providers regarding credit card orders and applications under Subpart G of Regulation Z. The CFPB has taken the position that other parts of Subpart G (e.g., the ability to repay requirement, penalty fee caps) do not apply to BNPL providers.

Since launching its BNPL market study in 2021, the CFPB has been comparing BNPL products to credit cards. While it’s not all that surprising that the CFPB applies credit card-like protections to BNPL products, the CFPB’s rule of interpretation leaves a lot to think about. Below are some preliminary thoughts on the potential impact of the CFPB’s interpretive rule.

1. This is a new interpretation of “credit card” within the meaning of Regulation Z. TILA, Regulation Z, and the official service interpretations do not indicate that a user account on a digital platform through which separate loans can be obtained would be viewed as a “credit card” under Regulation Z. The rule of interpretation arrives at this position by emphasizing that it is intended Congress, the term “or other single credit facility” was intended to be broad and flexible. However, as a basic reading of the text, the phrase “other single credit device” follows the words “card” and “pad” in the definition of “credit card” in Regulation Z. This provision suggests that “credit device” was not intended to be a broad term, but was intended to have a similar meaning to the terms mentioned earlier. The broadest interpretation of a “credit card” included in Regulation Z is the official staff interpretation originally enacted by the Federal Reserve Board, which states that a “credit card” may include an account number that allows access to an open line of credit for the purchase of goods or services. However, this interpretation applies only to open loans. The CFPB rejected this key limitation in a footnote, stating that “the logic applies similarly to a closed-end credit facility.”
2. BNPL does not naturally fall under Subpart B. The interpretative rule appears to be an example of an attempt to fit a more innovative product into an existing regulatory structure that may not have been intended to regulate the product. Subpart B primarily regulates open-end credit, where a single credit account allows for multiple extensions of credit within the account. A BNPL loan is a single-installment loan intended to finance a single purchase. Section 1602 of TILA indicates that the open-end requirements of Subpart B should apply to card issuers that offer closed-end credit facilities with no finance charges and four or fewer installments “to the extent applicable.” The interpretative rule does not clearly indicate which provisions of Subpart B don’t apply to BNPL providers as they provide closed-end credit. Therefore, it is unclear whether the CFPB expects BNPL providers to comply with all of the open lending provisions in Subpart B. If the interpretive rule is not clarified, BNPL providers may have difficulty bringing their programs into compliance with Part B of Regulation Z , which also aims to regulate open credit.
3. An interpretive rule may affect compliance with state law. The CFPB’s broad interpretation of “credit card” under Regulation Z may impact the interpretation of the definition of “credit card” under various state laws to the extent that a state law’s definition contains terms and elements similar to the definition in Regulation Z. Some state laws relating to credit cards can be interpreted to apply to BNPL providers and other point-of-sale installment lenders using the same logic set out in the interpretive rule.
4. The interpretative rule could have negative spillover effects on other point-of-sale (POS) installment lenders. As the CFPB has highlighted in several footnotes, lenders offering interest-bearing installment loans to finance purchases may be subject to additional Regulation Z rules if the loans are offered through a user’s digital account and if certain other facts exist. In other words, the CFPB’s interpretation that certain digital user accounts are “credit cards” under Regulation Z may not only impact BNPL providers, but may also impact some POS installment lenders.

The CFPB noted that under the rule of interpretation, the Federal Administrative Procedure Act does not require soliciting and responding to comments. Nevertheless, the CFPB elected to request comments on this interpretive rule and reserved the right to make revisions at a later date “as necessary in light of the feedback received.” Comments are open until August 1, 2024. The interpretive rule will become effective 60 days after publication in the Federal Register. Compliance with the interpretive rule will provide parties with safe harbor protection under TILA section 130(f).

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We have advised numerous programs on credit card regulation under Regulation Z and state law. If you would like to discuss the implications of the CFPB’s BNPL Interpretive Rule, please contact Susan Seaman, Mike G. Silver, or attorney Husch Blackwell.