Imminent CFPB Rule to Intensify Scrutiny on “Buy Now, Pay Later” Services

In an important move to extend consumer protections, the Consumer Financial Protection Bureau (CFPB) recently issued an interpretive rule significantly affecting the “Buy Now, Pay Later” (BNPL) landscape. The rule—set to take effect July 30th—requires closed-end BNPL credit products to adopt key consumer protection measures from the Truth in Lending Act (TILA) and Regulation Z.

BNPL financing—a popular method allowing consumers to make purchases and pay in interest-free installments—has traditionally operated as a short-term, closed-end loan. The new rule interprets these services to fall under certain open-end credit regulations, altering compliance obligations for BNPL providers significantly. Here’s what BNPL providers need to know about the upcoming changes.

Key Requirements for BNPL Providers Under the New Rule

  • Disclosure Requirements: Moving forward, BNPL providers must issue disclosures at the account level rather than transaction-level. This includes initial account-opening disclosures and changes-in-terms notices, pivoting from traditional transaction-specific disclosures.
  • Periodic Statements: Regulation Z mandates that creditors provide consumers with periodic statements for each billing cycle. For BNPL providers, this introduces the challenge of determining how to present multiple outstanding transactions within a single statement effectively.
  • Transaction Disputes: The new rule strengthens consumers’ abilities to dispute transactions, requiring BNPL providers to adapt their dispute management policies. This includes rigorous investigation of billing errors and unauthorized use claims within prescribed timelines.
  • Refund Credits: Should a consumer return a purchased product, BNPL providers are tasked with crediting the consumer’s account promptly. This ensures fairness in refunds and aligns with consumers’ expectations for timely return processing.
  • Advertising Standards: BNPL providers must also refine their advertising practices. Regulatory guidelines call for transparent disclosure of payment terms and financial charges in marketing materials, ensuring consumers are fully informed before committing to BNPL agreements.
  • Statement of Billing Rights: Either annually or with each periodic statement, BNPL providers must inform consumers of their billing rights, likely favoring the latter method due to the nature of BNPL loans.

What are the Risks of Non-Compliance?

Following the recent Supreme Court decision affirming the CFPB’s funding structure as constitutional, the CFPB has been emboldened, accelerating its agenda on rulemaking and guidance before the upcoming presidential elections. Although it is expected to face legal challenges, this interpretive rule reflects the CFPB’s more assertive stance and underscores the importance of compliance for BNPL providers. Non-compliance can lead to hefty penalties, fines, and increased litigation risks from consumers adversely affected by non-compliant practices – likely allegations of improper handling of disputes or failure to provide adequate disclosures citing the new interpretive rule. Providers are encouraged to proactively review and adjust their policies to meet these new regulatory expectations. As the July 30th implementation date approaches, BNPL providers must diligently adapt to these changes.

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