CFPB Issues Interpretive Rule on Buy Now Pay Later Services

June 20, 2024
By Cornerstone Staff

In an era where the convenience of digital transactions intersects with the needs of immediate gratification, the rise of buy now pay later (BNPL) services has reshaped the financial landscape. These services, offering an alternative to traditional credit card usage, promise a simplified purchasing process with deferred payments.

BNPL firms have seen a rapid increase in revenues due to the growing adoption of their products. Fintechs have largely driven this growth, while banks have been striving to catch up. It can be argued that banks have fallen behind because fintech firms have leveraged their technological advantage to attract a broad consumer base and streamline the customer lending process. However, industry experts also acknowledge that much of this performance gap may be attributed to regulatory differences. Large banks are subjected to greater scrutiny compared to fintechs and non-banking lenders in terms of policies, processes, and analytical strategies.

This shift in consumer financing has prompted the Consumer Financial Protection Bureau (CFPB) to implement new regulatory measures aimed at ensuring fair practices in the rapidly growing BNPL market. The CFPB’s latest “interpretive rule” on buy now pay later services marks a shift for lenders and consumers alike, setting forth a regulatory framework where little to none existed previously. While the CFPB is not introducing any new law or regulation, the Bureau is offering guidance on how existing law applies to covered BNPL transactions as an “interpretive rule.”

Background

The CFPB initiated its scrutiny into the growing BNPL market primarily due to rising consumer complaints concerning refunds and disputed transactions. This inquiry, which began over two years ago, has revealed significant inconsistencies in consumer protections. The CFPB’s investigation highlighted that BNPL services, often used as alternatives to traditional credit cards, lacked uniform disclosures and protections, leading to potential consumer harm. In a market report, CFPB revealed that over 13% of BNPL transactions experienced a return or dispute, amounting to $1.8 billion in disputes or returns at the five companies surveyed in 2021. The absence of dispute protections can lead to consumer chaos during merchandise returns or billing issues.

To address these issues, the CFPB issued the interpretive rule under the Truth in Lending Act, equating BNPL transactions with credit card provisions. This rule mandates BNPL lenders to offer similar dispute resolution and refund mechanisms as those provided by credit card companies. Additionally, the CFPB aims to ensure that BNPL providers adhere to fair market practices by standardizing cost-of-credit disclosures and enhancing consumer rights during billing disputes.

Historically, the rapid rise of BNPL services during the pandemic necessitated this regulatory response to protect consumers from potential overextension and to maintain market integrity.

Key Aspects of the New Rule

Dispute Resolution

Under the interpretive rule, BNPL lenders are required to investigate consumer disputes promptly. During the investigation, payment requirements must be paused, and, if warranted, credits may be issued to the consumer. This aligns BNPL lenders with credit card dispute mechanisms to offer a more standardized process for handling consumer complaints.

Refund Requirements

BNPL lenders must now credit refunds to consumers’ accounts when products are returned or services are canceled, mirroring the rights consumers have with traditional credit cards.

Billing Statements

The rule mandates that BNPL lenders provide periodic billing statements to consumers, similar to those issued by credit card companies. These statements must detail transactions, fees, credits, and any other charges

To read the interpretive rule, click here, effective July 30,2024. The Bureau will accept comments through August 1.

Industry Opposition

The imposition of these rules is expected to significantly alter the BNPL landscape. Industry experts have raised concerns about the rapid implementation.

The interpretive rule requires rapid and challenging adjustments for businesses offering 0% APR products. The 60-day compliance timeline from publication in the Federal Register poses a daunting pace for necessary programming and procedural changes, particularly for Fair Credit Billing Act compliance. Additionally, the potential requirement for the creation and implementation of periodic statements and other applicable regulations could further complicate this timeline.

The rule’s procedural aspects raise concerns, potentially inviting industry challenges due to its issuance as an “interpretive rule” and the limited scope for revisions or further action despite the collection of comments. There is a fundamental misalignment between the CFPB’s policy rationale and the FCBA, lacking support in the Truth in Lending Act. The CFPB’s failure to acknowledge the unique protections for physical credit cards, designed to address their susceptibility to theft and misuse, contrasts with the secure nature of BNPL products accessed via personal profiles, requiring multiple identity and fraud checks before any purchase. Additionally, there is apprehension about the potential for increased operational costs due to the enhanced consumer rights, which could reshape the market dynamics and influence the strategies of BNPL companies.

Conclusion

With the new CFPB interpretive rule ushering in a new era for the buy now pay later services, it’s crucial for BNPL lenders to navigate these changes with a keen understanding of the regulations to ensure compliance. The rule’s implications ripple across consumer protections, dispute resolutions, and billing practices, emphasizing a more even playing field for fintech’s and banks. As lenders adjust to these regulations, the ability to adapt and incorporate these changes into their operational frameworks will be paramount for sustained success and growth.

 

 

 

 

References

 

CFPB Takes Action to Ensure Consumers Can Dispute Charges and Obtain Refunds on Buy Now, Pay Later Loans | Consumer Financial Protection Bureau (consumerfinance.gov)
CFPB Rules Buy Now, Pay Later Lenders Must Offer Key Credit Card Protections | Consumer Financial Services Law Monitor

Author

Cornerstone Staff

Staff
| Cornerstone
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