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A major US fintech association is opposing a new Consumer Financial Protection Bureau (CFPB) rule that equates buy now, pay later (BNPL) products with credit cards.
The Financial Technology Association (FTA), whose members include BNPL heavyweights PayPal, Klarna and Block, is taking the CFPB to court over an “arbitrary” and “capricious” rule on BNPL.
In the complaint, the FTA accuses the agency of exceeding its authority, flouting its procedural obligations and misinterpreting existing legislation on credit regulation.
“We urge the CFPB to withdraw its interpretive rule and engage in an appropriate process to determine how best to regulate pay-in-four products,” said Penny Lee, CEO of the FTA.
“The CFPB is seeking to fundamentally change the regulatory treatment of pay-in-four BNPL products without adhering to required rulemaking procedures, in excess of its statutory authority, and in an unreasonable manner.”
CFPB’s first rule on BNPL
In May, as covered by Vixio, the CFPB published a new interpretive rule that sought to bring BNPL products under credit regulation for the first time.
Based on the agency’s latest reading of the Truth In Lending Act (TILA) and Regulation Z, its implementing regulation, the rule holds that BNPL providers meet the definition of “creditors” and are therefore subject to the same substantive and disclosure requirements as credit card issuers.
TILA’s primary definition of a “creditor” is any person that extends credit “payable by agreement in more than four installments” or that requires payment of a “finance charge”.
Pay-in-four BNPL plans are safely outside this primary definition, but a secondary definition was subsequently added by Congress.
Under this definition, a “card issuer” is someone “who issues a credit card”, and a “credit card” is “any card, plate, coupon book or other credit device existing for the purpose of obtaining money, property, labor, or services on credit.”
As noted by the FTA, when Congress devised this secondary definition, its “primary concern” was the mass mailing of unsolicited credit cards by issuing banks.
In the CFPB’s interpretive rule, the agency uses this secondary definition to argue that certain BNPL providers are subject to TILA.
As noted, the secondary definition drops the requirement that a “creditor” seeks repayment in more than four instalments.
Hence, the CFPB argues providers of pay-in-four BNPL products meet the definition of “creditors”, and that a “BNPL digital account number” meets the definition of a “credit card”.
As CFPB director Rohit Chopra has said previously, the wording of TILA is designed to capture credit devices “both known and unknown” to allow for interpretative changes.
But in the FTA’s view, the interpretive rule is “an abuse of discretion” and a “poor fit” for BNPL products.
Consistency issues
The FTA also draws attention to the “inconsistency” between the CFPB’s Official Commentary on TILA and the provisions of the new interpretative rule.
The CFPB’s Official Commentary, last amended on January 1, 2024, is the vehicle by which the agency issues official interpretations of TILA and Regulation Z.
Moreover, good faith compliance with this commentary affords firms protection from liability.
According to the FTA: “The Official Commentary has never understood Regulation Z to apply to BNPL products. To the contrary, two aspects of the Official Commentary foreclose the notion that BNPL products are subject to Regulation Z.”
The commentary gives examples of “card issuers” that are subject to TILA under the secondary definition.
Such examples do not include BNPL providers, but do include “issuers of so-called travel and entertainment cards that expect repayment at the first billing and do not impose a finance charge”.
In addition, the commentary generally rejects the notion that an “account number” without a physical card can constitute a “credit card” under TILA.
In the CFPB’s own words, only certain “account numbers that [can] access a credit account [are] credit cards for purposes of TILA”, and these account numbers must be able to access an “open-end line of credit”.
Pay-in-four BNPL products, which are subject to a fixed repayment term, are therefore a form of closed-end credit, and are not captured by this definition.
Next steps
The CFPB’s interpretive rule on BNPL is proving to be one of the agency’s most contentious of 2024.
In August, the agency conceded to requests to delay the launch of the rule.
Although the rule came into effect on July 30, 2024 and was technically not postponed, the CFPB agreed that it would not enforce it during an unspecified “transition” period.
“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,” said Chopra.
“We expect that other federal and state regulators will follow the same path.”
The FTA’s lawsuit against the CFPB, which also calls into question its lack of notice and comment periods, will put further pressure on the agency to think carefully about its next steps.
