The CFPB Gets Payback on Buy Now, Pay Later Lenders

The Consumer Financial Protection Bureau (CFPB) recently issued an interpretive rule confirming that buy now, pay later (BNPL) lenders meet enough criteria to be considered credit card lenders under the Truth in Lending Act. The announcement comes more than two years since the CFPB launched an inquiry into the space after the lending practice exploded in popularity during and after the pandemic.

Buy Now, Pay Later?

Before we get into the CFPB’s concerns, findings, and recommendations, let’s start by defining what a buy now, pay later plan is.

Buy now, pay later is a type of deferred payment option that lets a consumer split a purchase into several smaller installments, often with a down payment of around 25% due at checkout. The application process is quick, easy, and doesn’t require a credit check, which lenders tout as a primary benefit for consumers with poor or nonexistent credit.

BNPL lenders don’t typically charge interest on their loans; instead, they make their money by charging participating merchants 3% to 6% of the purchase price.  

CFPB Concerns

The CFPB listed three main concerns in their inquiry: accumulating debt, regulatory arbitrage, and data harvesting.

Accumulating Debt

One in five Americans have used BNPL loans, with financially fragile households almost three times as likely to use BNPL frequently as their financially stable counterparts. It is very easy for consumers to become regular users of BNPL services, especially if they utilize tools like BNPL apps and browser plugins for easier access to loans. The high utilization rate among financially fragile households is particularly concerning; making multiple purchases with multiple payment schedules can make it difficult to keep track of when payments are scheduled and potentially cause consumers to overdraft their accounts.

Regulatory Arbitrage

Regulatory arbitrage is a term used to describe business practices that circumvent existing regulations. Thanks in part to the unclear regulatory environment around BNPL, companies that provided BNPL loans may not have applied the consumer protections that apply to their products. This could be accidental, but may also be a deliberate attempt to have beneficial terms for the merchant. For instance, some BNPL products didn’t provide certain disclosures that were required by law, and many BNPL companies didn’t provide dispute resolution protections available to other forms of credit. The environment was so murky that different BNPL lenders would follow different sets of rules, which meant they would often have different or conflicting policies for late fees and other practices.

Data Harvesting

The CFPB was concerned with what BNPL lenders were doing with the data they harvested from their customers. Some were using their customers’ payment histories to create closed-loop shopping apps with their partners and pushing certain brands and products, often geared toward younger audiences. The CFPB wanted to better understand what data was being collected, how it was being used, and what risks it was creating for customers.

The CFPB’s New Rule

The CFPB has continued to hear complaints from BNPL customers related to refunds and disputed transactions since it began its inquiry. The agency published a market report in 2022 showing that some 13% of BNPL transactions involved a return or dispute, amounting to at least $1.8 billion in disputed or returned transactions in 2021 alone. The BNPL space has only grown since 2021, and it’s not hard to imagine that the number of disputes and returns has grown along with it – which is probably why the CFPB has chosen to step in.

The new interpretive rule doesn’t address data harvesting or debt accumulation, but it could significantly reduce the issue of regulatory arbitrage.

The CFPB’s choice to start treating BNPL the same as they treat credit cards may not seem like a big deal on its face – but it may end up having a big impact on BNPL and the way BNPL lenders interact with their customers. For example, this new rule means BNPL lenders must:

• Investigate disputes: Like credit card companies, BNPL lenders will now be required to investigate disputes that their customers initiate instead of just waving their hands and saying, "Not our problem, bud." In addition to getting involved in disputes, BNPL lenders will also be required to pause payment requirements during their investigations and potentially issue credits to customers who have been wronged. 
• Refund returned products or canceled services: When customers return products or cancel services for a refund, BNPL lenders must now credit the refunds to their consumers’ accounts.
• Provide billing statements: BNPL lenders will now be forced to provide consumers with periodic billing statements like customers receive for classic credit card accounts.

New Service, Old Rules

The CFPB’s new rule has some time for public comment before it goes into force, but it likely won’t face much serious pushback from anyone other than BNPL companies who will now have to provide a modicum of customer service. It’s also hard to argue that the BNPL loans, which have grown by orders of magnitude since their introduction, should escape any kind of regulation or oversight. BNPL is the latest of a long, long train of credit products that are implicitly designed to appeal to/target people with low incomes and credit scores, and only the most cynical capitalistic sorts would argue that BNPL lenders should be allowed to target vulnerable populations without at least some regulatory oversight.

Related Resources:

• Layaway Plans and the Law (FindLaw’s Learn About the Law)
• SCOTUS Upholds CFPB’s Funding in Controversial Ruling (FindLaw’s Federal Courts)
• What is the Consumer Financial Protection Bureau? (FindLaw’s Learn About the Law)