Where to Begin With the CFPB's "Buy Now, Pay Later" Interpretative Rule …

The Consumer Financial Protection Bureau's interpretative rule provides that traditional "Buy Now, Pay Later" (BNPL) products – closed-end loans that do not have a finance charge and are repaid in four installments – are subject to Regulation Z, specifically, subpart B (the "open-end credit" rules). Although BNPL has conventionally been considered outside of Regulation Z's scope, the CFPB applies Regulation Z by characterizing digital user accounts, used by consumers to access BNPLs online or via an app, as "credit cards." Consequently, providers of digital user accounts would be "card issuers," and in turn, "creditors" under 12 CFR 1026.2(a)(17)(iii).

The interpretative rule, however, presents compliance difficulties for BNPL lenders and is set to apply as of July 30 (with comments due by August 1). Moreover, as discussed further below, the interpretive rule could have the effect of applying credit card rules to other closed-end credit products (including those that are subject to TILA today) if they are accessed from time to time via a digital user account.

1. The interpretative rule lacks sufficient guidance to enable BNPL lenders to comply with subpart B.

In addition to the interpretive rule's lack of precision as what aspects of subpart B apply to BNPLs, compliance with the interpretative rule is further complicated by an apparent disconnect between 12 CFR 1026.2(a)(17)(iii)'s broad reference to Reg. Z's subpart B and the scope of 15 USC § 1602(g), on which the CFPB's interpretation relies. The CFPB paraphrases § 1602(g) in support of its authority to "apply [open-end credit] requirements" to BNPL lenders. But § 1602(g) does not encompass all of Regulation Z's subpart B. The statute specifically states that:

[f]or the purpose of the requirements imposed under part D of this subchapter [15 USC 1666 et seq., TILA's credit billing laws] and sections 1637(a)(5), 1637(a)(6), 1637(a)(7), 1637(b)(1), 1637(b)(2), 1637(b)(3), 1637(b)(8), and 1637(b)(10) of [TILA], the term 'creditor' shall also include card issuers whether or not the amount due is payable by agreement in more than four installments or the payment of a finance charge is or may be required.

The sections cited in § 1602(g) correspond to some – but not all – provisions of Regulation Z, subpart B. And some provisions in Regulation Z, subpart B, are not found in § 1602(g)'s cited references to "part D" or 15 USC § 1637. For example, Regulation Z's open-end credit advertising rules found under 12 CFR 1026.16, correspond to "part C" of 15 USC subchapter I (15 USC §§ 1661, et seq.).

The interpretative rule also makes passing reference to the potential applicability of Regulation Z provisions outside of subpart B to BNPL. Buried in footnotes 2 and 28 of the interpretive rule, the CPFB suggests that Regulation Z's application and solicitation disclosures in 12 CFR 1026.60 "may apply." Presumably, the CFPB cites to 1026.60 because that section used to be codified at 12 CFR 1026.5a, which fell within Regulation Z, subpart B, but the interpretive rule, as currently written, applies only subpart B to BNPL lenders. Even if regulators intended for 1026.60 to be captured by 1026.2(a)(17)(iii) – but failed to capture that intent when 1026.5a was recodified as 1026.60 – the CFPB fails to provide the legal groundwork for the application of these provisions to BNPL lenders.

2. The CFPB's interpretative rule implies that BNPL lenders need only follow those provisions of subpart B that are "appropriate" or "applicable."

Notwithstanding the text of 1026.2(a)(17)(iii), the entirety of subpart B need not apply to BNPLs – only those that are appropriate and applicable. This is reflected in both the statute and Regulation Z. See, e.g., 15 USC § 1602(g) (applying part D and certain sections of 1637 "to the extent appropriate") and 12 CFR 1026, cmt. 2(a)(17)(iii)-1 ("Since all disclosures are to be made only as applicable, such card issuers would omit finance charge disclosures").

The trick, of course, is determining which subpart B provisions are "appropriate" or "applicable" to BNPL products. The TILA references cited in 15 USC § 1602(g) may be a good start.

3. The CFPB's interpretive rule, while purportedly limited to BNPL, has the potential to pull in other closed-end credit products, already subject to TILA, within Regulation Z's open-end credit rules.

Regulation Z defines another type of closed-end creditor as a card issuer: "For purposes of [certain provisions of] subpart B … and subpart C, any card issuer that extends closed-end credit that is subject to a finance charge or is payable by written agreement in more than four installments." 12 CFR 1026.2(a)(17)(iv). In other words, 1026.2(a)(17)(iv) imposes certain provisions of subpart B's open-end credit rules to closed-end credit products already subject to Regulation Z (including subpart C), where such closed-end credit products are accessed via a credit card.

Based on the CFPB's interpretation of a "digital user account" as a credit card, this means that a closed-end creditor that is subject to TILA today and makes its closed-end loans available via a digital user account, could also be a card issuer for purposes of 1026.2(a)(17)(iv). In turn, such products could be generally subject to subpart B – requiring, among other things, consumer disclosures and billing dispute resolution procedures.

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We will continue to track the industry's response to the interpretative rule, and any developments from the CFPB, and will report more on how BNPL lender (and other closed-end creditors) can come into compliance.

DWT's banking and payments practice is a multidisciplinary team of subject-matter experts in financial services, privacy, data security, technology transactions, enforcement and litigation, and other relevant areas. The B&P team regularly advises open-end and closed-end creditors, including BNPL lenders, fintech program managers, and other clients that offer credit.

For more information or assistance in complying with the CFPB's interpretative rule, please contact Brian Hurh or Jonathan Engel.