On September 18, the Consumer Financial Protection Bureau (CFPB or Bureau) issued a set of frequently asked questions (FAQs) providing guidance on applying Regulation Z requirements to Pay-in-Four Buy Now, Pay Later (BNPL) products accessed through digital user accounts (DUAs). These FAQs follow the Bureau’s interpretive rule issued in May of this year, subjecting BNPL transactions to provisions of Regulation Z applicable to “credit cards.”

The FAQs consist of a series of questions and answers purportedly designed to clarify the application of Regulation Z. These questions address various aspects of BNPL loans, including their definition, the nature of DUAs, and the regulatory requirements imposed on BNPL providers. Specifically, the FAQs explain that Pay-in-Four BNPL loans are closed-end installment loans payable in four installments without incurring interest or other finance charges. They also clarify that DUAs, which enable consumers to access BNPL credit, are considered a form of credit card under Regulation Z. Consequently, BNPL providers must comply with several provisions of Regulation Z, including the requirement to provide periodic statements and the prohibition against treating payments as late within a certain period.

Key Takeaways:

• They Go Beyond the Interpretive Rule: The FAQs go beyond merely clarifying points made in the interpretive rule. Notably, the FAQs state that DUAs are not only “credit cards” but also “charge cards.” This is a significant expansion, as the interpretive rule did not mention the charge card concept in relation to DUAs.
• Internal Inconsistencies: The FAQs contain internal inconsistencies. For example, on page 6, the CFPB states that requirements for “open-end consumer credit plans” do not apply to DUAs. However, on page 11, the Bureau asserts that the 14-day rule applies to DUAs, which by its plain terms only applies to “open-end consumer credit plans” (see 12 CFR 1026.5(b)(2)(ii)(B)).
• Inconsistencies with the Truth in Lending Act (TILA): The FAQs interpret Regulation Z requirements in a manner inconsistent with the plain language of TILA. TILA specifies that only certain requirements can be imposed on card issuers, regardless of whether the amount due is payable in more than four installments or if a finance charge is required (15 USC 1602(g)). The FAQs suggest that additional requirements, such as tabular account opening disclosures under 12 CFR 1026.6(b) and closing date on a statement, are applicable, which go beyond the nine disclosure requirements listed in 15 USC 1602(g).
• Positive Change on Periodic Statements: On a somewhat positive note, the FAQs indicate that statements can be provided at the individual transaction level rather than at the DUA level.

Conclusion:

The CFPB’s FAQs introduce new interpretations and highlight inconsistencies within Regulation Z and TILA. The classification of DUAs as both credit cards and charge cards, the internal contradictions, and the extension of requirements beyond those specified in TILA present significant challenges for BNPL providers. These issues suggest that the rule, as further interpreted by the FAQs, could be a target for legal challenges in this post-Chevron world.

We will be providing further analysis of the CFPB’s FAQs on an upcoming episode of our Consumer Finance podcast. Subscribe here to stay updated.