To the likely surprise of providers of buy now, pay later ("BNPL") financing, last week the Consumer Financial Protection Bureau ("CFPB") issued an interpretive rule stating that BNPL products are actually "credit cards" under the Truth in Lending Act (TILA) and BNPL providers are "card issuers" and therefore "creditors" under, and subject to, Regulation Z. BNPL providers would be surprised by this conclusion because BNPL is non-revolving, "finance charge-free," "closed-end" credit not involving a typical plastic card.
Providers also likely were shocked that this CFPB conclusion was presented in an interpretive rule that will take effect only 60 days from publication in the Federal Register, with the CFPB taking the extraordinary position that this rule merely "clarif[ies] existing obligations for market participants," and "does not impose any new or revise any existing recordkeeping, reporting, or disclosure requirements on covered entities or members of the public" that would trigger the need for approval by the Office of Management and Budget under the Paperwork Reduction Act.
The CFPB reached this surprising position by first coming up with a new term not found in Regulation Z called a "digital user account." The term isn't even clearly defined in the rule but, parsing the rule, it appears to be an account relationship maintained in electronic form with a BNPL provider which account relationship can be used by the consumer "through websites, mobile apps, browser extensions, or integrations with merchant websites or mobile apps to access BNPL credit for the purchase of goods and services."
Next, the CFPB concludes that a "digital user account" is a "credit card," and therefore a BNPL provider is a "card issuer" under Regulation Z. Although credit cards are not limited to plastic cards, they also typically access "open-end" credit, and the CFPB acknowledges that "traditional BNPL products are closed-end loans payable in four or fewer installments without a finance charge, used to make purchases on credit." However, the CFPB then points to an alternative definition of "creditor" in Section 1026.2(a)(17)(iii) of Regulation Z that, as the Official Interpretations make clear, is primarily aimed at "the issuers of so-called travel and entertainment cards that expect repayment at the first billing and do not impose a finance charge," but the CFPB concludes that this prong of the "creditor" definition can be stretched to cover BNPL providers.
This series of regulatory leaps means that, when the rule shortly takes effect, BNPL providers will be required to comply with a wide range of provisions of Regulation Z that, by their terms, apply to "open-end" credit, including those governing account-opening disclosures, billing statements, and dispute and refund rights, among other things. The rule will become effective 60 days after publication in the Federal Register (which has not yet occurred), and comments on the rule are due by August 1.
The CFPB's facile conclusion that BNPL products are "credit cards" under TILA is so outside the common understanding of that term that the rule may be found to exceed the agency's statutory authority, lying beyond the clearly expressed intent of Congress. Furthermore, even if the CFPB were found not to have exceeded its mandate, as a purported interpretive rule, the CFPB's recent promulgation may not be entitled to Chevron deference, which is itself the subject of review by the Supreme Court this term. Furthermore, the rule's loose reasoning and tendentious conclusion increase the likelihood that a reviewing court would not grant deference to its position under the Skidmore rubric, which does not require a court to defer to an agency's interpretive choice.
In addition, a reviewing court may readily conclude that the CFPB has promulgated a legislative rule rather than an interpretive rule. While the border separating legislative from interpretive rules is not perfectly clear, here the CFPB appears to have crossed markedly into legislative territory. The rule purports to create binding norms for itself and others, namely that BNPL products are credit cards and thus must abide by applicable portions of Regulation Z, which is a touchstone of legislative rulemaking. When making legislative rules, administrative agencies are obligated to follow a full notice-and-comment process under the Administrative Procedure Act (APA), which the CFPB has failed to do here. The CFPB's willingness to accept public comment that it may consider if it revises the rule at a later time does not fulfill the rigorous process required for legislative rules. Accordingly, the rule is vulnerable to attack as having failed to comply with the requirements of the APA.
Many BNPL providers have to-date adopted policies and procedures that address many of the concerns with BNPL products raised by the CFPB, including resolving billing disputes and providing refunds. However, the rule mandates compliance with specific requirements in Subpart B that were not designed for closed-end loans, creating compliance challenges and risks of violations, especially given the short period of time BNPL providers are being given to substantially revamp procedures in order to comply. Notably, however, and based on the wording of the prong of the definition of "creditor" used by the CFPB that only references Subpart B, the CFPB confirms that BNPL providers are "generally" not subject to the credit card provisions in Subpart G of Regulation Z, including in particular "the ability-to-repay requirements."
In sum, and under the guise of an interpretive rule that supposedly interprets existing law rather than establishing new law, the CFPB has caused a sea change in the BNPL industry. Almost overnight, BNPL providers will now be required to comply with a whole host of regulatory requirements intended for an entirely different category of credit product. While we expect challenges to the rule, BNPL providers subject to the new requirements should begin preparing for compliance and should consider submitting comments to advocate for changes to the rule.
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