Financial Technology Association Files Suit Challenging CFPB Buy Now Pay Later (BNPL) Interpretive Rule

Alleging that the CFPB rushed to promulgate its interpretive rule, and exceeded its authority in doing so, the Financial Technology Association has filed suit against the bureau in the U.S. District Court for the District of Columbia, contending that the rule falls short on several counts.

Among other things, in the suit, the FTA contends that federal law, the Administrative Procedure Act, required the CFPB to treat the rule as a legislative rule, and, therefore, to go through the notice and comment process in issuing the rule. Instead, the CFPB issued it as an interpretive regulation without going through that formal process.

The crux of the Bureau’s interpretation is that certain BNPL programs involve “digital user accounts” and that those digital user accounts are “credit cards,” making the BNPL providers “card issuers.”

These card issuers are then deemed to be “creditors” for purposes of Regulation Z’s open-end credit provisions under a definition generally meant to apply to so-called travel and entertainment cards that require repayment at the end of each billing cycle.

As such, these BNPL providers are subject to Regulation Z’s open-end requirements under the Truth in Lending Act (TILA) which include requirements relating to account-opening disclosures, billing statements, changes in terms, payment processing, treatment of credit balances, issuance of cards, liability for unauthorized use, merchant disputes, billing disputes, crediting of returns, advertising, and, as the CFPB notes in a footnote, potentially application and solicitation disclosures.

In its suit, the FTA alleges that the new rule exceeds the CFPB’s statutory authority by imposing obligations beyond those permitted by TILA and by contravening TILA’s effective-date requirement for new disclosure requirements.

The FTA also contends that the interpretive rule was arbitrary and capricious under the Administrative Procedure Act because the CFPB overlooked that certain TILA requirements with respect to credit cards are a poor fit for BNPL products and because it does not give BNPL providers sufficient time to come into compliance.

While the new rule was issued on May 22 and went into effect on July 30, the CFPB said that it would give companies additional time to come into compliance with the rule.

In a statement after the suit was filed, FTA President/CEO Penny Lee said, “We believe the CFPB’s attempt to impose regulations designed for credit cards on the pay-in-four products offered by many of our members shows an underlying misunderstanding of BNPL. Consumers are having positive experiences with pay-in-four products and benefit from strong consumer protections such as zero interest on outstanding balances, no compounding interest, and pausing accounts if consumers fall behind on payments to avoid an excessive debt burden.”

We will continue to monitor litigation and other developments relating to this interpretive rule and its implications for BNPL providers. In addition to BNPL providers, any businesses that offers consumer accounts that may be used to login and pay for items over time, such as season ticket agreements and annual memberships paid in arrears, should carefully consider whether this rule might also apply to them.