Consumer Financial Protection Bureau Extends Federal Protections to Buy Now, Pay Later Customers

The Consumer Financial Protection Bureau (CFPB) has announced that customers of the buy now, pay later (BNPL) industry will receive the same federal protections as credit card users. In an “interpretive rule,” the CFPB stated that BNPL lenders, such as Affirm, Klarna, and PayPal, will be subject to the same regulations as traditional credit card providers under the Truth in Lending Act. This means that BNPL companies must offer refunds for returned products or canceled services, investigate merchant disputes, pause payments during investigations, and provide fee disclosures on bills.

CFPB Director Rohit Chopra emphasized that regardless of whether a shopper uses a credit card or BNPL services, they are entitled to consumer protections under existing laws and regulations. The CFPB has been actively working to regulate the financial industry, recently issuing rules that reduce credit card late fees and overdraft penalties. The agency began investigating the BNPL industry in late 2021.

The use of digital installment loan-type services has seen a tenfold increase from 2019 to 2021. However, the CFPB has expressed concerns about some users being given more debt than they can handle. Chopra stated that the CFPB wants to ensure that BNPL offerings do not gain an advantage by bypassing established consumer rights and responsibilities.

While it is unclear how many BNPL providers do not comply with refund and dispute requirements, the new rule will ensure consistent application of these services across the industry. The rule will take effect in 60 days, and public commentary on it is currently being accepted.

BNPL providers have anticipated increased regulation, including efforts to apply existing credit card rules to the industry. Some companies, like Klarna, have argued that their no-interest products are less risky for customers than credit cards and therefore require less oversight. The resistance from the industry raises the possibility of litigation against the CFPB rule, similar to the challenges faced by payday lenders.

It is worth noting that a federal judge recently challenged and paused a CFPB rule that would cap credit card late fees at $8 per incident, highlighting the potential for legal battles in the financial industry.

In conclusion, the CFPB’s new rule brings BNPL lenders under the same federal protections as credit card providers. The rule aims to ensure consistent application of refund and dispute services across the industry. However, resistance from the BNPL industry raises the possibility of litigation against the CFPB rule. As the BNPL market continues to grow, it is crucial to strike a balance between protecting consumers and allowing for innovation in the financial industry.