Use of Digital User Accounts to Access Buy Now, Pay Later Loans

On May 22, the Consumer Financial Protection Bureau (CFPB) issued an interpretive rule on the “Use of Digital User Accounts to Access Buy Now, Pay Later (BNPL) Loans” to address the applicability of Subpart B of Regulation Z to lenders that issue digital user accounts to access credit.¹  This rule is coming after the inquiry launched more than two years ago into the BNPL market and aims to bring “consistency to this market,” which has been rapidly expanding and seeing growing consumer risks.² The new requirements will be in effect on July 30, 2024, and the CFPB is requesting comments from the public, which may be used to revise the rule, until August 1, 2024.³

CFPB Interpretive Rule

The interpretive rule by the CFPB provides a definition for BNPL credit as a “closed-end consumer loan for a retail transaction that is repaid in four (or fewer) interest-free installments and does not otherwise impose a finance charge.”⁴ This definition opens many provisions of Subpart B of Regulation Z, which is typically focused on “open-end credit,”⁵ to BNPL providers and introduces additional consumer protections that will now apply to BNPL card issuers. Highlighted within the CFPB’s press release are three protections that BNPL lenders must:

1. Investigate disputes: BNPL lenders must investigate disputes that consumers initiate. Lenders must also pause payment requirements during the investigation and sometimes must issue credits.⁶
2. Refund returned products or canceled services: When consumers return products or cancel services for a refund, BNPL lenders must credit the refunds to consumers’ accounts.⁷
3. Provide billing statements: Consumers must receive periodic billing statements like the ones received for classic credit card accounts.⁸

How Does This Impact Your Organization?

According to the CFPB, BNPL loans were used by 17% of consumers between February 2021 and February 2022 and five lenders originated $24 billion of BNPL loans in 2021.  The volume of  BNPL loans consumers have secured combined with growing repeat usage⁹ is leading the CFPB to continue its focus on fintech oversight and providing consumers with protections they are entitled to under “longstanding laws and regulations already on the books.”¹⁰ With the CFPB issuing an interpretive rule, compared to the typical rulemaking process, a precedent has been set that allows for new requirements to be placed on banks and lenders without the procedural requirements laid out under the Administrative Procedure Act and Dodd-Frank Act.¹¹ While the new BNPL rule currently does not largely impact banks,¹² since they are typically considered traditional credit card providers under current laws,¹³ and will be expanding existing processes to include the BNPL loans, it opens the door for additional rules to be passed and require more substantial changes to firms’ existing procedures and controls.

For lenders that have not been defined as credit card issuers under previous interpretations, this rule greatly broadens the scope of responsibility for the lender to protect consumers and provide rights offered by traditional credit card providers.

How Guidehouse Can Help

With decades of experience responding to regulatory changes across all consumer financial products, Guidehouse helps financial institutions establish and enhance risk assessments, control infrastructure, and compliance programs in response to regulatory changes. Our seasoned specialists collaborate with client teams to facilitate compliance with CFPB rules and help them understand and manage regulatory risk.

Guidehouse can help your organization prepare for the new BNPL interpretive rule and future rules from the CFPB in various ways, including:

• Providing program management support
• Establishing strong and accountable governance structures
• Analyzing gaps in processes and systems
• Prioritizing and managing updates to those processes and systems
• Drafting policies, process flows, and procedures, incorporating steps to provide decision audit trails
• Conducting comprehensive training for applicable employees