Chris Willis and Josh McBeain interview two colleagues who delve into the Consumer Financial Protection Bureau's recent interpretive rule that classifies buy now, pay later transactions as credit cards.
In this special crossover episode of The Consumer Finance Podcast and Payments Pros Podcast, Chris Willis and Josh McBeain interview two colleagues who delve into the Consumer Financial Protection Bureau's (CFPB) recent interpretive rule that classifies buy now, pay later (BNPL) transactions as credit cards. Mark Furletti and Jason Cover explore the implications of this rule under Regulation Z, including the introduction of the term "digital user account" and its impact on BNPL providers. The discussion covers the regulatory requirements, potential challenges for compliance, and the broader legal context, including the possible effects of the Loper Bright case on administrative interpretations. With a July 30 compliance deadline looming, the episode provides critical insights for industry stakeholders navigating this significant regulatory shift.
The Consumer Finance Podcast and Payments Pros Podcast: CFPB's New Interpretive Rule: Buy Now, Pay Later as Credit Cards
Hosts: Chris Willis and Josh McBeain
Guests: Mark Furletti and Jason Cover
Date Aired: July 11, 2024
Chris Willis:
Welcome to a special crossover edition of The Consumer Finance Podcast and Payments Pros podcast. I'm Chris Willis, the co-leader of Troutman Pepper's consumer financial services regulatory practice. Today, Josh McBeain, one of the hosts of Payments Pros and I are going to be talking with two guests about the CFPB’s interpretive rule in which it has decreed that, buy now, pay later transactions are actually credit cards.
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Chris Willis:
Now, as I said, Josh and I today are co-hosting this episode and we have two of our colleagues on board to talk about the CFPB’s recent interpretive rule in which it decreed that buy now, pay later transactions are actually credit cards subject to at least some of the provisions applicable to credit cards in Regulation Z. Joining us to talk about that today are Mark Furletti and Jason Cover. Mark, Jason, thanks for joining us on the podcast today.
Mark Furletti:
Thanks, Chris.
Jason Cover:
Thanks, Chris.
Chris Willis:
This is a really juicy topic. I'd really love to ask the questions. But I think I should yield to you, Josh. Why don't you ask what questions are burning in your mind about this seemingly very interesting and controversial interpretive rule?
Josh McBeain:
Thank you, Chris. I would love nothing more than to talk about defined terms of Regulation Z with Mark and Jason. So, I'm going to jump right into it. How exactly has the CFPB reinterpreted, Regulation Z’s defined terms to subject a close-end buy now, pay later transaction, to Regulation Z’s credit card requirements?
Jason Cover:
I guess, Josh, first and foremost, they've created this new term called a digital user account. When you have a digital user account, you thus have a credit card. I mean, this is obviously all brand new. Importantly, however, digital user account isn't really defined by the rule. So, we have this kind of nebulous term, and the CFPB has helpfully provided some examples or some suggestions as to what a digital user account might be. They say, for example, that it's a secure profile that the BNPL provider activates for the consumer. Once activated, the account can immediately be used on an ongoing basis to access BNPL credit to make purchases. The account is typically associated with an amount available to spend that is akin to the credit limit of a traditional credit card. And the use of the account is frictionless borrowing process that allows consumers to rapidly access BNPL credit.
That's sort of, I guess, what we know, but we don't really have a precise definition that we can like, for example, advise our clients and tell them, “Yes, you are definitely using a digital user account with your product or you're not.” We just kind of have this suggested use case here where you're buying products on credit, with some sort of account that someone accesses.
Josh McBeain:
Thank you, Jason. So, as I understand it, if a buy now, pay later provider is offering a digital user account, they may be subject to Regulation Z's requirements for credit cards, which are numerous. So, are there any specific ones? Did the CFPB provide any more specificity on that? Or is it all the credit card requirements?
Mark Furletti:
Josh, the press release and everything seems to suggest that they were mostly caring about ensuring that consumers using buy now, pay later products had the ability to get access to dispute rights with merchants. So, there's billing error resolution rights under the Fair Credit Billing Act, for when a consumer experiences a merchant, perhaps that charges them the wrong amount, or overcharges them, or something along those lines. For the most part, that's what, at least in the press releases and in some of the public pronouncements of the CFPB, that's been the focus.
But of course, as you noted, the requirements under Reg Z are just – there are many, many of them and they can be quite onerous. So, what I was hoping to do is briefly discuss kind of how there are different requirements that apply to different types of “credit cards.” Let me start by just briefly outlining, if you look at the definition of credit card in Reg Z in 1026.2A15, you'll see that there's a few different definitions there. One of the definitions, it’s why I call a CARD Act credit card, and Reg Z called that a credit card account under an open-end, not home secured, consumer credit plan. Very pithy defined term.
That's the CARD Act credit card. Most people are very familiar with CARD Act credit card. They're the ones that they probably carry in their wallets today that allow them to make purchases at various merchants. And then, if they want to revolve, the balance they can. So, those are generally attached to open-end credit. Those kinds of products, they're both subjected to subpart B, and subpart G protections under Reg Z. What that means is, there's the felicitation disclosures and account opening disclosures. They get periodic statements. There's liability limits. There's claims and defenses. Ability to assert claims and defenses against the card issuer that you can assert against the merchant, and there's billing error resolution.
On top of all that, as a consequence of the CARD Act, there's also these other protections that relate to ability to repay and first-year fee limit and posting the agreement on the Internet, et cetera. So, that's kind of the full-blown that’s about all of the provisions that could potentially apply, I'd say, apply to the CARD Act credit card, at least the credit card-related ones. Then you have another definition in Reg Z for a charge card, and a charge card ends up getting treated like 90%, it's like 90% is burdensome as a CARD Act credit card. So, the vast majority of the requirements that apply to a CARD Act credit card, apply to a charge card.
Then we have, let's say a non-CARD Act, non-charge card credit card. That's what this rule purports to make the digital user account that Jason described. So, a digital user account, where what protections does it get, it doesn't get those subpart G protections under the CARD Act, generally speaking. It doesn't get the ability – you don't have to do an ability-to-pay analysis. There aren't limits on the first-year fees, at least as traditional. This is talking about traditional buy, now pay later, and posting of agreements don't have to do that.
Jason Cover:
Importantly, the new late fee rule, if applicable, I'm sorry, if it went into effect for credit cards would not apply to this type of credit card.
Mark Furletti:
That's right, yes. Because those late fee limits are in subpart G, and so they're not going to apply. But where that leaves you with respect to this kind of non-CARD Act, non-charge card credit card is you have to comply with subpart B, which account opening disclosures, periodic statements, limits of liability, billing error, all that. Then, on top of that, you may, depending on the credit, have to additionally comply with subpart C. Again, depending on what the product is. If it's a traditional buy now, pay later product, then you wouldn't have to because there's no finance charge. Because traditional buy now, pay later is a zero APR product.
But the subpart B requirements are really onerous. I would say, the periodic statements are really, really difficult to kind of create. That's an area where most clients will take months to develop their periodic statements, because they're doing lots of testing, just because they're pretty challenging. Then, the other issue here is most of these products, the providers think of them as kind of like, “Oh, there's one buy now, pay later transaction. Oh, now there's another by now” – they think of these things as separate transactions. Clearly, when you have a billing statement, and you try to bring them all together into one place, what does that do? You also have potentially different payment due dates.
So, I think that part of it, it could be fairly challenging. But fortunately, as Jason is going to tell us a little later, there's ample time. Right, Jason? For buy now, pay later providers to deal with all this new burden.
Jason Cover:
I guess, Mark, just to sort of add insult to injury, and I know, our colleague, Josh has gone through this process with us, you'll have to go through subpart B piecemeal and it's not always clear this is intended for open-end credit, and we're talking about closed-end credit. It's not always clear what provisions apply to a closed-end credit card. There's various references to open-end credit. There's references to Card Act cards. There's references to creditors and you sort of have to parse through all this and sometimes just make some risk-based decisions about what is or isn't applicable under subpart B to a “closed-end credit card.”
Josh McBeain
: To that point, Jason, an interpretive rule, the CFPB mentions dispute rights and billing statements that they find those important and those are subpart B rights that they want certain BNPL transactions to have. But there are account opening disclosure requirements subpart B, aren’t there?
Jason Cover:
Yes. I honestly think, I don't know if the CFPB missed that. But I do worry, based on some of the representations in the industry, that folks are largely glossing over all of these other, whether it's periodic statements, account opening disclosures, all of these other things they need to do. You may not just be able to rely on your current consumer facing agreement. You need to give it a close look and check. Again, that gets to Mark's point about timing. All of this is laborious and time intensive.
Josh McBeain:
Well, thank you both. I know the CFPB, they characterize this as an interpretive rule. They are reinterpreting some of the definitions in Reg Z to get to this conclusion. But is that name, interpretive rule, is that proper in this instance?
Jason Cover:
It's fairly clear that they didn't want to go through the normal rulemaking process. So, I think there's two considerations there. There's the Administrative Procedures Act, and that's your arbitrary and capricious rulemaking and all of those fun things. And then Dodd-Frank actually has separate requirements for rulemaking which include a small business study, which obviously wasn't done here. You see how all this plays out with all of the CFPB rulemaking where it's been litigated for years. So obviously, I think they were trying to avoid that.
But pertinent to your question, I mean, this feels like an actual amendment, I think, to both Mark and I. Just for example, I'm going to read the definition of credit card in both the Truth in Lending Act in Reg Z. So, for the Truth in Lending Act, a credit card means any card, plate, coupon book, or other credit device existing for the purpose of obtaining money, property, labor, or services on credit. Then for Reg Z, it's very similar, but just views in a fulsome manner, I'll read it anyway. Credit card means a card plate or other single credit device may be used from time to time to gain credit.
So, I think if you had asked us or most industry practitioners a month ago, what card, plate, coupon book, or other single credit device meant. We would have all said, almost to a tee, other than another comment for open-end credit. Did that meant an actual physical device, right? You actually had to manifest something, whether it was on paper, on a card, on something in the physical world of not electronic to constitute a credit card under both TILA and Reg Z.
Mark Furletti:
And if I could just build on that, there's this, and I'm not an expert at Latin, but there's this concept of, I think, ejusdem generis of the same kind, class, or nature, kind of concept to statutory construction. When you look at what these words mean, if I say, what is the plain meaning of card? I think people have an idea of what that means. It could be a business card, it could be a plastic card, but it's some physical device. Then plate, I think, back in the old days, I remember my grandparents would call their credit cards, like charger plate or something like that.
So, I think, again, a piece of material that you could hold. A coupon book is certainly something that has a physical manifestation, and then, or other credit device. I think when you interpret that list, when you look at that list, the catch-all, it's kind of like, all those things need to be like each other. I think other credit device means also something tangible. This all makes sense, because I think the whole reason these rules exist, are so if a consumer drops this thing. Because you can imagine, if you drop a card, a plate, a coupon book, or a real device, physical device on the ground, and someone picks it up, they can access credit with it. It's not the same with a digital user account. There can be many more fraud protections on that kind of account.
I just don't think this makes any sense. We have some colleagues who are researching presently the idea of whether the kind of Administrative Procedures Act aspects of this. But to me, this is redefined – I mean, it's going beyond. It’s not even merely – so not only is it – it's certainly not an interpretive rule. It's a lot more than that. Then, I think it's a rule that directly contravenes the plain language of the statute. So, even worse.
Jason Cover:
Mark, just to belabor that point. I think, one of the things you could point to that, “Oh, this is in line with what's exist,” is comment to Roman IIC. This is an exception for an account number tied to an open-end account that can make purchases. But even that, it’s like, I get this account number, I can go somewhere with it. There's no security or fraud protections. I can buy things. But to your point, a digital user account, most of the people that offer those, you have to log in, you have to have a password. There's a bunch of security steps that go in. It's not just something you can grab and start running around with and make purchases necessarily.
Chris Willis:
So, Mark, Jason, it seems to me that given what you've just noted, and particularly if we have the idea of court deference to administrative interpretations of statutes going the wayside because of Chevron deference going away in the Loper Bright case, it seems like there's room for an argument here, that the interpretation that's being used to support the BNPL rule may be arguably inconsistent with the Truth in Lending Act itself. What do you think about that?
Mark Furletti:
Yes, I mean, absolutely, Chris. That's my exact point with looking at the TILA definition and then comparing it to this interpretive rule, that basically reading the TILA definition, something that is not there, i.e., a credit card being something that doesn't have physical manifestation. So, I totally agree. I think it'll be something that can be raised in litigation, I think at some point.
Chris Willis:
Yes. Well, there's lots of that going around these days. So, we'll see what happens in that regard. Let me just ask the final question that we have on our list for today. When did the CFPB set the compliance deadline for this new change its made through this interpretive rule?
Jason Cover:
They've given us tons of time, Chris. July 30th of this year.
Mark Furletti:
You heard that. That's in a very short period of time. It's less than 45 days from now, yes.
Chris Willis:
Is that feasible for buy now, pay later providers?
Jason Cover:
I would just kind of say, Chris, I think, to Mark's point, the CFPB has stylized this as Fair Credit Billing Act protections. And even that, I think, would be nearly impossible. We've worked with clients in the past, just on the policies and procedures around those. Many folks, I think, don't realize that that includes for every dispute that comes in, that means analyzing it for billing errors, unauthorized use, and potentially claims and defenses that Mark mentioned, as well. So, it's like a multiple-step process just to do that, and I think it gets lost in the flux here a bit.
But then also, talking about all of those subpart B obligations that Mark was referencing, going through that list and trying to figure out what does or doesn't apply. Then, at a minimum, having periodic statements that go hand in hand with those FCBA protections, account opening statements, all of that fun stuff. To me, it seems nearly impossible that anyone could do that in two months’ time.
Chris Willis:
Yes. It seems that way to me too. Frankly, I've seen CFPB examinations, a Fair Credit Billing Act compliance, and those are incredibly detailed in terms of all the things that are necessary to do it.
Jason Cover:
Yes. It's somewhat terrifying.
Chris Willis:
Yes, definitely. Well, gentlemen, thank you for being on the podcast today to talk about this interpretive rule. We'll have to see kind of what happens from the industry's reaction standpoint. Josh, thank you for co-hosting this episode of today's podcast with me. Of course, thanks to our listeners for tuning into today's episode as well.
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