Chris Willis is joined by Partners Mark Furletti and Jason Cover to delve into the CFPB's recent interpretive rule that classifies buy now, pay later (BNPL) products as credit cards under Regulation Z.
In this episode of The Consumer Finance Podcast, Chris Willis is joined by Partners Mark Furletti and Jason Cover to delve into the CFPB's recent interpretive rule that classifies buy now, pay later (BNPL) products as credit cards under Regulation Z. The discussion unpacks the controversy surrounding this rule, the subsequent FAQs released by the CFPB, and the broader implications for the BNPL industry. The episode explores the challenges and ambiguities posed by the rule, potential compliance strategies, and the likelihood of legal challenges. Tune in for an insightful analysis of one of the year's most debated regulatory developments in consumer finance.
The Consumer Finance Podcast: Navigating the CFPB's Controversial Interpretive Rule on BNPL Products
Host: Chris Willis
Guests: Mark Furletti and Jason Cover
Date Aired: October 10, 2024
Chris Willis:
Welcome to The Consumer Finance Podcast. I'm Chris Willis, the co-leader of Troutman Pepper's Consumer Financial Services Regulatory Practice. Today, we're going to be talking about a recent set of frequently asked questions that the CFPB released related to its interpretive rule classifying buy now, pay later products as credit cards.
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Now, as I said, today we're going to be talking about the CFPB's Buy Now, Pay Later interpretive rule which in my mind ranks as probably at least one of the top five most controversial things that the CFPB has done this year, classifying buy now, pay later accounts as credit cards under Regulation Z for various purposes, including things like periodic statements and Fair Credit Billing Act disputes.
The fury that sort of came from the reading of that interpretive rule has now been followed by a set of frequently asked questions that the CFPB has released. I think it's fair to say that the CFPB has not done anything to quell the controversy but rather has probably added to it through these frequently asked questions.
Joining me to talk about that subject today are two of my partners who are very, very well-versed in this subject. First, we have my partner, Mark Furletti, who's the other co-leader of our Consumer Financial Services Regulatory practice, and our other partner, Jason Cover, who also is an expert on Truth in Lending, credit cards, and buy now, pay later. Mark, Jason, thanks again for being on the podcast.
Jason Cover:
Thanks, Chris.
Mark Furletti:
Thank you, Chris.
Chris Willis:
Okay. Jason, let me start with you. We know we had this interpretive rule earlier this year where the CFPB basically took the position that if a buy now, pay later account is accessed through a username and a password that it is a credit card for certain purposes under Reg Z. They've now released these frequently asked questions, I guess, designed to educate the industry more about what they meant with the interpretive rule. What does the frequently asked questions cover?
Jason Cover:
Thanks, Chris. I guess one of the burning questions when the original BNPL card rules were released is, well, what the heck is buy now, pay later. I think, unfortunately, this FAQ doesn't really provide much assistance in that regard. They say buy now, pay later products are typically – so we don't even know if we can rely on this, but they're typically loans to consumers that are structured as installment loans and made to consumers for the purchase of personal, family, or household goods and services.
Anytime you get a loan for anything that's goods or services on a consumer basis, may be buy now, pay later, which is a pretty broad view. I mean, an auto loan could be covered here, right? To make matters worse, they kind of elaborate further they may or may not have interest or other finance charges. They may include fees. They may be four payments or less. They may be less than that or more than that. Who really knows?
Then to make this guidance even sort of less worthwhile, the FAQ specifically applies only one certain type of buy now, pay later product. That's what we typically call the traditional pay in four model that doesn't have a finance charge and is due in four payments. That’s kind of all we have to go on for the time being.
Chris Willis:
Okay. So far on the strike ball count, we've got the CFPB zero for one in terms of actually answering a question is what I hear you say, right?
Jason Cover:
Well, I guess it depends on whose point of view you're giving balls and strikes in. I think it might be very carefully intended to be as broad as possible. But maybe that's just a cynical view on my part, Chris.
Chris Willis:
Well, we enjoy cynicism here on The Consumer Finance Podcast, so I welcome it. Jason, the other thing that was the linchpin of the interpretive rule when it was released is that the buy now, pay later product was accessed through a digital user account, and that was the thing that made it a credit card, I think, in the CFPB's mind in the interpretive rule. Does the FAQ provide any clarity to the definition of what constitutes this digital user account that supposedly is the linchpin of making it a credit card?
Jason Cover:
You're absolutely right, Chris. The BNPL rule had two components we needed. Or maybe in theory, we needed something to be BNPL. Then you had to have this digital user account. The original rule never really defined it. It wasn't – if you look up the definitions of Reg Z, most of them are – I can read that and tell you for the most part whether you're in or out of a definition. They're pretty tight and have multiple components. If you're missing a component, then you don't meet that definition.
In contrast, the BNPL card rule loosely elaborated on what the digital user account may or may not be. Unfortunately, the FAQ is the same thing again. Generally, they say that it's accessed using a consumer’s digital user account, and this is a secure personal profile that BNPL provider activates for a consumer, enabling the consumer to access and use BNPL credit.
This is essentially the same thing they were saying before, and really it begs the question of how broad is this? Do we need a certain type of digital user account? Or, again, going to that extreme, is an auto loan where maybe I go to the same car dealer every year, and they keep my account information, and I don't have to complete the whole application for credit again. It's a broad swath here, and it's very, very difficult, I think, for folks that may be in the BNPL industry to know whether they're in or out. I'm not sure that this FAQ really helps us much.
Chris Willis:
Okay. I guess that means our cynicism level is only rising further as a result of that second answer from you, Jason.
Jason Cover:
I think that's right, Chris.
Chris Willis:
By the way, I just would point out as a historical matter that one of the criticisms of the Truth in Lending Act during its first roughly decade of existence was that it was too broad and too ambiguous about what was covered and what the disclosure obligations were. The major thrust as I recall it of the Truth in Lending Simplification Act was to make it much more defined of like you knew whether you were in or out, and you knew what disclosures you were supposed to give. It feels like that maybe this is calling out for another simplification process as we had in 1980, but we'll see if you get that.
Jason Cover:
Or, Chris, I suppose we could just read Reg Z as it is and not have random interpretive guidance.
Chris Willis:
Well, that would be even more helpful, I think. Mark, let me switch over to you. Another one of the things that I remember being very puzzled about after reading the interpretive rule was which parts of the open-end credit provisions in Reg Z are supposed to be applicable to a buy now, pay later “credit card” because the CFPB, as I recall, mentioned periodic statements and Fair Credit Billing Act disputes but just as examples and weren't very exhaustive about what was supposed to apply and what's not. Did they answer that question in the FAQ?
Mark Furletti:
Chris, they provide an answer, but it's an answer that's internally inconsistent and in conflict with where the remaining parts of the guidance actually conflict with it. Question three is a question about the extent to which what exact provisions of Reg Z might apply. In this regard, the CFPB says, “Well, the ones that apply to card issuers, they certainly apply because a BNPL provider is a card issuer for these purposes.”
Then they say that provisions that target open-end specifically, for example, open-end consumer credit plans, or that apply to credit card accounts under an open-end, not home-secured consumer credit plan, what I call CARD Act, credit card provisions only, to the extent they apply exclusively to those things, they say they don't apply.
But then they contradict themselves because later, if you go to page 11 of the guidance, they then go on to say that the periodic statement requirement that a periodic statement be mailed or delivered at least 14 calendar days prior to the end of the date on which the periodic statement must be provided, which is in 1026.5(b)(2)(ii)(B), that requirement is prefaced by the exact thing they say that when something is prefaced by it doesn't apply, i.e. the open-end consumer credit plans.
This makes no sense, right? They're saying, “Oh, any requirement applies exclusively to an open-end consumer credit plan doesn't apply.” But then later, they're telling us that one of the requirements that applies in that same way such that should be excluded, it's brought in, so it makes no sense.
The second problem with all this is that it appears they are deviating significantly from the plain language of the Truth in Lending Act itself. The Truth in Lending Act itself has a definition of creditor. A lot of people, practitioners, you don't often look to the Truth in Lending Act because Reg Z is normally comprehensive in how it treats things. But in this case, I think it's critical to look at that at the statute because it sheds a lot of light on some of the terms they're meaning in the regulation.
If you look at that definition of creditor, there's actually Congress who should trump the CFPB supposedly. They tell us exactly what provisions apply to a product like this, and they're talking specifically about someone who is a card issuer. But the credit date they issue is not payable by agreement in more than four or where there's not a finance charge. That's exactly what we're talking about here, particularly given that the rule singles out the traditional BNPL no fee. Then they are this kind of creditor.
The Congress says that the bureau by regulation can apply certain requirements, and they specify the requirements, and they're limited. There's only nine of them. The CFPB is applying requirements beyond those that are set forth in 1602(g), in 15 U.S.C. 1602(g), the definition of creditor in the Truth in Lending Act.
This seems very ripe for – in the post-Chevron world, a challenge because they are totally disregarding the statute. I mean, in addition to disregarding their own guidance, which they give on page six, they're also disregarding what the statute says. The statute applies a rather limited or narrow set of requirements to these kinds of creditors. Bottom line, what they have here, I think, is somewhat nonsensical. They said a bunch of stuff applies. They say some things don't. But then the principles that they're applying, they're not following themselves.
Chris Willis:
Mark, it sounds like from the tone of your comments that you're thinking about making a little career change and coming over and doing some litigation.
Mark Furletti:
Yes. I would welcome the opportunity to be involved in litigation over this because I feel pretty strongly that they're on thin ice.
Chris Willis:
Yes. We've talked so far about some of the burning questions that we all had when we read the interpretive rule when it first came out. We sort of, I guess, hoped and expected there’d be answers to those, although I don't know that we got the answers that we wanted. But, Jason, were there any unexpected things that showed up in the frequently asked questions?
Jason Cover:
Yes. I guess, Chris, I think the FAQ in some ways is more expansive than the original BNPL card rules. For example, the card rules say that lenders that issue digital user accounts to access BNPL credit are generally not subject to credit card regulations appearing in subpart G. Now, they snuck this little footnote in that said, “However, 12 CFR 1026.60, this is the card application solicitation disclosures in Subpart G, may apply.”
But they didn't tell us what types of BNPL card issuers might be subject to Subpart G or 1026.60 in particular. They've reinterpreted or expanded on this little footnote, I suppose, to make traditional paying for no finance charge. BNPL providers charge card providers under Reg Z that now must comply with 1026.60 and presumably need to cover anything else that might apply to a charge card under Reg Z as well. I saw that footnote before and wondered what they meant. But it definitely, I think, caught us a bit off guard to see that these charge card provisions were now being asserted as well.
Mark Furletti:
If I could just add to that, Chris. I mean, what they've done here is they've promulgated a second substantive rule, right? We had the first thing that they promulgated, which is a subset rule that it was not promulgated, I think, in accordance with the Administrative Procedures Act and should have been probably. Then now, they're doing yet another expansion under – they're saying something different than they said before, and they are subjecting a product to an additional set of requirements that they didn't say in the first – they made no mention of this in the first interpretation that they put out.
I would give this is a pretty – it's like a substantive change in the law. The step one was these things are credit cards. Now, step two is they're also charge card, even though we did not say that the first time around. We've gotten worse to the extent that we were looking for some guidance that maybe cabined in or narrowed down and made more clear what requirements apply. We've actually gotten the opposite of that. They're making new rules and, again, no administrative procedure. There's no comment. It's just like, “Here it is. This is our interpretation.” It seems totally in disregard of administrative procedures.
Chris Willis:
Okay. Mark, we had talked about periodic statements, and that was one of the things that was in the original interpretive rule. I know there were a lot of questions on the industry side about how a buy now, pay later provider is supposed to provide the information that's required by Reg Z in periodic statements. Did the frequently asked questions help clarify that question at all?
Mark Furletti:
Chris, I guess this is maybe the single thing in here that isn't totally bad news and isn't possibly introducing new and novel requirements. The CFPB suggests in here that the periodic statements could be done two ways. I think the prior guidance suggested there might have only been one. This is good. It's giving some flexibility to BNPL providers.
Specifically, the way their original guidance was written, it looked like you had to create a consolidated statement of all BNPL transactions. Imagine I have a calendar month statement period, and I make three transactions, three BNPL transactions. The prior guidance suggested, I think, that you might have to create a single statement for that month that reflects all three transactions and then reflects the payments due on all three of those transactions and provides information on the sum of those transactions.
That would have been onerous or could be depending on the systems that the BNPL providers have in place. They have said in this guidance that a BNPL provider can treat each BNPL loan as a separate credit card account. That is you can pretend each one is a standalone extension of credit for the purpose of the statement. Just as an aside, the way they worded that, I would have just said that you could have statements that reflect one transaction. But they say that each loan is a separate credit card account. I don't know why they want to say that someone could have 200 credit card accounts over the course of a year through doing a couple hundred purchases, but it's kind of a very odd way of saying it.
In any event, the bottom line is at least, I think, there's a little bit of flexibility here, and we can have transaction-level statements, or we can have digital user account-level statements. Either seem to be fine.
Chris Willis:
By the way, it also seems to me just from listening to you, Mark, that this concept that each transaction is a separate credit card or separate credit card account doesn't square very well with the rationale for it being a credit card in the first place that the digital user account is what makes it a credit card.
Mark Furletti:
I agree. Then, yes, that could open a whole can of worms. I don't think that's what they're saying here, but I agree with you. It's just a very odd way of answering this question.
Chris Willis:
Well, as you can see, I'm trying to angle to help you out with the litigation when it comes.
Mark Furletti:
Yes, there you go.
Chris Willis:
Well, Mark, Jason, do you have any last thoughts about the FAQ or advice about this for BNPL providers?
Jason Cover:
Chris, I think our experience clients are starting to make decisions on how to comply based on their business practices and their risk tolerance. But I would say this industry, BNPL in particular, I think is really jumped through a lot of hoops and bend over backwards in an attempt to comply, right? There hasn't been litigation. Most of the industry statements have been pretty positive, and the only ask has been, “Hey, could you help clarify what some of these things mean or what exactly we need to do?”
The answer, I think, has generally been, “Well, you need – everything has to be complied with, right? Whether it says open-end credit or not or if it's a charge card or not, everything is BNPL, and everything in Reg Z applies, so on and so forth.” Then sometimes, the charge card thing, additional items are tacked on. This is just a long way of saying I think at this point, attempts to get clarification either formally or informally may not be entirely helpful because the response aren't helpful and if anything just broaden the scope and the problems that we already have.
Chris Willis:
There it is, the final crowning example of cynicism from you, Jason. Thank you. Mark, what do you have to say to close?
Mark Furletti:
I mean, just to reiterate what I said before, I think if someone were to dig into all of this and spend some time, the challenge to it would write itself here where you have just a promulgation of a substantive rule that's inconsistent with the current rule and inconsistent with the Truth in Lending Act statute itself. Just so many problems that I'd like to see someone challenge it because I think, otherwise, there's going to be a fair amount of confusion, and it won't be clear what is a violation or what is not a violation in the eyes of the CFPB. I think at least they should be forced to go to be more disciplined and more clear about what they're doing and follow the law. It’d be nice to see something in that regard.
Chris Willis:
Well, Mark, I would definitely say that I agree with that sentiment because I view the CFPB's interpretive rule and this set of FAQs as being very well outside their authority set of actions that are very much right for a challenge. We'll just have to wait and see if somebody from the industry decides to do that either now or in response to some sort of enforcement action by the CFPB which might also trigger it.
For now, let me just thank both of you for being on the podcast and thank our audience for tuning in today. Don't forget to visit and subscribe to our blogs, TroutmanPepperFinancialServices.com and ConsumerFinancialServicesLawMonitor.com. While you're at it, why not visit us on the web at troutman.com and add yourself to our Consumer Financial Services email list? That way, we can send you copies of our alerts and advisories and invitations to the industry-only webinars that we put on from time to time.
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