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CFPB Redefines BNPL Loans: A Major Shift Under Regulation Z
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CFPB Redefines BNPL Loans: A Major Shift Under Regulation Z

The Consumer Financial Protection Bureau (CFPB) recently issued an Interpretive Rule that significantly impacts the "Buy Now, Pay Later" (BNPL) industry. This rule, effective from May 22, 2024, classifies BNPL products accessed via digital user accounts as "credit cards," making them subject to specific provisions of Regulation Z, which oversees credit card disputes and refund processes. This marks the first time the CFPB has extended these particular regulatory protections to BNPL products, traditionally not considered under similar regulatory scrutiny due to their structure of no finance charge and repayment in four or fewer installments.

Significantly, this Interpretive Rule follows the CFPB's victory at the Supreme Court, affirming its funding structure and thereby solidifying its regulatory authority. The rule dictates that BNPL digital user accounts are now considered “card issuers” under Regulation Z, meaning they must adhere to obligations regarding charge disputes and refunds, among other requirements. However, it's crucial to note that not all Regulation Z provisions apply, such as those concerning credit card ability-to-repay requirements and late fee restrictions, since BNPL products are not classified as open-end credit.

The CFPB has also highlighted various consumer protection concerns in the BNPL sector, such as potential overextension of credit, the imposition of multiple late fees, and the risks associated with data harvesting. Future regulations may address these issues more comprehensively. Furthermore, the Interpretive Rule opens for comments until August 1, 2024, inviting feedback that could shape further regulatory adaptations. This development underscores a significant shift in how BNPL products are regulated, aligning them more closely with traditional credit instruments and enhancing consumer protections.

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