New CFPB Regulations for Buy Now, Pay Later Loans

We’re all familiar with Buy Now, Pay Later (BNPL) options when shopping, Affirm and Klarna being two of the heavy hitters. They’re great for consumers who might not have the cash-on-hand to immediately buy something outright, and they’re generally zero- or low-interest offerings. Small businesses see it as a perk they can offer customers. But there are risks involved in these payment types, most notably on the consumer end—and these risks could wind up impacting the small businesses supporting BNPL. The Consumer Financial Protection Bureau (CFPB) put out a report in 2022 unveiling that over 13 percent of BNPL transactions resulted in a dispute or return. And in 2021, consumers disputed or returned $1.8 billion in transactions at the five BNPL firms the report studied. An inquiry into the BNPL market was launched in 2021 by the CFPB, and they continue to see customer complaints surrounding refunds and disputed transactions. Because of its rapid growth in popularity and the amount of continued complaints and risks associated with BNPL, the consumer watchdog decided it’s time to regulate.

In late May of 2024, the CFPB issued what’s called an interpretive rule declaring that BNPL lenders should be treated the same way as credit card lenders; therefore, they must follow the Truth in Lending Act (TILA) and Regulation Z rules that apply to credit cards. Today, consumers enjoy legal protections and rights as they pertain to conventional credit cards. This ruling requires that BNPL lenders give consumers the right to dispute charges and request refunds after returning something purchased through a BNPL loan. Furthermore, BNPL lenders must:

1. Investigate disputes initiated by consumers, and pause payment requirements while the investigation is ongoing.
2. Provide refunds for returned products or canceled services by crediting their accounts.
3. Provide periodic billing statements, similar to those you’d get for a traditional credit card account.

In the press release, CFPB Director Rohit Chopra stated “When consumers check out and choose Buy Now, Pay Later, they don’t know if they will get a refund if they return their product or whether the lender will help them if they didn’t get what was promised. Regardless of whether a shopper swipes a credit card or uses Buy Now, Pay Later, they are entitled to important consumer protections under longstanding laws and regulations already on the books.”

This interpretive rule will be effective 60 days after publication in the Federal Register. The public is allowed to submit comments on the interpretive rule through August 1, 2024. According to the website, “Given the rapid changes in this market, public comments will help inform where the CFPB can offer further clarity, including through rules and guidance, related to the Buy Now, Pay Later market.”

We’ll continue to monitor the latest developments in this area over at the Financial Pantry, your go-to location for all things small business.

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