Buy now pay, pay later
Financial Technology Association v. Consumer Financial Protection Bureau
Date: Oct. 18, 2024
Issue: Whether the Consumer Financial Protection Bureau (CFPB)’s buy now, pay later (BNPL) final rule exceeds its statutory authority and violates the Administrative Procedure Act (APA) and Truth in Lending Act (TILA).
Case Summary: The Financial Technology Association (FTA) sued CFPB in the United States District Court for the District of Columbia to enjoin the bureau from implementing its BNPL final rule.
In light of TILA’s Simplification Act, the Federal Reserve Board of Governors amended Regulation Z and adopted the regulatory definition of “creditor” that exists to this day. For purposes of Subpart B of Regulation Z, “creditor” means “any card issuer” that extends either open-end credit or credit that is not subject to a finance charge and is not payable by written agreement in more than four installments. CFPB’s Official Staff Commentary, issued through notice and comment, is the CFPB’s “official interpretation of Regulation Z.” The commentary never understood Regulation Z to apply to BNPL products. According to FTA, through CFPB’s past public statements, the bureau made clear BNPL products have never been understood to fall under Regulation Z’s requirements which govern card issuers.
However, in May, rather than going through notice and comment, CFPB published an interpretive rule extending federal safeguards for traditional credit cards to shoppers using BNPL loans. The BNPL rule breaks from CFPB’s longstanding view that those who provide BNPL products are not “creditors” subject to subpart B of Regulation Z because they are not “card issuers.” Conversely, the BNPL rule explains that lenders who issue BNPL digital user accounts are “card issuers.” Under Regulation Z, the term “credit card” means any card, plate, coupon book, or “other credit device” existing to obtain money, property, labor, or services on credit. CFPB maintains “other credit devices” include BNPL products and thus, BNPL providers are “creditors.”
In its complaint, FTA claimed the BNPL rule must be vacated because it suffers from multiple legal defects under the APA and TILA. First, FTA argued the BNPL rule violates both the APA and TILA’s notice-and-comment requirements. FTA claimed under the APA, agencies must use the same procedures when they amend a rule as they used to issue the rule in the first instance. According to FTA, CFPB needed to go through notice and comment because the BNPL rule effectively amends the official commentary because the official commentary was promulgated through notice and comment. In addition, the BNPL rule violates TILA, because TILA requires CFPB to go through notice-and-comment rulemaking before extending obligation to card issuers who do not impose a finance charge or require repayment in more than four installments.
Second, FTA argued CFPB exceeded its statutory authority under TILA in several ways. To begin, FTA claimed the BNPL rule violates TILA by interpreting the term “credit card” to include BNPL products, which they are not. What is more, TILA declares that any new disclosure obligation “shall have an effective date of October 1, which follows by at least six months the date of promulgation.” In FTA’s view, the BNPL rule’s effective date was July 30, 2025, only two months after it was promulgated. In addition, FTA argued the BNPL rule violates TILA because it imposes obligations beyond the limitations TILA allows for card issuers that provide credit that does not impose a finance charge and is not repayable in more than four installments.
Finally, FTA argued the BNPL rule is arbitrary and capricious under the APA. According to FTA, the new disclosure obligations are ill-fitted for BNPL products; CFPB provided BNPL providers insufficient compliance time; CFPB failed to acknowledge the change in its position; CFPB failed to provide a justification for the BNPL rule despite the serious reliance interests its preexisting policy on BNPL products fostered; and the BNPL rule is based on an improper understanding of the law.
Bottom Line: CFPB’s answer to the complaint is due Dec. 21, 2024.
Document: Complaint
