CFPB Tightens Rules for Buy Now, Pay Later Plans
Last updated May 2024
Beginning later this year, consumers who use Buy Now, Pay Later (BNPL) services should have an easier time disputing charges or getting refunds when they have problems with their purchases.
The Consumer Financial Protection Bureau (CFPB) issued an “interpretive rule” this week stating that because BNPL lenders are essentially operating as creditors, the Truth in Lending Act should cover purchases made using these plans. That means BNPL customers will be entitled to most of the key legal protections and rights that apply when purchases are made using conventional credit cards, including the right to dispute charges and demand refunds. The new rule is set to take effect in 60 days.
The CFPB said this new policy “will help bring consistency to this market.” It started looking into the burgeoning BNPL market several years ago, following a growing number of consumer complaints. In 2021, the CFPB conducted a survey of five BNPL plans and found that more than 13 percent of BNPL transactions, totaling $1.8 billion, involved a return or dispute.
Failure to provide dispute protections “can create chaos for consumers when they return their merchandise or encounter other billing difficulties,” the report noted.
“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,” said CFPB Director Rohit Chopra.
The CFPB’s ruling means BNPL plans must:
- Investigate consumer disputes and pause payment requirements during the investigation. Such “chargeback” rights are one of the main benefits of using a credit card.
- Provide refunds for returned products or canceled services.
- Provide periodic billing statements similar to those required of traditional credit card companies.
Mixed Reactions to the CFPB Decision
Consumer groups welcomed the agency’s decision to bring regulation to the Buy Now, Pay Later marketplace. But they want the agency to do more.
“BNPL companies often have intentionally operated outside of traditional regulations, arguing they’re not lenders or credit cards but instead, they’re some kind of financing unicorn that actually helps people. Those days are over,” said Teresa Murray, director of U.S. PIRG’s consumer watchdog office. “We believe the BNPL business model isn’t transparent and that some companies have worked to evade consumer protection laws.”
BNPL lenders objected, continuing to argue that their loans cannot be compared to credit cards.
The Financial Technology Association (FTA), a trade group that represents several BNPL lenders, said its members “are committed to strong consumer protections, including for disputes and refunds.” But Penny Lee, FTA president and CEO, said in a statement that Buy Now, Pay Later products “are fundamentally different from credit cards” and that consumers are using BNPL “responsibly and paying back in full and on time.”
Klarna and Affirm, two of the most popular BNPL services in the U.S., seemed to support the rule. Klarna said the rule was “baffling,” but called it “a significant step forward in getting BNPL regulation in place in the US.” Affirm said it was “encouraged that the CFPB is promoting consistent industry standards.”
The Many Downsides of BNPL
Buy Now, Pay Later appeals to shoppers who want to avoid credit card debt, don’t have credit cards, or who lack the money to make a purchase. They can use these point-of-purchase loans (with no real credit check) to buy almost anything (vacations, clothing, appliances, electronics, even groceries and gasoline) and repay the loan over time—typically four payments over a six-week period with no interest.
BNPL spending in the U.S. topped $116 billion in 2023 and is expected to grow 14 percent this year, according to Statista.
As Checkbook previously reported, as BNPL loans have soared, so have complaints about lenders to the CFPB and other consumer agencies. In many cases, when customers have problems with purchases and want refunds, BNPL companies point to their refund policies, which state that their affiliated sellers are obligated to handle problems. But until refunds get approved, customers may be required to continue making payments.
Consumer advocates are concerned about how younger people, a target demographic for these loans, are encouraged to buy more than they need and can afford. They would like to see better disclosures and better underwriting, similar to requirements for credit card applications.
As we’ve previously reported, many BNPL users don’t understand how these plans work and get hit with late fees. The Consumer Federation of America and the Center for Responsible Lending (CRL) surveyed consumers in California who used BNPL and found “substantial misunderstandings” about how these financial products work and the potential costs. More than a third (37 percent) said that in the last six months they had incurred a bank overdraft fee and 16 percent paid a late or rescheduling fee charged by the BNPL provider or bank.
“With many financially stressed consumers, including young people new to credit, using BNPL to buy groceries and make ends meet, we also need to make sure that consumers can afford to repay these loans and that late fees are not used as disguised interest,” said, Lauren Saunders, associate director at the National Consumer Law Center.
Saunders said she would like to see the CFPB extend the protections of the 2009 Credit CARD Act to BNPL products, which would require providers to assess a borrower’s ability to repay the loan and to charge only reasonable late fees.
More Info:
- From Checkbook: Buy Now, Pay Later Often a Debt Trap
- From U.S. PIRG: Buy Now, Pay Later: What to Know Before You Sign Up
Contributing editor Herb Weisbaum (“The ConsumerMan”) is an Emmy award-winning broadcaster and one of America's top consumer experts. He has been protecting consumers for more than 40 years, having covered the consumer beat for CBS News, The Today Show, and NBCNews.com. You can also find him on Facebook, Twitter, and at ConsumerMan.com.