CFPB retreats from classifying BNPL like credit cards

Al Drago/Bloomberg

UPDATE: This article includes comments from a CFPB blog post about its payday lending rule.

The Consumer Financial Protection Bureau is planning to revoke its interpretive buy now/pay later rule that classified Pay in 4 loans as credit cards as the agency continues to undo former Director Rohit Chopra's flurry of actions undertaken late last year. 

The bureau on Wednesday filed a joint motion to stay with the U.S. District Court for the District of Columbia, saying that it did not plan on defending its position that Pay in 4 BNPL loans were credit cards. 

"The Bureau is planning to revoke the Interpretive Rule. To allow time for the Bureau to do so, the parties jointly request that the Court stay this litigation until the Interpretive Rule is Revoked," according to the filing. The CFPB suggested the court require a status report on its progress toward revocation by June 2, and every 30 days after. 

The Financial Technology Association, a trade association representing fintechs and BNPL providers such as Zip Co. and Klarna, first brought the suit against the CFPB in October. 

"We applaud the CFPB for committing to revoke the buy now/pay later interpretive rule," Penny Lee, president and CEO of the FTA, told American Banker in an email. "This interpretive rule was deeply flawed, seeking to fundamentally change the regulatory treatment of pay-in-four BNPL products without legislative authority and without a clear and proper understanding of the unique nature of the product."

Phil Goldfeder, CEO of the American Fintech Council, which also represents fintechs including BNPL provider Affirm, said the revocation "opens the door to a more tailored and pragmatic approach. 

"We were encouraged by the CFPB's proposed interpretive rule on BNPL and appreciated the bureau's effort to explore a clear regulatory path for this growing market," Goldfeder said. "AFC is eager to work with new CFPB leadership to develop a regulatory framework that reflects the realities of BNPL products, preserves consumer protections and supports continued access to transparent, responsible financial tools."

The CFPB did not respond to a request for comment.

Pay in 4 BNPL loans live in a gray area when it comes to regulatory oversight. Installment loans with four or less payments are exempt from the Truth in Lending Act and Regulation Z. The CFPB's interpretive rule, issued under the leadership of former Director Rohit Chopra, was an attempt to categorize Pay in 4 loans as open-ended credit, which require BNPL lenders to adhere to certain standards, such as providing lending disclosures and offering consumers the right to dispute charges and receive refund credits to their balances.

The original complaint argued that the CFPB's interpretive rule was illegal for three reasons. First, it claimed that the bureau's expanded definition of a "credit card" was incorrect, and that BNPL products do not fit key elements to previously established definitions of credit cards, despite the fact that some BNPL providers, such as Klarna, provide consumers with "purchasing power" similar to the structure of other revolving credit products. 

The suit also contended that the CFPB ignored the Administrative Procedure Act through its interpretive rule, and claimed that the rule was "arbitrary and capricious" due to ill-fitting disclosure requirements. 

The filing was made public on the same day that the CFPB said in a blog post that it would "not prioritize enforcement or supervision actions with regard to any penalties or fines associated with the Payment Withdrawal provisions and the Payment Disclosure provisions" in its payday lending rule that was set to go into effect at the end of March, eight years after Richard Cordray – the bureau's first director – first announced it. 

The payday rule is the first to regulate short-term and small-dollar loans, vehicle title loans and other high-cost installment loans, and requires lenders to provide consumers with a "first payment withdrawal notice" at least three business days before the first attempt to withdraw funds. BNPL loans, which take out the first payment at the point of sale, would fall under that category unless the bureau carves out specific exemptions for the industry.