“Buy Now, Pay Later” No Longer the Wild West: CFPB Rules Lenders Must Provide Full Credit Card Protections

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WASHINGTON, D.C. — In a significant shift, the Consumer Financial Protection Bureau (CFPB) recently ruled that Buy Now, Pay Later lenders are credit card providers according to the law. This move ensures that these lenders must offer users crucial legal protections and rights synonymous with traditional credit card use. Among these protections are the right to dispute charges and demand a refund from lenders after returning a product bought with a Buy Now, Pay Later loan.

“Consumers choosing Buy Now, Pay Later at checkout don’t know if they’ll receive a refund if they return their product or if the lender will help them if they didn’t get what was promised,” said CFPB Director Rohit Chopra. “Regardless of whether a shopper uses a credit card or Buy Now, Pay Later, they deserve the same customer protections under existing laws and regulations.”

The past few years have seen an exponential growth in the Buy Now, Pay Later market. These lenders often market their products as a simple way for consumers to afford pricey goods and services over time, without the need to pay interest. Everything from televisions to airline tickets can now be bought through these schemes, and their popularity spans across age groups, income levels, and races.

With the CFPB’s new rules, Buy Now, Pay Later lenders are obligated to extend many of the same rights and protections as classic credit card providers, including dispute and refund rights. This shift follows the CFPB’s discovery that more than 13% of Buy Now, Pay Later transactions involved disputes or returns. A sizable $1.8 billion was disputed or returned by customers at just five firms surveyed in 2021.

The interpretive ruling clarifies the criteria, under the Truth in Lending Act, that qualify Buy Now, Pay Later lenders as credit card providers. Consequently, these lenders are obliged to investigate disputes initiated by consumers, halt payment requirements during investigations, and sometimes credit refunds to consumers’ accounts. Moreover, they must credit the refunds to consumers’ accounts when they return products or cancel services. The rules also demand that consumers receive periodic billing statements akin to those distributed for traditional credit card accounts.

The CFPB launched its investigation into Buy Now, Pay Later in 2021 with a focus on debt accumulation, regulatory arbitrage, and data harvesting. The Bureau’s results, published in 2022, spotlighted the industry’s rapid growth and escalating consumer risks.

Shedding light on the Bureau’s efforts, Director Rohit Chopra stated, “While the term ‘credit card’ typically conjures an image of a plastic card with an embossed number, it encompasses a broad range of devices, including digital forms of credit payment.” He added that consumers deserve to know what to expect in terms of rights and protections, whether they use a traditional credit card or a Buy Now, Pay Later scheme.

With this rule, Chopra explains, the CFPB is clarifying how they would apply long-established law and regulations to this burgeoning form of credit. The goal is to ensure these new competitive offerings aren’t bypassing the vital rights and responsibilities under the law, while simultaneously providing a meaningful alternative to consumers.

This development stresses that we are entering a new era for the Buy Now, Pay Later market. With its place firmly established in the consumer credit sector, measures to ensure it operates within a fair and well-regulated framework will be pivotal for both consumer protection and the health of the sector.

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