BNPL Trade Group Sues CFPB Over ‘Impossible’ Disclosure Rules

The suit filed last week seeking to stop a new rule from the Consumer Financial Protection Bureau (CFPB) governing buy now, pay later (BNPL) loans has a number of what, to some observers, might be argued as technicalities.

But a deeper dive into the suit also finds that the challenge presented by the Financial Technology Association contends that it will be simply impossible for the BNPL firms themselves to satisfy new regulations — governing everything from billing statements to refunds.

To that end, as reported here, the FTA  a trade group that includes a number of FinTechs, including Klarna, among its members, is suing the CFPB in the U.S. District Court in Washington D.C., and asserts that the new rule must be “set aside,” because, in part, the CFPB has violated the Truth in Lending Act’s requirement that “the CFPB proceed through notice-and-comment rulemaking before extending obligations to card issuers who do not impose a finance charge or require repayment in more than four installments.” That’s an argument based on procedures, we note.   

The suit also argues that the CFPB has been operating outside the bounds of its statutory authority in issuing the interpretive rule, which took effect at the end of July, though the CFPB also said in August that it would not seek penalties against BNPL firms while they transition to compliance (in effect, a grace period).

The lawsuit makes the argument that new obligations — extending the same disclosure practices that are hallmarks of credit cards because BNPL providers will now be classified as credit card providers — are “ill-fitted” for BNPL products. 

As stated by the FTA in the suit, “the new rule is arbitrary and capricious because it fails to consider how its new disclosure obligations are ill-fitted for BNPL products, demonstrating that the CFPB fails to consider and address important aspects of how BNPL products function on the ground.”  

The CFPB’s interpretive rule focuses on the digital user accounts that would be and are used to access BNPL offerings, and by classifying them as credit cards, would subject those providers to adopt Regulation Z obligations governing account disclosures, billing statements, returns and disputes.

The FTA’s suit states that complying with periodic statement issuance — as applies to credit cards — is “infeasible for BNPL products” and says that the structure of credit cards, where billing statements must be sent at least 14 days before payment is due, is such that “consumers can make numerous purchases at different times during a billing cycle with payment due for the collective amount on the same date irrespective of when the purchase occurred during the billing cycle.” But since BNPL loans are closed end, and require payments in two-week increments (typically), it is “impossible to send periodic statements for all loans collectively” at least 14 days in advance of the next payment, per the FTA. 

“By refusing to acknowledge that BNPL providers cannot comply with Regulation Z’s periodic-statement requirement, without changing the structure of BNPL loans, the new rule raises more questions than it answers, creating uncertainty for FTA’s BNPL-provider members, who are left to attempt to comply with the New Rule’s insufficiently articulated requirements in inconsistent ways that will only confuse consumers,” the suit states. 

There would also be the need to embrace a “significant buildout of technology and processes,” to satisfy requirements tied to billing error disputes, the suit adds.

Affirm and Klarna, reached by PYMNTS on Monday (Oct. 21) declined to comment. Affirm’s own commentary letter posted by the CFPB in July states that, among other things, including with “account opening-disclosures, it is not clear what content BNPL providers must include in periodic statements, if any.” 

In addition, in its own recommendations to the CFPB, Affirm’s commentary offers that “given the lack of clarity on the timing of periodic statements, Affirm suggests that the Bureau promulgate a requirement that a statement be delivered every month in which any of the following occurred in the prior month: (i) the customer received a new BNPL loan, (ii) the customer had a payment due on a BNPL loan, (iii) the customer made a payment on a BNPL loan, or (iv) there was a dispute or resolution of a dispute on a BNPL loan.”

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