Colorado Court Ruling Puts BNPL Lending Models Under Fresh Pressure

Buy now, pay later (BNPL)’s rapid expansion across retail, travel, healthcare and even everyday essentials has made it one of the fastest-growing credit products in the United States, but its growth is increasingly shaped by changing legal and regulatory boundaries.

Lending laws are a key determinant of BNPL providers’ fortunes and go-to-market strategies. FinTech providers argue that installment loans offered through digital checkout flows do not map neatly onto existing credit card regulations, which in turn define rates, disclosures and other practices.

The core challenge is that BNPL is treated differently across jurisdictions. Some states consider it closed-end credit, while others treat it like a credit-card-based product because access occurs through a digital user account. In filings to the Consumer Financial Protection Bureau (CFPB) as part of the (now rescinded) rulemaking on the subject, providers said that applying Subpart B of Regulation Z to short-cycle installment structures is unclear and risks disclosures that will likely confuse consumers.

Though the CFPB’s process has been chilled as the ultimate fate of the agency is up in the air, we noted that ambiguities may intensify after a significant appellate ruling in Colorado involving interest-rate caps under the state’s Uniform Consumer Credit Code.

The case centered on whether Colorado could enforce its interest-rate limits on loans extended to Colorado residents originated by banks located in other states.

The Nov. 10 ruling has held that “loans made in” the opt-out state includes loans in which either the lender or the borrower is located in that state. This reverses the lower court’s earlier view that the location of the lender alone determined where a loan was made. The new interpretation means Colorado’s opt-out now “no longer preempts Colorado’s interest-rate caps for loans from out-of-state banks to Colorado borrowers,” the opinion stated.

Colorado argued in its regulatory filings that it opted out because of “proliferating rent-a-bank arrangements,” where nonbank lenders use partner banks to “circumvent interest-rate caps in the borrower’s state.” 

The Colorado ruling confirms that states can enforce interest-rate caps when either the borrower or the lender is located within the state. This affects any BNPL or FinTech provider using an out-of-state bank partner to originate the loans. Colorado’s interpretation means state-level caps apply even when the lending bank is headquartered elsewhere, that federal rate exportation cannot be relied upon in opt-out states and that states may challenge lending structures.

That ruling applies will impact short term, no-interest BNPL providers since APR is calculated by dividing the total fees (including late fees) and charges by the loan amount and then by the loan term, expressed as a percentage.

BNPL firms may also need to increase their compliance staffing and their scenario testing because a single national pricing table may no longer be viable for longer-term loans. More fees, including those covering processing or operational costs layered in, influence the APR, pushing it higher (and towards the cap “ceilings”).

The Colorado ruling highlighted what industry organizations describe as an already uneven regulatory landscape, fostering what we’d term “APR fragmentation.”

The recent comments in the CFPB activity noted above hints at some of the key controversies and positions on both the FinTech and traditional banking sides. The comment letters are available here.

Among the overarching themes has been that BNPL oversight is being constructed through overlapping state actions, federal interpretations and active rulemaking rather than a single, unified framework.

Providers that rely on sponsor bank partnerships may need to track borrower location far more precisely in order to determine which interest-rate cap applies. This forces the integration of state-specific rate constraints into underwriting engines and profit models originally designed for uniform national deployment.

Some providers may simplify offerings by eliminating offerings in states with lower caps, shifting toward merchant-subsidized zero percent plans or narrowing credit availability for higher-ticket purchases. Others may establish multiple bank partnerships in order to “match” products with states that allow particular APR structures or consider filing an application to become a national bank.

Regardless, these changes introduce new operational costs and could impact the profitability (and viability) of current business models. The Colorado ruling also raises the question whether additional states will follow.

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