Buy Now, Pay Later (BNPL) Providers Sue the Consumer Financial Protection Bureau (CFPB) Over New Regulations

The Financial Technology Association (FTA), a trade group representing numerous fintech companies including prominent Buy Now, Pay Later (BNPL) providers, has filed a lawsuit against the Consumer Financial Protection Bureau (CFPB). The lawsuit challenges new CFPB regulations governing BNPL loans, arguing that the rules are impractical and impossible to implement, ultimately harming both the BNPL industry and consumers. The case, filed in the U.S. District Court in Washington, D.C., seeks to overturn the regulations entirely.

The core of the FTA's argument centers on the CFPB's classification of BNPL services as credit cards, subjecting them to the same stringent disclosure requirements under Regulation Z of the Truth in Lending Act. The FTA contends that applying these regulations, designed for revolving credit accounts like credit cards, to the fundamentally different structure of BNPL loans is illogical and creates insurmountable compliance challenges.

The CFPB's interpretive rule, which took effect at the end of July 2024, mandates specific disclosures related to account openings, billing statements, returns, and dispute resolution. While the CFPB announced a grace period in August 2024, delaying enforcement of penalties during a transition period, the FTA argues that the underlying requirements themselves are fundamentally flawed and unenforceable for BNPL providers.

The Heart of the Dispute: Incompatibility of Regulations and BNPL Structure

The lawsuit highlights several key areas where the CFPB's regulations clash with the realities of BNPL operations:

1. Periodic Statements: Regulation Z requires credit card issuers to provide periodic statements at least 14 days before the payment due date. This allows consumers ample time to review transactions and ensure accuracy. However, the FTA argues that this requirement is impossible to meet for BNPL loans, which typically involve shorter, fixed repayment schedules often structured in two-week installments. Unlike credit cards where multiple purchases accumulate within a billing cycle, BNPL loans are typically closed-end, meaning each loan has its own separate repayment period. Sending a consolidated statement 14 days before each individual loan's due date, across potentially numerous concurrent loans, is logistically infeasible according to the FTA.

The suit claims that forcing BNPL providers to adhere to this requirement would necessitate a complete restructuring of their operations, potentially delaying payments and causing consumer confusion. The FTA emphasizes that the CFPB’s failure to acknowledge this inherent incompatibility renders the rule arbitrary and capricious.

2. Billing Error Resolution: The lawsuit also points to the complexities of complying with Regulation Z’s billing error resolution provisions. Implementing robust systems to handle disputes and investigate billing errors requires significant technological investment and operational changes. The FTA argues that this would place an undue burden on BNPL providers, many of whom are relatively smaller companies compared to established credit card issuers. The suit states that meeting these requirements would necessitate a “significant buildout of technology and processes,” representing substantial costs and effort for BNPL businesses.

3. Lack of Clarity on Disclosure Requirements: The FTA contends that the CFPB’s rule lacks sufficient clarity regarding specific disclosure content. For example, the suit mentions uncertainty about the precise information that must be included in periodic statements, if any are required at all given the difficulties noted above. This ambiguity, according to the FTA, leaves BNPL providers guessing about compliance, increasing the risk of non-compliance and potential legal repercussions. One specific example mentioned is the uncertainty around what information needs to be presented in account opening disclosures.

4. Truth in Lending Act Violation: The lawsuit further alleges that the CFPB violated the Truth in Lending Act by failing to follow proper notice-and-comment rulemaking procedures before extending the obligations to BNPL providers, who, unlike credit card issuers, do not generally impose finance charges or require repayment in more than four installments. This procedural argument suggests that the CFPB may have overstepped its authority in extending these regulations to BNPL firms.

Buy Now, Pay Later (BNPL) companies, highlighting their features, benefits, and potential drawbacks.

Company	Interest	Loan Term	Fees	Credit Line	Pros	Cons
Affirm	0% to 36%	Up to 36 months	None	Up to $17,500	Flexible payment plans; no late fees.	Higher interest rates for some plans.
Afterpay	None	Six weeks	Late fees up to 25%	Varies by user	Interest-free installments; widely accepted.	Late fees can accumulate quickly.
Klarna	0% to 19.99%	30 days, six weeks, up to 36 months	$7 late fee; up to $27 for returned payments	$1,000-$10,000	Available in many countries; multiple payment options.	Late fees apply for missed payments.
PayPal Pay In 4	None	Six weeks	None	$1,500 per transaction	Easy integration with existing PayPal accounts; purchase protection.	Limited availability in some regions.
Zip (formerly QuadPay)	None	Six weeks	$1 per payment (up to $4 total)	Varies by user	Available for online and in-store shopping; virtual card for purchases.	Convenience fee adds to purchase cost.
Splitit	None	Varies	None	Based on credit card limit	Uses existing credit cards; no credit checks required; allows earning rewards on purchases.	Requires sufficient credit limit on card.

Industry Responses and CFPB’s Stance

Some major BNPL providers, when contacted, declined to comment publicly on the ongoing litigation. However, previously submitted commentary to the CFPB reveals concerns echoed in the FTA's lawsuit. For example, some companies suggested alternative approaches to statement delivery, focusing on providing updates only when significant events occur such as a new loan origination, a payment due date, a payment made, or a dispute resolution. These suggestions highlight the industry's attempts to navigate the unclear and arguably incompatible requirements imposed by the CFPB.

The CFPB’s stance remains that the regulations are necessary to protect consumers. The Bureau likely argues that the similarities between BNPL loans and credit products warrant similar consumer protections. The upcoming legal battle will likely focus on whether the CFPB's interpretation of existing law is justified, and whether the challenges of compliance posed by the new rule outweigh its purported benefits. The lawsuit’s success hinges on demonstrating to the court that the regulations are indeed impractical, impossible to implement effectively, and ultimately detrimental to the BNPL industry and consumers. The outcome will significantly shape the future of the BNPL industry and its regulatory landscape.

The Broader Implications of the Lawsuit

This lawsuit has far-reaching implications for the fintech industry and the broader financial ecosystem. The outcome will significantly affect the operations of numerous BNPL providers and potentially set precedents for the regulation of other emerging financial technologies. The case raises important questions about the balance between consumer protection and the ability of innovative financial products to thrive. The court’s decision will influence how regulatory bodies approach the oversight of rapidly evolving financial technologies and determine the extent to which existing regulations can effectively accommodate new business models. Furthermore, the degree to which the court accepts or rejects the FTA’s arguments regarding practical impossibility and procedural errors will provide crucial guidance on the balance between regulatory authority and the operational realities of fintech companies. The dispute highlights a critical need for clear and well-defined regulations that are both effective in protecting consumers and feasible for businesses to implement. The case's outcome could reshape the regulatory landscape, influencing how future financial innovations are approached and governed. The debate goes to the core of ensuring both consumer protection and the fostering of innovation within the financial sector.