Buy Now, Pay Later: New Regulations

For the past few years, Buy Now, Pay Later (BNPL) services have operated in a regulatory grey area. Companies like Affirm, Klarna, and Afterpay allowed millions of Americans to split purchases into four installments without the strict consumer protections applied to traditional credit cards. That era is coming to an end. The Consumer Financial Protection Bureau (CFPB) has issued an interpretive rule that fundamentally shifts how these digital lenders must treat you.

The CFPB Interpretive Rule Explained

In May 2024, the CFPB issued a landmark decision regarding digital installment lenders. The bureau determined that BNPL lenders essentially function as credit card providers. Under this interpretation, they must adhere to the Truth in Lending Act (TILA) and Regulation Z.

Before this ruling, BNPL providers argued that because they often do not charge interest or finance charges on their standard “Pay in 4” products, they were not subject to the same laws as Chase, Citi, or Capital One. The CFPB rejected this argument. They stated that these digital apps provide a “credit device” that mimics a credit card, regardless of whether a physical plastic card exists.

The rule officially went into effect 60 days after its publication in the Federal Register. This means that by late 2024, consumers should see significant changes in how disputes and billing errors are handled across all major BNPL platforms.

Three Key Protections You Now Have

The primary goal of the new regulation is to close the gap between the protections you get when swiping a Visa card and the protections you get when clicking “Pay with Klarna.” There are three specific areas where your rights have expanded.

1. The Right to Dispute Charges

This is the most critical change for everyday shoppers. Previously, if you bought a product using a BNPL service and the item arrived damaged (or never arrived at all), you were often stuck in a difficult position. The lender would continue to deduct payments from your bank account while telling you to take it up with the merchant.

Under the new rules, BNPL lenders must investigate disputes. If you file a dispute stating you did not receive the goods, the lender must pause your payment obligations for that specific transaction while they investigate. They cannot force you to pay for an item you do not have.

2. Refund and Return Processing

Returning an item bought via BNPL can be a headache. Sometimes the merchant processes the return, but the BNPL lender continues to auto-draft payments because their systems are not synced.

Now, lenders are legally required to credit your account promptly once a return is processed. If there is a billing error where you are charged for a returned item, the lender must resolve it within the specific timeframes mandated by federal law (usually within two billing cycles).

3. Periodic Billing Statements

BNPL apps are designed to be frictionless, which sometimes leads to confusion about how much is owed and when. To comply with credit card regulations, providers like Affirm and PayPal Pay in 4 must now provide periodic billing statements.

These statements do not necessarily have to be mailed to your house; they can be digital. However, they must clearly outline:

• Your transaction history.
• Any fees charged.
• Upcoming due dates.
• Your rights regarding billing errors.

Impact on Major Lenders: Affirm, Klarna, and Afterpay

The industry reaction to these changes has been mixed but largely compliant. These companies have known regulatory scrutiny was increasing and have prepared for this shift.

Affirm Affirm has generally positioned itself as the “transparent” alternative to credit cards. Their CEO, Max Levchin, has historically welcomed regulation that creates a level playing field. Affirm already offered some dispute resolution features, but they will need to ensure their formal processes meet the strict timelines required by the Truth in Lending Act.

Klarna Klarna relies heavily on AI and automation to manage its massive global volume of small transactions. The requirement to investigate disputes may force Klarna to increase its customer service infrastructure. If a consumer disputes a charge, an AI chatbot may not be sufficient to satisfy federal investigation requirements. This could lead to higher operational costs for the company.

Apple Interestingly, shortly after the CFPB ramped up scrutiny on the sector, Apple announced in June 2024 that it was shutting down its “Apple Pay Later” service. Instead, Apple is choosing to integrate third-party loans (like those from Affirm and Citi) directly into Apple Pay. While Apple cited strategic reasons, the regulatory burden of becoming a “credit card issuer” under CFPB rules likely played a role in their decision to exit the direct lending space.

Will This Make BNPL More Expensive?

One concern for consumers is whether these regulations will end the era of interest-free loans.

The “Pay in 4” model relies on merchant fees. When you buy a pair of sneakers, the retailer pays the BNPL provider a fee (often 3% to 6%) to process the transaction. The consumer pays 0% interest if they pay on time.

Compliance costs money. Handling formal legal disputes, generating billing statements, and managing paused payments requires staff and software. There are two potential outcomes for pricing:

1. Stricter Approval Odds: Lenders may become more selective about who they approve. If they are legally on the hook for disputes, they may avoid risky borrowers.
2. Higher Late Fees: While the CFPB is also cracking down on excessive late fees across the finance sector, lenders may strictly enforce the fees they are allowed to charge to offset compliance costs.

Why This "Loophole" Existed

It is helpful to understand why this regulation was necessary. The Truth in Lending Act was written in 1968. It governs how lenders disclose interest rates (APR) and handle disputes. However, the law generally applied to loans that either had a finance charge or were payable in more than four installments.

BNPL companies cleverly designed their products to be payable in exactly four installments with zero finance charges. By doing so, they technically fell outside the definitions written in 1968. The CFPB’s 2024 interpretive rule did not rewrite the law; rather, it clarified that these digital accounts are “credit cards” in function, regardless of the installment count, bringing them under the existing legal umbrella.

Frequently Asked Questions

When do these new rules take effect? The interpretive rule was published in May 2024 and became effective 60 days later. Consumers should be seeing these protections implemented actively right now.

Do these rules apply to long-term financing? Mostly, no. If you use Affirm to finance a Peloton bike over 12 or 24 months with interest, that loan was already subject to the Truth in Lending Act. These new rules specifically target the short-term “Pay in 4” products that were previously unregulated.

Will BNPL loans now appear on my credit report? The CFPB rule does not mandate credit reporting. However, the major credit bureaus (Equifax, Experian, and TransUnion) have developed methods to include BNPL data on reports. While not required by this specific rule, lenders are increasingly likely to report your payment history to help build a complete credit profile.

What should I do if a BNPL lender refuses to refund a returned item? Under the new rules, you should file a formal dispute through the lender’s app or website. If they fail to acknowledge or investigate the dispute, you can now submit a complaint directly to the CFPB, citing the new interpretive rule regarding card issuers.