In August 2022, the California Department of Financial Protection and Innovation (“Department” or “DFPI”) entered into a consent order with a company offering point of sale financing products that the DFPI deemed to be buy now, pay later (“BNPL”) financing, for which a California Financing Law (“CFL”) license is required. The company is required to pay a penalty, refund previously collected fees from California residents, and obtain a CFL license.
The settlement follows an annual report released in October of 2021 in which the DFPI noted a sharp increase in BNPL “consumer loans.” In the accompanying press release to that report, the DFPI stated:
BNPL loans are an increasingly common type of short-term financing that allows consumers to make purchases and pay for them at a future date, often interest-free. Sometimes referred to as point-of-sale installment loans, BNPL products are becoming a popular payment option. The report shows a surge in BNPL unsecured consumer loans reported to the DFPI. This product has grown in recent years and has come under the DFPI regulatory umbrella.
The press release also noted that the Department had rendered prior legal opinions and entered into settlements with three separate BNPL / point-of-sale financers in 2019 and 2020 that were deemed to be structuring their BNPL products in a manner designed to evade regulation under the CFL. These companies had agreed to refund fees to consumers and obtain CFL licenses, and among other requirements, must: (i) consider consumers’ ability to repay loans, (ii) comply with rate and fee caps, and (iii) respond to consumer complaints
In one of those prior opinions, the DFPI (formerly, the Department of Business Oversight) asserted that the CFL applies to making consumer loans and noted that the CFL defines “consumer loan” as a loan “the proceeds of which are intended by the borrower for use primarily for personal, family, or household purposes.” (Note that loans in the principal amount of $5,000 or less for other than personal, family, or household purposes are also included in the definition, bringing certain commercial or business-purpose loans within the scope of the CFL). The Department further stated that the CFL incorporates certain aspects of the common law, including that merchants may sell goods in exchange for cash or in exchange for a consumer’s promise to pay later (a “credit sale”) and that a merchant may charge a premium for credit sales without the transaction being subject to the state’s loan laws and without the premium being subject to the state’s usury limit. The DFPI concluded, however, that “[e]xtensive third-party involvement may cause transactions to be deemed loans even if the underlying credit sale is bona fide.”
Taken together, the Department’s prior statements, opinions, and enforcement actions signal a broad interpretation of the CFL that could potentially apply to many lenders and third parties involved in point-of-sale financing, including the offering of buy now, pay later products. In the press release accompanying the most recent enforcement action, the DFPI concluded that it “continues investigating other companies offering Buy Now, Pay Later products.”
