Illinois Enacts Comprehensive Buy-Now-Pay-Later Loan Consumer Protection Act
Introduction
Illinois’s new Buy-Now-Pay-Later Loan Consumer Protection Act (the “Act”), enacted on June 26, 2026, establishes a comprehensive framework regulating the buy-now-pay-later (“BNPL”) lending market through a new licensing framework, consumer protection requirements, and enforcement mechanisms designed to subject BNPL products to licensing and regulation by the state. The Act’s compliance provisions will take effect on the earlier of January 1, 2028 or a later date established by the Illinois Department of Financial and Professional Regulation by rule.
The Act defines a “buy-now-pay-later loan” as closed-end credit provided to a consumer at the time of a transaction in connection with the consumer’s purchase of goods or services that is either (a) payable in four or fewer installments, or (b) has a term of 120 days or less. The definition encompasses both no-interest/no-finance charge BNPL loans and BNPL loans bearing interest or finance charges. The Act excludes motor vehicle loans, residential mortgage loans, inventory financing for sellers, and transactions where the creditor is the seller of the goods or services, such as retail installment transactions (unless the transaction is structured as a transaction where, at the consumer’s request, the creditor purchases specific goods or services from a seller and resells them to the consumer on closed-end credit) from the scope of a “buy-now-pay-later loan.”
Through the Act, Illinois becomes the second state to enact a regulatory regime specific to the BNPL industry after New York, as summarized in a prior Mayer Brown Legal Update regarding that state’s BNPL Act and initial rulemaking activities. In many respects, the two states have approached BNPL regulation in the same manner. They both, for example, provide for licensing of BNPL providers, substantive limitations on rates and fees, new disclosure requirements, and credit card-like dispute resolution and refunding requirements. Illinois’s law, however, is of narrower scope, addressing the shorter-term loans that have made up the core of the US BNPL industry in recent years, rather than aligning with New York’s broad coverage of most closed-end consumer loans for the purchase of goods and services.
Below, we address the major elements that Illinois has imposed on BNPL providers and their loans.
Licensing Requirements
Scope of Licensure: The Act imposes a new licensing requirement to engage in regulated BNPL business. Except with respect to express exemptions noted below, it applies to persons that offer or make BNPL loans, buy whole or partial interests in BNPL loans, arrange BNPL loans for third parties, act as agents in making BNPL loans, or service BNPL loans. Loans made by unlicensed and nonexempt persons are void, and no person may collect, attempt to collect, receive, or retain principal, fees, interest, or charges on such loans. No similar express invalidity applies if a party other than the person making the loan is unlicensed, however.
Exemptions: The Act excludes several categories of persons and entities from its licensing requirements:
- Depository institutions and insurance companies: Banks, savings banks, savings and loan associations, credit unions, and insurance companies organized, chartered, or authorized to do business under state or federal law are exempt.
- Merchants and merchant platforms: These entities fall outside the Act when they make BNPL loans available through an agreement with a licensed BNPL lender or exempt person and do not themselves originate, underwrite, service, or hold an ownership interest in the loans.
- Passive investors: Persons buying, acquiring, or holding partial interests in BNPL loans are exempt if they do not originate, underwrite, service, or control the servicing of BNPL loans.
- Existing licensees: Persons already licensed under the Illinois Consumer Installment Loan Act, Collection Agency Act, or Sales Finance Agency Act are not required to obtain a separate BNPL license, but must comply with the Act’s substantive provisions and notify the Department of Financial and Professional Regulation that it is conducting business under the Act at the time it renews its other license. (The Act separately provides that any loan made subject to and in compliance with the Act is not required to comply with the Illinois Consumer Installment Loan Act or Payday Loan Reform Act.)
True Lender Provision: The Act contains a broad “true lender” provision that characterizes a nonexempt person that acts as an agent or service provider or in another capacity for an exempt lender, as the “true lender” of a BNPL loan if the nonexempt person either: (1) holds the predominant economic interest in the loan; (2) markets, brokers, arranges, or facilitates the loan and has the right, requirement, or right of first refusal to purchase the loan or receivables or interests in the loan; or (3) the totality of circumstances indicates the nonexempt person is the true lender and the arrangement is structured to evade the Act. Circumstances that support a finding that a nonexempt person is the “true lender” under a totality of the circumstances test include the nonexempt person indemnifying or protecting an exempt entity from the costs or risks related to the loan; the nonexempt person predominantly designing, controlling, or operating the loan program, or the nonexempt person purporting to act as an agent or service provider or in another capacity for an exempt entity while acting directly as a lender in other states.
Additional Anti-Evasion Constructs: The Act also applies to persons who seek to evade its applicability, more generally, to make, offer, or assist a consumer in obtaining a loan with greater interest, consideration, or charge than the Act permits, and it provides the Illinois Department of Financial Institutions the authority to bring into scope any other person if the Department determinates that such person is engaged in transactions that are, in substance, disguised loans or a subterfuge for the purpose of avoiding the Act.
Consumer Protection Requirements
In addition to the broad licensing requirement, the Act also contains specific consumer-protection requirements that market participants subject to the Act must adhere to when originating and servicing BNPL loans subject to the Act. Notably, the Act provides that the consumer-protection requirements relating to servicing BNPL loans apply to any third-party servicer of a loan, and to any subsequent purchaser or assignee of a loan.
Rate Cap: BNPL loans are subject to the 36% “military APR” rate cap under the Illinois Predatory Loan Prevention Act. Note that such rate includes not only interest and other finance charges considered in the TILA APR, but also application and periodic participation fees (including subscription fees in the nature of TILA participation fees), various credit insurance/debt suspension and credit-related ancillary product fees. Credit cards subject to the federal CARD Act’s requirements are provided some leeway in application of these standards when calculating the miliary APR, but most BNPL products currently in the market do not position themselves as involving CARD Act cards.
Underwriting: Before providing a BNPL loan (or “causing” a BNPL loan to be provided), the lender must conduct reasonable risk-based underwriting. At a minimum, the lender must assess any outstanding BNPL loans taken by the consumer from the lender and consider the borrower’s ability to repay the loan on the terms provided in the loan agreement. Lenders must maintain underwriting policies and procedures and clearly and conspicuously disclose the factors considered in the underwriting process to the consumer. (The Act clarifies that lenders are not required to disclose proprietary underwriting models, anti-fraud criteria, or trade secrets to the public.) The Act prohibits the collection or use of information regarding the borrower’s social network to assess the borrower’s creditworthiness and prohibits the use of any group score to determine the borrower’s creditworthiness.
Disclosures: At the time of extending a specific offer for a BNPL loan, the lender must clearly and conspicuously disclose information including, among other items, the BNPL loan terms (including the cost of the loan, such as interest and fees); the repayment schedule; billing dispute procedures; whether the transaction will be reported to a credit reporting agency; other “material conditions” of the loan (which are not specifically defined by the Act); the factors considered by the lender in the underwriting process; and other disclosures required under rules that may be issued by the Illinois Department of Financial and Professional Regulation. All disclosures must comply with applicable federal regulations, including the Truth in Lending Act (“TILA”) and Regulation Z.
Privacy and Disputes: Lenders must comply with the financial privacy and information sharing provisions under the federal Gramm-Leach-Bliley Act (“GLBA”) Privacy Rule and Fair Credit Reporting Act (“FCRA”). The Act imposes an obligation for lenders to resolve disputes in a “fair and transparent” manner, provide a readily available and prominently disclosed dispute method, and maintain policies and procedures for handling customer disputes. Significantly, the Act extends the dispute rights and unauthorized charge protections under TILA’s special credit card provisions to BNPL loans, even if the TILA credit card protections would not otherwise apply.
Refunds, Payments, and Fee Restrictions: Lenders must provide refunds or credits for goods and services purchased in connection with a loan if the consumer is entitled to a refund and requests a refund. Lenders must maintain a refund and credit process that is “fair, transparent, and not unduly burdensome” to consumers. The Act prohibits requiring repayment of a BNPL loan through automatic payments from the borrower’s accounts, charging fees to cancel voluntary automatic payments, requiring payment by credit card, and debiting a borrower’s accounts after the lender is notified or has reason to believe that there are insufficient funds in the borrower’s account. The Act also prohibits lenders from presenting an ACH debit for payment more than twice. The Act grants consumers the right to pay off the loan at any time, without additional fees or finance charges beyond accrued interest. The Act prohibits lenders from accepting tips, expedited payment fees, or other fees identified by rule.
Violations of the Act Subject to Consumer Fraud and Deceptive Business Practices Act: The Act also amends the Illinois Consumer Fraud and Deceptive Business Practices Act, which contains Illinois’s state-level UDAAP prohibitions, to expressly characterize a violation of the Act as an unlawful practice under the Consumer Fraud and Deceptive Business Practices Act.
Compliance Timeline
The Act contains a compliance deadline of January 1, 2028 or a later date established by the Department of Financial and Professional Regulation. A person that provided BNPL loans in Illinois before January 1, 2028 and submits an application for a BNPL license by January 1, 2028 will be deemed to be provisionally licensed, and is authorized to continue operating under the Act until the Department acts on the application.
Practical Implications
The Illinois Buy-Now-Pay-Later Loan Consumer Protection Act represents one of the most comprehensive state-level regulatory frameworks for the BNPL industry. By extending new licensure, ability to repay underwriting requirements, rate caps, and substantive consumer protections to short-term BNPL products, Illinois signals that BNPL products—even traditional no interest “pay in four” programs—may be subject to increasing scrutiny and regulation at the state level. Stakeholders should consider using the period before the January 1, 2028 compliance date to conduct thorough assessments of their licensing status, underwriting practices, and consumer-facing operations to ensure full readiness.
