Federal Judge overturns parts of CFPB prepaid rule

Federal Judge overturns parts of CFPB prepaid rule

A federal judge in Washington, D.C., gave payment processing giant PayPal a win in its efforts to deep six rules established by the Consumer Financial Protection Bureau for prepaid cards and digital wallets.

U.S. District Court Judge Richard Leon ruled on Dec. 30, 2020, that the CFPB's rulemaking authority under the 2010 Dodd-Frank Act does not grant it authority to dictate how prepaid card and digital wallet providers disclose fees, nor can it restrict when consumers link credit card accounts to digital wallets. And he invalidated those provisions of the Prepaid Rule.

PayPal takes on CFPB

PayPal sued the regulator in 2019, arguing that its prepaid rules force it to make consumer disclosures that are irrelevant and confusing. "That dog won't hunt!" was Judge Leon's retort at one point in his decision.

The CFPB's prepaid rule, which took effect in April 2019 following five years of consideration and public comment gathering, imposes a slew of consumer protections (like error resolution procedures) and mandatory disclosures that the regulator said make it easier for consumers to comparison-shop for prepaid cards.

It also restricts when digital wallet customers can link credit cards to those accounts. Specifically, the ruling directs that consumers can't link credit cards to digital wallets until their wallet accounts have been open at least 30 days.

The CFPB's Prepaid Rule amended federal Regulation E (which implements the Electronic Funds Transfer Act) and Reg Z (Truth-in-Lending Act).

PayPal took issue with credit card linking and mandatory disclosure requirements. The company argued, among other things, that the mandatory disclosure language the CFPB adopted infringed on the company's First Amendment right. For example, it was required to include language about ATM balance inquiry fees and electronic withdrawals, which were confusing to customers, leading them to believe they were being charged fees that didn't exist.

In its court filing, PayPal alleged the prepaid rule's "prescriptive disclosure requirements" exceeded the CFPB's statutory authority because the EFT Act does not authorize the regulator to "mandate particular disclosure terms." The company also asserted that the mandated disclosure terminology, under Reg Z, restricts its ability to explain features of its Venmo digital wallet.

The CFPB countered that the EFT Act did not prohibit the agency from requiring specific disclosures regarding prepaid accounts and that the Truth-in-Lending Act gave it broad authority over how credit cards could be linked to digital wallets.

Judge Leon rebuffed the CFPB's assertions, and invalidated the mandatory disclosure requirements, which the judge said "exceeds the authority Congress granted to the Bureau."

Overreaching congressional intent

When Congress created the CFPB, under the Dodd Frank Act, it "directed the Bureau to 'issue model clauses for optional use by financial institutions,'" the judge wrote. "The bottom line is thus clear: Congress did not provide statutory authority – under either the EFTA or the Dodd-Frank Act – for the Bureau to issue mandatory disclosure clauses. And the Bureau's attempt to transform its general rulemaking power into such an authority runs afoul of basic principles of statutory construction."

As for the 30-day credit card linking restriction, Judge Leon ruled that although the Dodd-Frank Act granted the CFPB broad authority under the Truth in Lending Act, "it was not without limitations!." The CFPB's arguments that it was within its power to impose the 30-day restriction because Congress did not expressly prohibit it were "meritless," he wrote.

Judge Leon also blasted the CFPB for asserting the 30-day credit linking restriction is merely a disclosure requirement. "That dog won't hunt!" he wrote, adding that the 30-day restriction was outside its agency's statutory authority.

On a statement released through its attorneys and reported by Reuters, PayPal praised the decision. "The company remains fully supportive of the mission of the CFPB and we are unwavering in our commitment to protect consumers," PayPal said in the statement.

The CFPB said it does not comment on pending litigation.

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