PREPAID RULE
PayPal Inc. v. Consumer Financial Protection Bureau
Date: March 28, 2024
Issue: Whether the Consumer Financial Protection Bureau (CFPB) violated the Electronic Fund Transfer Act (EFTA) by imposing mandatory model clauses in its Prepaid Rule.
Case Summary: A District of Columbia federal district court granted PayPal’s motion for summary judgment in its lawsuit challenging CFPB’s Prepaid Rule.
PayPal sued to enjoin the CFPB from implementing the Prepaid Rule, which required account providers to disclose certain information before a consumer acquires an account and begins transacting. These disclosures come in two forms: the “long-form disclosure” includes all fees providers could impose in connection with a prepaid account, and the “short-form disclosure” includes only a subset of that information. PayPal’s complaint related to short-form disclosures.
PayPal argued the Prepaid Rule exceeded the CFPB’s statutory authority because the Bureau effectively mandated adoption of a model clause in violation of EFTA, which authorizes only “optional” clauses. The district court granted PayPal summary judgment and invalidated the Prepaid Rule’s short-form disclosure requirement and 30-day credit linking restriction. The court held that the short-form disclosure requirements exceeded the CFPB’s statutory authority under the EFTA by effectively creating “mandatory disclosure causes.”
The CFPB appealed the district court’s decision to the D.C. Circuit to answer the narrow question of whether the Prepaid Rule imposes a mandatory “model clause.” The panel concluded the Prepaid Rule does not impose mandatory model clauses. The panel remanded the case to the district court to address PayPal’s other Administrative Procedure Act (APA) and constitutional challenges to the Prepaid Rule. On remand, Judge Richard Leon of the D.C. federal court granted PayPal’s motion for summary judgment and vacated the Prepaid Rule’s short-form disclosure requirement as applied to digital wallets.
The court determined the CFPB lacked a rational justification for subjecting digital wallets to the Prepaid Rule’s short-form disclosure requirement. The court explained the Prepaid Rule originally intended to target a different product: the general-purpose reloadable (GPR) card. The Prepaid Rule imposed a short-form disclosure mandate on all products “capable of being loaded with funds.” PayPal argued the disclosure requirement is arbitrary and capricious because the CFPB lacked a well-founded basis for subjecting digital wallets to a heightened regulatory regime designed for a different product. The CFPB contended despite the products’ differences, a digital wallet has a balance functionality that renders it “sufficiently similar to other prepaid accounts to warrant consistent regulatory treatment.” The court sided with PayPal, ruling the CFPB’s explanation falls well short of the APA’s demand for reasoned decision-making. The court explained digital wallets are different from GPR cards and other types of prepaid products. Unlike other products, digital wallets are not mainly used to access funds or to function as a substitute checking account.
Next, the court concluded the CFPB’s statutorily mandated cost-benefit analysis was deficient. The court explained CFPB failed to meaningfully assess the costs and benefits of the mandate in the digital wallet context. As described by the court, the “glaring omission only adds to the pile of reasons” for vacating the mandate, as CFPB did not once mention digital wallets in its forty-page cost-benefit analysis of the Prepaid Rule. In the 700-page Prepaid Rule, the court highlighted no cost-benefit analysis was specific to digital wallets. The court explained the lack of qualitative analysis defied the bureau’s cost-benefit obligations under the Dodd-Frank Act and APA.
The court did not rule on PayPal’s First Amendment argument. PayPal previously argued the short-form disclosure regime violates the First Amendment by compelling the disclosure of information that is inapplicable to its product and misleads consumers. The court declined to review because it could resolve the case without examining the First Amendment claim.
Bottom Line: CFPB is expected to appeal the district court’s decision.
Document: Opinion
