In a case that will be of interest to digital wallet providers, last month PayPal, Inc. (“PayPal”) sued the Consumer Financial Protection Bureau (“CFPB”) in the U.S. District Court for the District of Columbia over the agency’s Prepaid Rule, which became effective on April 1, 2019 and modifies Regulation E and Regulation Z. PayPal’s lawsuit asserts that in promulgating the Prepaid Rule, the CFPB exceeded its statutory authority and acted arbitrarily and capriciously. PayPal further asserts that the Prepaid Rule infringes upon PayPal’s First Amendment rights by requiring PayPal to make allegedly misleading and inapplicable disclosures to customers.
PayPal objects to the Prepaid Rule on five grounds.
First, PayPal contends that the CFPB exceeded its statutory authority under the Electronic Fund Transfer Act (“EFTA”) by applying the Prepaid Rule’s prescriptive “short form” disclosure requirements to digital wallets. These requirements mandate disclosures about fees (e.g., periodic fees) using specific terminology (e.g., “Monthly fee” or “Annual fee”) that PayPal does not charge and mandate detailed and specific formatting requirements. Noting that the EFTA authorizes the CFPB to issue “model clauses for optional use” by financial institutions, PayPal argues that the EFTA does not authorize the CFPB to mandate particular disclosure terms or formatting requirements for disclosures.
Second, PayPal contends that the CFPB exceeded its statutory authority under the Truth in Lending Act (“TILA”) by imposing a 30-day ban on a consumer’s ability to link an existing credit product to a digital wallet account in certain circumstances, such as where the consumer would receive beneficial treatment for linking the credit product to the digital wallet. PayPal argues that while the CFPB has the authority to prescribe regulations to carry out the purpose of TILA, the primary purpose of TILA is to assure meaningful disclosure of credit terms. According to PayPal, the CFPB thus has no generalized authority to impose substantive requirements – such as the 30-day ban – on a consumer’s ability to obtain or use credit.
Third, PayPal contends that the CFPB arbitrarily and capriciously applied the Prepaid Rule – which PayPal believes the CFPB had designed for application to physical general purpose reloadable (“GPR”) cards available for purchase in retail stores – to digital wallets without regard to the significant differences between the two types of products. Of most concern to PayPal, the Prepaid Rule’s short form disclosure requirements limit PayPal’s ability to explain to consumers the limited circumstances in which PayPal charges fees. In PayPal’s view, the short form disclosure requirements were designed to present key information on the palm-sized standard packaging utilized for physical GPR cards in retail stores. The CFPB therefore failed to consider that when a consumer signs up online for a digital wallet, size and space limitations on physical packaging do not apply and questions can be directed more easily to dedicated support personnel.
Fourth, PayPal contends that the CFPB arbitrarily and capriciously failed to properly weigh the limited benefits of the Prepaid Rule against its extensive burdens. In particular, PayPal notes that the CFPB’s cost-benefit analysis “does not mention the term ‘digital wallet,’” suggesting that the CFPB “looked only at the potential costs and benefits of regulating traditional prepaid accounts, relying almost entirely on evidence derived from studies of GPR’s usage.” PayPal argues that the benefits to digital wallets users of the Prepaid Rule’s disclosure requirements are limited because most PayPal digital wallet users will not ever use their digital wallets in such a way as to incur fees, while the costs are significant because the prescriptive short form disclosures confuse and mislead many customers, who mistakenly believe that they will be charged fees by PayPal for usual payment and cash transfer features or that they will be charged theoretically possible maximum fees. Similarly, the 30-day ban on consumers’ ability to link credit products offered by PayPal’s business partners to PayPal digital wallets imposes significant costs that the CFPB failed to consider in its rulemaking process, in that ban makes it more difficult for consumers to obtain the benefits of offerings from PayPal and its business partners and will more generally stifle innovation.
Fifth, the Prepaid Rule violates PayPal’s First Amendment rights by requiring PayPal to deliver unnecessary, irrelevant, and misleading disclosures to consumers. In PayPal’s view, the short form disclosures that “compel” PayPal to “speak a particular message” are presumptively unconstitutional because they target speech based on the communicative content of that speech. The CFPB, meanwhile, has not met its burden of proving that the Prepaid Rule’s restrictions are narrowly tailored to meet compelling state interests. This is evidenced by the CFPB’s acknowledgement that “many of the fees that it required PayPal to include in the short form disclosure . . . did not apply to digital wallets and might not apply for the foreseeable future (if ever).” According to PayPal, “[t]he Bureau’s guesswork hardly constitutes a compelling state interest.”
Digital wallet providers who believe that the Prepaid Rule is overly restrictive or burdensome should monitor the outcome of the PayPal litigation closely – including through all appeals. If the short form disclosure requirements are ultimately held to be unlawful, digital wallets providers will not be required to provide disclosures to consumers using the specific terminology and format set forth by the Rule – language that PayPal contends may be misleading or confusing as applied. If the 30-day ban on linking existing credit products to digital wallet accounts is held to be unlawful, meanwhile, digital wallets providers and card issuers will benefit from increased freedom to partner in innovative and mutually beneficial ways.
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