In December 2020, the district court determined that both the short-form disclosure requirement and the credit linking ban exceeded the CFPB’s statutory authority. The court granted PayPal’s motion for summary judgment and vacated both challenged provisions. 

 

The CFPB appealed the district court’s ruling on the short-form disclosure requirement but not the credit linking ban. The US Court of Appeals for the DC Circuit heard oral arguments in the case in February. A decision is expected in the summer. 

The district court’s analysis follows the two-step Chevron process, which begins with a determination of whether Congress has directly addressed the question at issue. Accordingly, the court began by analyzing the text of the statutes on which the CFPB relied for its rulemaking authority: the Electronic Funds Transfer Act (EFTA), the Truth in Lending Act (TILA), and the Dodd-Frank Act.

 

With respect to the short-form disclosure requirement, which was promulgated under the EFTA, the court focused on statutory text authorizing the CFPB to issue “model clauses that providers may utilize” and legislative history describing use of the EFTA model clauses as optional for providers. The court concluded that Congress did not intend to authorize the CFPB to issue mandatory disclosure forms. 

 

The court found unconvincing the CFPB’s argument that it was permitted to issue the mandatory short-form disclosure under its general authority to issue rules under the EFTA and the Dodd-Frank Act. The specific limitations on the Bureau’s authority to issue model EFTA disclosures, the court determined, trumped the more general rulemaking authorities those statutes confer. The court also rejected the CFPB’s related argument that nothing in the EFTA, including the reference to “optional” disclosures, prohibited the agency from issuing mandatory disclosures. 

 

The district court also found that TILA provided insufficient authority for the credit linking ban. Here, the court’s conclusion was based less on the statutory description of the Bureau’s authority, which is expansive, than on TILA’s fundamental purpose. The statute grants the CFPB authority to impose additional requirements “necessary and proper to effectuate [TILA’s] purposes.” The court concluded that TILA’s purpose was limited to effective disclosure and that the credit linking restriction was “a substantive restriction on a consumer’s access to and use of credit under the guise of a disclosure rule.”

 

With respect to both the short-form disclosure requirement and the credit linking ban, the court was focused on the implications of allowing general grants of administrative rulemaking authority to override more specific statutory limitations. The result, the court stated, could be “virtually limitless hegemony” for administrative agencies.

 

PayPal’s complaint and supporting memorandum also challenge as arbitrary and capricious the CFPB’s decision to subject virtual wallets to the prepaid rule, alleging that the agency failed to consider the different functionality and risk profiles of digital wallets compared to general use prepaid cards. Because the district court determined that Congress had directly spoken on the scope of the Bureau’s rulemaking authority under the EFTA and TILA, it did not reach this argument. The DC Circuit would, however, address these issues if it disagrees with the district court’s determination and reaches the second step of the Chevron analysis.

The PayPal case directly impacts the legal landscape for prepaid providers. Because the CFPB did not appeal the district court’s decision to vacate the credit linking ban, that provision is no longer effective. The short-form disclosure requirement is in legal limbo pending the DC Circuit’s decision. 

 

Regardless of whether the district court’s holding on the short-form disclosure is affirmed on appeal, the operational impact to most prepaid providers may be limited. Mandatory or not, many will likely continue using the CFPB’s model disclosure forms in order to take advantage of the compliance safe harbor they provide. This is the approach many financial institutions take with respect to other statutes, such as the Equal Credit Opportunity Act and the Fair Credit Reporting Act, for which the CFPB has issued optional disclosure forms. The district court decision does not eliminate the requirement to make the disclosures the prepaid rule requires, only the requirement to make them using the Bureau’s model form. 

 

Similarly, removal of the credit linking restriction generally affects providers that allow customers to access a credit line offered by the provider or a related party via the prepaid product. That includes some digital wallet providers but not most providers of general use prepaid cards, which allow users to spend only preloaded funds. 

We believe the impact to the CFPB’s rulemaking agenda may be more significant than the fate of the challenged provisions of the prepaid rule. The CFPB is now considering an array of regulatory initiatives, including action on credit card fees, overdraft protection, home valuation, and “buy now pay later” products. PayPal’s victory in the district court may impact these initiatives in ways that extend beyond the prepaid rule, regardless of the outcome on appeal. 

 

Disclosure is the primary focus of most consumer financial protection statutes and, therefore, much of the CFPB’s rulemaking activity. If the DC Circuit confirms the district court’s holding that the CFPB cannot impose mandatory disclosure forms under the EFTA, the CFPB may have to content itself with optional disclosure forms with respect to that statute. This could impact any plans to require, for example, overdraft disclosures using prescribed forms. On the other hand, optional forms are the norm among the federal consumer financial protection statutes the CFPB administers, including the Equal Credit Opportunity Act (ECOA), Fair Credit Reporting Act (FCRA), and TILA.⁴

 

We believe the district court’s holding with regard to the credit linking ban, which the CFPB did not appeal, is significant because it speaks to the scope of the CFPB’s rulemaking, not just under the EFTA, but other statutes the agency administers. The congressional grant of rulemaking authority under TILA, which the district court found insufficient to support the credit linking ban, authorizes the Bureau to “prescribe regulations to carry out the purposes of [TILA]”, which may contain such “additional requirements . . . as in the judgment of the Bureau are necessary or proper to effectuate the purposes of [TILA], to prevent circumvention or evasion thereof, or to facilitate compliance therewith.”⁵ Because the purpose of TILA is effective disclosure, the district court held, the CFPB could not use it as a basis for a rule regulating substantive terms. 

 

The implication of this holding for future TILA rulemakings is clear. It prevents the CFPB from using its TILA rulemaking authority to regulate substantive credit terms unless it can link the regulation to a specific statutory requirement, such as the late fee, billing cycle, and ability-to-repay requirements that Congress applied to credit cards and mortgages. The district court’s holding could limit the Bureau’s options for imposing similar substantive restrictions on other types of consumer credit products using its TILA authority. 

 

The holding may also have implications for other CFPB-administered statutes that authorize rulemaking using “carry out the purposes” language similar to that contained in the TILA, such as the EFTA and ECOA⁶. Going forward, any rulemaking the CFPB undertakes under either statute could be closely scrutinized for congruence with congressional purpose absent a link to a corresponding statutory requirement. The result could be that the CFPB is encouraged to ground future rulemakings not on these statutes, which it inherited upon its formation in 2011, but on its sweeping authority to prevent unfair, deceptive, and abusive acts and practices under the Dodd-Frank Act.

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¹ PayPal, Inc. v. Consumer Fin. Prot. Bureau, 512 F. Supp. 3d 1 (D.DC December 30, 2020).

² Regulation E, 12 CFR § 1005.18(b).

³ Regulation Z, 12 CFR § 1026.6(c)(1)(iii).

⁴ 14 USC. § 1604(b) (“Nothing in this subchapter may be construed to require a creditor or lessor to use any such model form or clause prescribed by the Bureau under this section. A creditor or lessor shall be deemed to be in compliance with the disclosure provisions of this subchapter with respect to other than numerical disclosures if the creditor or lessor (1) uses any appropriate model form or clause as published by the Bureau, or (2) uses any such model form or clause and changes it by (A) deleting any information which is not required by this subchapter, or (B) rearranging the format, if in making such deletion or rearranging the format, the creditor or lessor does not affect the substance, clarity, or meaningful sequence of the disclosure.”)

⁵ 15 USC. § 1604(a).

⁶ 15 USC. § 1691(b); 15 USC § 1693; 15 USC. § 1693b.