On December 11, 2019, PayPal filed a complaint in the United States District Court for the District of Columbia over the “Prepaid Rule” that went into effect in April 2019. PayPal, Inc. v. Consumer Financial Protection Bureau, No. 1:19-cv-03700, (D.D.C).
The “Prepaid Accounts Under the Electronic Fund Transfer Act (Regulation E) and the Truth in Lending Act (Regulation Z)” Rule, or the Prepaid Rule, requires financial institutions to provide short form disclosures before a consumer acquires a prepaid account. PayPal contends that the Prepaid Rule was originally designed with products like the prepaid card or the general purpose reloadable cards in mind and asserts that the extension of the Prepaid Rule to digital wallets is unconstitutional, arbitrary and capricious, and exceeds the statutory authority of the CFPB. A digital wallet allows consumers to make electronic transfers by linking their payment credentials (credit card or bank account) and storing it in one place. For services like PayPal and Venmo, if a consumer receives money from another party and does not immediately transfer those funds, those funds will remain stored on that service.
PayPal alleges the Prepaid Rule’s “prescriptive disclosure requirements” exceed the CFPB’s statutory authority because the Electronic Funds Transfer Act does not authorize the CFPB to “mandate particular disclosure terms” or in other words, require them to use certain terminology. In their complaint, the company states that the forced inclusion of the short form disclosure requirements, which requires PayPal to make “misleading and inapplicable disclosures to its consumers” has caused wide-spread confusion by which their consumers falsely believe PayPal charges various fees, such as a fee to access their stored funds. The company also states that the mandated disclosure terminology severely restricts their ability to explain main features of the digital wallet.
PayPal also alleges the Prepaid Rule’s 30-Day Ban on consumers’ ability to link certain credit products to their digital wallet accounts also exceeds the CFPB’s statutory authority, which the CFPB claims it has authority to do under the Truth in Lending Act (TILA). PayPal alleges the Prepaid Rule is arbitrary and capricious as it applies to digital wallets as the CFPB failed to take into account the unique characteristics and differences of the digital wallet versus a general purpose reloadable card.
Lastly, PayPal alleges applying the Prepaid Rule to digital wallets and not permitting PayPal to clarify the disclosures to its consumers violates the First Amendment of the U.S. Constitution as it requires the company to deliver unnecessary, irrelevant and misleading disclosures to its consumers.