On December 30, 2020, Judge Richard J. Leon on the United States District Court for the District of Columbia entered an Order in PayPal, Inc. v. Consumer Financial Protection Bureau, et al., No. 19-3700-RJL, 2020 WL 7773392 (D.D.C. Dec. 30, 2020) invalidating two provisions of the Consumer Financial Protection Bureau (“the CFPB” or “Bureau”)’s “Prepaid Rule” (“the Rule”): (i) the mandatory short-form fee disclosure requirement, and (ii) the requirement for a thirty-day waiting period before linking prepaid products to credit. As detailed below, in granting plaintiff PayPal’s motion for summary judgment, the Court held that the CFPB acted outside of its statutory authority when promulgating these two provisions.
Provisions of the Rule at Issue
The Court’s Order examined two CFPB regulations in the context of digital wallets. First, under the Rule’s short-form disclosure requirement, providers must disclose certain information about the seven most common fees—including periodic fee, per purchase fee, ATM withdrawal fees, and cash reload fee—associated with their prepaid products in a specific form and language as outlined in the Rule. 12 C.F.R. § 1005.18(b). Second, the Rule’s thirty-day credit linking restriction, as relevant here, requires credit card issuers, in limited circumstances, to wait thirty days after a consumer registers a prepaid account before linking credit to that account. 12 C.F.R. § 1026.61(c).
PayPal, a provider of digital wallets, argued the disclosure requirement at issue exceeded the CFPB’s statutory authority because Congress only authorized the CFPB to adopt the model, optional disclosure clauses—not mandatory disclosure clauses. Additionally, PayPal attacked the 30-day waiting-period rule by arguing the CFPB exceeded its statutory authority by creating a substantive restriction on a consumer’s access to and use of credit under the guise of a disclosure rule.
In response, the CFPB argued that its disclosure requirement is lawful because the Electronic Fund Transfer Act (“EFTA”) and the Dodd-Frank Act authorize the Bureau to issue—or at least do not foreclose it from issuing—rules mandating the form of a disclosure. Similarly, the CFPB contended that its general rulemaking power, under either the Truth in Lending Act (“TILA”) or the Dodd-Frank Act, provides the statutory authority for such waiting-period restriction.
Court Agrees with PayPal and Strikes Down the Two Provisions of the Rule
First, the Court held that the disclosure requirement at issue exceeded the Bureau’s authority under EFTA and the Dodd-Frank Act reasoning that “[it] is not a model form that providers have the option of utilizing, as required by EFTA. . . . Rather, it is mandatory and provides the specific form, structure, and contents of disclosures that providers must use.” 2020 WL 7773392, at *6 (emphases original).
In so holding, the Court put emphasis on the plain text of the EFTA statute, which requires providers to disclose the “terms and conditions of electronic fund transfers” but does not require that providers adhere to a specific form for these disclosures. Id. at *5. Instead, the statute directs the CFPB to “issue model clauses for optional use by financial institutions.” (emphases original). Further, the Court rejected the Bureau’s attempt to rely on its general rulemaking authority under the Dodd-Frank Act, stating that the specific statute “controls over a general one.” Id. at *6. In the court’s words, the Bureau’s attempt to transform its general rulemaking power into such authority “runs afoul of basic principles of statutory construction.” Id.
Similarly, the Court struck down the thirty-day credit-linking restriction concluding that the CFPB exceeded its statutory authority under the TILA and the Dodd-Frank Act. Id. at *7. This regulation—which restricts when the credit provider can allow the consumer to access the credit on the prepaid product—“is not merely a disclosure requirement” but “substantive restriction on offering credit” that must be vacated. Id. at *7, 8.
The Court reasoned that the statutory language and legislative history of TILA establish that the Bureau’s authority under TILA is limited to the disclosure of credit terms and does not extend to regulation of a consumer’s access to or use of credit. Again, the Court rejected the CFPB’s reliance on the general rulemaking authority in justifying its position as “the Bureau cannot simply rely on the overarching purpose of the statute without giving credence to how Congress intended the agency to fulfill the statute’s purpose. And the fact that a consumer may have more time to consider credit terms does not transmute an unlawful ban on a consumer’s access to credit into a lawful disclosure requirement.” Id. at *9 (emphasis original).
While many in the prepaid payments industry, including those in the digital wallets business, may cheer this decision, the CFPB’s appeal period does not expire until January 29, 2021. Watch this space to see whether the CFPB decides to take the issue to the United States Court of Appeals for the District of Columbia Circuit.