PayPal filed a lawsuit against the CFPB last week in the D.C. federal district court seeking to invalidate the Bureau’s prepaid card rule (“Rule”). The Rule became effective on April 1 of this year.
PayPal’s primary consumer offering is a “digital wallet.” A digital wallet is primarily used by a consumer to access his or her traditional payment devices (Funding Instruments), such as credit cards, debit cards, and checking accounts in order to allow the consumer to make electronic peer-to-peer transfers of funds or to purchase products from third-party merchants. To use a digital wallet, a consumer links the wallet to the credentials for the Funding Instruments. Once linked, PayPal can complete a transaction on the consumer’s behalf. Significantly, when completing a transaction involving a consumer’s use of the wallet to make a purchase from a merchant, only PayPal accesses the payment credentials for the Funding Instrument selected by the consumer to pay for the purchase. As a result, the consumer does not have to expose his or her full financial credentials to the merchant.
PayPal’s complaint takes aim at the Bureau’s decision when adopting the Rule to impose the same regulatory regime on digital wallets as it imposed on “prepaid cards” or “general purpose reloadable cards” (GPR cards) despite the material differences that exist between the products. Specifically, PayPal targets the Rule’s mandated short form disclosure and its 30-day ban on linking credit products to prepaid accounts. It explains how the Rule’s “mandated short form disclosure regime forces PayPal to make disclosures [concerning fees] that confuse consumers as to the products’ actual costs yet bars PayPal from providing the very information that would assist consumers in making an informed decision.” With regard to the 30-day ban, PayPal explains that its effect, in certain circumstances, is to prevent consumers from linking credit products to PayPal digital wallets for the first 30 days after they acquire the wallet, “even where a consumer has already acquired the credit product before obtaining the digital wallet.”
In the complaint, PayPal also details its unsuccessful efforts during the rulemaking process to persuade the Bureau to revise its proposal to address PayPal’s concerns regarding the Rule’s coverage of digital wallets. In particular, PayPal submitted comments to the Bureau’s proposal concerning the Bureau’s decisions to include digital wallets in the definition of “prepaid account,” require the same standardized disclosures for GPR products and digital wallets, and apply the 30-day ban to credit products linked to a digital wallet. PayPal states that since the Rule went into effect, it “has endeavored to comply with the Rule’s onerous and disruptive requirements” but that its efforts to comply “have only underscored the fundamental irrationality and harm to consumers of the application of a regime designed for GPR cards to digital wallets.”
PayPal claims that the Rule:
- Exceeds the Bureau’s authority under the EFTA (Count One). The EFTA allows the Bureau to promulgate regulations regarding disclosure of the “terms and conditions of electronic fund transfers involving a consumer’s account” and requires that such disclosures “shall be in readily understandable language.” It also directs the Bureau to issue “model clauses for optional use by financial institutions to facilitate compliance with…disclosure requirements” and states that in developing these optional model clauses, “the Bureau shall take account of variations in the services and charges under different electronic fund transfer systems and…shall issue alternative model clauses for disclosure of these differing account terms.” (emphasis included). PayPal claims that these provisions do not authorize the Bureau “to mandate particular disclosure terms…or mandate the precise manner in which the terms are presented.” Accordingly, it claims that the Rule exceeds the Bureau’s statutory authority because “EFTA does not allow the Bureau to mandate the terms used in financial disclosures or the precise form or formatting of such disclosures.”
- Exceeds the Bureau’s authority under TILA (Count Two). The Bureau relied on the TILA for its authority to promulgate the 30-day ban. PayPal states that TILA’s primary purpose is to “assure a meaningful disclosure of credit terms.” It states further that “in keeping with that congressional purpose, TILA’s implementing regulations generally establish disclosure requirements—not substantive restrictions on the ability of consumers to access and use credit, unless specifically authorized by statute.” (emphasis included). PayPal claims no statutory authority exists in TILA or elsewhere that allows the Bureau “to prohibit a consumer from linking a credit card to a digital wallet or to require a delay in such linkage” and that the Bureau’s “theory that it may impose a 30-day ban under TILA—ostensibly to ‘separate the decision’ to obtain the digital wallet from the decision to obtain a credit card lacks any limiting principle, and in any case is entirely inapplicable where the consumer already obtained the credit card.” (emphasis included).
- Represents arbitrary and capricious action by the Bureau under the APA (Counts Three and Four). The Administrative Procedure Act (APA) requires a court to “hold unlawful and set aside agency action…found to be…arbitrary, capricious, [or] an abuse of discretion.” In Count Three, PayPal claims that the Bureau “violated the APA’s core requirement of reasoned decision-making in applying the Rule to digital wallets in several ways” and that “the Bureau’s fundamental error was to take a regulatory regime designed for GPR cards and irrationally apply it to digital wallets, without regard to significant differences between the two types of products.” In Count Four, PayPal claims that the Bureau also violated the Dodd-Frank Act requirement for the Bureau, when promulgating a rule, to consider “the potential benefits and costs to consumers and covered persons, including the potential reduction of access by consumers to consumer financial products or services resulting from such rule.” According to PayPal, “the Bureau failed to appropriately consider the significant costs and the lack of benefits of requiring digital wallets to comply with the [Rule].”
- Violates the First Amendment of the U.S. Constitution (Count Five). PayPal claims that the Rule violates the First Amendment “because it requires PayPal to make a series of largely misleading and inapplicable disclosures to its customers that it would not otherwise make and that drown out the speech in which PayPal would prefer to engage.” According to PayPal, the Rule does not satisfy the tests established by the U.S. Supreme Court for when government requirements for compelled speech are constitutional.
The relief sought by PayPal includes vacating the Rule and enjoining the Bureau from enforcing the Rule.