In filings submitted last week, the Consumer Financial Protection Bureau (the Bureau) both opposed and moved for summary judgment in PayPal, Inc. v. Consumer Financial Protection Bureau, asking the court to put an end to PayPal, Inc.’s lawsuit challenging the prepaid card rule (Rule), which took effect last year. The Rule set out certain fee disclosure requirements, credit-linking restrictions, and other consumer protections for “prepaid accounts.”
The lawsuit, which was filed in December 2019 in the D.C. federal district court, stems from the Bureau’s alleged “fundamental category error” applying “digital wallets” (i.e., digital payment products, like PayPal and Venmo, which users can link to their traditional payment devices like credit/debit cards and bank accounts to make electronic peer-to-peer transfers of funds or purchases from third-party merchants) to the same standards as “general purpose reloadable cards” (i.e., plastic cards typically sold in stores that allow users to load funds without a bank account). In particular, PayPal argued digital wallets should not be subject to the Rule’s provisions (1) requiring “short form” fee disclosures, and (2) imposing a 30 day waiting period for linking payment devices.
In its summary judgment motion, PayPal argued that these provisions should be invalidated because they were issued without statutory authority under (and in violation of) the Electronic Funds Transfer Act (EFTA) and Truth in Lending Act (TILA). PayPal further asserted that in extending these provisions to digital wallets, the Bureau violated the Administrative Procedures Act (APA) by: (1) acting in an arbitrary and capricious manner by ignoring material differences between digital wallets and general purpose reloadable cards; (2) failing to perform a cost-benefit analysis, and (3) placing a content-based restriction on PayPal’s free speech rights, in violation of the First Amendment of the U.S. Constitution.
The Bureau urges the Court to reject these arguments, which it characterizes as “distort[ing] the governing statutory framework, the Bureau’s reasons for adopting the Rule, and the scope of the Rule itself.” The Bureau argues the disclosure requirements and mandatory waiting period are authorized by the EFTA and TILA, and were properly issued under the Bureau’s broad authority to prescribe rules to carry out the purposes of each statute, the Bureau’s interpretation of which is entitled to deference. It further asserts the provisions are separately authorized by the Bureau’s general authority under section 1032 of the Dodd-Frank Act, to “prescribe rules to ensure that the features of any consumer financial product or service … are fully, accurately, and effectively disclosed to consumers in a manner that permits consumers to understand the costs, benefits, and risks.”
The Bureau insists PayPal’s APA claim fails because it cannot show that the Bureau’s decision to include digital wallets within the Rule’s coverage was “arbitrary or capricious.” While acknowledging there are “some differences” between digital wallets and other prepaid accounts including, without limitation, their tendency to charge fewer fees, and that “consumers [are] less likely to use them as a substitute for a checking account” the Bureau found digital wallets to be “similar enough” in that both can be used “to load funds for use in conducting transactions.” The Bureau also points to its goals of providing clear regulations, and insists that PayPal’s arguments misconstrue the Rule’s underlying purpose of clarifying what protections apply to digital payments while avoiding “a patchwork regulatory regime that could leave consumers confused about what protections applied to which products.” The Bureau identifies these same factors, along with industry comments regarding the costs, confusion, and effect on innovation, as factors that it considered in addressing the benefits and costs of applying the Rule to digital wallets.
The Bureau also presses the Court to reject PayPal’s First Amendment claim, arguing that the disclosure requirements are not a content based restriction as they do not restrict companies from providing consumers with “clarifying information.” Instead, the Bureau states that the Rule only prohibits additions “to the short-form disclosure box itself,” leaving companies free to “provide additional information, including clarifying details about when certain fees may be lower or waived, anywhere else they wish, including immediately outside the disclosure box.” This distinction is dispositive, the Bureau says, because “[n]othing in the First Amendment bars disclosure regulations . . . [imposing] modest restriction on where commercial information may be placed.”