Banking and Finance Law Daily CFPB files reply memorandum in PayPal’s challenge to Prepaid Accounts Rule
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Tuesday, September 29, 2020

CFPB files reply memorandum in PayPal’s challenge to Prepaid Accounts Rule

By Nicole D. Prysby, J.D.

The Bureau’s brief argues that PayPal conceded that it was appropriate to apply the vast majority of the Prepaid Rule to digital-wallet asset accounts, and argues that it acted well within its authority in adopting those provisions.

The Consumer Financial Protection Bureau submitted a reply brief in litigation involving a challenge from PayPal, Inc. to the Prepaid Accounts Rule. The Bureau argued that PayPal conceded that it was appropriate to apply the vast majority of the Prepaid Rule to digital-wallet asset accounts, and limited its challenge to two specific provisions: the short-form disclosure requirements and the 30-day waiting period for linking credit to a prepaid account in certain limited circumstances. The Bureau argued that it acted well within its authority in adopting those provisions and the rule is not arbitrary and capricious for declining to exempt digital-wallet accounts. The CFPB argued that PayPal failed to explain why the Bureau’s explanations for applying the short-form disclosure requirements to digital-wallet accounts were arbitrary and capricious. PayPal also failed to acknowledge the Bureau’s reasoning with respect to the 30-day waiting period, especially considering that the Bureau narrowed the waiting-period provision so that it applies to consumers seeking to link a credit card to a digital-wallet account only rarely, most notably when linking the accounts would cause certain account terms to change (PayPal, Inc. v. CFPB, D.D.C, Case No. 1:19-cv-03700-RJL.).

PayPal sued the Bureau over the Prepaid Accounts Rule, which amends Reg. E and Reg. Z to give prepaid account consumers protections similar to those for checking account and credit card consumers. PayPal motioned for summary judgment and made several arguments related to statutory authority, the rulemaking process, and constitutionality (see Banking and Finance Law Daily, May 8, 2020). Specifically, that the Bureau lacks the statutory authority under the Electronic Fund Transfer Act (EFTA) to impose the rule’s short form disclosure requirement and lacks the statutory authority under the Truth in Lending Act (TILA) to impose the 30-day credit linking ban. PayPal also argued that the rule is arbitrary and capricious, that the Bureau failed to perform a cost-benefit analysis, and that the rule violates the First Amendment in that it compels PayPal to disclose information.

In July, the Bureau filed its brief in opposition, and argued that the court should grant summary judgment in the Bureau’s favor (see Banking and Finance Law Daily, July 9, 2020). The Bureau argued that it reasonably exercised its broad authority in adopting the short-form disclosure requirements and the 30-day waiting period, as authorized under the EFTA and the Dodd-Frank Act. Similarly, both the TILA and the Dodd-Frank Act authorize the waiting period for linking certain credit to a prepaid account. And the Bureau argued that the rule’s disclosure requirements are entirely consistent with the First Amendment. PayPal submitted a response in August (see Banking and Finance Law Daily, Aug. 25, 2020), which it argued that the EFTA’s absence of a prohibition against mandatory disclosure form requirements is not a carte blanche delegation to prescribe such forms. PayPal reiterated its argument that the Bureau lacked authority to adopt the rule and that it applied an ill-fitting regulatory regime designed for general purpose reloadable cards to digital wallets without adequate justification.

The Bureau’s reply memorandum argues that PayPal conceded that it was appropriate to apply the vast majority of the Prepaid Rule to digital-wallet asset accounts, and made clear that its challenge is limited to two specific provisions: the short-form disclosure requirements and the 30-day waiting period for linking credit to a prepaid account in certain limited circumstances. But the Bureau acted well within its authority in adopting those provisions. The EFTA and the Dodd-Frank Act authorize the short-form disclosure requirements, through their authorization of rule standardizing the form of disclosures. The EFTA’s mandate that the Bureau "must" provide optional models that providers can use to avoid liability does not imply that the Bureau "must not" adopt rules that effectively make the models mandatory. The fact that the Bureau did not previously adopt form requirements as detailed as the Prepaid Rule’s is not evidence that it lacks authority to do so. Because nothing in EFTA forecloses rules governing disclosures’ form, the court must defer to the Bureau’s reasonable interpretation that the statute permits such rules.

PayPal’s challenge to the rule is merely a policy disagreement, said the reply. The Bureau also argued that both TILA and the Dodd-Frank Act authorize the 30-day waiting period. The waiting period effectuates TILA’s purposes by promoting informed use of credit and the rule is not arbitrary and capricious for declining to exempt digital-wallet accounts. PayPal may not like the Bureau’s policy judgment that digital-wallet accounts deserved no special exemption, but it cannot show that judgment was so implausible that it could not be ascribed to a difference in view. The CFPB made the "reasonable policy judgment" that standardized disclosures were warranted for similar products: digital wallets and other prepaid accounts. The Bureau met its obligation to consider the rule’s costs and benefits, specifically in the preamble’s overall discussion of costs and benefits—nothing in the statute required the Bureau to include a separate discussion of the rule’s benefits and costs for digital-wallet accounts specifically. The Bureau also argued that PayPal cannot show a First Amendment violation, as there is no basis for a court to conclude that a heightened standard of review would apply.

Attorneys: Mary McLeod, John R. Coleman, Steven Y. Bressler, Kristin Bateman, and Julia Szybala for the Consumer Financial Protection Bureau and Kathleen Kraninger.

Companies: PayPal, Inc.

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