The court found the CFPB rule was arbitrary and lacked a reasoned cost-benefit analysis when applied to digital wallets.
06/18/2024 12:05 P.M.
3 minute read
In December 2019, PayPal, Inc. sued the Consumer Financial Protection Bureau and its director, Rohit Chopra, over the Prepaid Rule, which regulated digital wallets and prepaid accounts. PayPal contended that the rule was arbitrary, capricious, and lacked a reasoned cost-benefit analysis when applied to digital wallets.
After four years, two opinions and an appeal, the court considered cross-motions for summary judgment on whether the Prepaid Rule’s short-form disclosure requirement was arbitrary and capricious for digital wallets, and if the CFPB adequately performed a cost-benefit analysis.
The court ruled in favor of PayPal, granting its motion and denying the CFPB’s cross-motion. The decision stemmed from the CFPB’s failure to provide a well-founded, non-speculative reason for including digital wallets under the Prepaid Rule’s short-form disclosure requirement. Additionally, the court found the CFPB’s cost-benefit analysis inadequate, deeming the rule arbitrary, capricious, and contrary to law. Consequently, the short-form disclosure requirement for digital wallets was vacated.
Digital wallets, such as those provided by PayPal, store a consumer’s payment credentials electronically and typically do not hold funds. Most users do not maintain balances in digital wallets, which primarily facilitate secure transactions. The CFPB’s Prepaid Rule, initially targeting general-purpose reloadable (GPR) cards, imposed a short-form disclosure mandate on all products capable of storing funds, including digital wallets. However, digital wallets differ significantly from GPR cards as they are not primarily used to store funds and do not rely on charging consumer fees.
Despite recognizing these distinctions, the CFPB extended the rule to digital wallets, suggesting potential future fee charges by providers to fill a regulatory gap and prevent inconsistency. However, these justifications lacked substantial evidence and were deemed speculative.
The court reviewed the timeline, noting the rule’s April 1, 2019, implementation. PayPal initially sought to invalidate the rule, resulting in a 2020 decision vacating two provisions. The CFPB appealed only the ruling on the short-form disclosure requirement, leading to a 2023 appellate decision remanding the case for further consideration of PayPal’s challenges.
Ultimately, the court found the CFPB’s rationale for subjecting digital wallets to the Prepaid Rule’s disclosure requirement unconvincing and criticized the lack of a thorough cost-benefit analysis.
Discussion
In the remanded case, PayPal challenged the CFPB’s short-form disclosure requirement under the Prepaid Rule, arguing it was arbitrarily applied to digital wallets. PayPal raised three objections: first, that the CFPB lacked rational justification for applying a rule designed for GPR cards to digital wallets; second, that the CFPB failed to assess costs and benefits as required by the Dodd-Frank Act; and third, a First Amendment claim, which the court chose not to address, focusing on the first two objections.
The court upheld PayPal’s first objection, stating the CFPB acted arbitrarily and capriciously by subjecting digital wallets to the same regulatory regime as GPR cards without sufficient grounds.
The court also found fault with the CFPB’s justification for the short-form disclosure requirement, which was intended for physically sold products and irrelevant for online-only digital wallets that do not impose fees like ATM withdrawals or monthly charges. This misalignment could mislead consumers about irrelevant fees.
Additionally, the court rejected the CFPB’s speculative reasoning that digital wallets might someday charge such fees, noting the business model relies on merchant fees rather than consumer charges. The court also found the CFPB’s argument that the rule filled a regulatory gap unconvincing, as digital wallets already fell under the Electronic Fund Transfer Act (EFTA) and Regulation E, suggesting the CFPB could have clarified rather than imposed new regulations.
Decision
Based on these reasons, the court granted PayPal’s motion for summary judgment and denied the CFPB’s cross-motion. As a result, the court vacated the Prepaid Rule’s short-form disclosure requirement for digital wallets. An order consistent with this decision has been issued.
Read the opinion (PDF) and order (PDF).
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