In Paypal, Inc. v. Consumer Fin. Prot. Bureau, No. 19-3700 (RJL), 2020 U.S. Dist. LEXIS 244761 (D.D.C. Dec. 30, 2020), Judge Leon held that the CFPB’s Pre-Paid Card Rule exceeded the CFPB’s authority because Congress neither authorized it to require mandatory short forms nor permitted it to create a substantive restriction on a consumer’s access to and use of credit under the guise of a disclosure rule.
A. The Prepaid Rule. In May of 2012, the Bureau issued an advance notice of proposed rulemaking “seeking comment, data, and information from the public about … prepaid cards” for the purpose of “determin[ing] how best to implement consumer protection rules for this product.” Pl.’s Mot. at 12 (AR 1-3); Defs.’ Mot. at 8. After the comment period, the Bureau issued a proposed rule in December of 2014 and a final rule in November of 2016. Pl.’s Mot. at 13 (AR 4-238 (proposed rule)); id. at 16 (AR 240-693 (final rule)); Defs.’ Mot. at 8 (AR 240). After delaying implementation of the final rule, the Bureau issued amendments to the rule in February of 2018. Pl.’s Mot. at 18 (AR 743-828); Defs.’ Mot. at 8-9 (AR 743); see also (AR 698-704) (delaying implementation of the final rule). The final rule, as amended, (“prepaid rule” or “rule”) took effect on April 1, 2019. Pl.’s Mot. at 18 (AR 743); [*4] Defs.’ Mot. at 8-9 (AR 743). The prepaid rule applies to some—but not all—digital wallets. To qualify as a prepaid product, a product “must be capable of holding funds, rather than merely acting as a pass-through vehicle.” 12 C.F.R. pt. 1005, Supp. I ¶ 2(b)(3)(i)-6. Therefore, digital wallets that only hold payment credentials—and do not store funds—or digital wallets with distinct asset accounts (i.e. ones that are not bundled with the digital wallet) are not a prepaid account subject to the prepaid rule. Id. Here, PayPal challenges two provisions of the prepaid rule: the short-form disclosure requirement and the thirty-day credit linking restriction. Short-Form Disclosure Requirement. The Bureau promulgated the short-form disclosure requirement as an amendment to the Electronic Fund Transfer Act. Under this amendment, the Bureau requires providers to disclose specific information about fees associated with their prepaid product in a standardized form. 12 C.F.R. § 1005.18(b)(6)(iii). Specifically, the rule requires that a provider disclose the seven most common fees associated with prepaid products in a table format with four fees—periodic fee, per purchase fee, ATM withdrawal fees, and cash reload fee—featured prominently at the top. Id. § 1006.18(b)(2), (b)(7)(i)(A), (b)(7)(ii)(B)(1). The Bureau included a number of other requirements for the short-form disclosure, including where and how a provider can use footnotes and caveats and the font or pixel size of the text. Id. §§ 1005.18(b)(3), 1005.18(b)(7)(ii)(B). Most importantly, the specific format and language of the disclosures in short-form disclosure requirement is mandatory. Id. § 1005.18(b)(2) (“[A] financial institution shall provide a disclosure setting forth the following fees and information for a prepaid account ….”) (emphasis added). Thirty-Day Credit Linking Restriction. The prepaid rule also amended the Truth in Lending Act by establishing rules for certain credit offered in conjunction with prepaid accounts. Relevant here, the prepaid rule 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)(1)(iii). This provision applies only to “covered separate credit features,” which is separate credit that both: (1) can be accessed by the prepaid card in the course of buying goods or services, withdrawing cash, or making person-to-person transfers; and (2) is offered by a party related to the prepaid account issuer—either the issuer itself, its affiliate, or its business partner. Id. §§ 1026.61(c), (a)(2)(i)(A). As applied to digital wallets, if a provider—such as PayPal—offers a digital wallet and a separate asset account, the consumer must wait thirty days before linking a credit account to the separate asset account, but the consumer does not have to wait to link credit to the separate digital wallet. Defs.’ Mot. at 18-19. If a provider offers a digital wallet that includes an asset account, the thirty-day credit linking restriction applies in two scenarios: (1) when the same financial institution or affiliates issue the prepaid account and the credit card; or (2) where the prepaid account issuer and the credit card issuer have a business relationship and vary certain costs or other characteristics of either account based on whether the accounts are linked. See Defs.’ Mot. at 19 (AR 5949-69, 10334-43, 10515-23, 10616-17).