PayPal, Inc., filed suit against the Consumer Financial Protection Bureau (CFPB) recently, challenging the Prepaid Accounts Under the Electronic Fund Transfer Act (Regulation E) and the Truth in Lending Act (Regulation Z) Rules as a violation of its First Amendment rights.
In addition, the company alleged that the CFPB lacked the statutory authority to issue the Prepaid Rule as drafted and promulgated the Rule via a “fundamentally flawed process.”
What happened
PayPal’s primary consumer offering is a “digital wallet” that allows consumers to keep their payment credentials (such as debit card account numbers, credit card account numbers and bank account information) in a single place to be accessed to make purchases. Consumers do have the ability to store money with PayPal, but the vast majority of PayPal’s customers use its services to make purchases using the stored credentials, not to spend stored cash balances, the company said.
Despite this limited use of stored money, PayPal’s digital wallets were lumped together with general purpose reloadable (GPR) cards in the Prepaid Rule issued by the Bureau in April, requiring PayPal to comply with the mandatory disclosure requirements of the Rule, the company said.
The mandatory fee disclosures are “extremely prescriptive and rigid,” PayPal alleged, compelling the company to disclose the highest possible fee under the worst-case scenario, even if the fee would rarely be incurred by the typical consumer and, in the case of PayPal users, would never be incurred without further customer authorization.
“In other words, the Rule’s mandated short form disclosure regime forces PayPal to make disclosures 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,” according to the D.C. federal court complaint.
The lawsuit cited several consumer complaints submitted to PayPal after it began providing the Rule’s mandatory disclosures, such as “Seems like there’s a fee for any way you use your money … I don’t understand this new rule” and “Why do I have to have all these terms and conditions for a small amount of money in my PayPal account? Fees to transfer to my bank now …? This is a really anti-consumer move on your part.”
However, the company does not charge fees to access funds stored as a balance with PayPal, to make a purchase with a merchant or to transfer money from a PayPal account to a bank account, the company said, demonstrating the actual consumer confusion that has occurred as a result of the Rule’s required disclosures.
PayPal cited three reasons the court should strike down the Prepaid Rule.
First, the CFPB contravened its statutory authority by establishing “a mandatory and misleading disclosure regime nowhere authorized by federal law” and imposing a 30-day ban on consumers linking certain credit cards to their prepaid account, “a prohibition the law nowhere authorizes the Bureau to impose,” the company claimed.
Even if the Bureau did have the statutory authority it claims, the rulemaking process was “fundamentally flawed,” PayPal said, subjecting digital wallets to the same requirements as GPR cards despite their fundamental differences. PayPal engaged extensively with the CFPB throughout the rulemaking process, presenting evidence to the Bureau that PayPal’s digital wallet offerings differed in significant ways from GPR cards and warning of negative consequences to consumers—concerns that were disregarded and have proven to be accurate, the company said.
Finally, the Prepaid Rule violates the First Amendment by forcing PayPal to impair the speech in which it might otherwise engage.
“The effect of the Rule’s inflexible application to PayPal is to muddle PayPal’s ability to present and describe its products to consumers in a manner that accurately informs, not confuses, them about the key product features,” according to the complaint. “And the Bureau can hardly have a substantial interest in forcing PayPal and other digital wallet providers to prominently feature disclosures that are largely irrelevant to the principal uses of their products and that actively mislead consumers about the features of those products.”
PayPal asked the court to declare the Prepaid Rule invalid and unconstitutional, and to enjoin the Bureau from its enforcement.
To read the complaint in PayPal, Inc. v. Consumer Financial Protection Bureau, click here.
Why it matters
PayPal’s lawsuit is a high-profile challenge to the CFPB’s Prepaid Rule, coming eight months after the 1,600-page Rule took effect in April following multiple revisions and extensions of its effective date. PayPal challenges the CFPB’s “one size fits all” notion by alleging that digital wallets that fundamentally store payment credentials are the functional equivalent of prepaid cards that store consumer funds, and should be regulated in the same manner. In addition, while the idea that mandatory disclosures for a financial product could be a First Amendment violation may have once seemed like a far-fetched argument, the Supreme Court’s decision that state surcharge laws violated free speech lends credence to PayPal’s argument.