In a case brought by Paypal, Inc. under the Administrative Procedure Act (APA) and the First Amendment, a D.C. district court has sided with PayPal and vacated two provisions of the CFPB's final rule regulating prepaid accounts under the Electronic Fund Transfer Act (EFTA/Regulation E) and the Truth In Lending Act (TILA/Regulation Z) (the "Prepaid Rule") – the final rule's short-form disclosure requirement and the 30-day credit linking provision.
The Prepaid Rule was promulgated in November 2016 and took effect on April 1, 2019. Among other provisions, the Prepaid Rule requires:
- Short-Form Disclosure Requirement: Under authority of the EFTA, the Prepaid Rule requires providers to disclosure fee information in a standardized form, stating that "[a] financial institution shall provide a disclosure setting forth the following fees and information for a prepaid account." The short-form disclosure consists of a table of the seven most common fees associated in with the product. Four of these fees, period fee, per purchase fee, ATM withdrawal fee, and a cash reload fee, must be featured prominently at the top of the form.
- 30-Day Credit Linking Requirement: Under authority of the TILA, the Prepaid Rule requires credit card issuers, in certain circumstances, to wait 30 days after a consumer has registered a prepaid account before linking a credit product to the account. This provision applies to a separate credit product that (1) can be accessed by the prepaid card in the court 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 – this can be the issuer itself, its affiliate, or its business partner.
The opinion, authored by Judge Richard J. Leon, compared the challenged provisions to the specific statutory authority delegated by Congress under the EFTA and TILA. In vacating both provisions, the court held that the statutory authority was inconsistent in the manner in which the Prepaid Rule achieved its objectives. For the short-form disclosure requirement, the court highlighted the fact that the EFTA provides only for the regulator to create a model form that covered persons can voluntarily use as a compliance safe harbor.
Similarly, the court explained that the TILA and Dodd-Frank Wall Street Reform and Consumer Protect Act provided the CFPB with rulemaking authority related to credit product disclosures, but not general authority to regulate the actual extension of credit.
The court held the two challenged provisions to be in excess of the statutory jurisdiction, authority, or limitations on the CFPB, as required by the APA. The court applied the two-step Chevron analysis to first determine whether Congress had "directly spoken on the precise question at issue" and, if not, whether the CFPB's interpretation was "a permissible construction of the statute." In both instances, the court ruled that the CFPB's Prepaid Rule went beyond the authority provided by Congress.
The CFPB has not publicly commented on the decision, but it is likely that the agency will appeal the decision. We will continue to monitor this case as it develops.