Payments 3.0: A Judge’s Common Sense Vs. Regulatory Overreach

The saga of PayPal versus the Consumer Financial Protection Bureau entered a new chapter early this spring when PayPal won a favorable ruling from the U.S. District Court for the District of Columbia.

On March 29, Judge Richard Leon ordered that the Bureau not require PayPal to provide the short-form disclosure required under the prepaid accounts rule to customers using the PayPal digital wallet. Judge Leon agreed with PayPal’s arguments that digital wallets are different from general-purpose reloadable prepaid cards—especially cards bought in a retail setting—and so should not need the same kind of disclosures. He also wrote that the CFPB’s cost analysis was not sufficiently detailed.

While the Bureau will likely appeal, regulators should take the time to consider the ruling beyond just formulating legal strategies, because it provides a guide to how they should write, and evaluate comments on, their proposed rules. The decision as a whole is worth reading, but a few highlights are in order.

First, Judge Leon took issue with the CFPB’s assertion that it should regulate digital wallets with the same rule as prepaid cards because, even though wallets do not charge fees today, they might some time in the future. “The CFPB dreams up a problem in search of a solution by making ‘unsupported assumptions’…about fees that ‘may’ be charged by digital wallet providers at some unspecified time ‘in the future’… That kind of conjecture cannot masquerade as a predicate for rational agency action,” Leon wrote.

His decision also took issue with the idea that there is a regulatory gap for digital wallets, noting that Regulation E already applies. This is an important point. As new products are brought to market, they don’t always require a new regulatory regime. Regulators need to develop a process for evaluating new products thoroughly and figuring out where existing rules should apply—such as Reg E for mobile wallets—and where they should not—such as Regulation Z for employer-based earned-wage access programs.

In his cost-benefit analysis, Leon pushes back on the rulemaking by noting that the CFPB never tested its disclosures in an electronic setting. Consumers could be confused by disclosures of fees at $0 when they are never charged, he argues, especially when no qualifications are allowed.

Perhaps the most important point Leon makes is that the Bureau did not analyze industry comments fully. “The CFPB’s first citation…points only to a recitation of industry comments,” he notes, “not to any independent analysis by the agency and certainly not to a thoughtful quantitative and qualitative weighing of the Rule’s costs and benefits with respect to digital wallets.”

Leon is calling on regulators to do rigorous analysis on proposed rules that recognizes as more than a formality the input of potentially regulated entities. The prepaid rule started as a short rule about disclosures for open-loop prepaid cards and grew into a sprawling web that tries to solve problems with all kinds of financial products.

Perhaps it’s time to revisit the prepaid-accounts rule with renewed rigor—especially considering the rule never actually defines the product it regulates. In many cases, whether an account falls under a rule seems to come down to how it is marketed.

This case has been to the Supreme Court and back, and may end up there again. Regardless of the outcome of appeals, we can hope that regulators will study Leon’s decision with an eye to improving their own rulemaking and that it will prompt them to read comment letters to improve their analysis instead of reading them to create a veneer of fairness.

—Ben Jackson bjackson@ipa.org