PayPal Holdings Inc. may have prevailed in its lawsuit against the Consumer Financial Protection Bureau over the CFPB’s rules pertaining to prepaid cards and digital wallets, but the overarching legal battle is likely to continue.
The ruling, which was handed down Dec. 30 by U.S. District Judge Richard Leon and vacates the CFPB’s rules pertaining to prepaid cards and digital wallets, will probably be appealed by the CFPB, says Ben Jackson, chief operating officer at the Innovative Payments Association, a Washington, D.C.-based trade group.
“The CFPB is likely to appeal because [Leon’s] decision will create a lot of challenges to the CFPB’s authority,” Jackson says. “The ruling says in essence that the CFPB can’t mandate when it comes to disclosure and that is a difficult precedent for the regulator.” PayPal filed the suit in the U.S. District Court for the District of Columbia in December 2019.
In his ruling, Leon says that the CFPB overstepped its authority when it implemented its final, 1,600-page rule, which went into effect in April 2019. Among other stipulations, the rule states that in order for a payment product to qualify as a prepaid card it must be able to hold funds, as opposed to acting as a pass-through vehicle for those funds. PayPal argued in its lawsuit that the rule improperly included digital wallets under its definition of general-purpose reloadable cards and that there is a clear distinction between the two products.
Leon’s ruling says “[M]ere reference to ‘necessary’ or ‘appropriate’ in a statutory provision authorizing an agency to engage in rulemaking does not afford the agency authority to adopt its regulations as it sees fit with respect to all matters covered by the agency’s authorizing statute. And any ‘additional requirement’ must still be within the confines of the means authorized by Congress.”
Leon further argues that it is clear Congress did not provide the CFPB statutory authority to issue mandatory disclosure clauses.
When asked by email for comment about the ruling and whether the CFPB has plans to appeal it, a CFPB spokesperson said the CFPB does not comment on pending litigation.
Should the CFPB appeal Leon’s decision, it could of course win or lose the appeal, Or, says Jackson, the appellate court could return the case to Leon to clarify the basis for his decision, Jackson says.
The door for the appellate court to return the case to Leon was left open by a footnote in his conclusion, which states that because he ruled against the CFPB, that does not mean he concluded whether the rules in question were “arbitrary and capricious” or whether a short-form disclosure requirement “violates the First Amendment” free-speech rights, as PayPal alleged.
If the appellate court sends the case back to the federal district court, it could pave the way for a new regulatory environment when it comes to prepaid cards and digital wallets.
“Should the case go back to Leon, it could open a whole new can of worms because it could prompt Congress to grant the CFPB more regulatory power or clarify its regulatory power, which if that happens, could lead the CFPB to write new regulations,” Jackson says. “At issue is what are regulators allowed to require of the companies they regulate. This could be the beginning of a long-appeals process.”