PayPal Sues Consumer Financial Protection Bureau

On December 11, plaintiff PayPal filed a complaint against the Consumer Financial Protection Bureau (PayPal, Inc. v. Consumer Financial Protection Bureau 1:19-cv-03700) over disclosures required by CFPB. PayPal is represented by Wilmer Cutler Pickering Hale and Dorr. The complaint was filed in the District of Columbia District Court.

The complaint is for a promulgated CFPB rule that requires PayPal to “make misleading and confusing disclosures about the fees and functionalities of its products and places unreasonable restrictions on consumers’ abilities to link certain credit products to their PayPal accounts.” PayPal claimed that “[a]s a result, the Bureau’s rulemaking has resulted in consumer misunderstanding and confusion and has deprived PayPal’s customers of access to significant benefits offered by PayPal.” The rule in question is the “Prepaid Accounts Under the Electronic Fund Transfer (Regulation E) and the Truth in Lending Act (Regulation Z) Rule.” The complaint stated that this rule came from an “initiative to regulate a product known commonly as a ‘prepaid card’ or ‘general purpose reloadable card.’”  Most people use PayPal to transfer funds and make purchases, however, if someone receives payment on PayPal without immediately transferring the funds, the user could pay someone with the funds that had not been transferred yet. Additionally, the regulation requires PayPal to feature items irrelevant to most of its digital wallet features and offerings, such as ‘periodic,’ ‘per purchase,’ customer service,’ and inactivity fees.”

PayPal alleged that CFPB dismissed its argument about how their digital wallet is different from a prepaid card.  According to PayPal, the agency provided no reasoning or evidence for this decision. However, CFPB provided a description of digital wallets, which notes that a digital wallet is different from a prepaid card because digital wallets store bank account and card credentials, including prepaid cards. The complaint alleged the “The Bureau thus seized on an occasional and incidental feature of digital wallets to impose on digital wallets a sweeping regulation designed for GPR cards.” PayPal argued that the Bureau has taken advantage of this similarity, though it is not a core function or feature of PayPal.

PayPal alleged that CFPB exceeds its statutory authority set out by the Electronic Funds Transfer Act and the Truth in Lending Act and violated the First Amendment.     

Digital Transactions reported, “PayPal’s case represents what is probably the most serious challenge to the rule since it took effect after years of delay. Created by the Obama Administration in the wake of the 2008-09 financial crisis, the CFPB considered prepaid regulation for years before releasing the first version of its rule in January 2017. The rule then underwent three revisions and two extensions of its effective date before finally taking effect in April.”

Apple Inc. and Alphabet Inc., Google’s parent company, could also be affected by this regulation because they also offer digital wallets.