A federal judge in D.C. recently vacated the CFPB’s short-form disclosure requirement for prepaid products and the related 30-day credit linking restriction, as exceeding the CFPB’s rulemaking authority, in part because of more specific provisions in the relevant statutes that effectively limit the Bureau’s general rulemaking power.
In December 2014, the CFPB issued a proposed Prepaid Accounts Rule that was finalized in November 2016. The final rule went into effect on April 1, 2019. The rule included the short-form disclosure requirement, which amended the Electronic Fund Transfer Act (EFTA), and required providers to disclose specific information about fees for prepaid products (including some digital wallets) using mandatory format and language. The rule also included a 30-day credit linking restriction, which amended TILA, and required credit card issuers to wait up to 30 days before linking a consumer’s credit account to a prepaid account in some instances.
On December 11, 2019, a provider of prepaid products sued the CFPB under the Administrative Procedure Act and the First Amendment, challenging these two provisions. On May 6, 2020, the provider moved for summary judgment, and, on July 7, 2020, the CFPB cross-moved for summary judgment. The judge granted the provider’s motion, denied the CFPB’s cross-motion, and vacated both regulatory provisions.
The judge found that the CFPB had acted outside the scope of its statutory authority in issuing both rules. Under the EFTA, the CFPB can issue optional, model clauses that financial institutions can use. Under TILA, it can prescribe regulations that effectuate meaningful disclosures of credit terms. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), the CFPB can adopt rules to ensure full, accurate, and effective disclosures of costs, benefits, and risks associated with consumer financial products and services. However, the judge found that the Bureau’s statutory authority did not include promulgating mandatory disclosure provisions, or issuing substantive regulations restricting credit.
The judge rejected the CFPB’s arguments that it had general rulemaking authority under the EFTA, Dodd-Frank Act, and TILA to issue these provisions, or that the provisions were permitted because Congress had not explicitly prohibited them.