Risk & Compliance

PayPal Sues CFPB Over ‘Confusing’ Prepaid Card Rules

The company is challenging regulations that require PayPal accounts to guarantee the same consumer protections as prepaid credit cards.
Lauren MuskettDecember 16, 2019

PayPal has filed a lawsuit against the Consumer Financial Protection Bureau over regulations that require the company to guarantee consumer protections like those required by prepaid credit card providers.

In the suit, PayPal is seeking to vacate the application of the regulation to its products, arguing the rule is a “category error” and the CFPB did not cite evidence that consumers use prepaid cards and the digital wallets provided by PayPal in the same way.

PayPal said the disclosure has mistakenly confused many customers who believed the company was charging fees to access money stored as a balance to make a purchase or send as a transfer.

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“The resulting regulatory regime is fundamentally ill-suited to PayPal digital wallets and is likely to mislead or confuse consumers,” PayPal said in its filing. “The rule mandates PayPal make disclosures concerning fees that PayPal does not charge and misrepresent the actual fees paid by most customers.”

Regulators say the ability of users to store money in PayPal accounts makes them function like prepaid credit cards. PayPal said subjecting its digital wallet to the same disclosure requirements as the reloadable cards was unduly arbitrary. PayPal also said the rule was a violation of the First Amendment.

The Prepaid Accounts Under the Electronic Fund Transfer Act (Regulation E) and the Truth in Lending Act Rule (Regulation Z) went into effect in April as part of the CFPB’s campaign to prevent the use of prepaid cards in money-laundering.

The suit could also impact digital wallets offered by Apple and Alphabet, though neither of those companies is suing the agency.

In 2015, in its own complaint in federal court, the CFPB alleged PayPal had been engaged in unfair, abusive and deceptive practices in the marketing and management of its PayPal Credit service. Under a consent order, PayPal agreed to pay $15 million to refund consumers and a $10 million fine to settle those allegations.

In a statement, the Innovative Payments Association, a trade group, said its members should fully comply with the prepaid rule while the decision is before the court.

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