A DC Court Could Limit CFPB’s Rulemaking Authority

During the last months, the Consumer Financial Protection Bureau (CFPB) has introduced changes in its procedural rules to be able to tackle its ambitious agenda in a timely manner. Additionally, last month, the agency announced that it would dust off an old rule to investigate FinTech companies. Last, the CFPB may be considering rulemaking in a number of areas like buy now pay later (BNPL), credit card fees, overdraft protections or home valuation. However, the agency has found opposition from some lawmakers.

Read also: CFPB’s New Procedural Rules May Be a Game-Changer

When CFPB Director Rohit Chopra testified in Congress in April to present the results of the agency and the upcoming plans, some lawmakers argued that Chopra has exceeded the powers vested in him and in the agency. But it is a court in Washington D.C., which will issue a ruling in summer, that could limit the agency’s capacity to carry out certain regulatory initiatives.

Read more: CFPB Dusts off Old Rule to Investigate FinTech

The DC Circuit Court of Appeals is hearing a case involving PayPal, Inc. and the CFPB regarding the agency’s prepaid rule. In December 2019, PayPal challenged the CFPB’s authority to issue two provisions of the so-called prepaid rule, which governs consumer financial products that allow consumers to store funds for later use. PayPal´s complaint focuses on two provisions of the rule: 1) short-form disclosure requirements, a requirement to give prepaid customers a “short form” regarding fees and other terms promulgated by the agency; and 2) a credit linking ban, which is a 30-day limitation on linking a credit account to a prepaid product.

In December 2020, the district court determined that both the short-form disclosure requirement and the credit linking ban exceeded the CFPB’s statutory authority. The CFPB appealed the district court’s ruling on the short-form disclosure requirement but not the credit linking ban. A decision on this ground is expected in the summer.

The court decision is important for the future rulemaking plans of the CFPB, because it addresses the scope of certain statutes on which the agency relied for its rulemaking authority, like the Electronic Funds Transfer Act (EFTA), the Truth in Lending Act (TILA) and the Dodd-Frank Act.

In summary, the district court’s decision in 2020 determined that the CFPB went beyond what legislators have established in these rules. For instance, the court found unconvincing the CFPB’s argument that it was permitted to issue the mandatory short-form disclosure under its general authority to issue rules under the EFTA and the Dodd-Frank Act. The court determined that the specific limitations on the Bureau’s authority to issue model EFTA disclosures trumped the more general rulemaking authorities those statutes confer. Therefore, the court imposed some limitations on how the agency can use its general rulemaking authority when there are other specific limitations.

Similarly, on the credit linking ban, the court found that the statute granted the CFPB authority to impose additional requirements “necessary and proper to effectuate [TILA’s] purposes.” But TILA’s purpose was limited to effective disclosure and what the CFPB proposed was a “substantial restriction on a consumer´s access to and use of credit under the guise of a disclosure rule.”

Now, if the DC Circuit Court of Appeals upholds the decision from the lower court, it may affect the disclosure requirements that the CFPB may impose for its rulemaking activity. If the CFPB cannot impose mandatory disclosure forms, the agency may need to resort to optional disclosure forms. This could affect the agency’s work in some investigations. For instance, the agency raised concerns regarding disclosure and transparency of fees and other charges in the junk fee and BNPL investigations. Thus, any mandatory disclosure requirements in these investigations could face some limitations from the court ruling.