(Reuters) - A federal judge in Washington, D.C., has invalidated part of a U.S. Consumer Financial Protection Bureau rule governing prepaid cards and digital wallets, emphatically agreeing with fintech giant PayPal that the agency overstepped its authority.

In a decision studded with exclamation points, U.S. District Judge Richard Leon wrote that the agency's rulemaking authority under Dodd–Frank Wall Street Reform and Consumer Protection Act did not allow it to dictate how prepaid card and digital wallet providers disclose fees to customers or to limit when credit cards could be linked to new accounts, saying those restrictions were precluded by other consumer finance laws.

"Doubtless, this is a broad grant of authority," he wrote of the authority Congress gave the CFPB when it created the agency in 2010. "But it is not without limitations!"

A CFPB spokesperson on Thursday said the agency does not comment on pending litigation. PayPal, represented by Wilmer Cutler Pickering Hale and Dorr, said in a statement that Wednesday's decision will alleviate customer confusion.

"The company remains fully supportive of the mission of the CFPB and we are unwavering in our commitment to protect consumers," said spokesman Justin Higgs.

San Jose, California-based PayPal had sued the agency under the Administrative Procedure Act in December 2019 challenging a final rule issued that year regulating prepaid cards, which the CFPB defined to include digital wallets that hold customer funds.

The CFPB created the rule to offer prepaid card users legal protections, such as the ability to address account errors, that already apply to other products such as checking accounts.

PayPal challenged part of the rule that requires prepaid card providers to send customers a specific disclosure form listing any fees associated with the card, including purchase fees or reload fees. The company claimed the form confused PayPal customers, who are not charged such fees.

The rule also restricted customers from linking credit cards associated with their prepaid card providers for 30 days after a new prepaid account was opened. PayPal had argued in its lawsuit that applying that rule to PayPal accounts unnecessarily blocked customers from linking cards issued by other companies that had business dealings with PayPal.

In a motion for summary judgment in May, PayPal argued that the mandatory disclosure requirement went beyond the agency's authority to suggest appropriate fee disclosure forms under the Electronic Fund Transfer Act. The company also said that the CFPB was not authorized to limit when credit accounts could be linked to prepaid ones under the Truth in Lending Act, which it called a disclosure law.

The CFPB moved for summary judgment in July, arguing that the EFTA, which Congress passed to protect consumers in electronic transactions, did not prohibit the agency from requiring specific disclosure forms. Likewise, TILA, a law meant to ensure borrowers are adequately informed about the terms of their credit accounts, gave the CFPB broad authority to impose the 30-day waiting period, the agency said.

Leon on Wednesday rejected the CFPB's arguments, writing that congressional silence is not authorization.

The judge said the CFPB had highlighted EFTA provisions that gave it rulemaking power but ignored provisions setting out the CFPB's role in issuing optional model disclosure forms, to which the judge replied, "Please!"

"That dog won't hunt!" said the judge to the CFPB's argument that the 30-day linking restriction could be considered a disclosure rule under TILA.

The case is Paypal Inc v. Consumer Financial Protection Bureau et al., U.S. District Court, District of Columbia, No. 19-cv-03700.

For Paypal: Kelly Dunbar, James Barton and Rebecca Lee of Wilmer Cutler Pickering Hale and Dorr

For the CFPB: Kristin Bateman and Julia Szybala