The U. S. Court of Appeals for the D.C. Circuit held that the CFPB’s prepaid card rule (Prepaid Rule) does not mandate a “model clause.”  The ruling was made in the lawsuit that PayPal, one of the largest digital wallet providers, filed against the CFPB in December 2019 to challenge the Prepaid Rule. 

PayPal’s complaint alleged that by imposing the same regulatory regime on digital wallets as it imposes on “prepaid cards” or “general purpose reloadable cards,” the Prepaid Rule requires PayPal to make misleading and inapplicable disclosures to its customers while prohibiting it from offering relevant clarifying information.  Specifically, PayPal targeted the Rule’s mandated short form disclosure and its 30-day ban on linking credit products to prepaid accounts.  In addition to claims under the First Amendment of the U.S. Constitution, PayPal alleged that the Prepaid Rule violated the Administrative Procedure Act because the CFPB exceeded its authority under the Electronic Fund Transfer Act (EFTA) by imposing mandatory “model clauses” when the EFTA only authorizes optional “model clauses.”  PayPal filed for summary judgment and the CFPB opposed and moved for summary judgment.  The district court granted summary judgment for PayPal and the CFPB appealed to the D.C. Circuit which reversed the district court.

The authority to issue regulations implementing the EFTA was transferred to the CFPB by the Dodd-Frank Act.  The EFTA requires the CFPB to issue model clauses to facilitate compliance with disclosure requirements and provides a safe harbor from liability for institutions using the model clauses.  The EFTA provides that an institution’s use of model clauses is “optional.”

In 2016, the CFPB promulgated the Prepaid Rule, which requires a short form and long form account disclosure.  PayPal challenged the requirement that an issuer disclose its “most important fees” in the short form disclosure.  (See the CFPB’s short form model clause.)  For each type of fee, the Prepaid Rule suggests a specific word or phrase to describe the fee and directs providers to use that language or language that is “substantially similar.”

PayPal argued that the Prepaid Rule’s short form disclosure requirements effectively impose mandatory model clauses that the CFPB has no authority to mandate under either EFTA or Dodd-Frank.  The district court granted PayPal’s summary judgment motion and vacated the Prepaid Rule, ruling that the Prepaid Rule’s short form disclosure requirements exceeded the CFPB’s statutory authority under the EFTA by effectively creating “mandatory disclosure clauses.”  The district court declined to rule on PayPal’s other claims.

For the purposes of the case, the CFPB did not dispute that it lacks statutory authority under the EFTA or Dodd-Frank to issue mandatory clauses.  Accordingly, the narrow question on appeal was whether the Prepaid Rule imposes a mandatory “model clause.”

Ruling in favor of the CFPB, the D.C. Circuit reversed and remanded the case after concluding the Prepaid Rule does not require specific language or mandate a “model clause.”  In reaching its decision, the D.C. Circuit first determined that the text and structure of EFTA establishes that the term “model clause” means “specific, copiable language—not content or formatting requirements.”  Applying this definition, the D.C. Circuit concluded the Prepaid Rule does not impose mandatory model clauses.  The D.C. Circuit stated:

[T]he CFPB has not mandated that financial providers use specific, copiable language to describe [the certain enumerated fees].  Rather, providers can choose to use the CFPB’s model clauses or they can use other language that is “substantially similar.”  Because the Prepaid Rule does not mandate the use of specific language, the CFPB has not mandated a ‘model clause’ in contravention of EFTA.

In its analysis, the D.C. Circuit addressed PayPal’s argument that because the Prepaid Rule imposes certain topline requirements, such as particular content and formatting, the Prepaid Rule impermissibly mandates a model clause.  The D.C. Circuit determined that the “EFTA makes clear that model clauses and disclosure requirements are discrete terms,” with “[d]isclosure requirements regulat[ing] content, while model clauses suggest[ing] the language that may be used for the disclosure.” The D.C. Circuit further stated that “[t]he fact the Prepaid Rule requires the disclosure of certain content does not, standing alone, mandate a model clause.”

The D.C. Circuit remanded the case to the district court to address PayPal’s other APA and constitutional challenges to the Prepaid Rule.  In doing so, it observed that although the Prepaid Rule’s content and formatting requirements did not constitute a “model clause,” that did “not necessarily mean the CFPB can impose whatever content and formatting requirements it chooses.”

We will follow the district court’s ruling on PayPal’s remaining claims for a future blog post.