Consumer Finance Insights
February 14, 2023

DC Circuit Holds CFPB Did Not Exceed Statutory Authority with the Prepaid Rule

On February 3, 2023, the U.S. Court of Appeals for the District of Columbia Circuit (DC Circuit) issued a decision regarding the disclosure requirements of the Consumer Financial Protection Bureau’s (CFPB) Prepaid Rule.  In PayPal, Inc. v. CFPB, No. 21-5057 (D.C. Cir. 2023) (PayPal), a unanimous panel of the DC Circuit held that the Prepaid Rule does not violate the Electronic Fund Transfer Act (EFTA) because the Rule only provided modeled or suggested language for its disclosure requirements, as opposed to mandatory terminology, and because the Rule’s mandatory formatting for disclosures was not prohibited by the EFTA.

The Electronic Fund Transfer Act (EFTA) requires that “the terms and conditions of electronic fund transfers involving a consumer’s account shall be disclosed at the time the consumer contracts for an electronic fund transfer service” and that these disclosures be in “readily understandable language.”  15 U.S.C. § 1693c(a).  The EFTA also requires that the CFPB “issue model clauses for optional use by financial institutions” in “readily understandable language” in order to ensure compliance with the disclosure requirements.” 15 U.S.C. § 1693b(b).

The Prepaid Rule requires account providers to disclose certain information regarding fees before a consumer acquires an account using “model language” or other “substantially similar wording.”  In addition, the rule mandates certain formatting requirements such as how the disclosures should be structured, the font size, the location of each fee in relation to others, and the emphasis given to each fee.

PayPal challenged the Prepaid Rule’s short form disclosures requirements, alleging, inter alia, the Prepaid Rule improperly exceeded the CFPB’s statutory authority because it required the adoption of a model clause where the EFTA only authorizes model clauses for “optional” use.  The United States District Court for the District of Columbia agreed, holding that the plain language of the EFTA did not allow the CFPB to issue mandatory model clauses with specific formatting and language. The CFPB appealed.

On appeal, both PayPal and the CFPB stipulated that the EFTA prohibits mandatory model clauses.  The CFPB contends that its Prepaid Rule does not impose any such mandatory model clauses.  The DC Circuit overturned the district court’s decision, finding that the Rule requires financial institutions disclose fees using “model language” or a “substantially similar term;” therefore, because it did not require specific language, the Prepaid Rule did not impose mandatory model clauses.  The DC Circuit also held that the term “model language” in the EFTA refers to “specific, copiable language” and held that the Prepaid Rule’s content and formatting requirements did not fall under the meaning of a “model clause.”  The DC Circuit remanded the case back to the district court for further consideration of PayPal’s other challenges.

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