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PayPal’s legal battle against the Consumer Financial Protection Bureau (CFPB) has taken a new turn after an appellate court rejected the fintech’s argument that led to the partial invalidation of the agency’s prepaid card rule.
The US Court of Appeals for the DC Circuit has sent PayPal’s lawsuit back to the lower court having previously annulled part of a rule, which had found that the CFPB overstepped its authority.
The debate concerns the CFPB’s prepaid card rule that created a number of legal rights for prepaid card users, including protections in case of errors and loss, and disclosure rights.
As a provider of digital wallets that can store customer funds, PayPal falls under the scope of the rule.
The fintech challenged various aspects of the rule, which led to the invalidation of mandatory model clauses for short-form disclosures that PayPal said were “extremely prescriptive” and “rigid”.
The Court of Appeals has now reversed that decision, finding that the use and form of the model clauses were optional, not mandatory, therefore the CFPB did not overstep its authority.
Short-term disclosures
The rule’s short-form disclosure obligation requires prepaid account providers to display their most important fees, such as periodic fees, transaction fees, ATM withdrawal fees and fees for inactivity.
These fees must be disclosed even if they are $0 and the form must show the highest possible fee users may pay for a service. It also prescribes where certain fees should appear and in which font size. Although this is generally useful for most prepaid cards, PayPal argues it is less relevant for its products.
In the case of PayPal, the fintech says its short-form disclosure would practically display $0s and N/As in most boxes and the remaining two values would show charges that are confusing and do not help consumers understand the actual costs.
This would impose “substantial cost without a commensurate consumer benefit”, according to PayPal.
The fintech also argues the prepaid rule is “fundamentally ill-suited to PayPal digital wallets” and digital wallets are significantly different from general-purpose reloadable cards where the limited space on the back of the cards arguably justifies the need for shortened, formulaic disclosures.
But in its case, “the rule mandates PayPal make disclosures concerning fees that PayPal does not charge and misrepresent the actual fees paid by most customers”, the company says.
Appeal court reverses district court decision
At the tail end of 2020, the short-form disclosure rule was invalidated by Judge Richard Leon in the Washington, DC district court.
Leon concluded that the prepaid rule exceeded the CFPB’s authority because the agency effectively mandated the adoption of a model clause whereas the Electronic Fund Transfer Act (EFTA) allows for optional clauses only.
The model clauses were, therefore, overturned on statutory grounds without the judge looking at the rest of PayPal’s claims.
On February 3, the appellate court reversed Leon’s summary judgment stating that the rule does not mandate a model clause.
“The fact the prepaid rule requires the disclosure of certain content does not, standing alone, mandate a model clause,” Judge Neomi Rao wrote in the document on behalf of a panel of three judges.
In their opinion, when the CFPB explains the disclosure requirements, it lists a couple of examples of what words could be used but also states that these could be replaced by “a substantially similar term”.
For example, the rule says a "per purchase fee" must be disclosed using the term "per purchase" or a "substantially similar term". Similarly, an "inactivity fee" must be disclosed using the term "inactivity" or a "substantially similar term", and so on for each static fee.
Additionally, the judges say "model clause" has a particular meaning in legal texts which includes that it could be adopted by companies in full or changed as needed. It helps consumers understand their rights and shields businesses from liability.
But “an institution’s use of model clauses and forms is optional”, the judge wrote.
Therefore, they conclude that the CFPB did not mandate the use of specific language. Instead, providers can choose to use the CFPB’s model clauses or they can use other language that is substantially similar.
The court sent the case back to Leon who will now have to look at PayPal’s other challenges.
“The recent ruling on CFPB/PayPal shows that CFPB has been granted the freedom to write very tight disclosures” that serve as a model for the industry, according to Brian Tate, CEO of the Innovative Payments Association.
It means that the CFPB “now has the flexibility to require very strict disclosures in future rulemakings on different products”, he added.
The CFPB told VIXIO it is pleased with the ruling and “will continue to defend this consumer protection rule before the District Court”.
PayPal spokesperson commented: “While the ruling is unfortunate, PayPal will continue to put consumers first as we review the opinion and evaluate next steps.”
The spokesperson added that the company “remains unwavering in our commitment to protect consumers and in our efforts to alleviate confusion that would be created by this rule”.
