Monday, February 6, 2023

FYI: DC Cir Hods CFPB's "Prepaid Rule" Did Not Contravene EFTA, Reversing Trial Court

The U.S. Court of Appeals for the District of Columbia recently reversed the ruling of a trial court and concluded that the Consumer Financial Protection Bureau's ("CFPB") Prepaid Rule does not mandate a "model clause" in contravention of the Electronic Fund Transfer Act ("EFTA").


A copy of the opinion is available at:  Link to Opinion


The CFPB promulgated the Prepaid Rule, which regulates digital wallets and other prepaid accounts. As relevant here, the Rule requires financial institutions to make certain disclosures by using model language or other "substantially similar" wording. The Rule also imposes formatting requirements, which include how the disclosures must be structured, where each fee must appear in relation to the others, and the font size and emphasis given to each fee.


Challenging the Rule on statutory, administrative, and constitutional grounds, a financial technology company sued the CFPB. The trial court addressed only the tech company's statutory claims, vacating part of the Rule because it mandated a "model clause" in violation of the Electronic Fund Transfer Act ("EFTA"). The CFPB timely appealed.


On appeal, the tech company and the CFPB both stipulated that the EFTA prohibits mandatory model clauses, and therefore the DC Circuit considered only whether the Prepaid Rule mandates such a clause.


"Model clause" is not defined in EFTA, so the DC Circuit looked to the meaning of the term in its statutory context. Model clauses must be designed "to facilitate compliance with the disclosure requirements of section 1693c" and "to aid consumers in understanding the rights and responsibilities of participants in electronic fund transfers." 15 U.S.C. § 1693b(b). In addition, a model clause provides a safe harbor from liability for financial institutions. Id. § 1693m(d)(2). Thus, the Court reasoned that, within the EFTA, a "model clause" serves to disclose and protect legal rights.


Moreover, the DC Circuit found that, in legal parlance, model legal documents refer to specific, copiable language that lawyers, legislators, and contracting parties can adopt in full or adapt as needed. Thus, the Court concluded that sections 1693b(b) and 1693m(d)(2) of the EFTA demonstrate that a "model clause" is a particular set of words, namely "readily understandable language," that prepaid account providers can adopt to satisfy their disclosure obligations and to benefit from the Act's safe-harbor provision.


Accordingly, assuming the CFPB lacks authority to impose mandatory model clauses, and applying the above understanding of "model clause," the DC Circuit held that the CFPB's Prepaid Rule does not mandate model clauses in contravention of the EFTA.


The DC Circuit noted that the Prepaid Rule requires financial providers to disclose certain fees by using a suggested phrase "or a substantially similar term." For example, providers "shall provide a disclosure" for a "[c]ash reload fee ... using the term 'Cash reload' or a substantially similar term." 12 C.F.R. §1005.18(b)(2)(iv). They must also disclose a "periodic fee ... using the term 'Monthly fee,' 'Annual fee,' substantially similar term." Id. § 1005.18(b)(2)(i).


Therefore, the Rule suggests the use of a particular word or phrase, but the DC Circuit also pointed out that the Rule provides an option to use terms that are "substantially similar." The CFPB interprets the Prepaid Rule to require the disclosure of certain enumerated fees. See 12 C.F.R. pt. 1005, supp. I, cmt. 18(b)(2)-1. But the CFPB has not mandated that financial providers use specific, copiable language to describe those 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 Court concluded that the CFPB does not mandate a "model clause" in contravention of EFTA.


The tech company argued that model clauses include some combination of specific wording, content, and formatting requirements. However, the DC Circuit countered that, in the EFTA, "model clause" means specific copiable language. With respect to the content of model clauses, specific information "shall be disclosed." 15 U.S.C. §1693c(a). And separately, the CFPB must issue "model clauses" suggesting language providers can use to satisfy the disclosure requirements. Id. § 1693b(b).


The DC Circuit similarly determined that formatting is not part of a "model clause." The Court noted that a model clause, in legal parlance, does not ordinarily include formatting requirements; specific, copiable language is the essential element of such clauses. The Prepaid Rule does mandate certain formatting, but the Court held that such requirements fall outside the ambit of a "model clause."


Accordingly, the DC Circuit concluded that the CFPB's Prepaid Rule does not mandate a "model clause" in contravention of the EFTA. However, the Court also stated that the fact the Rule's content and formatting requirements do not fall within the meaning of "model clause" does not necessarily mean that the CFPB can impose whatever content and formatting requirements it chooses.


Thus, the DC Circuit remanded the case to the trial court with instructions to consider the tech company's other challenges to the Rule, including the administrative and constitutional claims.




Ralph T. Wutscher
Maurice Wutscher LLP
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