[author: Joseph Schuster]

The D.C. federal district court has granted PayPal’s motion for summary judgment in its lawsuit challenging the CFPB’s prepaid card rule (Prepaid Rule) and vacated the Prepaid Rule’s short-form disclosure requirement as applied to digital wallets.

In 2016, the CFPB promulgated the Prepaid Rule, which requires a short- form and long- form account disclosure and requires an issuer to 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.” The Prepaid Rule became effective on April 1, 2019.

In its lawsuit filed in December 2019 challenging the Prepaid Rule, PayPal 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, PayPal alleged that the Prepaid Rule violated the Administrative Procedure Act (APA) 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.”

In a motion for summary judgment, 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 CFPB opposed PayPal’s motion and moved for summary judgment. In January 2021, 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.

The CFPB appealed to the D.C. Circuit to answer the narrow question of whether the Prepaid Rule imposes a mandatory “model clause.” In February 2023, the U. S. Court of Appeals for the D.C. Circuit held that the Prepaid Rule does not 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 mandatory “model clause,” that did “not necessarily mean the CFPB can impose whatever content and formatting requirements it chooses.”

On remand, in ruling on the parties’ new cross motions for summary judgment, the district court considered PayPal’s arguments that the Prepaid Rule’s short-form disclosure requirements as applied to digital wallets are arbitrary and capricious in violation of the APA because the CFPB (1) had no rational justification for subjecting digital wallets to a heightened regulatory scrutiny scheme that was designed for a different product (i.e., general purpose reloadable (GPR) cards), and (2) failed to meaningfully comply with its duty under Dodd-Frank to assess the costs and benefit of applying the Prepaid Rule to digital wallets. The CFPB argued that because both GPR cards and digital wallets are capable of storing consumer funds, the products warrant consistent regulatory treatment. The district court concluded that the CFPB’s “conclusory explanation” for treating the products the same “falls well short of the APA’s demand for reasoned decisionmaking.” It found that “[t]he record before the CFPB clearly demonstrates that digital wallets are different in kind from GPR cards and other types of prepaid products, like payroll cards.” Among the differences cited by the district court were that digital wallets “are not primarily used to access funds or to function as a substitute checking account” and “do not require a consumer to preload or prefund an account before they can use it.” In addition, the court found that “[t]he CFPB’s error” in treating the two products alike was “especially glaring when it comes to the short-form disclosure requirement.” The district court observed that the preacquisition display of a table of fees as mandated by the short-form disclosure requirement “is wholly disconnected from the way in which providers structure their digital wallet businesses, and in which consumers buy and use digital wallet products.” The court noted that the CFPB’s main justification for designing the disclosure was its ability to accommodate the display of prepaid cards in retail locations but digital wallets are not sold in brick-and-mortar stores.

As a justification for extending the short-form disclosure requirement to digital wallets, the CFPB asserted that, despite the fact that the underlying revenue model of digital wallets is not dependent on charging fees to consumers as opposed to merchants, the requirement was needed because digital wallets could begin charging usage fees to consumers in the future. (We saw a similar justification from the CFPB for its NSF fee proposed rulemaking earlier this year which, according to the CFPB, would prevent banks from charging in the future NSF fees that are currently “rarely charged.”) The district court concluded that “application of the short-form mandate to digital wallets reads as ‘a classic case of arbitrary and capricious agency action.’”

The district court also found that the short-form disclosure requirement violated the APA because “the CFPB failed to meaningfully assess the costs and benefits of that mandate in the digital wallet context.” According to the court, the CFPB “gave almost no consideration at all” to the potential costs and benefits of applying the short-form disclosure requirement mandate specifically to digital wallets. (emphasis included). In the court’s view, the CFPB’s “attempt to hide behind a ‘general’ cost-benefit discussion” was problematic because digital wallets are not similar to the other products covered by the Prepaid Rule and, for that reason, “the costs and benefits of regulating these products [are not] sufficiently similar to get the same treatment.” In particular, the district court observed that “the CFPB’s ‘general’ cost-benefit analysis entirely ignored concerns specific to digital wallets that the short-form disclosure would ‘risk inadvertently stunting the continuing development’ of digital products in this highly technical space.’” In addition, according to the district court, the CFPB’s analysis also “‘duck[ed] [a] serious evaluation of’ the risks of consumer confusion resulting from the use of the short form in the digital wallet setting.”

The district court concluded its opinion by stating:

All told, in imposing a prescriptive and burdensome disclosure regime on a nascent and fast-evolving product, the CFPB was required to offer-at a minimum-‘a rational connection between the facts found and the choice made,’ and some quantitative or qualitative assessment of the ‘costs’ of regulation for digital wallets as well as its ‘benefits.’ The CFPB did neither, and instead tried to solve an imaginary problem with no real evaluation of what the ‘solution’ would cost digital wallet providers or consumers. These missteps render the Prepaid Rule’s short-form disclosure requirement arbitrary and capricious and contrary to law. Administrative arrogance of this magnitude is hardly deserving of judicial imprimatur! (emphasis included, citations omitted).

Because it resolved the case based on PayPal’s APA claims, the district court did not reach PayPal’s First Amendment argument. PayPal argued that the short-form disclosure violated the First Amendment because it compels PayPal to disclose information that is inapplicable to its product and misleads consumers. We expect the CFPB to appeal the new district court ruling. As noted above, this case raises the issue of whether it is appropriate for the CFPB to justify the imposition of new regulatory requirements by claiming that such requirements are needed to address a hypothetical scenario that speculates on future fees, a justification that the CFPB has also offered for its NSF fee proposal.

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