D.C. Circuit says CFPB’s Prepaid Rule does not mandate model disclosures for payment companies

Courts CFPB Appellate D.C. Circuit Prepaid Rule Disclosures Prepaid Accounts Dodd-Frank EFTA TILA

On February 3, the U.S. Court of Appeals for the D.C. Circuit reversed a district court’s decision that had previously granted summary judgment in favor of a payment company and had vacated two provisions of the CFPB’s Prepaid Rule: (i) the short-form disclosure requirement “to the extent it provides mandatory disclosure clauses”; and (ii) the 30-day credit linking restriction. As previously covered by InfoBytes, the company sued the Bureau alleging, among other things, that the Bureau’s Prepaid Rule exceeded the agency’s statutory authority “because Congress only authorized the Bureau to adopt model, optional disclosure clauses—not mandatory disclosure clauses like the short-form disclosure requirement.” The Bureau countered that it had authority to enforce the mandates under federal regulations, including the EFTA, TILA, and Dodd-Frank, and argued that the “EFTA and [Dodd-Frank] authorize the Bureau to issue—or at least do not foreclose it from issuing—rules mandating the form of a disclosure.”

The district court concluded, among other things, that the Bureau acted outside of its statutory authority, and ruled that it could not presume that Congress delegated power to the agency to issue mandatory disclosure clauses just because Congress did not specifically prohibit it from doing so. Instead, the Bureau can only “‘issue model clauses for optional use by financial institutions’” since the EFTA’s plain text does not permit the Bureau to issue mandatory clauses, the district court said. The Bureau appealed, arguing that both the EFTA and Dodd-Frank authorize the Bureau to promulgate rules governing disclosures for prepaid accounts, and that the decision to adopt such rules is entitled to deference. (Covered by InfoBytes here.) However, the Bureau maintained that the Prepaid Rule “does not make any specific disclosure clauses mandatory,” and stressed that companies are permitted to use the provided sample disclosure wording or use their own “substantially similar” wording.

In reversing and remanding the ruling, the appellate court unanimously determined that because the Bureau’s Prepaid Rule does not mandate “specific copiable language,” it is not mandating a “model clause,” which the court assumed for purposes of the opinion that the Bureau was prohibited from doing. While the Prepaid Rule imposes formatting requirements and requires the disclosure of certain enumerated fees, the D.C. Circuit stressed that the Bureau “has not mandated that financial providers use specific, copiable language to describe those fees.” Moreover, formatting is not part of a “model clause,” the appellate court added. And because companies are allowed to provide “substantially similar” disclosures, the appellate court held that the Bureau has not mandated a “model clause” in contravention of the EFTA. The appellate court, however, did not address any of the procedural or constitutional challenges to the Bureau’s short-form disclosures that the district court had not addressed in its opinion, but instead directed the district court to address those questions in the first instance.