US court revives CFPB prepaid rule on fees, in defeat for PayPal

A US appeals court has revived a US Consumer Financial Protection Bureau (CFPB) rule governing how providers of digital wallets disclose commonly used fees to prepaid customers.

The US Court of Appeals for the DC Circuit rejected an argument by PayPal, one of the largest digital wallet providers, that the CFPB overstepped its authority by making fee disclosures mandatory, not optional.

Friday’s decision reversed a Dec 2020 ruling by US District Judge Richard Leon in Washington, DC, who said the CFPB lacked power under the federal Electronic Funds Transfer Act or the 2010 Dodd-Frank financial reforms to impose a mandatory “model clause” for the fees.

Kannon Shanmugam of Paul, Weiss, Rifkind, Wharton & Garrison represented PayPal, while CFPB senior counsel Christopher Deal represented the regulator.

The CFPB created its Prepaid Rule to offer consumers legal protections on prepaid accounts similar to those on products such as checking accounts, including the ability to challenge payment errors, unauthorised transactions and fraud.

Among the charges to be disclosed were ATM withdrawal and balance inquiry fees, and fees for holding accounts, reloading cash, account inactivity and customer service.

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The appeals court said the CFPB’s disclosure requirement was not a mandatory model clause because financial providers were free to use language “substantially similar” to what the regulator proposed.

Though there may be only a “limited range of permissible wording”, Circuit Judge Neomi Rao concluded that “the fact the Prepaid Rule requires the disclosure of certain content does not, standing alone, mandate a model clause”.

Chief judge Sri Srinivasan and circuit judge Cornelia Pillard joined Rao’s decision.

A PayPal spokesperson said the company “remains unwavering in our commitment to protect consumers and in our efforts to alleviate confusion that would be created by this rule”.

The San Jose, California-based company had said that there were “significant differences” between digital wallets and prepaid cards, including that the cards’ small size arguably necessitated “formulaic” disclosures.

The appeals court returned the case to Leon to consider PayPal’s other challenges to the Prepaid Rule, including constitutional and administrative law claims. PayPal was not challenging its obligation to disclose fees altogether.

A CFPB spokesperson said the regulator was pleased with the decision and will continue defending the rule. REUTERS