On June 4, the Consumer Financial Protection Bureau issued Circular 2024-03 regarding “unlawful and unenforceable contract terms and conditions.” At a high level, the circular warns covered persons that including unlawful or unenforceable terms and conditions in consumer contracts can violate the prohibition on deceptive acts or practices (UDAAPs) in the Consumer Financial Protection Act (CFPA).
While the CFPB did not provide analysis as to why such practices might be “unfair” (or abusive), the circular notes that a representation or omission is “deceptive” if it is likely to mislead a reasonable consumer and is material, i.e., it “involves information that is important to consumers and, hence, likely to affect their choice of, or conduct regarding, a product.”
Thus, a contractual provision in which a consumer waives or “agrees not to exercise a legal right is likely to affect a consumer’s willingness to attempt to exercise that right in the event of a dispute.” The circular also notes that “qualifying” provisions such as “except where unenforceable,” “subject to applicable law,” or similar disclaimers issued after the fact are unlikely to cure the underlying UDAAP.
Examples of contractual UDAAPs
Based on the experience of supervisory examiners and several prior enforcement matters, the CFPB identified specific examples of these contractual UDAAPs:
- A deposit agreement waiving consumers’ rights to hold a bank liable for improperly responding to garnishment notices when consumers had an express right to challenge the garnishments.
- Loan extension agreements or written confirmations that included language that “created the net misimpression that consumers could not exercise bankruptcy protection rights” when the waiver of such rights have been voided by courts as against public policy and were seen as generally unenforceable.
- Statements of a remittance transfer provider that attempted to limit consumers’ error resolution rights in violation of the Electronic Fund Transfers Act (EFTA) and the Remittance Rule.
- Terms and conditions in student tuition payment plans and financial responsibility agreements that purported “to waive the student’s legal protections or limit how students can enforce their rights,” including waiver of the right to seek a discharge in bankruptcy and waiver of the right to retain legal counsel.
The circular also notes specific laws with anti-waiver or similar provisions from which UDAAPs presumably arise if consumer-facing materials contained language to the contrary:
- Provisions of Regulation Z, the Truth-in-Lending Act’s implementing regulation, that prohibit mandatory arbitration or other nonjudicial procedures in residential mortgage-secured credit agreements.
- The EFTA’s prohibition of contract terms that waive “any right conferred” by, or “cause of action” under, the EFTA.
- The Military Lending Act’s (MLA) and its implementing regulation’s prohibition on contract terms that would require a covered borrower to “waive the covered borrower’s right to legal recourse under any otherwise applicable provision of state or federal law …”
- Similarly, provisions of the Servicemembers Civil Relief Act (SCRA) that, according to at least one court, render provisions unenforceable that attempt to waive the class actions rights of servicemembers.
According to the CFPB, the list of laws at issue are not limited to those addressing federal consumer financial services. The circular also notes the Consumer Review Fairness Act of 2016—that generally prohibits and invalidates provisions of consumer agreements that attempt to limit how a consumer may review goods or services—and a host of state laws and laws administered by the Federal Trade Commission with similar anti-waiver provisions many of which are, at best, tangential to consumer financial service laws.
Impact on financial institutions
Nearly all financial institutions utilize form consumer contracts that may be implicated by the circular, and astute financial institutions will no doubt undertake reviews of consumer-facing materials with an eye towards “material” provisions that seek to limit consumers’ rights or that might otherwise be deemed to impede consumers from exercising those rights. But the breadth and extent to which the CFPB intends to enforce the circular is not clear and may lead to hard risk-based decisions.
For example, it should be a relatively easy exercise to review a credit agreement intended for servicemembers to ensure that waivers of material rights (e.g., a mandatory arbitration provision with a class action waiver) that are expressly prohibited by the MLA or SCRA are not included. But what about financial institutions that use a single form for all borrowers? May they carve out servicemembers and covered military borrowers from waivers that are otherwise enforceable (e.g., “this arbitration provision applies unless you are a covered borrower under the MLA”) or could a carveout constitute a disfavored “qualifying” provision that may result in a UDAAP?
Similarly, financial institutions often use a single multi-state form for certain transactions (e.g., an unsecured personal installment loan agreement). It again should be relatively easy to ensure that these types of forms do not include material provisions that violate well known laws that are broadly pertinent to the type of transaction or agreement. But multi-state agreements often include “qualifying” provisions such as “subject to applicable law” for more discrete terms potentially governed by state law (e.g., collections costs or attorney fee provisions). And the circular arguably covers these narrowly-tailored terms and conditions made on a state-by-state basis that could result in significant compliance burdens even if limited to the laws and regulations directly related to the product (e.g., a state consumer credit statute).
However, the burdens could be significantly higher to the extent the circular is read to apply to any federal or state law or regulation regardless of its tangentiality to the transaction (e.g., must financial institutions seeking mandatory mediation prior to the initiation of litigation review the laws of civil procedure in each statute before adoption such a provision for anything to the contrary). Similarly, the circular implies that applicable case law—even in the absence of an express prohibition in a law or regulation—could give rise to contractual UDAAPs (e.g., must a financial institution conduct a 50-state case law research on the enforceability of a limitation on liability provision in a consumer contract).
Conclusion
The circular’s use of far-reaching examples and broad concepts unfortunately creates more questions for financial institutions than it answers. But it is abundantly clear that all manner of consumer financial services contracts are subject to scrutiny. Financial institutions should accordingly (1) review all of their consumer contracts to make sure there are no contractual provisions that are “materially” unfair or deceptive from the perspective of the CFPB; and (2) formulate a risk-based approach with respect to the breadth and applicability of the circular.
Jason Cover is a partner at law firm Troutman Pepper, where he advises customers on consumer lending matters as an in-house counsel and outside advisor.
