On Jan. 11, 2023, the Consumer Financial Protection Bureau (“CFPB”) issued a proposed rule that would require nonbanks under its supervisory authority, subject to limited exceptions, to annually register information about their use of certain terms and conditions in nonnegotiable form contracts that seek to waive or limit consumer rights and legal protections. The CFPB’s actions are widely viewed as an attempt to make another run at creating new requirements around arbitration agreements, after its arbitration rule was struck down by Congress in a Congressional Review Act (CRA) challenge in 2017. Once a rule is struck down by the CRA, the CFPB is prohibited from creating a substantially similar rule.
Under the proposed rule, information about the contracts would be posted in a publicly available nonbank registration system established by the CFPB. The proposed rule cites common examples of instances where consumers are in the process of purchasing a product, downloading an app or signing up for a service, and must subsequently click on a checkbox to agree to “terms of service” or sign contracts containing boilerplate form language to consummate the applicable purchase, download or perform another transaction. The CFPB describes these as “take or leave it” form contracts with terms of service or boilerplate language not subject to negotiation with a consumer.
The CFPB argues that the proposed rule seeks to increase public transparency of such “take it or leave it” form contracts by requiring the creation of a public registry regarding such terms and conditions that purport to waive consumers’ legal protections, limit how consumers enforce their rights or restrict consumers’ ability to file complaints or post reviews, among other things. Some industry participants have argued that it is a backdoor attempt at making it more cumbersome to use arbitration agreements, particularly in light of recent judicial precedent that has given their use a green light when adequately disclosed to consumers.
The proposed rule cites several pieces of legislation and regulatory actions over past decades as precedent for limiting the use of such “take it or leave it” terms and conditions in the context of consumer financial products and services. It points to an action in 1984, when the Federal Trade Commission issued the Credit Practices Rule, which prohibited the use of certain contract terms, including: (i) so-called “confessions of judgement” provisions under which consumers generally agree to plead guilty when faced with a creditor’s collection lawsuit, and as such, waive state laws protecting consumer assets from seizure by unsecured creditors, and (ii) so-called “gag clauses” that prohibit consumers from posting negative online reviews or filing complaints. Before the establishment of the CFPB, this rule was adopted by the Federal Reserve Board and the National Credit Union Administration. The CFPB also recently restated the scope of such protections in a compliance bulletin issued in March 2022. Further, in 2016, Congress passed the Consumer Review Fairness Act, which generally prohibited the use of form contracts that limit the way consumers communicate their reviews or assessments of the sale of goods and services.
The proposed rule also is another step in the CFPB’s scrutiny of nonbank financial institutions. As Brownstein previously highlighted, in December 2022, the CFPB issued a proposed rule that would require applicable nonbank financial institutions to report certain public agency enforcement actions and court orders for publication in an online publicly available registry similar to the public registry contemplated under this most-recent proposed rule.
Covered Entities and Covered Terms and Conditions:
The proposed rule aims to cover nonbanks subject to the CFPB’s jurisdiction that engage in the offering or provision of consumer financial products or services in markets the CFPB supervises, including, but not limited to, nonbank entities that: (a) offer or provide residential mortgage-related products or services; private educational consumer loans; and consumer payday loans, among other similar products or services, or (b) are larger participants operating in student loan servicing, automatable financing, consumer reporting, consumer debt collection and international remittances, among other similar industries. That said, the proposed rule exempts certain entities from compliance, including nonbanks with less than $1 million in annual receipts resulting from the offering or provision of certain consumer financial products or services that would make the nonbank subject to the CFPB’s supervisory authority.
Covered terms and conditions of form contracts that would fall under the scope of the proposed rule generally include clauses, terms or conditions that purport to establish a limitation on consumer legal protections applicable to the offering or provision of consumer financial products or services. The proposed rule cites categories of certain terms and conditions that:
- Preclude the consumer from bringing a legal action after a certain period;
- Specify a forum or venue where a consumer must bring a legal action in court;
- Limit the ability of the consumer to file a legal action seeking relief for other consumers or to seek to participate in a legal action filed by others;
- Limit liability to the consumer in a legal action including by capping the amount of recovery or type of remedy;
- Waive a cause of legal action by the consumer, including by stating a person is not responsible to the consumer for a harm or violation of law;
- Limit the ability of the consumer to make any written, oral or pictorial review, assessment, complaint or other similar analysis or statement about the offering or provision of consumer financial products or services by the supervised registrant;
- Waive, whether by extinguishing or causing the consumer to relinquish or agree not to assert, any other identified consumer legal protection, including any specified right, defense or protection afforded to the consumer under constitutional law, a statute or regulation or common law; or
- Require that a consumer bring any type of legal action in arbitration.
Examples of such terms and conditions that are contemplated to be included in the public registry are the following:
- Waiver of servicemembers’ legal protection: Terms and conditions in arbitration agreements that seek to waive certain protections in place for military families, including, but not limited to, the prohibition of waivers of legal protections and arbitration agreements set forth in the Military Lending Act and the Servicemembers Civil Relief Act, as applicable.
- Credit reporting rights: Terms and conditions set forth in contracts for credit monitoring products that inhibit an applicable consumer’s ability to pursue legal action, including via class action lawsuits, for claims alleging violations of the Fair Credit Reporting Act.
- Limitations on lender liability for bank fees caused by repeated debit attempts: Terms and conditions in certain contracts for short-term, small-dollar loans that seek to waive liability for bank fees incurred by borrowers in scenarios where an applicable lender repeatedly attempts to debit payments from a bank account without sufficient funds to cover the amount due.
- Unenforceable waivers in mortgage contracts: Terms and conditions in mortgage contracts with respect to waivers and limitations of an applicable mortgagor’s rights that conflict with provisions restricting the same set forth in the Truth in Lending Act.
Next Steps and Brownstein’s Take:
The proposed rule is subject to a 60-day public comment period following its publication on the CFPB’s website or 30 days following its publication in the Federal Register, whichever period is longer. Given the broad scope of the proposed rule and its impact of making it more cumbersome to use arbitration and other agreements that protect against litigation, it is expected that various stakeholders across multiple industries will submit comments to the CFPB. Brownstein urges nonbank financial services providers, and other stakeholders who may be impacted through their relationships with nonbanks, to review the proposal to determine applicability.
Brownstein Hyatt Farber Schreck’s Government Relations and Consumer Protection practice groups are uniquely able to assist any such nonbank entity looking to interface with the CFPB, relevant policymakers in Congress or in the administration or other stakeholders in this space, as well as in preparing comments in response to the proposed rule.
THIS DOCUMENT IS INTENDED TO PROVIDE YOU WITH GENERAL INFORMATION REGARDING NEW CFPB REGUALTIONS AROUND RESTRICTIVE CONTRACTS FOR NONBAN ENTITIES. THE CONTENTS OF THIS DOCUMENT ARE NOT INTENDED TO PROVIDE SPECIFIC LEGAL ADVICE. IF YOU HAVE ANY QUESTIONS ABOUT THE CONTENTS OF THIS DOCUMENT OR IF YOU NEED LEGAL ADVICE AS TO AN ISSUE, PLEASE CONTACT THE ATTORNEYS LISTED OR YOUR REGULAR BROWNSTEIN HYATT FARBER SCHRECK, LLP ATTORNEY. THIS COMMUNICATION MAY BE CONSIDERED ADVERTISING IN SOME JURISDICTIONS.