The bureau is also in the final stages of issuing a related rule to create a registry of supervised nonbank entities with arbitration agreements in their contracts.
06/04/2024 3:55 P.M.
4 minute read
Doubling down on its focus on nonbank supervision this week, the Consumer Financial Protection Bureau issued a circular, “warning against the use of unlawful or unenforceable terms and conditions in contracts for consumer financial products or services,” according to a news release.
The CFPB’s latest circular is a part of “broader efforts to ensure freedom and fairness in people’s interactions with financial institutions.”
Last year, the bureau proposed a rule (PDF) that would create a registry of supervised nonbank entities with arbitration agreements in their contracts.
The CFPB wants nonbanks subject to its supervisory jurisdiction to “submit information on terms and conditions in form contracts they use that seek to waive or limit individuals’ rights and other legal protections,” ACA International previously reported.
The rule is in the final stages, according to the bureau’s rulemaking agenda, and, when issued, would follow another final rule on nonbank supervision released earlier this week to require nonbank entities, including debt collectors, to register with the bureau when they are subject to local, state or federal court or agency enforcement actions.
If the contracts rule is issued as expected, the information would be available in a public registry, including for other consumer financial protection enforcement agencies.
The rule would also identify and collect information on contract terms and conditions that seek to waive or limit consumer rights and other legal protections and increase market transparency and improve risk-based oversight.
By issuing the circular in advance of the rule, the CFPB warns that certain terms in contracts may violate the Consumer Financial Protection Act’s prohibition on deceptive acts and practices.
“Companies may be liable even if the unenforceable terms are borrowed from form templates or widely available contracts,” according to the bureau.
It cites the Military Lending Act as an example because it “generally prohibits terms in certain consumer credit contracts that require servicemembers and their dependents to waive their right to legal recourse.”
CFPB circulars are policy statements under the Administrative Procedure Act released publicly to increase transparency for the benefit of the public and regulated entities.
They are published on the CFPB website and in the Federal Register with Director Rohit Chopra’s authorization.
The question presented in the contracts circular is: “Can persons that include unlawful or unenforceable terms and conditions in contracts for consumer financial products and services violate the prohibition on deceptive acts or practices in the Consumer Financial Protection Act (CFPA)?”
The CFPB says yes and provides background and analysis on contract terms.
ACA’s Take
ACA filed comments (PDF) on the pending contracts rule, as well as the rule on the registry of enforcement actions, during the proposed stage.
Overall, ACA’s comments, led by lobbyist Leah Dempsey, shareholder at Brownstein Hyatt Farber Schreck LLP, and using member feedback, say the CFPB’s actions in these proposed rules circumvent congressional intent of arbitration agreements and overextend the bureau’s authority, ACA previously reported.
Highlights from ACA’s comments on the contracts rule (PDF) include:
- The proposed rulemaking seeks to circumvent established jurisprudence and congressional intent regarding the constitutionality of arbitration clauses and implicates due process concerns.
- The Congressional Review Act prohibits the CFPB from issuing a substantially similar rule to one the bureau proposed in 2017. At that time, Congress disapproved of the bureau’s rule that placed restrictions on the use of arbitration agreements.
- The CFPB’s claims on debt collection and arbitration agreements, including that waivers and other limitations often found in the terms and conditions of a form contract can put consumers at risk during the debt collection process, in the proposed rulemaking relies on research and data from 2010 to 2012, rather than more recent findings after Regulation F took effect and addressed consumer protection concerns while providing regulatory clarity to industries.
- The proposal impacts a substantial number of small entities and would require the bureau to conduct a Small Business Regulatory Framework Fairness Act (SBREFA) review. ACA urged the CFPB to consider the value and importance of the SBREFA process in ensuring that small-business members can provide their input, and more importantly, that such input will be taken into account during the CFPB’s internal rule formulation process.
Access the CFPB circular on contracts here. ACA will continue to provide updates on the status of the final rule.
For more information on the enforcement action registry, which includes debt collectors, members can read ACA’s report here.
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