Proposed Rule2023-00704
Registry of Supervised Nonbanks That Use Form Contracts To Impose Terms and Conditions That Seek To Waive or Limit Consumer Legal Protections
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Published
February 1, 2023
Issuing agencies
Consumer Financial Protection Bureau
Abstract
The Consumer Financial Protection Act of 2010 (CFPA) requires the Consumer Financial Protection Bureau (Bureau or CFPB) to monitor markets for consumer financial products and services for risks to consumers in order to support the various statutory functions of the CFPB, and to conduct a risk-based nonbank supervision program for the purpose of assessing compliance with Federal consumer financial law (among other purposes). Pursuant to these authorities, the CFPB is proposing a rule to require that nonbanks subject to its supervisory authority, with limited exceptions, register each year in a nonbank registration system established by the CFPB information about their use of certain terms and conditions in form contracts for consumer financial products and services that pose risks to consumers. In particular, these nonbanks would be required to register if they use specific terms and conditions defined in the proposed rule that attempt to waive consumers' legal protections, to limit how consumers enforce their rights, or to restrict consumers' ability to file complaints or post reviews. To facilitate public awareness and oversight by other regulators including the States, the Bureau is proposing to publish information identifying registrants and their use of these terms and conditions.
Full Text
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<title>Federal Register, Volume 88 Issue 21 (Wednesday, February 1, 2023)</title>
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[Federal Register Volume 88, Number 21 (Wednesday, February 1, 2023)]
[Proposed Rules]
[Pages 6906-6969]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-00704]
[[Page 6905]]
Vol. 88
Wednesday,
No. 21
February 1, 2023
Part III
Bureau of Consumer Financial Protection
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12 CFR Part 1092
Registry of Supervised Nonbanks That Use Form Contracts To Impose Terms
and Conditions That Seek To Waive or Limit Consumer Legal Protections;
Proposed Rule
Federal Register / Vol. 88, No. 21 / Wednesday, February 1, 2023 /
Proposed Rules
[[Page 6906]]
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BUREAU OF CONSUMER FINANCIAL PROTECTION
12 CFR Part 1092
[Docket No. CFPB-2023-0002]
RIN 3170-AB14
Registry of Supervised Nonbanks That Use Form Contracts To Impose
Terms and Conditions That Seek To Waive or Limit Consumer Legal
Protections
AGENCY: Bureau of Consumer Financial Protection.
ACTION: Proposed rule with request for public comment.
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SUMMARY: The Consumer Financial Protection Act of 2010 (CFPA) requires
the Consumer Financial Protection Bureau (Bureau or CFPB) to monitor
markets for consumer financial products and services for risks to
consumers in order to support the various statutory functions of the
CFPB, and to conduct a risk-based nonbank supervision program for the
purpose of assessing compliance with Federal consumer financial law
(among other purposes). Pursuant to these authorities, the CFPB is
proposing a rule to require that nonbanks subject to its supervisory
authority, with limited exceptions, register each year in a nonbank
registration system established by the CFPB information about their use
of certain terms and conditions in form contracts for consumer
financial products and services that pose risks to consumers. In
particular, these nonbanks would be required to register if they use
specific terms and conditions defined in the proposed rule that attempt
to waive consumers' legal protections, to limit how consumers enforce
their rights, or to restrict consumers' ability to file complaints or
post reviews. To facilitate public awareness and oversight by other
regulators including the States, the Bureau is proposing to publish
information identifying registrants and their use of these terms and
conditions.
DATES: Comments should be received on or before April 3, 2023.
ADDRESSES: You may submit comments, identified by Docket No. CFPB-2023-
0002 or RIN 3170-AB14, by any of the following methods:
<bullet> Federal eRulemaking Portal: <a href="https://www.regulations.gov">https://www.regulations.gov</a>.
Follow the instructions for submitting comments.
<bullet> Email: <a href="/cdn-cgi/l/email-protection#70424042435d3e20223d5d331f1e040211130403221517190304020930131600125e171f06"><span class="__cf_email__" data-cfemail="b88a888a8b95f6e8eaf595fbd7d6cccad9dbcccbeadddfd1cbcccac1f8dbdec8da96dfd7ce">[email protected]</span></a>. Include
Docket No. CFPB-2023-0002 or RIN 3170-AB14 in the subject line of the
message.
<bullet> Mail/Hand Delivery/Courier: Comment Intake--Nonbank
Registration and Collection of Contract Information, Consumer Financial
Protection Bureau, c/o Legal Division Docket Manager, 1700 G Street NW,
Washington, DC 20552. Because paper mail in the Washington, DC area and
at the Bureau is subject to delay, commenters are encouraged to submit
comments electronically.
Instructions: The Bureau encourages the early submission of
comments. All submissions should include the agency name and docket
number or Regulatory Information Number (RIN) for this rulemaking. In
general, all comments received will be posted without change to <a href="https://www.regulations.gov">https://www.regulations.gov</a>.
All comments, including attachments and other supporting materials,
will become part of the public record and are subject to public
disclosure. Proprietary information or sensitive personal information,
such as account numbers or Social Security numbers, or names of other
individuals, should not be included. Comments will not be edited to
remove any identifying or contact information.
FOR FURTHER INFORMATION CONTACT: Owen Bonheimer, Senior Counsel, Office
of Supervision Policy, at 202-435-7700. If you require this document in
an alternative electronic format, please contact
<a href="/cdn-cgi/l/email-protection#a7e4e1f7e5f8e6c4c4c2d4d4cec5cecbced3dee7c4c1d7c589c0c8d1"><span class="__cf_email__" data-cfemail="5e1d180e1c011f3d3d3b2d2d373c3732372a271e3d382e3c70393128">[email protected]</span></a>.
SUPPLEMENTARY INFORMATION:
I. Summary of the Proposed Rule
The proposal would establish a Bureau system for registration of
nonbanks that use covered terms or conditions, as described below, in a
new part 1092 in title 12 of the Code of Federal Regulations. Proposed
subpart C would require annual registration by most nonbanks subject to
the Bureau's supervisory authority under section 1024(a) of the CFPA
\1\ when they use certain terms or conditions that seek to waive
consumer rights or other legal protections or limit the ability of
consumers to enforce or exercise their rights.\2\ With limited
exceptions, including an exception for certain small entities,\3\
supervised registrants would be required to register annually in the
system by submitting or updating their identifying information as well
as information about their use of covered terms or conditions. The
Bureau will provide filing instructions with details on how to
register, the implementation date for the registration system, and the
annual registration date. Under the proposal, the Bureau would publish
this information on its website and potentially in other forms, as
permitted by applicable law and described further in Sec. 1092.303 of
the proposed rule.
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\1\ 12 U.S.C. 5514(a).
\2\ For brevity, the proposal refers to these nonbanks as
``supervised nonbanks.''
\3\ Proposed Sec. 1092.301(h) of the proposed rule would
include certain exclusions from the registration requirements,
including an exclusion for nonbanks with less than $1 million in
annual receipts from offering or providing certain consumer
financial products or services that would make the nonbank subject
to the Bureau's supervisory authority.
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In particular, the Bureau is generally proposing to collect
information about supervised nonbanks' use of terms and conditions in
form contracts that expressly seek to impose the following limitations
on consumer rights and other legal protections applicable to the
offering or provision of consumer financial products or services in
markets the Bureau supervises: waivers of claims a consumer can bring
in a legal action; limits on the company's liability to a consumer;
limits on the consumer's ability to bring a legal action by dictating
the time frame, forum, or venue for a consumer to bring a legal action;
limits on the ability of a consumer to bring or participate in
collective legal actions such as class actions; limits on the ability
of the consumer to complain or post reviews; certain other waivers of
consumer rights or other legal protections; and arbitration agreements.
The proposal defines these terms and conditions as covered terms and
conditions. Covered terms and conditions would be covered by the
proposal whether they are legally enforceable or not.\4\
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\4\ For brevity, the proposal generally uses the phrase
``waivers and limitations'' on consumer legal protections broadly,
to include terms and conditions that seek to impose waivers and
limitations whether or not they are enforceable. See, e.g., Waiver,
Black's Law Dictionary (11th ed. 2019) (alternate definitions for
the relinquishment or abandonment of a right, and for an instrument
seeking to have that effect). This broad framing is reflected in the
scope of proposed Sec. 1092.301(d), which covers both effective and
purported waivers and limitations, as discussed in the section-by-
section analysis in part V below.
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Consistent with the risks to consumers posed by covered terms and
conditions contained in form contracts as described below, Congress,
States, the courts, the Bureau, the Federal Trade Commission (FTC), and
other governmental bodies periodically have restricted their use in
some contexts. In its statutory risk-based nonbank supervision program
and in other activities, the Bureau also has identified risks posed by
covered terms and conditions contained in form contracts. In addition,
some States have begun to require registration and publication of
[[Page 6907]]
form contracts in one market (private student lending).
The Bureau is proposing this rule, pursuant to CFPA sections
1022(b) and (c) and section 1024(b), to facilitate the Bureau's market
monitoring functions and its risk-based supervisory processes,
including by identifying an important subset of non-bank covered
persons and the covered terms and conditions they use in form contracts
for the consumer financial products or services they offer or provide.
In exercise of its authorities discussed in part II.C.3 of the
proposal, and consistent with general standards for transparency of
government data, the Bureau preliminarily has determined that the
Bureau would publish the information it collects as permitted by law
and described in the proposed rule. Publishing this information would
facilitate public awareness and oversight by other regulators of the
use of covered terms and conditions including those that waive or limit
consumer protections under State law and Tribal law.
The Bureau proposes to establish the registry to monitor risks to
consumers from the use of covered terms or conditions in form contracts
in today's marketplace and to inform its various functions, including
supervision, enforcement, consumer education, and rulemaking. Most
immediately, the information collected by the registry would facilitate
the Bureau's prioritization and implementation of examination work in
its statutorily-mandated risk-based nonbank supervision program.
II. Background and Rationale for the Proposed Rule
Fair, transparent, and competitive markets for consumer financial
products and services depend on fair, transparent, and competitive
contracting with consumers. Form contracts are the dominant means of
setting terms and conditions for consumer financial products and
services in today's marketplace. However, consumers face risks when
businesses use form contracts to impose terms and conditions that seek
to waive consumer legal protections or to limit how consumers enforce
their rights or post complaints or reviews. There is often little
choice for people except to sign these form contracts due both to the
market pervasiveness of form contracts and the critical role the
products and services play in consumers' daily lives.
In recognition of these risks to consumers, over the past several
decades, many Federal, State, Tribal, and local laws and regulations
have limited the use of these types of terms and conditions, including
in form contracts for consumer financial products and services.
Examples, discussed in part II.B, include the 1984 FTC Credit Practices
Rule, which, among other things, prohibits contract terms purporting to
waive State laws protecting consumer assets from seizure by unsecured
creditors. In addition, the 2016 Consumer Review Fairness Act generally
prohibits the use of form contracts that limit how consumers
communicate their reviews, assessments, or similar analysis of the sale
of goods or services. Several Federal consumer financial laws the
Bureau administers also restrict the use of certain covered terms and
conditions in the offering or provision of consumer financial products
and services, including in markets where the CFPB exercises supervisory
authority. The CFPB preliminarily has determined that a nonbank
registration system to continuously and systematically monitor and
assess these risks to consumers is needed to support its functions in
promoting a fair, transparent, and competitive consumer financial
marketplace, including its statutorily-mandated risk-based non-bank
supervision program.
CFPA sections 1022(c) and 1024(b), respectively, require the Bureau
to monitor for risks to consumers in markets for consumer financial
products and services, and to conduct a risk-based supervision program
for nonbanks operating in markets the Bureau supervises. As discussed
in part II.A below, the use of form contracts to set terms and
conditions for consumer financial products and services in general
poses a degree of risk to consumers, particularly as to consumer
understanding. As elaborated in part II.B, certain terms and conditions
that often appear in these form contracts either waive or limit
enforcement or exercise of applicable legal protections, or purport to
do so. Such waivers of and limitations on applicable legal protections
often pose risks to consumers, as evidenced by: (a) examples of Federal
laws, State laws, and Tribal laws summarized in part II.B and also
discussed in part II.C.2 restricting or invalidating the use of covered
terms and conditions in certain contexts; and (b) examples discussed in
part II.C.2 suggesting the prevalence of, and potential for consumer
harm caused by, the use of covered terms and conditions in markets
supervised by the Bureau. The risks that covered terms and conditions
pose to consumers vary in degree or magnitude. And the degree to which
specific examples would be covered by the proposed rule also may depend
on the precise wording and context of their terms and conditions
analyzed in light of the specific provisions of the proposed rule. But
any time a consumer legal protection is being relinquished or
constrained pursuant to a term or condition contained in a form
contract, some degree of risk to the consumer arises. For that reason,
an assessment of the risk is warranted. Accordingly, for the reasons
explained in part II.C and elsewhere in the proposal, the Bureau seeks
to collect information to monitor and assess risks posed by covered
terms and conditions that supervised nonbanks use to waive or limit
applicable legal protections in the offering or providing of consumer
financial products or services.\5\ In developing the proposal, the
Bureau has considered alternative approaches to achieving these goals,
as discussed below including in part II.D and the section-by-section
analysis of the proposed rule in part V.
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\5\ The examples provided in part II illustrate the types of
terms and conditions that may pose risks to consumers by purporting
to waive or limit legal protections applicable to consumer financial
products or services. As noted above, the scope of the proposed rule
is informed by these examples but will not necessarily cover each
and every one of them or similar examples. The proposed regulation
text as further explained in the section-by-section analysis in part
V would govern whether the proposed rule would cover a particular
term or condition.
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A. Use of Form Contracts Poses Risks to Consumer Understanding of Terms
and Conditions
Form contracts that establish terms and conditions are a standard
feature of markets for consumer financial products or services. In the
Bureau's experience and expertise, virtually all consumer financial
products and services the Bureau supervises are governed by or operate
largely on the basis of a paper or electronic written contract with the
consumer, and sometimes on the basis of multiple such contracts. The
consumer may enter the contract directly with a provider such as a
lender, loan servicer, debt collector, remittance provider, or in some
cases, a consumer reporting agency. The contract typically defines how
the product or service works and the rights and obligations of the
consumer, the provider, and, sometimes, third parties hired by the
provider such as a loan servicer or debt collector.
Consumers generally do not choose most contract terms and
conditions in their agreements for consumer financial products or
services. Form contracts often specify a fixed set of terms and
[[Page 6908]]
conditions which the consumer typically must accept in their totality.
While form contracts may memorialize certain conspicuous financially
``core deal terms,'' like price, payment methods, and a few others,
other contract terms and conditions appear in fine print among a
variety of ``non-core standard contract terms'' that the business
requires.\6\
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\6\ Restatement (Third) of Consumer Contracts (Tentative Draft
No. 2, approved at ALI 2022 Annual Meeting) at 1. For convenience,
the proposal refers to this source simply as the Restatement.
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This type of contracting is ubiquitous in the modern economy and
gives rise to certain risks. According to a leading treatise on
contract law published by the American Law Institute, the prevalence of
``standard-form'' consumer contracts throughout the United States
presents a ``fundamental challenge . . . arising from the asymmetry in
information, sophistication, and stakes between the parties to the
contracts--the business and consumers.'' \7\ This form of contracting
risks turning the overall agreement into what sometimes is referred to
as an ``adhesion contract.'' That name derives from the notion that the
consumer must adhere to the terms and conditions in the form contract;
they are presented to the consumer on a take-it-or-leave-it basis and
are non-negotiable by the consumer. A defining characteristic of these
terms and conditions is ``the absence of meaningful choice on the part
of the consumer.'' \8\
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\7\ Id. at 1.
\8\ Id. sec. 5(b)(2).
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Consumers also lack an incentive to review fully the terms and
conditions in form contracts that they cannot negotiate. Form contracts
often are lengthy, with terms and conditions written by the provider,
often in fine print. With the expansion of the digital consumer
economy, online contracting with features such as ``click-through''
contracts are the norm. The terms and conditions in electronic form
contracts may not be visible on the page where the consumer is asked to
indicate their agreement; consumers may be required to do additional
clicking or downloading to view the terms and conditions.\9\ Some terms
or conditions may be de-emphasized. In some cases, some companies may
also engage in risky digital design practices--termed ``dark
patterns''--that obscure certain terms and conditions in adhesion
contracts or the adhesion contract itself.\10\
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\9\ See generally, e.g., id. at 55-62 (discussing numerous court
decisions on so-called browsewrap and clickwrap electronic
contracting processes).
\10\ See generally FTC Staff Report, ``Bringing Dark Patterns to
Light'' (Sept. 2022) at 7 (``[s]ome dark patterns operate by hiding
or obscuring material information from consumers, such as burying
key limitations of the product or service in dense Terms of Service
documents that consumers don't see before purchase''), <a href="https://www.ftc.gov/system/files/ftc_gov/pdf/sP214800%20Dark%20Patterns%20Report%209.s14.2022%20-%20FINAL.pdf">https://www.ftc.gov/system/files/ftc_gov/pdf/sP214800%20Dark%20Patterns%20Report%209.s14.2022%20-%20FINAL.pdf</a>;
Restatement at 116-17 (discussing relationship between the use of
dark patterns and risk of procedural unconscionability in the
contracting process, discussed in this proposal at part II.B.5).
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Studies confirm that consumers rarely read adhesion contracts.\11\
These studies validate conventional wisdom recognized by other academic
research.\12\ Moreover, consumers generally focus attention on salient
terms such as price and quantity.\13\ As a result, providers of
consumer financial products and services may seek to insert terms and
conditions that pose risks to consumers who may not notice, until the
consumer has a problem that they need to resolve or the terms and
conditions face wider public scrutiny. In a recent reported example, a
provider of consumer financial products and services inserted a term or
condition that purported to provide for a substantial fine on users of
a payment processing platform for promoting so-called
``misinformation.'' \14\
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\11\ See, e.g., Yannis Bakos, Florencia Marotta-Wurgler & David
R. Trossen, ``Does Anyone Read the Fine Print?, Testing a Law and
Economics Approach to Standard Form Contracts,'' 43 U. Chicago J. of
Legal Studies 1 (2014) (describing study finding one or two of every
1,000 retail software shoppers access the license agreements and
that most of those who do access it read no more than a small
portion), <a href="https://www.jstor.org/stable/10.1086/674424">https://www.jstor.org/stable/10.1086/674424</a>; Carl
Schneider & Omri Ben-Shahar, ``The Failure of Mandated Disclosure,''
159 U. Penn. L. Rev. 647, 671 (2011) (reciting research that
``suggests that almost no consumers read [contract] boilerplate,
even when it is fully and conspicuously disclosed''), <a href="https://www.jstor.org/stable/41149884#metadata_info_tab_contents">https://www.jstor.org/stable/41149884#metadata_info_tab_contents</a>; Uri
Benoliel & Shmuel Becher, ``The Duty to Read the Unreadable,''
Boston Col. L. Rev. 2255, 2270-81 (2019) (discussing empirical
research), <a href="https://lira.bc.edu/work/ns/508eab7d-ddca-4829-be55-7aa6be4820b1">https://lira.bc.edu/work/ns/508eab7d-ddca-4829-be55-7aa6be4820b1</a>; Jeff Sovern, ``The Content of Consumer Law Classes
III,'' 22 J. Consumer L. 1 (2018) (reporting 2018 update to survey
finding 57% of professors surveyed rarely or never read contracts),
<a href="http://www.jtexconsumerlaw.com/V22N1/V22N1_Classes.pdf">http://www.jtexconsumerlaw.com/V22N1/V22N1_Classes.pdf</a>.
\12\ See generally Ian Ayres, ``The No-Reading Problem in
Consumer Contract Law,'' 66 Stanford L. Rev. 546 (2014), <a href="https://ianayres.yale.edu/sites/default/files/files/sThe%20No%20sReading%20Problem">https://ianayres.yale.edu/sites/default/files/files/sThe%20No%20sReading%20Problem</a>(2).spdf; Ian Ayres & Gregory Klass,
``Responses: One-Legged Contracting,'' 133 Harv. L. Rev. Forum 1
(2019), <a href="https://harvardslawreview.org/wp-content/uploads/2019/11/Ayres-Klass_Online.pdf">https://harvardslawreview.org/wp-content/uploads/2019/11/Ayres-Klass_Online.pdf</a>.
\13\ See generally Robert Hillman & Jeffrey Rachlinski,
Standard-Form Contracting in the Electronic Age, 77 N.Y.U. L. Rev.
429, 450-54 (2002) (discussing research on how cognitive factors
affect consumer decisions related to terms and conditions in form
contracts, including consumer focus on salient terms).
\14\ Xinyi Wan, ``PayPal's `Misinformation' Fine Sparks
Backlash,'' Harv. J. L. & Tech. (Nov. 1, 2022) (describing how
payment processor updated terms and conditions to claim authority to
impose a $2,500 ``fine'' on consumers for promoting
``misinformation'' and then removed the update after public
criticism), <a href="https://jolt.law.sharvard.edu/digest/paypals-misinformation-fine-sparks-backlash">https://jolt.law.sharvard.edu/digest/paypals-misinformation-fine-sparks-backlash</a> (last visited Nov. 30, 2022).
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In some cases, consumers may have nominal choices, such as to opt-
out of a particular term or condition, or they are given notice of
certain terms and conditions that they cannot negotiate, or both. And,
depending on the facts and circumstances, these choices may be
constrained; for example, some negative options may not present a
meaningful choice.\15\ Alternatively, a contract may provide a process
for the consumer to opt into a term or condition such as a waiver or
limitation. Either way, the business, not the consumer, defines the
option and drafts the associated terms and conditions. As discussed
further below in part II.C, the use of so-called non-core contract
terms and conditions seeking to waive or limit consumer legal
protections raises questions about a consumer's understanding of these
terms and conditions.
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\15\ FTC Enforcement Policy Statement Regarding Negative Option
Marketing, 85 FR 60822, 60823 (Nov. 4, 2021) (discussing how
negative option marketing and contracting are ``widespread in the
marketplace'' and that FTC and States ``regularly bring cases
challenging a variety of harmful negative option practices''). See
also CFPB, Supervisory Highlights, 87 FR 26727, 26737 (May 5, 2022)
(discussing examiner findings of consumer reporting agency using
``digital dark patterns'' to impose recurring payments that are
difficult to cancel).
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B. Public Policy Recognizes Risks to Consumers Posed by Contract Terms
and Conditions That Seek To Waive or Limit Applicable Legal Protections
Many providers of consumer financial products and services
regularly use form contracts to impose one or more contract terms or
conditions that may effectively strip consumers of legal protections or
diminish their adequacy, either through an express waiver of rights or
other legal protections, or a limitation on how consumers may seek to
enforce or exercise their rights. In this proposal, the Bureau is
focused on terms and conditions in form contracts that expressly seek
to impose the following limitations on consumer rights and other legal
protections: waivers of claims a consumer can bring in a legal action;
limits on the company's liability to a consumer; limits on the
consumer's ability to bring a legal action by dictating the time frame,
forum, or venue for a consumer to bring a legal action; limits on the
[[Page 6909]]
ability of a consumer to bring or participate in collective legal
actions such as class actions; limits on the ability of the consumer to
complain or post reviews; certain other waivers of consumer rights or
other legal protections; and arbitration agreements.
Express waivers, by definition, purport to extinguish legal
protections otherwise applicable to consumer financial products and
services. Some of these legal protections may afford consumers rights,
such as the right to assert claims in a legal action. Even when terms
and conditions do not purport to set forth such express waivers, they
may impose significant limitations on a consumer's ability to bring a
legal action, such as by capping liability or restricting the timing,
venue, or forum for a consumer to file a private legal action to
enforce an applicable consumer legal protection. These limitations,
like waivers, may diminish the adequacy of the consumer legal
protections to which they apply. Arbitration agreements also generally
foreclose a consumer's choice to bring legal actions in court,
sometimes with limited exceptions for individual actions in small
claims court. Informal mechanisms, like filing a complaint or posting a
review online, provide another mechanism for consumers to assert their
rights and to identify business practices that, in some cases, may
signify non-compliance with applicable legal protections or their
inadequacy. Contract terms and conditions that restrict or limit
consumers' ability to take those steps thus also undermine consumers'
ability to prevent or obtain relief for violations of their rights.
By eliminating or diminishing private enforcement or exercise of
rights, covered terms and conditions risk harming consumers. Indeed,
given the limited resources of public regulators, private enforcement
and other forms of exercising rights play an important role in
incentivizing compliance with the laws applicable to consumer financial
products and services. For example, Bureau research suggests that
public and private enforcement actions often have not overlapped, such
that private enforcement often plays an additive, not duplicative, role
in supporting the rule of law.\16\ Even when private and public
enforcement overlap, private enforcement can set the stage for public
enforcement by identifying risky or unlawful conduct. The Bureau also
may consider both private and public enforcement actions as field
market intelligence for its supervisory prioritization process
discussed in part II.C.2 below.
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\16\ CFPB, Arbitration Study: Report to Congress, pursuant to
Dodd-Frank Wall Street Reform and Consumer Protection Act section
1028(a) (2015) at sec. 1.4.8 (summarizing Bureau research indicating
that class action and public enforcement resolutions often do not
both address the same claims), <a href="https://www.consumerfinance.gov/data-research/research-reports/arbitration-study-report-to-congress-2015/">https://www.consumerfinance.gov/data-research/research-reports/arbitration-study-report-to-congress-2015/</a>.
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Public policy has long recognized the risk covered terms and
conditions pose to consumers. This part II.B discusses below numerous
examples of public policies prohibiting or restricting covered terms
and conditions, dating back to regulations that the FTC issued before
the 2010 CFPA established the Bureau and some of which the Bureau also
now enforces. These examples generally confirm that covered terms and
conditions pose risks to consumers by undermining or diminishing the
adequacy of existing legal protections.\17\ The Bureau requests comment
on the risks to consumers indicated by these examples, and requests
that commenters provide additional examples of Federal, State, or
Tribal laws that prohibit or restrict the use of covered terms and
conditions, as well as additional enforcement and supervisory actions
applying these prohibitions or restrictions.
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\17\ To be sure, existing law permits certain contractual
waivers or limitations in consumer contracts. Cf. United States v.
Mezzanatto, 513 U.S. 196, 203 (1995) (citing presumption that legal
rights generally, and in the criminal law context, evidentiary
protections, may be voluntarily waived), cited by Clark v. Capital
Credit & Collection Services, Inc., 460 F.3d 1162, 1170 (9th Cir.
2006) (noting exceptions including for waivers that contravene
statutory policy). However, as discussed in this part II, several
examples in statutes and regulations applicable to supervised
nonbanks explicitly restrict when and how waivers can be obtained.
And while an expressly-prohibited waiver may risk deceiving
consumers as to the nature of their rights (in the face of an
express public policy recognizing the importance of the particular
right), the risk of such provisions is not limited to this
deception, but rather derives from the consumers inability to
exercise the affirmative right lost through the contract clause.
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1. Consumer Protection Statutes and Regulations Administered by the FTC
Including Trade Regulations Enforced by the CFPB
In 1975, the FTC promulgated a trade regulation, titled
``Preservation of Consumers' Claims and Defenses'' (also known as the
Holder in Due Course Rule or the Holder Rule). The Holder Rule requires
sellers of goods or services to consumers to include a provision in
their finance contracts that ensures that if another person holds the
loan or lease a consumer uses to finance acquisition of a good or
service from a seller or lessor, then the holder is subject to the same
consumer rights and defenses that the consumer had with respect to the
seller or lessor.\18\ The FTC adopted this regulation in part to
prohibit merchant creditors from including a ``waiver of defenses''
clause in their installment sale and lease agreements.\19\ ``A `waiver
of defenses' is the consumer's written agreement that his installment
purchase contract may be treated like a promissory note in the event it
is sold or assigned to a credit company.'' \20\ Absent the Holder Rule,
when such a promissory note was assigned to a third-party, the third-
party would take it free of any claim or defense the buyer would have
against the seller.
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\18\ 16 CFR part 433 (Holder Rule), <a href="https://www.ecfr.gov/current/title-16/chapter-I/subchapter-D/part-433">https://www.ecfr.gov/current/title-16/chapter-I/subchapter-D/part-433</a>. A ``seller'' is a
person that, in the ordinary course of business, sells or leases
goods or services to consumers. 16 CFR 433.1(j).
\19\ See 40 FR 53506, 53507 (Nov. 15, 1975) (issuing final
Holder Rule). FTC Staff Guidelines on Trade Regulation Rule
Concerning Preservation of Consumers' Claims and Defenses (May 4,
1976) at 5, <a href="https://www.ftc.gov/system/files/documents/rules/holder-due-course-rule/s760504hidcrule.pdf">https://www.ftc.gov/system/files/documents/rules/holder-due-course-rule/s760504hidcrule.pdf</a> (last visited Dec. 30, 2022).
\20\ Id.
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In adopting the Holder Rule, the FTC also acknowledged ``widespread
public concern about mechanical abrogations of consumer rights'' \21\
and noted that associated economic injury ``results from terms
contained in form contracts'' that ``consumers rarely comprehend. . .
.'' \22\ The FTC explained that the ``waiver of defenses are presented
to consumers on a take-it-or-leave-it basis. These contracts are
drafted by sellers and creditors, and they are not susceptible to
modification at the point of sale.'' \23\
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\21\ See 40 FR at 53508.
\22\ Id. at 53523.
\23\ Id. at 53524.
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The Bureau also enforces the Holder Rule,\24\ which applies in
important ways in markets the Bureau supervises described in part
II.C.2. For example, the regulation covers many types of consumer
automobile finance agreements. As a result, under the rule, a consumer
who obtains automobile financing through a dealer has the right to
assert claims and defenses that they have against the dealer, as
against an indirect automobile finance company, when the dealer sells
the financing to that company. The Holder Rule also applies to credit
contracts used to finance the sale of services such as trade or
vocational school agreements.\25\ In addition, U.S. Department of
Education regulations specify that, in certain
[[Page 6910]]
circumstances, the holder of certain types of Federal student loans is
subject to ``all claims and defenses that the borrower could assert
against the school with respect to that loan. . . .'' \26\
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\24\ The Bureau included the Holder Rule among the list of
enforceable rules and orders it identified upon transfer of
authorities to the Bureau in July 2011, pursuant to CFPA section
1063(i). See 76 FR 43569, 43571 (July 21, 2011), <a href="https://www.gpo.gov/fdsys/pkg/FR-2011-07-21/pdf/2011-18426.pdf">https://www.gpo.gov/fdsys/pkg/FR-2011-07-21/pdf/2011-18426.pdf</a>.
\25\ 40 FR at 53524.
\26\ 34 CFR 682.209(g) (describing rules for FFEL loan program).
See also 34 CFR 685.206 (Direct Loan program borrower defense
regulations).
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The FTC also addressed the issue of waivers and limitation of
consumer rights in form contracts in its 1984 Credit Practices Rule,
which the Bureau also enforces.\27\ This trade regulation prohibits,
among other practices, the use of contract terms purporting to waive a
consumer's State law right to block creditors from seizing personal or
real property of the consumer in which they do not hold security
interests.\28\ In adopting that rule, the FTC found that ``creditors
frequently include clauses in their consumer contracts that require
consumers to waive [such] statutory protections.'' \29\ It determined
that such waivers can cause substantial injury because, without these
assets, ``the consumer can lose the basic necessities of life.'' \30\
The FTC also determined that, when entering into contracts, ``most
consumers are neither aware of the rights they have under [asset
seizure] exemption statutes nor of the presence or significance of
waiver clauses in their contracts.'' \31\ For one thing, the waivers
relate to ``elements of a transaction that are distant in time and
probability.'' \32\ As a result, the FTC found consumers could not
bargain over this provision or shop for a contract without one.\33\ Yet
the FTC found that, when the time comes for collection of a debt, the
waivers function as ``in terrorem collection devices[.]'' \34\
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\27\ 76 FR at 43571.
\28\ 16 CFR 442(a)(2).
\29\ 49 FR 7740, 7769 (Mar. 1, 1984), <a href="https://archives.federalregister.gov/issue_slice/1984/3/1/7708-7793.pdf#spage=82">https://archives.federalregister.gov/issue_slice/1984/3/1/7708-7793.pdf#spage=82</a>.
\30\ Id. at 7744.
\31\ Id. at 7770.
\32\ Id. at 7747.
\33\ Id.
\34\ Id. at 7769.
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The 1984 FTC rule also prohibits creditors from using contract
terms that waive consumers' due process rights, such as in the event of
a future debt collection lawsuit.\35\ The FTC similarly found that
consumers either are not aware of or rarely understand the significance
of these clauses, which are framed in technical, confounding language
and presented in small print; thus, consumers cannot bargain over them
or shop for alternatives.\36\
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\35\ 16 CFR 442(a)(1).
\36\ 49 FR at 7749, 7753.
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In addition, Congress, in the 2016 Consumer Review Fairness Act,
generally prohibited the use of form contracts that limit how consumers
communicate their reviews, assessments, or similar analysis of the sale
of goods or services.\37\ The statute also invalidates these types of
contract terms and conditions.\38\ As the legislative history noted,
these so-called ``[g]ag clauses have been imposed by many different
types of businesses and come in different forms.'' \39\ Congress noted
that such clauses may ``become widely adopted[.]'' \40\ Under the
statute, use of these types of contract terms and conditions
constitutes an unfair or deceptive act or practice.\41\ The statute
specifically authorizes enforcement by the FTC and State attorneys
general. The FTC recently brought enforcement actions for violations of
this statute by providers of credit repair services and a real estate
investment training scheme.\42\ One of the clauses purported to
explicitly restrict the filing of complaints with government
authorities.\43\
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\37\ 15 U.S.C. 45b(c); Consumer Review Fairness Act of 2016,
Public Law 114-258 (Dec. 14, 2016), 130 Stat. 1355.
\38\ Id. at 45b(b). California law also includes a similar
protection against these types of terms and conditions in contracts
for the sale or lease of consumer goods or services. Cal. Civ. Code
1670.8.
\39\ H.R. Rep. No. 114-731 at 5 (Sept. 9, 2016).
\40\ Id.
\41\ 15 U.S.C. 45b(d)(1).
\42\ See FTC v. Grand Teton Professionals, LLC, et al., Case No.
19cv933 (D. Conn) (Complaint filed June 17, 2019), ]] 62-63, 80-82,
and 127-35; FTC & Utah Div. of Cons. Prot. v. Zurixx, LLC, Case No.
19cv713 (D. Utah) (Second Amended Complaint filed Feb. 12, 2021), ]]
115-20, and 150-55.
\43\ Zurixx Second Amended Complaint, ] 116.
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In early 2022, the Bureau issued a bulletin noting the public
policy against that use of these types of terms and conditions. The
bulletin warned that their use in contracts for consumer financial
products and services also may constitute an unfair, deceptive, or
abusive act or practice (UDAAP). The bulletin stated that the Bureau
intends to prioritize scrutiny of these provisions in its supervisory
and enforcement activities.\44\
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\44\ CFPB Bulletin 2022-05, ``Unfair and Deceptive Acts or
Practices That Impede Consumer Reviews,'' 87 FR 17143 (Mar. 22,
2022), <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-issues-policy-on-contractual-gag-clauses-and-fake-review-fraud/">https://www.consumerfinance.gov/about-us/newsroom/cfpb-issues-policy-on-contractual-gag-clauses-and-fake-review-fraud/</a>.
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Finally, the FTC also administers the Credit Repair Organizations
Act (CROA),\45\ which prohibits waivers and attempts to obtain waivers
of CROA's legal protections. The FTC has applied CROA to, among other
businesses, foreclosure relief services.\46\
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\45\ See, e.g., FTC v. United Credit Adjusters, Case No. 09-cv-
798 (D. N.J.) (consent order entered Feb. 4, 2010, with foreclosure
relief firm resolving, among other allegations, an alleged violation
of CROA); FTC v. Lalonde, 545 F. Appx. 825 (11th Cir. 2013)
(upholding trial court decision finding violations of CROA by firm
offering credit repair and foreclosure relief services).
\46\ 15 U.S.C. 1679f(a)-(b).
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2. Federal Consumer Financial Laws Administered by the CFPB
Several other provisions in statutes and regulations the Bureau
enforces include prohibitions and restrictions on waivers and
limitations on the enforcement of consumer legal protections. These
examples also reflect public policy concerns with the risks covered
terms and conditions pose to consumers.
Regulation Z implements the Truth-in-Lending Act (TILA) prohibition
against including, in a residential mortgage loan or open-ended
consumer credit plan secured by the principal dwelling, terms requiring
arbitration or any other nonjudicial procedure as the method for
resolving any controversy or settling claims arising out of the
transaction.\47\ Regulation Z also implements the TILA prohibition
against applying or interpreting terms in agreements related to these
transactions to bar a consumer from bringing a claim in court in
connection with any alleged violation of Federal law.\48\
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\47\ 12 CFR 1026.36(h)(1), implementing 15. U.S.C. 1639c(e)(1).
For this reason, the Bureau's 2015 Arbitration Study generally did
not study the mortgage market. See, e.g., Arbitration Study sec. 5
n.34, sec. 8 at 8 & n.24.
\48\ 12 CFR 1026.36(h)(2), implementing 15. U.S.C. 1639c(e)(3).
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Several other provisions in the Bureau's consumer mortgage
regulations also restrict waivers of specified rights or other
protections, such as waivers of the right of rescission of certain
mortgage transactions, as well as the right to receive certain
disclosures within a certain time period in advance of
consummation.\49\ By restricting the circumstances in which these
waivers can be lawfully obtained, these regulations illustrate the
risks that the waivers pose. For example, mortgage lenders cannot use
``[p]rinted forms'' for purposes of obtaining a waiver of the right of
rescission.\50\ In addition, consumers can only waive most of these
protections when necessary to obtain a loan to meet a ``bona fide
personal financial emergency.'' \51\ Federal
[[Page 6911]]
regulators have rejected requests to allow such waivers in a broader
set of circumstances. For example, in rejecting a request to broaden
the exception to the general prohibition against waiving the right of
rescission for certain mortgage transactions, the Federal Reserve Board
stated in a 1981 rule as follows:
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\49\ 12 CFR 1026.15(e) (rescission); 12 CFR 1026.23(e) (same);
12 CFR 1026.19(a)(3), (e)(1)(v), (f)(1)(iv) (timing requirements for
delivery of certain mortgage disclosures); 12 CFR 1026.31(c)(1)(iii)
(timing requirement for delivery of certain disclosures for high-
cost mortgages); 12 CFR 1024.10(c) (timing requirement for delivery
of settlement statement); 12 CFR 1002.14(a)(1) (timing requirement
for providing copy of appraisal or other writing valuation in
certain mortgage transactions).
\50\ 12 CFR 1026.15(e).
\51\ See 12 CFR 1026.15(e); 12 CFR 1026.23(e); 12 CFR
1026.19(a)(3), (e)(1)(v), (f)(1)(iv); 12 CFR 1026.31(c)(1)(iii).
before accepting a waiver [of the right of rescission],
creditors must assure themselves that the reasons given for the
waiver are both substantial and credible and that the waiver is in
all respects bona fide. This requirement, combined with the
prohibition on the use of preprinted forms, will prevent abusive
practices, while at the same time permitting consumers to waive the
rescission right in appropriate circumstances.\52\
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\52\ Federal Reserve Board, Credit; Truth in Lending; Revision
of Regulation Z, Final Rule, 46 FR 20848, 20872 (Apr. 7, 1981),
<a href="https://www.govinfo.gov/content/pkg/FR-1981-04-07/pdf/FR-1981-04-07.pdf#page=190">https://www.govinfo.gov/content/pkg/FR-1981-04-07/pdf/FR-1981-04-07.pdf#page=190</a>.
More broadly across the markets the Bureau supervises, including
when making payments to supervised nonbanks, consumers enjoy important
protections afforded by the Electronic Fund Transfer Act (EFTA) and its
implementing regulation, Regulation E.\53\ EFTA prohibits contract
terms that contain a ``waiver of any right conferred'' by EFTA.\54\
Recognizing that depriving consumers of a remedy undermines the right
itself, EFTA section 914 also prohibits waiver of any ``cause of
action'' under EFTA.\55\
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\53\ 15 U.S.C. 1693 et seq.; 12 CFR part 1005.
\54\ 15 U.S.C. 1693l.
\55\ Id.
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3. Federal Consumer Bankruptcy Statute Protections
The Federal bankruptcy statute provides a legal process for
liquidating the debts of consumers who cannot repay their debts. A
fundamental goal of the bankruptcy laws enacted by Congress is to give
debtors a financial ``fresh start'' from burdensome debts.\56\ The
Federal bankruptcy statute generally stays collection on most consumer
debts during a bankruptcy proceeding,\57\ which generally can result in
discharge of those debts (under Chapter 7 of the Bankruptcy Code \58\)
or a plan to facilitate repayment of those debts (under Chapter 13 of
the Bankruptcy Code \59\). Consumers generally initiate the bankruptcy
proceeding, which is overseen by the bankruptcy courts and bankruptcy
trustees. The Bureau does not administer or enforce the Bankruptcy
Code. However, Federal consumer financial law generally applies to
consumer financial product and service providers' communications with
consumers and other acts and practices relating to bankruptcy
protections and the bankruptcy process.\60\
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\56\ Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934) (noting
that a primary purpose of the bankruptcy law is to ``relieve the
honest debtor from the weight of oppressive indebtedness, and permit
[the debtor] to start afresh . . . ,'' citing Williams v. U.S.
Fidelity & Guaranty Co., 236 U.S. 549, 554 (1915), and elaborating
that the bankruptcy law ``gives the honest but unfortunate debtor .
. . a new opportunity in life and a clear field for future effort,
unhampered by the pressure and discouragement of pre-existing
debt'').
\57\ 11 U.S.C. 362.
\58\ See generally 11 U.S.C. chapter 7.
\59\ See generally 11 U.S.C. chapter 13.
\60\ See, e.g., CFPB, Supervisory Highlights (Fall 2014) at
2.5.5 (describing examiner findings that one or more supervised
entities were misrepresenting to consumers that student loans are
never dischargeable in bankruptcy); Supervisory Highlights (Fall
2015) at 2.5.3 (same); Supervisory Highlights (Spring 2022) at 2.2.6
(describing examiner findings that certain furnishers violated the
Fair Credit Reporting Act by, among other things, failing to
promptly update account statutes to reflect the discharge of debt in
bankruptcy).
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A number of bankruptcy courts long have held that creditors cannot
enforce contracts purporting to waive consumers' statutory right to
file for bankruptcy protection under the Federal bankruptcy
statute.\61\ Relatedly, since 1978, the Federal bankruptcy statute has
explicitly stated that, in the event of discharge of a debt in
bankruptcy, the debt may be voided ``whether or not discharge of such
debt is waived'' by contract.\62\ As discussed in part II.C.2 below,
however, some lenders nevertheless may use contract terms that attempt
or purport to limit or waive bankruptcy protections such as these.
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\61\ See, e.g., In re Weitzen, 3 F. Supp. 698, 699 (S.D.N.Y.
1933) (holding that a contract provision seeking to waive the
benefit of bankruptcy is unenforceable because it would ``frustrate
the object of the Bankruptcy Act,'' which would be ``nullified in
the vast majority of debts arising out of contracts, if this were
permissible''); In re Madison, 184 B.R. 686, 690-692 (E.D. Pa.
Bktcy. 1995) (``an agreement not to file bankruptcy is unenforceable
because it violates public policy''). See also Paul R. Hage,
``Border Control: The Enforceability of Contractual Restraints on
Bankruptcy Filings, Part 1'' (Dec. 14, 2019) (``Courts almost
universally agree that the right to file a petition in bankruptcy is
fundamental and cannot be waived . . . because of the strong public
policy favoring access to bankruptcy relief.''), <a href="https://www.americanbar.sorg/groups/business_law/publications/blt/2019/12/border-control/">https://www.americanbar.sorg/groups/business_law/publications/blt/2019/12/border-control/</a> (last visited Dec. 2, 2022).
\62\ 11 U.S.C. 524(a)(1). See Bktcy. Reform Act of 1978, Public
Law 95-598 (Nov. 6, 1978), 92 Stat. 2549, 2592 (codifying section
524(a)(1) provisions on non-waiver of discharge); H.R. Rep. No. 95-
595 (Sept. 8, 1977) at 366 (anti-waiver provision ``intended to
prevent waiver of discharge of a particular debt from defeating the
purposes'' of the discharge provision in the bankruptcy statute); S.
Rep. No. 95-989 at 80 (July 14, 1978) (same).
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4. Federal Statutory Protections for Military Families Including
Protections Enforced by the CFPB
Federal law also affords servicemembers other relevant protections
when taking out mortgages and installment loans, including from lenders
supervised by the Bureau such as mortgage lenders, payday lenders,
private student lenders, and automobile finance lenders. The Bureau
enforces the Military Lending Act (MLA), which covers many types of
consumer credit, including payday and private student loans.\63\ The
MLA and its implementing regulations generally prohibit terms in
consumer credit contracts that require servicemembers and their
dependents to ``waive the covered borrower's right to legal recourse
under any otherwise applicable provision of State or Federal law . . .
.'' \64\ The MLA and its implementing regulations also prohibit
arbitration agreements in these transactions.\65\ These provisions do
not apply, however, to certain consumer credit transactions, such as
residential mortgage or automobile finance transactions.\66\ Congress
enacted the MLA in 2006 at the recommendation of the Department of
Defense, which in a 2006 report on predatory lending to servicemembers
noted:
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\63\ 10 U.S.C. 987(f)(6) (authorizing Bureau enforcement of the
Military Lending Act). See also 32 CFR part 232 (regulations
implementing the Military Lending Act).
\64\ 32 CFR 232.8(b), implementing 10 U.S.C. 987(e)(2).
\65\ 10 U.S.C. 987(e)(3); 32 CFR 232.8(c).
\66\ See, e.g., 32 CFR 232.3(f)(2).
Service[ ]members should maintain full legal recourse against
unscrupulous lenders. Loan contracts to Service members should not
include mandatory arbitration clauses or onerous notice provisions,
and should not require the Service[ ]member to waive his or her
right of recourse, such as the right to participate in a plaintiff
class. Waiver is not a matter of ``choice'' in take-it-or-leave-it
contracts of adhesion.\67\
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\67\ Department of Defense Report (Aug. 6, 2006) at 7-8, <a href="https://apps.dtic.mil/sti/pdfs/ADA521462.pdf">https://apps.dtic.mil/sti/pdfs/ADA521462.pdf</a> (last visited Dec. 2, 2022).
The Bureau has alleged MLA violations with respect to the use of
contract terms and conditions prohibited by the MLA, including when
short-term small-dollar lenders allegedly provided servicemembers with
loans at high rates prohibited by the MLA under contracts that included
arbitration agreements.\68\
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\68\ CFPB v. LendUp Loans, LLC, Case No. 20cv8583 (Complaint
filed Dec. 4, 2020) (N.D. Cal.), ]] 13-16 (arbitration count),
<a href="https://www.consumerfinance.gov/enforcement/actions/lendup-loans-llc/">https://www.consumerfinance.gov/enforcement/actions/lendup-loans-llc/</a>; CFPB v. First Cash, Inc. & Cash America West, Inc., Case No.
21cv1251 (Complaint filed Nov. 12, 2021) (N.D. Tex.), ]] 22-25
(same), <a href="https://www.consumerfinance.gov/enforcement/actions/firstcash-inc-and-cash-america-west-inc/">https://www.consumerfinance.gov/enforcement/actions/firstcash-inc-and-cash-america-west-inc/</a>; CFPB v. MoneyLion
Technologies Inc. et al., Case No. 22cv8308 (Compliant filed Sept.
29, 2022) (S.D.N.Y.), ]] 65-68 (same), <a href="https://www.consumerfinance.gov/about-us/newsroom/cfpb-sues-moneylion-for-overcharging-servicemembers-trapping-consumers-in-costly-memberships/">https://www.consumerfinance.gov/about-us/newsroom/cfpb-sues-moneylion-for-overcharging-servicemembers-trapping-consumers-in-costly-memberships/</a>.
[[Page 6912]]
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In addition, the Servicemembers Civil Relief Act (SCRA), among
other things, allows servicemembers to reduce interest rates on
preservice loans and includes certain protections against default
judgments and automobile repossessions.\69\ The SCRA also requires that
any time period for servicemembers to file legal action or to enjoy
certain defenses in mortgage transactions exclude periods of military
service.\70\ The SCRA further imposes specific requirements for any
contractual waiver of a right or other protection afforded by the
SCRA.\71\ However, in a recent report, the U.S. Government
Accountability Office (GAO) found that most of the stakeholders GAO
interviewed who have regular contact with servicemembers or their
representatives said that ``servicemembers do not understand the
waivers they are asked to sign[.]'' \72\ And, in resolving claims of
SCRA violations, the Department of Justice often imposes detailed
constraints on how lenders may obtain these waivers in order to further
limit risks to consumers.\73\
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\69\ See 50 U.S.C. 3937 (interest rate cap); 50 U.S.C. 3931
(protections against default judgments); 50 U.S.C. 3952 (protections
against automobile repossessions); 50 U.S.C. 3953 (mortgage
protections).
\70\ 50 U.S.C. 3936(a) (tolling of statute of limitations); 50
U.S.C. 3936(b) (excluding period of military service from any time
period provided by law for the redemption of real property sold or
forfeited to enforce a mortgage obligation).
\71\ 50 U.S.C. 3918(a)-(c).
\72\ GAO Rept. 21-550R, Servicemember Rights: Stakeholders
Reported Servicemembers Have Limited Understanding about Waivers of
Their Consumer Rights and Protections (June 29, 2021) at 4-7
(reporting that 12 of 15 stakeholders interviewed reported that
servicemembers have limited understanding about waivers of their
rights and protections under SCRA, and the other three said they did
not know or did not respond).
\73\ See e.g., United States v. Sallie Mae, Inc., et al., Case
No. 14cv600 (D. Del.), Consent Order (Sept. 29, 2014), ]] 36.c, 37-
38 (requiring Department of Justice (DoJ) approval of procedures for
obtaining waivers of SCRA legal protections); United States v. 3rd
Generation, Inc. & California Auto Finance, Case No. 18cv523 (C.D.
Cal.), Consent Order (Mar. 12, 2019), ] 10.e; United States v.
Westlake Services, LLC, Case No. 17cv7125 (C.D. Cal.), Settlement
Agreement (Sept. 27, 2017), ] 10.e; see also generally DoJ SCRA
settlement agreements, <a href="https://www.justice.gov/servicemembers/servicemembers-civil-relief-act-scra">https://www.justice.gov/servicemembers/servicemembers-civil-relief-act-scra</a>.
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5. State Laws and Tribal Laws
As discussed in this part II.B.5 and also in part II.C below, a
number of State laws and Tribal laws specifically prohibit or restrict
contractual waivers of or certain limits on enforcement and exercise of
important consumer legal protections. These State and Tribal laws
reflect a judgment that waivers and other such limitations may
undermine the adequacy of legal protections. Some of these legal
protections are so fundamental that waiving or otherwise limiting their
enforcement or exercise through consumer contracts is prohibited under
State or Tribal law. Other State and Tribal laws set specific standards
for waivers of certain consumer legal protections or limits on their
enforcement or exercise. These anti-waiver prohibitions, waiver
restrictions, and prohibitions and restrictions on other limits on
enforcement and exercise of legal protections appear in a variety of
State laws and Tribal laws, including some of those that prohibit
unfair and deceptive acts and practices, some consumer lending
statutes, and other statutes setting forth specific types of
protections, as well as in the general principles of State common law
of contracts. While not summarized in detail in this part II.B, other
similar prohibitions also appear in regulations and ordinances adopted
at the local level.\74\
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\74\ See, e.g., New York City Admin. Code sec. 20-701(4)
(providing that ``the degree to which terms of the transaction
require consumers to waive legal rights'' shall be a factor in
considering whether to regulate an act or practice in connection
with the extension of consumer credit or the collection of consumer
debt as a prohibited unconscionable trade practice); S.F. Police
Code sec. 2704 (prohibiting attempts by mortgage modification
consultants to induce real property owners to waive rights under
municipal mortgage modification regulations); City of Los Angeles
Muni. Code sec. 47.107 (same).
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For example, the California Consumer Privacy Act affords consumers
certain rights to know how their information is used and to instruct
businesses not to sell personal information of the consumer.\75\ That
statute further states that ``[a]ny provision of a contract or
agreement of any kind, including a representative action waiver, that
purports to waive or limit in any way rights under this title,
including, but not limited to, any right to a remedy or means of
enforcement, shall be deemed contrary to public policy and shall be
void and unenforceable.'' \76\ California's consumer credit reporting
agencies statute includes a similar anti-waiver provision.\77\
Similarly, the Model Tribal Consumer Protection Code also encourages
Indian Tribes to establish privacy protections that are non-
waivable.\78\
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\75\ See generally Cal. Civ. Code sec. 1798.100 et seq.
described at <a href="https://oag.ca.gov/privacy/ccpa">https://oag.ca.gov/privacy/ccpa</a>.
\76\ Cal. Civ. Code sec. 1798.192.
\77\ Cal. Civ. Code sec. 1785.36.
\78\ First Nations Development Institute, Model Tribal Consumer
Protection Code (2018) Ch. II--Privacy Protection--section D
(``[a]ny waiver of a provision of this title is contrary to public
policy and is void and unenforceable''), <a href="https://www.firstnations.org/publications/model-tribal-consumer-protection-code/">https://www.firstnations.org/publications/model-tribal-consumer-protection-code/</a> (last visited Dec. 5, 2022).
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In addition, several State and Tribal laws specifically prohibit or
restrict waivers of protections against unfair and deceptive acts and
practices. Michigan law defines prohibited unfair, unconscionable, or
deceptive methods, acts, or practices to include ``[e]ntering into a
consumer transaction in which the consumer waives or purports to waive
a right, benefit, or immunity provided by law, unless the waiver is
clearly stated and the consumer has specifically consented to it.''
\79\ Texas law prohibits waivers of consumer legal protections under
the State deceptive trade practices statute as contrary to public
policy, unenforceable, and void unless certain conditions are met and
``the consumer is not in a significantly disparate bargaining
position.'' \80\ Other State laws contain outright prohibitions of
waivers of legal protections in general consumer protection laws.
Illustrative examples include the laws of California,\81\ Illinois,\82\
Kansas,\83\ and Tennessee.\84\ Finally, the Navajo Nation unfair trade
practices statute broadly prohibits acts or practices that take
advantages of a lack of consumer understanding of contract terms to an
unreasonably unfair degree.\85\
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\79\ Mich. Code 445.903 sec 3(1)(t).
\80\ Tex. Bus. & Com. Code sec. 17.42.
\81\ Cal. Civ. Code. sec. 1751 (barring waivers of protections
under California Consumers Legal Remedies Act).
\82\ Ill. St. Ch. 815 sec. 505(10c), Waiver or modification
(barring waiver or modification of protections under consumer fraud
and deceptive practices statute).
\83\ Kan. Stat. 50-625(a), Waiver (generally prohibiting waivers
of rights or benefits under the Kansas Consumer Protection Act,
unless otherwise specified in the statute).
\84\ Tenn. Stat. 47-18-113(a) (generally prohibiting waivers
``by contract, agreement, or otherwise'' of provisions of the
Tennessee Consumer Protection Act of 1977). See also Tenn. Stat. 47-
18-113(c) (specifying conditions for waivers of other consumer
protections in Tennessee law).
\85\ NNCA Ch. 7 sec. 1103.E.1, <a href="https://www.nnols.org/wp-content/uploads/2022/05/1-5.pdf">https://www.nnols.org/wp-content/uploads/2022/05/1-5.pdf</a>.
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Some State consumer lending laws also generally prohibit waivers,
either outright or by provisions rendering them void and unenforceable.
Illustrative examples include the Virginia usury statute,\86\ the
Louisiana consumer credit law,\87\ and the Nebraska loan brokers
statute.\88\ Other State laws generally prohibit waivers for certain
types of loan and loan-related
[[Page 6913]]
products. For example, the Florida payday lending statute expressly
prohibits waiver of its protections, including a mandatory cooling-off
period between payoff on an existing payday loan and origination of a
new payday loan.\89\ Several other State payday and short-term small-
dollar lending statutes include similar prohibitions, whether against
waivers generally \90\ or waivers of certain rights such as jury trial
waivers not contained in permissible arbitration agreements.\91\ In the
automobile lending market, the California automobile sales financing
statute and the New Mexico motor vehicle sales financing statute
include general prohibitions on waivers, and in the mortgage market,
the New Mexico mortgage foreclosure relief statute does the same.\92\
And in the context of secured lending nationwide, Article 9 of the
Uniform Commercial Code (UCC)--adopted in both State and Tribal laws--
identifies numerous consumer legal protections that may not be waived
or varied, including, among others, a prohibition on extrajudicial
repossession without breach of the peace.\93\ Article 9 also restricts
waivers of other consumer legal protections, including several that
apply in the event of default on the loan.\94\ Some State laws also set
forth additional applicable legal protections against certain waivers
in contracts for the financing of the sale of goods and services.\95\
---------------------------------------------------------------------------
\86\ Va. Code. Ann. 6-2-306, Waiver of rights violative of
public policy.
\87\ La. R. S. 9:3513 (barring waivers or agreements to forego
rights or benefits under Louisiana Consumer Credit Law, except for
settlement of a claim disputed in good faith).
\88\ Neb. Stat. 45-191.05, Waiver of sections; attempt;
prohibited.
\89\ Fl. Stat. 560.404(10)(e) (general prohibition on waivers);
Fl. Stat. 560.404(19)-(20) (cooling-off period provisions).
\90\ See, e.g., Ks. Stat. 16a-2-404(10)(d)(iii) (prohibiting use
of terms and conditions in which the consumer agrees not to assert a
claim or defense arising out of the contract); Oh. Stat. 1321.41(G)
(prohibiting short-term loan licensees from requiring the borrower
to ``waive the borrower's right to legal recourse under any
otherwise applicable provision of state or federal law''); Ill.
Stat. Ch. 815 sec. 122/4-5(10)(D) (prohibiting ``a provision in
which the consumer agrees not to assert any claim or defense arising
out of the contract'').
\91\ Ill. Stat. Ch. 815 sec. 122/4-5(10)(B).
\92\ Cal. Civ. Code sec. 2983.7(a) & (c), Prohibition on certain
provisions (prohibiting automobile sale finance agreements that
contain waivers of claims or defenses of consumers); N.M. Stat. 58-
19-12, Waiver (``Any waiver of the provisions of this act shall be
unenforceable and void''); N.M. Stat. 47-15-5.G(1) (prohibiting
including a provision in a foreclosure consulting contract that
``attempts or purports to waive an owner's rights'' under the New
Mexico foreclosure relief statute).
\93\ UCC 9-602, Waiver and Variance of Rights and Duties. See,
e.g., CNCA, title 80, sec. 9-602 (Cherokee nation secured lending
code restricting waiver and variance of rights), <a href="https://attorneygeneral.cherokee.org/media/5upcrg3j/word-searchable-full-code.pdf">https://attorneygeneral.cherokee.org/media/5upcrg3j/word-searchable-full-code.pdf</a>. See also First Nations Development Institute, Model Tribal
Consumer Protection Code (2018) Ch. IV--Rental-Purchase Agreements--
sec. F.1.e (defining ``waiver by the consumer of claims or
defenses'' as an example of ``[p]rohibited rental-purchase agreement
terms; practices'' in automobile finance agreements); Ch. V--
Repossessions of Personal Property--sec. D.4.c (prohibiting any
seller from ``attempt[ing] to obtain a waiver of this section from
any consumer, or to obtain such a waiver''), <a href="https://www.firstnations.org/publications/model-tribal-consumer-protection-code/">https://www.firstnations.org/publications/model-tribal-consumer-protection-code/</a>.
\94\ UCC 9-624, Waiver (placing restrictions on waivers of
certain rights to notice of disposition of collateral, to require
disposition of collateral, and to redeem collateral). See, e.g.,
CNCA title 80, sec. 9-624.
\95\ See, e.g., N.J. Stat. 17:16C-38.2. See also Nat'l Conf. of
Commissioners on Uniform Laws, Revised Model Tribal Secured
Transactions Act (May 2017), sec. 9-403(a) (model statute for Tribal
use providing that waivers of rights and defenses not enforceable in
consumer finance agreements related to sale or lease of goods or
services), https://www.uniformlaws.org/committees/community-
home?CommunityKey=1f31aa7f-74be-457e-904b-
ba3b6d7d3646#:~:text=The%20Model%20Tribal%20Secured%20Transactions,se
cured%20credit%20to%20their%20members.
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Other provisions of State and Tribal laws prohibit contract terms
and conditions that limit how consumers can enforce applicable legal
protections. The California automobile sales financing statute, for
example, prohibits contract provisions that limit liability for legal
remedies available to the consumer.\96\ Tennessee law, for example,
prohibits specifying an out-of-state forum for adjudication of claims
arising under the Tennessee consumer protection statute.\97\ Minnesota
law similarly prohibits specifying an out-of-state forum for resolution
of disputes related to certain short-term loans.\98\ Idaho law
prohibits contract terms shortening the statute of limitations in some
circumstances.\99\ Cherokee Nation law prohibits waiver of numerous
provisions in arbitration agreements.\100\
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\96\ Cal. Civ. Code sec. 2983.7(e).
\97\ Tenn. Stat. 47-18-113(b).
\98\ See, e.g., Minn. Stat. 47.601 sec. 2 (prohibiting certain
terms and conditions in contracts for short-term loans, including,
among others, ``a provision choosing a forum for dispute resolution
other than the state of Minnesota.'').
\99\ See, e.g., DelJack, Inc. v. U.S. Bank Nat'l Ass'n, 2012 WL
4482049 at *6-*7 (D. Idaho 2012) (applying Idaho Code 29-110(1) to
invalidate attempt to use a standard contract term to shorten
statute of limitation). Under Idaho law, ``[e]very stipulation or
condition in a contract . . . which limits the time within which
[any party thereto] may thus enforce [their] rights, is void as it
is against the public policy of Idaho.'' Idaho Code 29-110(1) (also
qualifying that section 110(1) does not apply to arbitration
agreement allowing arbitration in Idaho).
\100\ CNCA title 11, Ch.8, sec. 1304.B & C.
---------------------------------------------------------------------------
Even when State statutory law may not expressly prohibit or
restrict waivers or limitations on how consumers may enforce or
exercise their rights, the Restatement of the law of consumer contracts
further articulates how the State common law of contracts scrutinizes
certain standard terms and conditions for unconscionability. A similar
analysis also may be applied under some Tribal laws.\101\ The doctrine
of unconscionability protects consumers against (1) fundamentally
unfair or unreasonably one-sided terms and conditions that are (2)
imposed through a contracting process that results in unfair surprise
or results from the absence of meaningful choice on the part of the
consumer.\102\ The common law of contracts describes two distinct
aspects of unconscionability: substantive and procedural. As the
American Law Institute has explained, when consumer contract terms and
conditions are substantively unconscionable, they ``undermine the
substantive rights consumers acquired under the contract.'' \103\
Examples of substantively unconscionable terms and conditions include
terms and conditions that unreasonably limit either liability for a
consumer's loss ``by an intentional or negligent act or omission of the
business'' or ``the consumer's ability to pursue or express a complaint
or seek reasonable redress for a violation of a legal right.'' \104\
The Restatement also expressly acknowledges the potential for overlap
in circumstances involving terms and conditions that are unconscionable
and UDAAPs under the CFPA.\105\
---------------------------------------------------------------------------
\101\ See, e.g., Green Tree Servicing, LLC v. Duncan, 7 a.m.
Tribal Law 633, 640 (Navajo Nat'n Sup. Ct. 2008) (applying
principles of unconscionability to invalidate an arbitration
agreement associated with a mobile home loan), <a href="https://cite.case.law/am-tribal-law/7/633/">https://cite.case.law/am-tribal-law/7/633/</a>.
\102\ Restatement sec. 5.
\103\ Id. at 97 (comment on sec. 5(c)(3)).
\104\ Id. at secs. 5(c)(1)(B) and 5(c)(2).
\105\ Id. at 99 (citing 12 U.S.C. 5531 and 5536(a)).
---------------------------------------------------------------------------
The Restatement discusses how the doctrine of unconscionability may
render several types of contractual waivers and limitations on
applicable legal protections unenforceable.
First, terms and conditions in consumer contracts may attempt to
waive certain types of liability of the business. Public policy
recognizes that these types of contract terms and conditions pose risks
to consumers. As the Restatement explains, most State courts deem a
contact term to be substantively unconscionable and thus,
unenforceable, if it ``unreasonably exclude[s] or limit[s] the
business's liability or the consumer's remedies that would otherwise be
applicable for . . . any loss to the consumer caused by an intentional
or negligent act or omission of the business.'' \106\
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\106\ Standard contract terms stating that the liability or
remedy limitations are specifically agreed upon, or that conduct
that would otherwise be regarded by law as negligent is
contractually-agreed upon to be non-negligent, do not necessarily
render the limit on liability reasonable. Restatement at 93-94.
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[[Page 6914]]
Second, forum selection clauses often found in consumer contracts
may designate a specific judicial forum to hear any ensuing disputes
arising out of the contract.\107\ In some cases, the designated forum
might be so inconvenient as to eliminate the viability of pursuing
legal action. The Restatement describes some examples that may pose
risks to consumers, including the following:
---------------------------------------------------------------------------
\107\ Forum clauses were historically perceived as contrary to
public policy and as preventing the proper forum from hearing the
dispute. Now, courts generally enforce forum selection clauses
unless exceptional circumstances exist. M/S Bremen v. Zapata Off-
Shore Corp., 407 U.S. 1, 15 (1972) (holding that, in an
international commercial dispute, ``the forum clause should control
absent a strong showing that it should be set aside'').
---------------------------------------------------------------------------
<bullet> A business's standard contract terms include a dispute-
resolution term specifying a forum in a distant location, such that the
consumer would have to bear travel and accommodation expenses exceeding
the value of the remedy sought. The dispute-resolution forum requires a
non-refundable filing fee exceeding the value of the remedy sought.
Either one of these two features unreasonably limits or imposes
obstacles to the consumer's ability to enforce legal rights. That
result applies to any type of dispute-resolution forum clause in
standard terms in a consumer contract that imposes such an unreasonable
cost or personal burden, be it a public court or a private arbitration
panel.\108\
---------------------------------------------------------------------------
\108\ Restatement sec. 5 cmt. 7.
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Third, terms and conditions that impose unreasonably short
limitations periods may pose risks to consumers by imposing challenges
or creating hurdles for consumers in seeking redress. Terms and
conditions that limit the period in which a consumer must bring an
action to a shorter time period than underlying law may block the
consumer from asserting an otherwise viable substantive claim. These
terms and conditions reduce the time for a consumer to sue, which may
result in fewer actions and otherwise actionable claims prematurely
going stale. As noted above, some State laws prohibit these terms and
conditions as void and against public policy in some circumstances.
Absent an express prohibition in State law, though, the Restatement
indicates that courts often enforce these terms and conditions, even
when the parties have unequal bargaining power, as long as the
resulting time period is reasonable (six months is an oft-mentioned
floor).\109\
---------------------------------------------------------------------------
\109\ Restatement sec. 5. The Restatement notes (at 98),
however, that a business's standard contract terms that require that
all claims against the business be made within three months after
the conclusion of the transaction may be unenforceable to the extent
that it covers claims for ``latent defects'' (claims not widely
relevant to consumer financial products and services). Cf. UCC sec.
2-725(1).
---------------------------------------------------------------------------
Fourth, some arbitration agreements may have features that
unreasonably limit the consumer's ability to enforce their rights. The
Restatement describes examples, including the following:
<bullet> A business's standard contract terms require consumers to
resolve disputes through arbitration. If the costs of pursuing
individual arbitration make it impractical for consumers to seek
redress for breach of the contract, a court may determine that the
provision in the contract barring class actions is not enforceable. In
those circumstances where costs of pursuing individual arbitration are
prohibitive, such arbitration clauses may still be enforceable where
the arbitration forum permits class arbitration, but substantively
unconscionable otherwise.\110\
---------------------------------------------------------------------------
\110\ Restatement at 98 (example 9). The Department of Education
also has proposed to prohibit the use of arbitration agreements and
class action waivers in connection with Federal student loan
programs. See Dept. of Educ. Proposed Rule, 87 FR 41878 (July 13,
2022).
---------------------------------------------------------------------------
<bullet> A business's standard contract terms include a class-
action waiver and do not specify a choice of forum, thus allowing
consumers to resolve disputes in court. A common grievance for
consumers entering this contract involves low damages--no more than a
few dollars each. Thus, these clauses may unreasonably limit consumers'
ability to obtain a remedy for breach.\111\
---------------------------------------------------------------------------
\111\ Restatement at 98 (example 8).
---------------------------------------------------------------------------
While the Restatement expressly does not address ``possible
preemption under the Federal Arbitration Act,'' \112\ these examples
nonetheless illustrate how arbitration agreements can pose risks to
consumers.
---------------------------------------------------------------------------
\112\ Id. at 97.
---------------------------------------------------------------------------
Fifth, in addition to the Consumer Review Fairness Act discussed
above and the Bureau's related policy statement, State law contract
principles also illustrate how clauses that seek to restrict consumers
from posting negative reviews or filing complaints may pose several
risks to consumers. These restrictions may explicitly limit the ability
of consumers to obtain informal resolution of a dispute. These
restrictions also pose risks to other consumers who may be deprived of
the benefits of information about the experiences of other consumers.
As the Restatement explains, ``[s]uch restrictions undermine the
reputation mechanism. In consumer markets, in which legal forms of
redress are often impractical or delayed, the existence of a robust
reputation mechanism is particularly important. Contractual
arrangements that seek to weaken it are therefore against public policy
and substantively unconscionable.'' \113\ When such restrictions are
prohibited by law, they ``may also be unenforceable under the doctrine
of illegality or on grounds of public policy.'' \114\
---------------------------------------------------------------------------
\113\ Id. at 114; see also id. at 98-99 (discussing example
where a business includes in its standard-form contract a clause
that charges a high monetary penalty every time a consumer posts a
negative review of the business online or obligates the consumer to
indemnify the business for any loss caused by the negative
review.'').
\114\ Id. at 107.
---------------------------------------------------------------------------
C. Need for Registry of Supervised Nonbanks That Use Form Contracts To
Impose Terms and Conditions That Seek To Waive or Limit Consumer Legal
Protections
Accordingly, and in light of the considerations described in part
II.C.1 below, the Bureau is proposing to collect information described
in this rule to learn more about the business practices of supervised
nonbanks that use the covered terms and conditions, and to monitor for
associated risks to consumers that would inform the Bureau's evaluation
of how it can utilize its functions to address those risks. Most
immediately, as further described in part II.C.2 below, the proposal
would facilitate the Bureau's risk-based nonbank supervision program,
including through facilitating the assessment and detection of risks to
consumers posed by covered terms and conditions. In addition, to
support the public interest in promoting public understanding of the
use of covered terms and conditions, as discussed in part II.C.3 below,
the Bureau is proposing to make information collected public as
described in Sec. 1092.303 of the proposed rule. The proposal is thus
authorized under the Bureau's monitoring, supervisory, and related
nonbank registration authorities, described below and in part IV of the
proposal. The proposed registry also would further these goals in ways
that existing registration systems do not.
This proposal reflects a priority on establishing a system by rule
for the collection of information on the use of covered terms and
conditions from supervised nonbanks as a subset of covered persons. One
of the reasons for prioritizing coverage of supervised nonbanks is the
need to identify them, as discussed in part II.C.2 below. As discussed
in the impacts analysis in part VII of the proposal, the Bureau
estimates that there are thousands of nonbanks subject to its
supervisory authority
[[Page 6915]]
under CFPA section 1024(a). In addition, there is no comprehensive
registry of identifying information for nonbanks subject to the
Bureau's supervisory authority across supervised markets. Finally, in
light of resource constraints, the Bureau does not regularly examine
each of the thousands of nonbanks subject to its supervisory authority
under CFPA section 1024. Rather, under CFPA section 1024(b)(2), the
Bureau must implement a risk-based program for supervision of these
nonbanks. By contrast, Federal prudential regulators track and already
publicize information about the identity and size of depository
institutions.\115\ These include depository institutions subject to the
Bureau's supervisory authorities under CFPA sections 1025 and 1026. The
Bureau also publicly identifies the fewer than 200 large depository
institutions subject to its supervisory authority under CFPA section
1025, and it has procedures for regularly supervising them.\116\ In
light of all these considerations, the Bureau is prioritizing this
proposal to establish a registration system for identifying those
nonbanks that use covered terms or conditions and monitoring and
assessing the associated risks to consumers as discussed in this part
II above.\117\ This proposal does not affect how the Bureau can apply
its functions for monitoring and assessing risks posed by covered terms
and conditions used by depository institutions and credit unions
subject to its authority under CFPA sections 1022, 1025, and 1026.
---------------------------------------------------------------------------
\115\ See, e.g., FDIC Bank Find Suite, <a href="https://banks.data.fdic.gov/bankfind-suite/bankfind">https://banks.data.fdic.gov/bankfind-suite/bankfind</a>; Federal Financial
Institutions Examinations Council National Information Center,
<a href="https://www.ffiec.gov/NPW">https://www.ffiec.gov/NPW</a>; OCC Financial Institutions Lists, <a href="https://www.occ.treas.gov/topics/charters-and-licensing/financial-institution-lists/index-financial-institution-lists.html">https://www.occ.treas.gov/topics/charters-and-licensing/financial-institution-lists/index-financial-institution-lists.html</a>; Credit
Union Locator, <a href="https://mapping.ncua.gov/">https://mapping.ncua.gov/</a>.
\116\ See CFPB, List of Depository Institutions and Depository
Affiliates under CFPB Supervision, <a href="https://www.consumerfinance.gov/compliance/supervision-examinations/institutions/">https://www.consumerfinance.gov/compliance/supervision-examinations/institutions/</a>; CFPB Supervision
and Examination Manual, Overview at 5 (describing Bureau's approach
to setting regular examination schedules for large depository
institutions), <a href="https://files.consumerfinance.gov/f/documents/cfpb_supervision-and-examination-manual_2022-09.pdf">https://files.consumerfinance.gov/f/documents/cfpb_supervision-and-examination-manual_2022-09.pdf</a>.
\117\ In prioritizing this proposal, the Bureau also has
considered other factors, including the following: The Bureau's
existing regulations already require depository institutions to
submit to the Bureau information about their agreements in certain
markets, such as credit cards and prepaid accounts. The Bureau makes
these agreements publicly available at <a href="https://www.consumerfinance.gov/credit-cards/agreements/">https://www.consumerfinance.gov/credit-cards/agreements/</a> and <a href="https://www.consumerfinance.gov/data-research/prepaid-accounts/">https://www.consumerfinance.gov/data-research/prepaid-accounts/</a>. In
addition, CFPA sections 1022 and 1024 do not expressly authorize the
Bureau to establish a registration system for depository
institutions, which are excluded from the Bureau's registration
authority under section 1022(c)(7)(A) and excluded from the scope of
section 1024(b)(7). There is no parallel registration provision in
the Bureau's authorities over depository institutions generally.
---------------------------------------------------------------------------
1. The Proposed Registry Would Support the Bureau in Fulfilling Its
Statutory Mandate To Monitor Risks to Consumers in Markets for Consumer
Financial Products and Services
As recently discussed in the Bureau's proposal to register certain
orders,\118\ Congress established the Bureau to regulate (among other
things) the offering and provision of consumer financial products and
services under the Federal consumer financial laws, and it granted the
Bureau authority to ensure that the Bureau could achieve that
mission.\119\ But it also understood that the Bureau could not fully
and effectively achieve that mission unless it developed a clear window
into the markets for and persons involved in offering and providing
such products and services. To that end, Congress mandated that the
Bureau ``shall monitor for risks to consumers in the offering or
provision of consumer financial products or services, including
developments in markets for such products or services.'' \120\
---------------------------------------------------------------------------
\118\ See generally CFPB, Proposed Rule, Registry of Nonbank
Covered Persons Subject to Certain Agency and Court Orders (Dec. 12,
2022), (``Nonbank Registration--Orders Proposal''), <a href="https://files.consumerfinance.gov/f/documents/cfpb_proposed-rule__registry-of-nonbank-covered-persons_2022.pdf">https://files.consumerfinance.gov/f/documents/cfpb_proposed-rule__registry-of-nonbank-covered-persons_2022.pdf</a>.
\119\ See 12 U.S.C. 5511.
\120\ See 12 U.S.C. 5512(c)(1).
---------------------------------------------------------------------------
Notably, Congress directed the Bureau to engage in such monitoring
``to support its rulemaking and other functions,'' \121\ instructing
the Bureau to use monitoring to inform all of its work. Congress
separately described the Bureau's ``primary functions'' as ``conducting
financial education programs''; ``collecting, investigating, and
responding to consumer complaints''; ``collecting, researching,
monitoring, and publishing information relevant to the functioning of
markets for consumer financial products and services to identify risks
to consumers and the proper functioning of such markets'';
``supervising covered persons for compliance with Federal consumer
financial law, and taking appropriate enforcement action to address
violations of Federal consumer financial law''; ``issuing rules,
orders, and guidance implementing Federal consumer financial law''; and
``performing such support activities as may be necessary or useful to
facilitate the other functions of the Bureau.'' \122\ Put simply,
Congress envisioned that the Bureau would use its market monitoring
work to inform its activities, all with the express purpose of
``ensuring that all consumers have access to markets for consumer
financial products and services and that markets for consumer financial
products and services are fair, transparent, and competitive.'' \123\
---------------------------------------------------------------------------
\121\ Id.
\122\ 12 U.S.C. 5511(c).
\123\ 12 U.S.C. 5511(a).
---------------------------------------------------------------------------
To achieve these ends, Congress took care to ensure that the Bureau
had the tools necessary to effectively monitor for risks in the markets
for consumer financial products and services. It granted the Bureau
authority ``to gather information from time to time regarding the
organization, business conduct, markets, and activities of covered
persons and service providers.'' \124\ In particular, Congress
authorized the Bureau to ``require covered persons and service
providers participating in markets for consumer financial products and
services to file with the Bureau, under oath or otherwise, in such form
and within such reasonable period of time as the Bureau may prescribe
by rule or order, annual or special reports, or answers in writing to
specific questions,'' that would furnish the Bureau with such
information ``as necessary for the Bureau to fulfill the monitoring . .
. responsibilities imposed by Congress.'' \125\
---------------------------------------------------------------------------
\124\ 12 U.S.C. 5512(c)(4)(A).
\125\ 12 U.S.C. 5512(c)(4)(B)(ii).
---------------------------------------------------------------------------
To assist the Bureau in allocating resources to perform its
monitoring, Congress also identified a non-exhaustive list of factors
that the Bureau may consider, including ``likely risks and costs to
consumers associated with buying or using a type of consumer financial
product or service''; \126\ ``understanding by consumers of the risks
of a type of consumer financial product or service''; \127\ ``the legal
protections applicable to the offering or provision of a consumer
financial product or service, including the extent to which the law is
likely to adequately protect consumers''; \128\ ``the extent, if any,
to which the risks of a consumer financial product or service may
disproportionately affect traditionally underserved consumers''; \129\
and ``the types, number, and other pertinent characteristics of covered
persons that offer or provide the consumer financial product or
service.'' \130\
---------------------------------------------------------------------------
\126\ 12 U.S.C. 5512(c)(2)(A).
\127\ 12 U.S.C. 5512(c)(2)(B).
\128\ 12 U.S.C. 5512(c)(2)(C).
\129\ 12 U.S.C. 5512(c)(2)(E).
\130\ 12 U.S.C. 5512(c)(2)(F).
---------------------------------------------------------------------------
The Bureau takes its market monitoring obligations seriously, and
it
[[Page 6916]]
has incorporated valuable insights gained to date from such monitoring
in conducting the multiple functions assigned to it under the CFPA,
including its supervisory and enforcement efforts, as well as its
rulemaking, consumer education, and other functions.\131\ As discussed
in further detail below, this proposed rule seeks to continue and build
upon that commitment by creating a registry of covered terms and
conditions to accomplish a number of goals, with a particular focus on
monitoring for risks to consumers related to the use of form contracts
containing terms and conditions that waive or limit consumer legal
protections.
---------------------------------------------------------------------------
\131\ See, e.g., CFPB Semiannual Regulatory Agenda, 87 FR 5326,
5328 (Jan. 31, 2022) (``The Bureau's market monitoring work assists
in identifying issues for potential future rulemaking work.'');
Payday, Vehicle, and Certain High-Cost Installment Loans, 82 FR
54472, 54475, 54488, 54498 (Nov. 17, 2017) (citing information
obtained through Bureau market monitoring efforts); Arbitration
Agreements, 82 FR 33210, 33220 (July 19, 2017) (same). See also,
e.g., Consumer Fin. Prot. Bureau, Buy Now, Pay Later: Market trends
and consumer impacts (Sept. 2022), <a href="https://files.consumerfinance.gov/f/documents/cfpb_buy-now-pay-later-market-trends-consumer-impacts_report_2022-09.pdf">https://files.consumerfinance.gov/f/documents/cfpb_buy-now-pay-later-market-trends-consumer-impacts_report_2022-09.pdf</a> (publishing information
obtained through Bureau market monitoring efforts); Consumer Fin.
Prot. Bureau, Consumer Credit Trends: Credit Card Line Decreases
(June 2022), <a href="https://files.consumerfinance.gov/f/documents/cfpb_credit-card-line-decreases_report_2022-06.pdf">https://files.consumerfinance.gov/f/documents/cfpb_credit-card-line-decreases_report_2022-06.pdf</a> (same); Consumer
Fin. Prot. Bureau, Data Point: Checking Account Overdraft at
Financial Institutions Served by Core Processors (Dec. 2021),
<a href="https://files.consumerfinance.gov/f/documents/cfpb_overdraft-core-processors_report_2021-12.pdf">https://files.consumerfinance.gov/f/documents/cfpb_overdraft-core-processors_report_2021-12.pdf</a> (same). See also, e.g., Consumer Fin.
Prot. Bureau, Buy Now, Pay Later: Market trends and consumer impacts
(Sept. 2022), <a href="https://files.consumerfinance.gov/f/documents/cfpb_buy-now-pay-later-market-trends-consumer-impacts_report_2022-09.pdf">https://files.consumerfinance.gov/f/documents/cfpb_buy-now-pay-later-market-trends-consumer-impacts_report_2022-09.pdf</a> (publishing information obtained through Bureau market
monitoring efforts); Consumer Fin. Prot. Bureau, Consumer Credit
Trends: Credit Card Line Decreases (June 2022), <a href="https://files.consumerfinance.gov/f/documents/cfpb_credit-card-line-decreases_report_2022-06.pdf">https://files.consumerfinance.gov/f/documents/cfpb_credit-card-line-decreases_report_2022-06.pdf</a> (same); Consumer Fin. Prot. Bureau,
Data Point: Checking Account Overdraft at Financial Institutions
Served by Core Processors (Dec. 2021), <a href="https://files.consumerfinance.gov/f/documents/cfpb_overdraft-core-processors_report_2021-12.pdf">https://files.consumerfinance.gov/f/documents/cfpb_overdraft-core-processors_report_2021-12.pdf</a> (same).
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How the Proposed Registry Would Support Market Monitoring
A registry of covered terms and conditions would further the
Bureau's market monitoring activities in several ways. As discussed in
further detail below, among other things, the registry would assist the
Bureau in assessing the impact of the covered terms and conditions on
the adequacy of applicable legal protections, and consumer
understanding of covered terms and conditions included in form
contracts.\132\
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\132\ 12. U.S.C. 5512(c)(2).
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In particular, and as reflected in Congress' own judgment, the
Bureau has a particular interest in exercising its market monitoring
authorities to address questions or concerns regarding the ``legal
protections applicable'' to consumer financial products and services
``including the extent to which the law is likely to adequately protect
consumers. . . .'' \133\ Numerous legal protections apply to consumer
financial products and services. Federal, State, Tribal, and local
government bodies have adopted these consumer protections in statutes
and regulations. However, these laws may not adequately protect
consumers when consumers are required through covered terms and
conditions to waive the protections or agree to limits on their
enforcement or exercise.
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\133\ 12 U.S.C. 5512(c)(2)(C). Inadequate legal protections also
create risks the Bureau's monitoring program must consider under
section 1022(c)(2)(A).
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These types of provisions may simultaneously place consumers at an
increased risk of harm from conduct the protections are designed to
prevent, while making it more difficult for consumers to remedy those
harms by enforcing the protections. Covered terms and conditions pose
risks to consumers by potentially reducing deterrence, compliance, and
accountability for non-compliance with the underlying legal protections
to which they apply. Some of these legal protections are so fundamental
that the use of covered terms and conditions is prohibited or
restricted by law, as discussed in part II.C.1. As discussed above and
in the section 1022(b) impacts analysis, when consumers cannot protect
themselves, such as by directly enforcing legal protections or
exercising informal mechanisms, there may be an increased risk that
these protections will not be followed (less deterrence) and that they
will not be remedied when violated (less accountability). These risks
may be significant, given the prevalence of covered terms and
conditions in supervised markets and the examples of harms identified
in supervisory and enforcement actions discussed in part II.C. The
proposed registry would allow for fuller and continuous monitoring of
these risks, but the information already available suggests these risks
warrant increased regulatory oversight of supervised market
participants that use covered terms and conditions. Indeed, Federal,
State, Tribal, and local regulators can enforce many of the legal
protections constrained by covered terms and conditions, or analogous
legal protections. The GAO recently recognized, for example, that
public enforcement of a Federal statute can be particularly important
where private enforcement is constrained by contract.\134\
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\134\ See GAO Rept. 21-221, Servicemember Rights: Mandatory
Arbitration Clauses Have Affected Some Employment and Consumer
Claims but the Extent of Their Effects is Unknown (Feb. 2021) at 9-
10 (describing instances where arbitration agreements prevented
servicemembers from resolving SCRA claims in court, while noting
that Federal enforcement under the SCRA is not limited by
arbitration agreements).
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In addition to the foregoing risks, covered terms and conditions
also may create the risk of a UDAAP violation whether they are
expressly prohibited under existing statutes or regulations and thus
unenforceable or whether no existing law expressly addresses the
provision. In the former circumstance, as discussed below, the covered
term or condition risks deceiving consumers into thinking the
underlying legal protection no longer applies or that they cannot
enforce a right, when in fact that is not this case. This misimpression
is likely to dissuade consumers from availing themselves of available
mechanisms to enforce or otherwise exercise their rights. In the latter
circumstance, as also discussed below, the waiver still might
constitute an unfair act or practice under Federal or State law. For
example, Bureau examiners have found unfairness violations where,
although not expressly prohibited under existing law, a waiver
substantially injured consumers (through loss of the underlying right),
was not reasonably avoidable (for example, because presented in a form
contract on a take it or leave it basis), and did not have
countervailing benefits to consumers or competition.\135\
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\135\ See discussion of examples from mortgage market
supervision, part II.C.2 infra.
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Consumer understanding of the risks described above also is a
factor the Bureau has considered in proposing the registry. Because
covered terms and conditions are established through an adhesion-type
contracting process, as discussed in part II.A above, consumers may not
understand the covered terms and conditions or be aware that they have
agreed to them and therefore may not recognize the ensuing risks from
this agreement.
Of course, the Bureau does not supervise or enforce all consumer
legal protections that are applicable to consumer financial products
and services it supervises, including both the laws to which covered
terms and conditions apply and the laws that may prohibit particular
covered terms and conditions. But, even apart from a potential UDAAP
violation as described
[[Page 6917]]
above, a company that violates other applicable law may have a poor
compliance management system and thus may be more likely to violate
Federal consumer financial law. And the existence of a covered term or
condition in some circumstances may be indicative of a violation of
law, since a company that would go to such lengths to include certain
terms or conditions in its contracts may be acting in other ways to
undermine the underlying rights addressed by the waivers or
limitations. Thus, the existence of covered terms and conditions may
inform the Bureau's understanding of the adequacy of legal protections,
including compliance with Federal consumer financial law, in protecting
consumers who buy or use consumer financial products or services.
The Bureau can use that market monitoring information to support a
variety of its functions, including through conducting consumer
education (where a waiver or limit may risk deceiving consumers, or may
be lawful but nevertheless harmful to consumers who lack
understanding), bolstering its consumer response function (for example,
through better understanding of whether consumer complaints the Bureau
receives or does not receive may be driven by covered terms and
conditions or the risks they pose), or identifying regulatory voids
that it may consider filling through regulation implementing Federal
consumer financial law, orders, or guidance (if another important
protection is not adequate due to waivers or limitations).
A registry of covered terms and conditions would fill an important
information gap on the topic of covered terms and conditions.
Currently, there is limited information on the use of covered terms and
conditions, especially at the individual provider/product level. Even
at the market level, information is limited. The Bureau issued the
latest comprehensive national study of one type of covered term or
condition--arbitration agreements--in a report to Congress over seven
years ago, discussed above. The Bureau requests information from
commenters on other studies of the use of covered terms and conditions.
The Bureau also has not identified any existing Federal, State, or
Tribal system that collects information specifically about the use of
covered terms and conditions across markets the Bureau supervises.\136\
The absence of this data leaves uncertain the degree to which the use
of covered terms and conditions is eroding legal protections in many of
the markets the Bureau oversees. Collection of that data and filling
the gaps in available information on these issues would be important
for the Bureau's efforts to monitor for risks to consumers in the
offering of consumer financial products or services.
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\136\ As noted in this part II.C.2, the Bureau is only aware of
existing registration systems that collect and publish limited
information about standard contracts in private student loan markets
in certain states and mortgage market contracts used for certain
federally-related mortgage transactions.
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As indicated above, in developing the proposal, the Bureau has
considered (among others) the factors listed at CFPA section
1022(c)(2), to the extent relevant here to the allocation of Bureau
resources to perform market monitoring. For example, the proposed
registry would help the Bureau to monitor the extent to which
supervised nonbanks are using covered terms or conditions in form
contracts in a manner that allows consumers to understand the risks
that covered terms or conditions pose to consumers (see CFPA section
1022(c)(2)(B)). The proposed registry would help the Bureau to monitor
potential effects of covered terms or conditions on the adequacy of
legal protections to which they apply or which apply to them (see CFPA
section 1022(c)(2)(C)). And relatedly, the proposed registry would help
the Bureau to monitor likely risks and costs to consumers from buying
or using consumer financial products or services that contain covered
terms and conditions (see CFPA section 1022(c)(2)(A)).\137\
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\137\ See 12 U.S.C. 5512(c)(2)(A)-(C).
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In addition, the information collected in the proposed registry may
form the basis of additional focused assessments. For example, the
information collected may help the Bureau to identify changes over time
in the use of certain covered terms or conditions which may be relevant
to assessing the rate of growth in the offering of consumer financial
products and services that have different contractual frameworks (see
CFPB section 1022(c)(2)(D)). In addition, to the extent that supervised
nonbanks use covered terms or conditions in offering a consumer
financial product or service to traditionally underserved consumers,
the registry would enable comparisons to covered terms and conditions
used by other supervised nonbanks offering similar consumer financial
products or services. That information may help the Bureau to monitor
whether the covered terms or conditions may disproportionately affect
these consumers (see CFPB section 1022(c)(2)(E)). The registry also
would enable other comparisons in the degree and type of covered terms
and conditions used across supervised nonbanks in a given market and
across supervised markets. These comparisons may identify pertinent
characteristics of firms that use particular covered terms or
conditions or combinations of covered terms or conditions (see CFPB
section 1022(c)(2)(F)).\138\
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\138\ See 12 U.S.C. 5512(c)(2)(D)-(E).
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Accordingly, for the reasons described in this part II., as
elaborated elsewhere in the proposal, the Bureau proposes to establish
a registration system to collect data on supervised nonbanks' use of
covered terms and conditions, allowing it to monitor and assess the
risks described above on a continuous basis in supervised markets.
2. The Proposed Registry Would Facilitate the Bureau's Statutorily-
Mandated Risk-Based Nonbank Supervision Program
As recently discussed in the Bureau's proposal to register certain
orders,\139\ one of the Bureau's key responsibilities under the CFPA is
the supervision of very large banks, thrifts, and credit unions, and
their affiliates, and certain nonbank covered persons. Congress has
authorized the Bureau to supervise certain categories of nonbank
covered persons under CFPA section 1024.\140\ Congress provided that
the Bureau ``shall require reports and conduct examinations on a
periodic basis'' of nonbank covered persons subject to its supervisory
authority for purposes of ``assessing compliance with the requirements
of Federal consumer financial law''; ``obtaining information about the
activities and compliance systems or procedures of such person[s]'';
and ``detecting and assessing risks to consumers and to markets for
consumer financial products and services.'' \141\ Pursuant to the CFPA,
the Bureau implements a risk-based supervision program under which it
prioritizes nonbank covered persons for supervision in accordance with
its assessment of risks posed to consumers.\142\ In making
prioritization determinations, the Bureau considers several factors,
including ``the asset size of the covered person,'' \143\ ``the volume
of transactions involving consumer financial products or services in
which the covered person engages,'' \144\ ``the risks to consumers
created by the provision of such consumer financial
[[Page 6918]]
products or services,'' \145\ ``the extent to which such institutions
are subject to oversight by State authorities for consumer
protection,'' \146\ and ``any other factors that the Bureau determines
to be relevant to a class of covered persons.'' \147\ CFPA section
1024(b)(7)(A)-(C) further authorizes the Bureau to prescribe rules to
facilitate supervision and assessing and detecting risks to consumers,
as well as to ensure that supervised nonbanks ``are legitimate entities
and are able to perform their obligations to consumers.'' \148\ Since
it began its nonbank supervision program in 2012, the Bureau has
provided further explanation to the public about the purposes of the
program and how it works.\149\
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\139\ See generally Nonbank Registration--Orders Proposal.
\140\ 12 U.S.C. 5514.
\141\ 12 U.S.C. 5514(b)(1).
\142\ 12 U.S.C. 5514(b)(2).
\143\ 12 U.S.C. 5514(b)(2)(A).
\144\ 12 U.S.C. 5514(b)(2)(B).
\145\ 12 U.S.C. 5514(b)(2)(C).
\146\ 12 U.S.C. 5514(b)(2)(D).
\147\ 12 U.S.C. 5514(b)(2)(E).
\148\ 12 U.S.C. 5514(b)(7)(A)-(C).
\149\ See, e.g., Steve Antonakes and Peggy Twohig, ``The CFPB
launches its nonbank supervision program'' (Jan. 5, 2012), <a href="https://www.consumerfinance.gov/about-us/blog/the-cfpb-launches-its-nonbank-supervision-program/">https://www.consumerfinance.gov/about-us/blog/the-cfpb-launches-its-nonbank-supervision-program/</a>; Lorelei Salas, ``Explainer: What is nonbank
supervision? (May 25, 2022), <a href="https://www.consumerfinance.gov/about-us/blog/explainer-what-is-nonbank-supervision/">https://www.consumerfinance.gov/about-us/blog/explainer-what-is-nonbank-supervision/</a>.
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How the Proposed Registry Would Facilitate Risk-Based Nonbank
Supervision
Under those authorities, the Bureau is proposing the registry to
facilitate its assessment of risks to consumers in connection with its
nonbank supervision program. The proposed registry can facilitate the
Bureau's risk-based nonbank supervision program in a number of ways.
For example, as discussed below, the proposed registry can facilitate
the Bureau's prioritization of which entities to examine, as well as,
relatedly, its identification of entities eligible for examination. The
proposed registry also can facilitate the scoping of its examinations.
First, the Bureau can use the information collected on supervised
nonbanks' use of covered terms and conditions to inform its
prioritization process to determine which entities to examine.
Prioritization is a fundamental component of the Bureau's supervision
program, which has been designed to conduct slightly more than 100 on-
site examinations per year, and less than 1,000 overall exam events per
year.\150\ As discussed in the impacts analysis in part VII of the
proposal, the Bureau estimates that there are thousands of nonbanks
subject to its supervisory authority under CFPA section 1024(a). Given
resource constraints and the number of supervised nonbanks, the Bureau
does not regularly examine each of the nonbanks subject to its
supervisory authority under CFPA section 1024. Rather, pursuant to CFPA
section 1024(b)(2), the Bureau implements a risk-based supervision
program, prioritizing which supervised nonbanks it will examine in a
given annual period based on information available about the risks they
pose to consumers. By incorporating into its supervisory prioritization
process the information it collects on supervised registrants' use of
covered terms and conditions that pose risks to consumers, the Bureau's
risk-based nonbank supervision program would be able to better take
into consideration the ``risks to consumers created by the provisions''
of consumer financial products and services within the meaning of CFPA
section 1024(b)(2)(C).\151\
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\150\ See CFPB Annual Performance Plan and Report FY 2022 at
Table 2.2.1.1 (on-site exams) & Table 2.2.1.2 (all supervisory
events with significant activity), <a href="https://files.consumerfinance.gov/f/documents/cfpb_performance-plan-and-report_fy22.pdf">https://files.consumerfinance.gov/f/documents/cfpb_performance-plan-and-report_fy22.pdf</a>.
\151\ 12 U.S.C. 5514(b)(2)(C).
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The Bureau can use the information collected on supervised
nonbanks' use of covered terms and conditions to assess potential risks
to consumers posed by different covered terms and conditions, and
combinations of covered terms and conditions. That assessment can
inform its decisions prioritizing which supervised nonbanks to examine.
For example, when covered terms and conditions violate anti-waiver and
other legal prohibitions in Federal consumer financial law, the
proposed registry could highlight where this may be a problem,
potentially facilitating prioritization of supervisory action or, in
some cases, potentially, enforcement action.
In addition, certain covered terms and conditions, such as non-
disparagement clauses, also could be an important companion to the
Bureau's existing prioritization process that is based in significant
part on consumer complaints. Depending on the wording of these terms
and conditions, they may pose varying degrees of risk of suppressing
consumer complaints, which could result in an understatement of or gap
in complaint information in the Bureau's consumer complaint database.
Or they could deter online reviews, which the Bureau also may use as
field market intelligence to inform its assessments of risks used for
prioritization of its exam work.
In addition, by prioritizing based on the risks specifically posed
by covered terms and conditions, the Bureau's risk-based supervision
would better account for the limited extent to which this information
is available to inform existing oversight by enforcers of Federal
consumer financial law, including certain State authorities.\152\ As
discussed below, the universe of nonbanks supervised by the States and
the Bureau overlaps but is not coextensive. Even with respect to areas
of overlap, existing State registration systems generally do not
collect information about the use of supervised entity's covered terms
and conditions across the market. States have made only limited use of
this option for specific markets. For example, Colorado, Louisiana,
Maine, and Illinois recently adopted laws establishing registration
systems for private student lenders that obtain their standard loan
terms and conditions; the Colorado, Louisiana, and Maine statutes also
require the registry to post these terms and conditions on a public
website.\153\ Accordingly, the proposed rule would facilitate
supervision on a topic--the use of covered terms or conditions in form
contracts--that otherwise would not be overseen to the same extent by
State authorities for consumer protection within the meaning of CFPA
section 1024(b)(2)(D).\154\
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\152\ See CFPB Consumer Financial Protection Circular 2022-01,
``System of Consumer Financial Protection Circulars to Agencies
Enforcing Federal Consumer Financial Law'' (June 14, 2022), 87 FR
34868 (June 14, 2022) (discussing role of State attorneys general
and State regulators in enforcing Federal consumer financial law as
described in CFPA section 1042, codified at 12 U.S.C. 5552).
\153\ See Col. Rev. Stat. 5-20-203(2)(b)(V) (requiring private
education lenders to annually provide model loan agreements) & id.
5-20-203(3)(c) (requiring copies of the model loan agreements for
each registered private education lender to be posted on a publicly
accessible website); La. Rev. Stat. 6:1401-1404 (added by HB 789
enacted June 18, 2022); Me. Rev. Stat. 9-A:15-102.1.B(5) & id. 15-
102.2 (same); Il. Pub. Act. 102-0583 sec. 10(e). These websites are
available at <a href="https://coag.gov/office-sections/consumer-protection/consumer-credit-unit/student-loan-servicers-act/private-education-lender-registration/registered-private-education-lenders/">https://coag.gov/office-sections/consumer-protection/consumer-credit-unit/student-loan-servicers-act/private-education-lender-registration/registered-private-education-lenders/</a>, <a href="https://www.maine.gov/pfr/consumercredit/student_loan_registry/index.html">https://www.maine.gov/pfr/consumercredit/student_loan_registry/index.html</a>.
\154\ 12 U.S.C. 5514(b)(2)(B) (describing ``the extent to which
supervised nonbanks are subject to oversight by State authorities
for consumer protection'' as something for the Bureau to consider in
conducting risk-based supervision). As discussed in the section-by-
section analysis of the exemption in proposed Sec. 1092.301(h)(5)
related to certain small entities, the Bureau also has considered
the factors in CFPA section 1022(b)(2)(A) and (B). Other factors,
such as risks from the provision of the consumer financial product
or service, also are generally discussed throughout this part II.
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Second, and relatedly, for those nonbank entities that use covered
terms and conditions in offering consumer financial products or
services in markets supervised by the Bureau, the proposed registry can
facilitate a more efficient process for the Bureau to identify these
[[Page 6919]]
nonbank entities. In particular, a registration system that more
comprehensively and periodically collects identifying information about
many nonbank entities subject to the Bureau's supervisory authority
would facilitate the Bureau's nonbank supervision program at the most
basic level--identifying who the Bureau could examine. As discussed
below there is no comprehensive registry of identifying information for
nonbanks subject to the Bureau's supervisory authority across
supervised markets. Thus, the identifying information the proposal
would collect would, in turn, enhance the Bureau's prioritization
process discussed above.
The proposed registry would gather identifying information that
would be uniquely useful to the Bureau's supervision of nonbanks. For
most nonmortgage markets where the Bureau has supervisory authority,
existing registration systems do not necessarily identify all nonbanks
based on whether they are subject to Bureau supervisory authority.\155\
While some States and Indian Tribes require licensing of participants
in certain supervised markets, there is no comprehensive list of who
participates in these markets. The full scope of State and Tribal
licensing requirements across the States and Tribes is not co-extensive
with the scope of the Bureau's supervisory authority across these
markets, leaving geographic and market gaps where the Bureau supervises
but States or Tribes do not license. Moreover, even for institutions
that States or Tribes license, the data about them that States and
Tribes collect does not consistently establish whether they engage in
the specific activities, or volume of such activity, that would make
them subject to the Bureau's supervisory authority.\156\ As a result,
for purposes of identifying Bureau-supervised nonbanks, information on
providers licensed at the State and Tribal level is both overinclusive
(of entities the Bureau does not supervise, such as persons who are not
larger participants) and potentially underinclusive (not necessarily
covering all markets as defined in the statute in all States).
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\155\ For mortgage markets, there is considerably more
information available about who participates and may be subject to
the Bureau's supervisory authority, in light of registration and
licensing systems for mortgage originators under the SAFE Act
(discussed in more detail at <a href="https://files.consumerfinance.gov/f/201203_cfpb_update_SAFE_Act_Exam_Procedures.pdf">https://files.consumerfinance.gov/f/201203_cfpb_update_SAFE_Act_Exam_Procedures.pdf</a>), data submission
requirements of mortgage originators under the Home Mortgage
Disclosure Act (HMDA) in Regulation C at 12 CFR part 1003, and call
reports for mortgage servicers and others (described at <a href="https://mortgage.nationwidelicensingsystem.org/slr/common/mcr/Pages/default.aspx">https://mortgage.nationwidelicensingsystem.org/slr/common/mcr/Pages/default.aspx</a> (last visited Dec. 5, 2022)).
\156\ For the international money transfer market, State
registration money services business licensing data often is aligned
with the Bureau's supervisory authority to facilitate the Bureau's
identification of larger participants.
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The Bureau currently may draw upon information about who is
licensed at the State and Tribal level to inform its assessment of who
may be subject to the Bureau's supervisory authority. However, as
described above, that information does not clearly or consistently
identify which entities are subject to the Bureau's supervisory
authority in many cases. As a result, in many cases, to determine
whether it can commence an examination, the Bureau must first collect
information directly from individual market participants about the
nature, and in the case of markets subject to larger participant rules,
the volume of certain consumer financial product and service offerings
or associated receipts. This activity can be resource- and time-
intensive and can lead to rescheduling of planned exams when the
information collected indicates entities are not subject to supervisory
authority. A registration system that more comprehensively collects and
periodically updates identifying information about many nonbank
entities subject to the Bureau's supervisory authority would facilitate
the Bureau's nonbank supervision program at the most basic level--
identifying who the Bureau could examine.
For that reason, the Bureau also considered proposing a registry
that would require registration of all supervised nonbank covered
persons, regardless of whether those persons use form contracts that
impose covered terms and conditions that pose risks to consumers.
However, the Bureau preliminarily has concluded that it is a higher
priority to require registration of supervised nonbank covered persons
that use covered terms and conditions contained in covered form
contracts. The proposed registry therefore has a fundamentally
different purpose from a universal registration system. This proposal
would focus on identifying the supervised nonbanks offering consumer
financial products and services that pose risks to consumers as
identified above, rather than identifying all supervised nonbanks
regardless of whether they present such risks. In this way, the
proposed registry is almost fully distinct from the type of licensing
and registration systems typically maintained by States and Tribes,
which, as discussed above, generally do not focus on collection of
covered terms and conditions contained in covered form contracts. As a
result, this approach is even less likely to lead to duplication with
State and Tribal licensing and registration systems. The Bureau
requests comment on this approach.
Third, the information collected can form a basis for the Bureau to
scope and conduct examinations of supervised nonbanks, enhancing its
ability to detect and address violations and risks of violations of
Federal consumer financial law or compliance management system
deficiencies.\157\ With respect to detecting and addressing violations,
if the Bureau scheduled an examination at an entity who had registered
its use of a covered term or condition that appeared to be prohibited
by Federal consumer financial law, the Bureau likely would incorporate
the use of this term or condition into the scope of an exam. More
broadly, if the entity registered other covered terms and conditions,
an examination could review and assess risks to consumers related to
how the entity established, used, and applied these terms or
conditions, including in the contracting process or in response to
consumer complaints. That review could inform examiners' conclusions
concerning the presence of a UDAAP, a risk of a UDAAP, or a compliance
management system concern. Examiners also could coordinate with other
regulators about their findings, especially if they implicate consumer
legal protections administered by the other regulators. In addition,
prior to an examination, examiners could consult the registry and
review any non-disparagement clause, which may inform how the examiners
scope and conduct a review of consumer complaints. In these and other
ways discussed in this proposal, by developing its examination scope
based on the information it collects on supervised registrants' use of
covered terms and conditions that pose risks to consumers, the Bureau's
risk-based nonbank supervision program would be able to better take
into consideration the ``risks to consumers created by the provisions''
of consumer financial products and services within the meaning of CFPA
section 1024(b)(2)(C).\158\
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\157\ See generally CFPB Bulletin 2021-01, ``Changes to Types of
Supervisory Communications'' (Mar. 31, 2021) (describing scope of
Bureau supervisory communications as including findings of
violations of laws the Bureau enforces, risks of violation, and
compliance management system concerns), <a href="https://files.consumerfinance.gov/f/documents/cfpb_bulletin_2021-01_changes-to-types-of-supervisory-communications_2021-03.pdf">https://files.consumerfinance.gov/f/documents/cfpb_bulletin_2021-01_changes-to-types-of-supervisory-communications_2021-03.pdf</a>.
\158\ 12 U.S.C. 5514(b)(2)(C).
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[[Page 6920]]
Covered Terms and Conditions Are Prevalent in Markets Supervised by the
Bureau
As discussed below, enforcement and supervisory findings in markets
the Bureau supervises illustrate how covered terms and conditions used
by nonbanks pose risks to consumers. The proposed registry would
facilitate review and assessment of these types of risks more broadly
throughout the Bureau's non-bank supervision program, as discussed
above.
Mortgage Markets
While the TILA and Regulation Z provisions discussed at the outset
of part II.B.2 above may protect consumers against certain waivers and
limitations on private enforcement in the mortgage market, the Bureau
has routinely highlighted for the public examiner findings over the
past decade that some mortgage originators and servicers have been
engaging in acts and practices inconsistent with this prohibition and
that the examiners found constituted UDAAPs.\159\ In addition, even
before the June 1, 2013 effective date of this provision of Regulation
Z,\160\ examiners found that two mortgage servicers engaged in an
unfair practice in connection with the use of ``across-the-board
waivers of existing claims'' in a ``take it or leave it'' loss
mitigation agreements for forbearance or loan modification.\161\
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\159\ See, e.g., Supervisory Highlights (Fall 2022) at 2.6.2;
Supervisory Highlights (Summer 2021) at 2.6.3; Supervisory
Highlights (Summer 2017) at 2.6.2; Supervisory Highlights (Fall
2015) at 2.4.2; Supervisory Highlights (Summer 2015) at 2.4.5. See
also Lyons v. PNC Bank, N.A., 26 F.4th 180, 191 (4th Cir. 2022)
(holding that an arbitration agreement related to a mortgage
transaction was unenforceable in light of the restriction in TILA
discussed in part II.B.2 above).
\160\ 12 CFR 1026.36(h).
\161\ Supervisory Highlights (Winter 2013) at 2.1.2 (covering
results of supervision work completed between July and October
2013).
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In addition, the Bureau's supervisory authority over the mortgage
market extends to nonbanks that offer or provide ``loan modification or
foreclosure relief services'' in connection with residential
mortgages.\162\ Some nonbanks offering these products and services have
used terms and conditions that pose risks. For example, as noted
earlier, the FTC has taken action against a credit repair firm for its
use of non-disparagement clauses in violation of a Federal
statute.\163\ In addition, the Bureau is aware of reports that a
nonbank mortgage lender had imposed certain non-disparagement
provisions in certain loan modification agreements associated with
settlement of pending legal claims, until committing to the New York
State financial regulator to stop doing so.\164\
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\162\ 12 U.S.C. 5514(a)(1)(A).
\163\ FTC v. Grand Teton Professionals, LLC, et al., Case No.
19cv933 (D. Conn) (Complaint filed June 17, 2019).
\164\ Peter Rudegeair, Michelle Conlin, ``Exclusive: Ocwen
Financial to stop gagging homeowners in mortgage deals,''
<a href="http://Reuters.com">Reuters.com</a> (June 3, 2014), <a href="https://www.reuters.com/article/us-banks-mortgages/exclusive-ocwen-financial-to-stop-gagging-homeowners-in-mortgage-deals-idUSKBN0EE1XG20140603">https://www.reuters.com/article/us-banks-mortgages/exclusive-ocwen-financial-to-stop-gagging-homeowners-in-mortgage-deals-idUSKBN0EE1XG20140603</a> (last visited
Dec. 2, 2022); Brena Swanson, ``Ocwen will stop using mortgage gag
orders,'' <a href="http://Housingwire.com">Housingwire.com</a> (June 3, 2014), <a href="https://www.housingwire.com/articles/30196-ocwen-will-stop-using-mortgage-gag-orders/">https://www.housingwire.com/articles/30196-ocwen-will-stop-using-mortgage-gag-orders/</a> (last visited Dec. 8, 2022).
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Other Credit Markets (Payday Lending, Private Student Lending, and
Automobile Finance) \165\
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\165\ The Bureau supervises the automobile finance market
pursuant to its rule defining larger participants in that market.
See 12 U.S.C. 5514(a)(1)(B) & 5514(a)(2); 12 CFR 1090.108.
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The potential for significant prevalence in the use of contract
terms and conditions seeking to waive or limit applicable legal
protections in the automobile finance, private student lending, and
short-term small-dollar markets is supported by the following examples:
<bullet> Automobile finance lender engaged in a deceptive act or
practice by using a contract term that created the impression consumers
could not exercise a right to file bankruptcy when in fact consumers
could file for bankruptcy in light of the public policy voiding waivers
of individual's right to file for bankruptcy.\166\
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\166\ In re Nissan Motor Acceptance Corporation, Admin. Proc.
2020-BCFP-0017 (Consent order filed Oct. 13, 2020), ] 46 et seq.,
<a href="https://files.consumerfinance.gov/f/documents/cfpb_nissan-motor-acceptance-corporation_consent-order_2020-10.pdf">https://files.consumerfinance.gov/f/documents/cfpb_nissan-motor-acceptance-corporation_consent-order_2020-10.pdf</a>.
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<bullet> Private student lenders and servicers enjoined from
enforcing borrower certifications in contracts entered into before
filing for bankruptcy on the ground that such prepetition waivers of
dischargeability in bankruptcy are unenforceable as against public
policy.\167\
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\167\ In re Homaidan v Sallie Mae, Inc. Navient Sol'n, LLC,
Navient Cred. Fin. Corp., 640 B.R. 810, 848 (E.D.N.Y. Bktcy. 2022).
See also In re Mazloom, 2022 WL 950932 at *5 (N.D.N.Y. Bktcy. 2022)
(``Courts are rightfully concerned that lenders would consistently
take advantage of unsophisticated or desperate debtors by including
pre-petition waivers of dischargeability in all loan agreements,
thus vitiating one of the core protections of the bankruptcy
process.''); Lichtenstein v. Barbanel, 161 F. Appx. 461, 467 (6th
Cir. 2005) (collecting earlier cases); Klingman v. Levinson, 831
F.2d 1292, 1296 n.3 (7th Cir. 1987) (``For public policy reasons, a
debtor may not contract away the right to a discharge in
bankruptcy.''), cited by In re Palmer, 2021 WL 1259258 at *10 (N.D.
Ohio Bktcy. 2021) (holding ``stipulation contained in the [student
loan] Credit Agreement's boilerplate language is legally
insufficient to determine nondischargeability in a later-filed
bankruptcy case'').
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<bullet> Institutional private student lender violated the Holder
Rule where it failed to include the notice required under that rule,
and attempted to waive consumers' legal rights by including a contract
clause purporting to ``waive any claim or cause of action of any kind
whatsoever that they may have'' against the lender education
institution.\168\
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\168\ FTC v. Hum. Resc. Dev. Svcs., Inc., d/b/a Saint James
Schools of Medicine and HRDS et al., Case No. 22cv1919 (N.D. Ill.)
(Complaint filed Apr. 14, 2022), ]] 28, 43-48 (citing violation of
the Holder Rule); id. Stipulated Order dated Apr. 14, 2022)
(settlement of allegations).
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<bullet> Short-term small-dollar lender allegedly used contract
term excluding lender liability for fees imposed by the borrower's bank
as a result of lender's payment practices.\169\
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\169\ See, e.g., Klarna Pay Later in 4 Agreement (Oct. 26, 2022)
(provision labelled ``Fees Imposed By Your Financial Institution or
Card Issuer'' stating that lender ``do[es] not have any liability to
[consumer] for such fees''), <a href="https://cdn.klarna.com/1.0/shared/content/legal/terms/0/en_us/sliceitinx">https://cdn.klarna.com/1.0/shared/content/legal/terms/0/en_us/sliceitinx</a> (last accessed Dec. 5, 2022).
Cf. Perks et al. v. Activehours, Inc. d/b/a Earnin, Case No.
19cv5543 (N.D. Cal. 2019) (Complaint filed Sept. 3, 2019), ] 52,
<a href="https://www.govinfo.gov/app/details/USCOURTS-cand-5_19-cv-05543/context">https://www.govinfo.gov/app/details/USCOURTS-cand-5_19-cv-05543/context</a>. That matter resulted in a court order of final approval of
a class action settlement. Id., Order of Mar. 25, 2021, 2021 WL
1146038. In the Bureau's experience and expertise, payday lenders
may also be incentivized to use provisions like this, given the
potential their payment practices have to cause bank fees. See
generally CFPB v. ACE Cash Express, Case No. 22cv1494 (N.D. Tex.),
Complaint filed July 12, 2022, ]] 79-84 (citing unfair practice for
payment practices likely to result in bank fees).
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<bullet> Short-term small-dollar lender allegedly frequently
enforced a forum selection clause to file debt collection lawsuits in a
State that was not where consumers resided or entered into the loan
agreement, leading to default judgments and their enforcement in
garnishment actions against consumers.\170\
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\170\ CFPB v. Freedom Stores, Inc., et al. (E.D. Va. Case no.
2:14cv643) (Complaint filed Dec. 18, 2014), ]] 50-59, 62-81
(alleging unfair and abusive acts and practices based on lender's
filing ``over 3,500 [collection] lawsuits in Norfolk, Virginia,
against consumers who lived in distant venues and who were not
physically present in Norfolk, Virginia, when they executed the
underlying financing contract; almost all of the lawsuits resulted
in a default judgment.''), <a href="https://files.consumerfinance.gov/f/201412_cfpb_complaint_freedom-stores_va-nc.pdf">https://files.consumerfinance.gov/f/201412_cfpb_complaint_freedom-stores_va-nc.pdf</a>. The Bureau entered
into a 2015 settlement barring this company from filing distant-
forum actions and providing relief for affected consumers. See
<a href="https://files.consumerfinance.gov/f/201512_cfpb_stipulated-final-judgment-and-order-freedom-stores_va-nc.pdf">https://files.consumerfinance.gov/f/201512_cfpb_stipulated-final-judgment-and-order-freedom-stores_va-nc.pdf</a>.
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<bullet> Short-term small-dollar lender's standard terms set an
unenforceable 30-day deadline for filing suit, attempting to shorten
four-year period set by State law.\171\
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\171\ Gandee v. LDL Freedom Enterprises, Inc., 293 P.3d 1197,
1201 (Wa. 2013).
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[[Page 6921]]
<bullet> Short-term small dollar lender allegedly used term or
condition attempting to limit or waive consumers' right to cancel
preauthorized electronic funds transfers used to repay loan, despite
anti-waiver provision in EFTA section 914.\172\
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\172\ 15 U.S.C. 1693l. See, e.g., Cobb v. Monarch Finance Corp.,
913 F. Supp. 1164, 1179 (N.D. Ill. 1995) (rejecting motion to
dismiss claim that nonbank lender violated EFTA anti-waiver
provisions by using contract term purporting to waive right under
EFTA to stop payment of preauthorized electronic funds transfers);
Baldukas v. B&R Check Holders, Inc., 2012 WL 7681733 at *5 (D. Colo.
Oct. 2, 2012) (similar holding), adopted by 2013 WL 950847 (D. Colo.
Mar. 8, 2013). See also Jordan v. Freedom Nat'l, 2016 WL 5363752 (D.
Ariz. Sept. 26, 2016) (granting class certification for EFTA anti-
waiver claims involving payment authorizations requiring consumers
to agree that the payee ``will not be responsible for claims
relating to the debit or credit of my account'').
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The Bureau also previously studied and reported on the prevalence
of one type of contract term that limits enforcement of consumer rights
in these markets--arbitration agreements. For more than a decade now,
under U.S. Supreme Court precedent, the Federal Arbitration Act has
preempted State law prohibitions on enforcement of arbitration
agreements due to their containing a ``no class'' provision.\173\ As a
result, some supervised institutions have used arbitration agreements
to block collective legal action by consumers. When that occurs, there
is a risk that consumers may not receive relief for breach of consumer
legal protections unless they pursue actions individually. And if the
threat of individual action is lower, arbitration agreements also may
reduce deterrence and in turn compliance with these consumer legal
protections. This risk may be present across supervised markets.\174\
For example, in its 2015 Arbitration Study, the Bureau noted that
nearly 84% of storefront payday loan agreements representing nearly 99%
of storefronts sampled had arbitration clauses in their agreements in
2013 and 2014, with almost all of these agreements also limiting
availability of class proceedings.\175\ Similarly, over 85% of private
student loan contracts sampled by the Bureau included arbitration
clauses in 2014, with all of these limiting availability of class
proceedings.\176\ The 2015 Arbitration Study also found that, while
consumers sometimes can obtain relief in class actions concerning these
products,\177\ arbitration agreements also can be used to block those
efforts.\178\ Although the Bureau had issued a 2017 regulation to
prohibit limitations on class actions in arbitration agreements for
many types of consumer financial products and services,\179\ Congress
overturned that rule later that year.\180\ As a result, in the Bureau's
experience and expertise, arbitration agreements remain a common term
or condition in contracts for supervised consumer financial products or
services. Arbitration agreements also may specify the location for an
arbitration hearing \181\ and may include provisions setting deadlines
for filing of claims, raising a question of whether those deadlines are
shorter than the time frame specified in State statutes.\182\ Tracking
on an ongoing basis when these agreements are used, by whom, and
whether they are held to be enforceable, is important to the Bureau for
the assessment of potential risks to consumers from such limitations on
their ability to actually pursue and/or participate in legal action.
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\173\ Arbitration Study at 4 (citing AT&T Mobility LLC v.
Concepcion, 131 S. Ct. 1740 (2011)).
\174\ As noted in part II.B.2 above, Federal law (TILA)
restricts the use of arbitration agreements in the mortgage market.
But as discussed at the outset of this part II.C.2, the Bureau
routinely finds acts and practices inconsistent with the TILA
prohibitions and restrictions.
\175\ 2015 Arbitration Study sec. 2.3.4 & sec. 2.5.5 (describing
prevalence of class action-limiting terms).
\176\ Id. sec. 2.3.5 & sec. 2.5.5 (describing prevalence of
class action-limiting terms).
\177\ Id. sec. 8 Table 1 (number of Federal class action
settlements, by market, identified from cases filed from 2010 to
2012) & Table 8 (gross monetary relief to class members, by market).
\178\ Id. sec. 6.7.1 (motions to compel arbitration of putative
class litigation filed in Federal court and selected State courts
from 2010 through 2012 in payday loan, private student loan, and
automobile finance markets).
\179\ 82 FR 33210 (July 19, 2017).
\180\ 82 FR 55500 (Nov. 22, 2017) (discussing adoption of joint
resolution of Congress disapproving the 2017 rule, signed by the
President).
\181\ Arbitration Study sec. 2 at 56.
\182\ Id. sec. 2.5.7 (noting three storefront payday loan
agreements specified time limits for consumer claims).
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Consumer Reporting Market \183\
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\183\ The Bureau supervises the consumer reporting market
pursuant to its rule defining larger participants in that market.
See 12 U.S.C. 5514(a)(1)(B) & 5514(a)(2); 12 CFR 1090.104.
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In the credit monitoring market, contract waivers and other
provisions may undermine the adequacy of the legal protections afforded
to consumers under the Fair Credit Reporting Act (FCRA). The Bureau's
Arbitration Study found that FCRA claims were the third most common
type of Federal statutory claim in Federal class action settlements
reviewed by the Bureau from selected cases filed from 2010 through
2012.\184\ Moreover, class settlements of Federal class actions related
to consumer reporting filed between 2010 and 2012 provided over $750
million in relief to consumers.\185\ More recently, as discussed below,
case law indicates that consumer reporting agencies may use arbitration
agreements to block potential availability of this type of relief in
this market.
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\184\ Arbitration Study sec. 8.3.1 Figure 1.
\185\ Id. sec. 8.3.3 Table 8.
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For example, the Bureau has learned that some credit monitoring
products that some consumer reporting agencies market by representing
that they help consumers detect and fix inaccuracies in their consumer
reports may undermine FCRA protections. For example, in one case, after
consumers engaged the service, the consumer reporting agency used the
terms of that service against the consumer to block a putative class
action lawsuit. The consumer reporting agency used an arbitration
agreement in the credit monitoring contract to block consumers' legal
action seeking to remedy alleged failure to reasonably investigate
inaccurate information on consumer reports in violations of the
FCRA.\186\ This outcome illustrates how consumer reporting agencies
could use arbitration agreements to limit collective legal action
seeking to remedy pre-existing inaccuracies in a consumer's credit
report. This outcome also may indicate a broader trend: through its
market monitoring activity, the Bureau also has seen several examples
of national consumer reporting agencies imposing arbitration agreements
when consumers use their online interface to obtain copies of their
credit report or their credit score, to file a dispute, or to place a
security freeze. The Bureau has a need, through its nonbank supervision
program and market monitoring more broadly, to assess the potential
magnitude of these risks across the consumer reporting market.
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\186\ See, e.g., Coulter v. Experian Info. Sols., Inc., Case No.
20-cv-1814 (E.D. Pa.) (Order Feb. 25, 2021), 2021 WL 735726.
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Consumer Debt Collection Market \187\
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\187\ The Bureau supervises the consumer debt collection market
pursuant to its rule defining larger participants in that market.
See 12 U.S.C. 5514(a)(1)(B) & 5514(a)(2); 12 CFR 1090.105.
---------------------------------------------------------------------------
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. For example, although debt collectors typically do
not enter into arbitration agreements directly with consumers,
nevertheless, they may attempt to use these and other limitations in
the terms and conditions of the underlying consumer contract
establishing the debt
[[Page 6922]]
to block class actions.\188\ When used in this manner, any valid claims
that would have been asserted only on a class basis are suppressed.
Such potential for claim suppression may pose risks to consumers.
Indeed, the collective action mechanism can generate relief in this
market, as the Bureau's Arbitration Study found that Fair Debt
Collection Practices Act (FDCPA) claims were by far the most common
type of claim in Federal class action settlements the Bureau analyzed
from cases filed between 2010 and 2012.\189\ And these settlements
provided over $95 million in monetary relief to consumers.\190\
---------------------------------------------------------------------------
\188\ Arbitration Study sec. 6 at n.94 (describing examples).
\189\ Id. sec. 8.3.1 Figure 1.
\190\ Id. sec. 8.3.3 Table 3.
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In addition, as discussed above, when setting up recurring payments
or payment plans on loans, creditors or their collectors may use
contract terms that attempt to limit or waive consumers' rights to
cancel these payments, including in circumstances that violate the
anti-waiver provision in EFTA section 914.\191\
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\191\ 15 U.S.C. 1693l. See, e.g., Cobb v. Monarch Finance Corp.,
913 F. Supp. 1164, 1179 (N.D. Ill. 1995) (rejecting motion to
dismiss claim that nonbank lender violated EFTA anti-waiver
provisions by using contract term purporting to waive right under
EFTA to stop payment of preauthorized electronic funds transfers);
Baldukas, 2012 WL 7681733 at *5 (D. Colo. Oct. 2, 2012) (similar
holding), adopted by 2013 WL 950847 (D. Colo. Mar. 8, 2013). See
also Jordan v. Freedom Nat'l, 2016 WL 5363752 (D. Ariz. Sept. 26,
2016) (granting class certification for EFTA anti-waiver claims
involving payment authorizations requiring consumers to agree that
the payee ``will not be responsible for claims relating to the debit
or credit of my account'').
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Debt collectors also may seek to rely on other covered terms and
conditions used by creditors. For example, debt collectors may seek to
rely on contract terms in creditor contracts that seek to waive the
right of consumers to revoke consent to receive autodialed calls under
the Telephone Consumer Protection Act and its implementing
regulations.\192\ In the Bureau's experience and expertise, including
based on findings in recent examination activity, waivers of that
consumer right to revoke consent--an applicable legal protection
administered by the Federal Communications Commission (FCC)--may make
it challenging for consumers to exercise applicable legal protections
under other statutes the Bureau administers to stop unwanted or even
harassing or unlawful debt collection calls. The FCC has determined
that consumers' right to revoke this consent cannot be waived.\193\ But
some courts have not embraced that position.\194\ Creditor contract
terms that waive any such right to revoke consent to so-called
robocalls pose potential risk to consumers in debt collection markets.
Similarly, to the extent that debt collectors contract directly with
consumers, debt collectors also might attempt to directly deploy
contract terms that seek to waive or otherwise limit consumer rights
under the FDCPA and its implementing regulations \195\ to stop
collections communications or to specify inconvenient times, places, or
media for collections communications.\196\
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\192\ Under the TCPA, according to the FCC, such consent when
given to a creditor in connection with an existing debt may also
extend to the debt collector. Implementing the Telephone Consumer
Protection Act of 1991, Request of ACA Int'l for Clarification and
Declaratory Ruling, 23 FCC Rcd 559, 563-65 (Feb. 1, 2008).
\193\ In re Rules & Regulations Implementing the Tel. Consumer
Prot. Act of 1991, 30 FCC. Rcd. 7961, 7994-7999 (2015); ACA
International v. FCC, No. 15-1211 (D.C. Cir. 2018). See also
Ginwright v. Exeter Finance Corp., 280 F.Supp.3d 674, 683-84 (D. Md.
2017) (holding that a standard contractual term in an automobile
finance agreement prohibiting the consumer from revoking consent to
be called would violate FCC ruling that a consumer has a right of
revocation); Jara v. GC Servs. LP, 2018 WL 2276635 at *5 (C.D. Cal.
May 17, 2018) (same, in private legal action by consumer against a
debt collector).
\194\ Reyes v. Lincoln Automotive Fin. Svs., 16-2104-cv, 2017 WL
2675363 (2d Cir. June 22, 2017); Medley v. Dish Network, LLC, No.
18-13841 (11th Cir. 2020). See also Harris v. Navient Sols., LLC,
2018 WL 3748155 (D. Conn. Aug. 7, 2018) (applying Reyes to private
legal action by consumer against student loan servicer).
\195\ See Bureau's Regulation F at 12 CFR part 1006.
\196\ Cf. Clark v. Capital Credit & Collection Services, Inc.,
460 F.3d 1162, 1170 (9th Cir. 2006) (applying heightened standard of
voluntariness but finding that consumer's initiation of contact with
a debt collector constituted a limited waiver of the consumer's
cease communications request under the FDCPA).
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As also discussed above, under FTC rules, in consumer credit and
collection markets, consumers have important rights to limit the types
of assets that can be seized or garnished to enforce a court order to
pay a debt. As noted above, terms and conditions may directly flout
those rules and the rules may not be comprehensive enough to prevent
contract terms that waive or undermine these rights. For example, the
Bureau recently found that a very large depository institution sought
to limit its liability to consumers for failing to follow these
laws.\197\ Garnishor creditors or their debt collectors may seek to
utilize similar contract terms and conditions.
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\197\ In re Bank of America, N.A., Admin. Proc. 2022-CFPB-0002
(Consent Order filed May 4, 2022), ] 49 et seq. (citing deposit
agreement provision stating that bank has ``no liability to'' the
consumer if it follows the provisions of the contract), <a href="https://files.consumerfinance.gov/f/documents/cfpb_bank-of-america_consent-order_2022-05.pdf">https://files.consumerfinance.gov/f/documents/cfpb_bank-of-america_consent-order_2022-05.pdf</a>.
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Further, the Bureau notes that the FDCPA prohibits debt collectors
from bringing legal actions in certain inconvenient venues, generally
requiring that debt collectors only file suit where the consumer
resides or entered into the contract, or in the case of real property,
where the real property is located.\198\ Forum selection clauses in
terms or conditions may suggest otherwise. For example, similar to the
case involving a short-term small-dollar lender described above, a debt
collector could seek to use such a clause as a basis for filing actions
in venues not permitted under the FDCPA.
---------------------------------------------------------------------------
\198\ 15 U.S.C. 1692i(a).
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Finally, some larger participant debt collectors the Bureau
supervises also collect medical debt. Collection of amounts subject to
waiver, arbitration agreements, or both can pose risks to consumers in
the medical debt context. For example, the Department of Health and
Human Services (HHS) recently finalized rules implementing the No
Surprises Act. Under these implementing regulations, when an insured
consumer seeks non-emergency treatment at a hospital, the hospital may
use a contract that includes a waiver of the consumer's new Federal law
protections against surprise bills. The regulations require that these
waivers must meet certain standards, including that they are ``provided
voluntarily, meaning the individual is able to consent freely, without
undue influence, fraud, or duress . . . .'' \199\ HHS estimated that
hospitals may deploy these contract waivers nearly 2.5 million times
each year.\200\ Debt collectors may attempt to collect amounts
hospitals charge on the basis of such waivers. Depending on the
circumstances of the waiver, this may raise risks to consumers
including under applicable legal protections such as the FDCPA and the
FCRA.\201\ If a consumer contests such an amount in a legal action, a
debt collector could seek to enforce the underlying waiver to block
such a claim. If a consumer asserts the waiver is invalid, that may
raise questions of whether the Holder Rule, described above, applies to
ensure the consumer may assert that defense. Or
[[Page 6923]]
the debt collector could seek to enforce an arbitration agreement the
hospital may enter into with the consumer. In addition, in a different
medical debt context, debt collectors could seek to enforce arbitration
agreements in long-term care facility admission contracts. If a debt
collector uses an arbitration agreement in that context, its use may
raise a question about whether the consumer was given a choice to
accept the arbitration agreement as is required by HHS regulations and
whether the arbitration agreement complies with other requirements in
the HHS regulations.\202\
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\199\ 45 CFR 149.420(c)(2)(i).
\200\ HHS Supporting Statement--Part A, Requirements Related to
Surprise Billing: Qualifying Payment Amount, Notice, and Consent,
Disclosure on Patient Protections Against Balance Billing, and State
Law Opt-in (CMS-10780/OMB control number: 0938-1401) at 16.
\201\ See CFPB Bulletin 2022-01, ``Medical Debt Collection and
Consumer Reporting Requirements in Connection with the No Surprises
Act,'' 87 FR 3025 (Jan. 20, 2022).
\202\ See 42 CFR 483.70(n)(2).
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Student Loan Servicing Market \203\
---------------------------------------------------------------------------
\203\ The Bureau supervises the student loan servicing market
pursuant to its rule defining larger participants in that market.
See 12 U.S.C. 5514(a)(1)(B) & 5514(a)(2); 12 CFR 1090.106.
---------------------------------------------------------------------------
As in the consumer debt collection market discussed above, student
loan servicers may attempt to rely on waivers or other covered terms
and conditions in creditor contract clauses to defend against legal
actions by consumers. Examples of waivers that may pose risks to
consumers include terms and conditions attempting to waive
dischargeability of loans prior to the filing of a bankruptcy petition.
In addition, depending on the facts and circumstances and applicable
law, student loan servicers may use creditor contracts to compel
arbitration of claims consumers file in court.\204\ As noted above,
while class actions can provide relief to student loan borrowers,
arbitration agreements in private student loan contracts can be used to
block that relief. Further, as with creditors and their debt collectors
discussed above, loan servicers also could attempt to use terms and
conditions for payment authorizations that attempt to limit or waive
consumers' rights to cancel these payments--including in circumstances
that may violate the anti-waiver provision in EFTA section 914.
---------------------------------------------------------------------------
\204\ See, e.g., Howard v. Navient Solutions, LLC, 2018 WL
5112634 at *4 (W.D. Wa. 2018) (granting student loan servicer's
motion to compel arbitration of consumer's claims based on
arbitration provision in original promissory note).
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Remittance Market \205\
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\205\ The Bureau supervises the remittance market (International
Money Transfer Market) pursuant to its rule defining larger
participants in that market. See 12 U.S.C. 5514(a)(1)(B) &
5514(a)(2); 12 CFR 1090.107.
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Remittance transfer service agreements may contain rights waivers
that are prohibited by statute. The Bureau recently resolved an
enforcement action for violations of EFTA's anti-waiver provision by a
remittance provider.\206\ In addition, the Bureau recently reported
that examiners found multiple instances of such violations in
remittance transfer service agreements with consumers in direct
violation of the law. Specifically, examiners found terms and
conditions that expressly limited consumer rights under EFTA section
916 to bring legal action against the institution and to recover costs
and attorney's fees.\207\
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\206\ In re Choice Money Transfer, Inc., Admin. Proc. 2022-CFPB-
0009 (Oct. 4, 2022), ]] 79-83 (consent order citing a waiver of
liability that was inconsistent than rights conferred by regulations
implementing EFTA).
\207\ See Supervisory Highlights (Spring 2022) at sec. 2.8.2.
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In addition, with respect to arbitration agreements and waivers of
collective legal action, the Bureau's Arbitration Study noted an
example of $5.5 million in monetary relief in a Federal class action
settlement in the remittances market.\208\
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\208\ Arbitration Study sec. 8 at 25.
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3. Making Information Collected in the Registry Publicly Available
Would Serve the Public Interest
The public transparency provisions in proposed Sec. 1092.303,
described in the section-by-section analysis in part V below, also
accomplish core elements of the Bureau's mission.
Congress anticipated that the insights the Bureau would gain from
mandatory market monitoring should at times become available to a wider
audience than just Bureau employees. Not only did Congress mandate that
the Bureau ``publish not fewer than 1 report of significant findings of
its monitoring . . . in each calendar year,'' but it also instructed
that the Bureau may make non-confidential information available to the
public ``as is in the public interest.'' \209\ Congress gave the Bureau
discretion to determine the format of publication, authorizing the
Bureau to make the information available ``through aggregated reports
or other appropriate formats designed to protect confidential
information in accordance with [specified protections in this
section].'' \210\ These instructions regarding public release of market
monitoring information align with one of the Bureau's ``primary
functions'' mentioned above--to ``publish[ ] information relevant to
the functioning of markets for consumer financial products and services
to identify risks to consumers and the proper functioning of such
markets.'' \211\ CFPA section 1022(c)(7)(B) similarly contemplates that
publishing registry information for this purpose can be beneficial to
consumers, authorizing the Bureau to ``publicly disclose registration
information to facilitate the ability of consumers to identify covered
persons that are registered with the Bureau.'' \212\
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\209\ 12 U.S.C. 5512(c)(3).
\210\ 12 U.S.C. 5512(c)(3)(B).
\211\ 12 U.S.C. 5511(c)(3).
\212\ 12 U.S.C. 5512(c)(7)(B).
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The Bureau believes that publication of registration information is
in the public interest for a variety of reasons as discussed below and
in the section-by-section analysis of proposed Sec. 1092.303.
Other regulators would be able to quickly access the centralized,
publicly-accessible database, facilitating their efficient
prioritization of oversight of supervised nonbanks that, in their
judgment, use particularly risky covered terms and conditions. These
regulators could associate the data the Bureau publishes with other
information they have about supervised nonbanks, providing a better
picture of their practices. This oversight would be particularly
valuable when the covered terms and conditions limit private
enforcement or exercise of rights. Some regulators also may identify
published covered terms and conditions explicitly prohibited by laws
they enforce or supervise, including some of the laws discussed in part
II.B above and similar laws. This information may spur action by those
regulators to enjoin or otherwise stop further use of those covered
terms and conditions. However, as discussed in part VII.E below, the
registry already would disincentivize use of expressly prohibited
covered terms and conditions. Thus, it is uncertain how prevalent use
of expressly prohibited covered terms and conditions would be in the
registry.
More broadly, use of form contracts and covered terms and
conditions have long been topics of public debate in consumer finance
markets and beyond, informing adoption of the legal protections
applicable to consumer financial products and services offered in
markets supervised by the Bureau discussed in part II.B and the broader
public policy they reflect. The registry would provide reliable,
comprehensive, and periodically updated data about this matter of
significant public import. For example, regulators, legislatures,
courts, the legal profession, researchers, universities, and other non-
governmental organizations, the press, and the general public would be
able to use data from the registry to monitor trends and to identify
high-risk areas affecting consumers in markets for consumer financial
products and services. Indeed, as described above,
[[Page 6924]]
some statutory consumer legal protections either specifically
contemplate waivers or are silent on the topic. A registry of waivers
could highlight legal protections that are at risk of being undermined.
Currently, there appears to be no similar database of covered terms
and conditions available to the public with widespread coverage of one
or more markets for consumer financial products and services. The
public appears to have access to only limited data, such as form
contracts used by certain private student lenders registered in the few
States that collect and publish the entire form contract, form
contracts for first-lien mortgages on site-bult homes insured,
guaranteed, or eligible for purchase in Federal mortgage programs, and
to some degree, form contracts marketed by form providers for
automobile finance transactions. As a result, a comprehensive,
periodically-updated database focused on the use of covered terms and
conditions would substantially inform that debate and more fully ground
it in data.\213\
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\213\ The Bureau's recent proposal to register orders also, in
conjunction with data gathered under this proposal, can help the
public to understand when contract terms and conditions limiting
private action are associated with conduct that leads to public
orders. See Nonbank Registration--Orders Proposal.
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Other benefits exist as well. For example, other regulators,
researchers, consumer advocacy organizations, the press, and others
could review this information and, where it indicates a concern,
potentially educate consumers about identifying and managing these
risks. Those activities could complement the Bureau's consumer
education functions. Based on information gleaned from trends in the
information collected, researchers, non-governmental organizations, and
other regulators could provide timely and well-informed consumer
education materials. And companies that do not include covered terms or
conditions in their contracts may consider using their absence from
being required to register and other information in the registry from
competitors to market their consumer financial products or services as
potentially less risky to consumers.
Similarly, publication of registration information would facilitate
the ability of consumers to identify supervised nonbank covered persons
that are registered with the Bureau. CFPA section 1022(c)(7)(B)
contemplates that publishing registry information for this purpose can
be beneficial to consumers.\214\ Publishing registration information
identifying the supervised nonbanks that use covered terms and
conditions could help consumers when disputes or problems arise. When a
consumer has a dispute with a supervised registrant giving rise to a
potential legal claim, the consumer or their representative could
quickly check the Bureau's website to see if the supervised registrant
was identified as using covered terms or conditions for that type of
consumer financial product or service.\215\ Reviewing information in a
published registry would not be a substitute for reviewing the covered
form contract. But the registry can be a resource that may be easier
for consumers to perform an initial check quickly, before obtaining and
reviewing their entire contract. It also may identify additional
covered terms or conditions that may affect to the consumer's account
or transaction.
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\214\ 12 U.S.C. 5512(c)(7)(B).
\215\ This information could indicate whether the consumer's
covered terms and conditions were typical of those offered to other
consumers. But the consumer's form contract itself (which a
consumer's representative may already have) typically would be used
with many consumers by its very nature. And arbitration agreements
generally do not allow class actions, as discussed elsewhere in this
part II. Thus, for these and other reasons discussed in part VII.E,
a significant increase in class action litigation as a result of the
proposal is unlikely. Indeed, a chief purpose of the proposal is to
increase public oversight of covered terms and conditions precisely
because of the limitations covered terms and conditions impose on
private enforcement.
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All of the above groups and the rest of the general public also
would have access to identifying information collected on the nonbank
itself, affording a better understanding of which specific nonbanks are
subject to supervision and examination by the Bureau.
Finally, publication would formally align the proposed nonbank
registration system with the Federal government's emphasis on making
government data available to and usable by the public, by default, to
the greatest extent possible.\216\
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\216\ See, e.g., Open, Public, Electronic and Necessary
Government Data Act, in title II of Public Law 115-435 (Jan. 14,
2019); Office of Management & Budget, M-19-18, ``Federal Data
Strategy--A Framework for Consistency'' (June 4, 2019), <a href="https://www.whitehouse.gov/wp-content/uploads/2019/06/M-19-18.pdf">https://www.whitehouse.gov/wp-content/uploads/2019/06/M-19-18.pdf</a> (last
visited Dec. 7, 2022).
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D. Other Alternatives Considered
As explained in part II.C and in the section-by-section analysis in
part V, the Bureau has considered a number of alternatives to the scope
of the rule and the coverage of particular provisions. In addition to
those alternatives, the Bureau has considered several other
alternatives.
The Bureau considered proposing that supervised nonbanks submit
their covered form contracts, instead of providing information about
them. That alternative might reduce burdens on some registrants, who
would not have to review their contracts in order to provide
standardized data. However, that type of registry would result in a
much greater volume of information collected and published. As
discussed in this part II above, the Bureau is concerned that terms and
conditions waiving or limiting enforcement of consumer legal
protections may not receive adequate attention by consumers or the
public. Publication of additional information unrelated to those types
of terms could reduce the attention to those type of terms in the
registry. At the same time, the Bureau also lacks the resources to
engage in an annual review of the full text of all of the standard
contracts of every nonbank subject to its supervisory authority. In
particular, the Bureau lacks the resources to extract from such
standard contracts the standardized data on the clauses of concern
described in the proposal. Therefore, collecting this data from the
supervised registrants themselves would establish a registration system
that is more effective.
The Bureau also has considered alternative means of collecting
information relating to use of covered terms and conditions, including
requesting the information on an ad hoc basis from supervised entities,
whether during examinations or through an order pursuant to CFPA
section 1022(c)(4)(B)(ii). However, these alternatives generally would
be infeasible for accomplishing the goals of the proposed rule. As
discussed in the impacts analysis in part VII, there are thousands of
nonbanks subject to the Bureau's supervisory authority. By contrast,
the Bureau's supervision program historically has been designed to
conduct slightly more than 100 on-site examinations per year, and less
than 1,000 overall exam events per year.\217\ In addition, as discussed
in this part II above, existing systems do not generate a comprehensive
list of persons the Bureau may supervise.\218\ In addition,
[[Page 6925]]
an important purpose of the proposal is to facilitate an assessment of
the adequacy of applicable legal protections for consumers whose
contracts contain covered terms and conditions. These legal protections
are not ad hoc or time-limited. Furthermore, the Bureau's need to
consider their adequacy as part of its monitoring and supervisory work
is similarly ongoing, and so is best served by a system that collects
information on a recurring basis. In addition, these alternatives would
not be as effective at informing the Bureau's ongoing prioritization of
its supervisory resources for examining nonbank covered persons.
Nonbank covered persons' use of covered terms and conditions may change
over time, as business structures, product offerings, and markets
evolve. In the Bureau's experience and expertise, supervised
registrants frequently make changes in terms and conditions in their
form contracts, including to alter or add covered terms or conditions.
Doing a one-time collection or performing point-in-time collections
would be less useful to the Bureau's continuous prioritization. And for
the same reasons, it would be less useful to the public as well.
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\217\ See CFPB Annual Performance Plan and Report FY 2022 at
Table 2.2.1.1 (on-site exams) & Table 2.2.1.2 (all supervisory
events with significant activity), <a href="https://files.consumerfinance.gov/f/documents/cfpb_performance-plan-and-report_fy22.pdf">https://files.consumerfinance.gov/f/documents/cfpb_performance-plan-and-report_fy22.pdf</a>.
\218\ For markets where the Bureau has information about many of
the participants, the Bureau also has considered the alternative of
issuing orders on a recurring basis, which might approximate an
annual collection. However, a general plan for such orders, even if
recurring, would not establish a rule that creates predictability,
reliability, and certainty that a rule provides. For example, the
proposed rule would require nonbanks to collect the relevant
information. Absent that requirement in regulation, supervised
nonbanks could find responding to an order more burdensome.
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Further, the Bureau has considered the alternative of not
specifying in the rule whether information collected would be publicly
released. After all, the Bureau has authority to publicly release
information under CFPA section 1022(c)(3) without first promulgating a
rulemaking. In addition, the information collection under proposed
Sec. 1092.302 would enable the Bureau to monitor for risks to
consumers and to prioritize its resources based on risk indicators,
even without publication of the information as described in proposed
Sec. 1092.303. Thus, the information collection requirements in
proposed Sec. 1092.302 can operate independently of the publication
requirements in proposed Sec. 1092.303.
However, the Bureau is proposing to specify expectations about
public release in the rule. Without specifying these expectations, the
rule itself would lack transparency, and submitters of information, and
the public (consumers, competitors, and researchers, among others)
would be less certain about how the Bureau will use and disclose the
information. In addition, by including in the proposed regulation its
plans to disclose the data, the Bureau will gain the benefit of public
comment on those plans in the rulemaking process, including comment on
the degree to which the submitters of collected information may keep
that information confidential (a topic on which the Bureau requests
comment in the section-by-section analysis of proposed Sec. 1092.303
below). In any event, the Bureau requests comment on whether there is
an important reason for nondisclosure of the information collected when
disclosure otherwise would be permitted by law.
Finally, this proposal reflects a priority on establishing a system
by rule for the collection of information on the use of covered terms
and conditions from supervised nonbanks as a subset of covered persons.
One of the reasons for prioritizing coverage of supervised nonbanks is
the need to identify them, as discussed in this part II.C.2 above. As
discussed in the impacts analysis in part VII of the proposal, the
Bureau estimates that there are thousands of nonbanks subject to its
supervisory authority under CFPA section 1024(a). In addition, there is
no comprehensive registry of identifying information for nonbanks
subject to the Bureau's supervisory authority across supervised
markets. Further, given resource constraints, the Bureau does not
regularly examine each of the thousands of nonbanks subject to its
supervisory authority under CFPA section 1024. Rather, under CFPA
section 1024(b)(2), the Bureau must implement a risk-based program for
supervision of these nonbanks. By contrast, Federal prudential
regulators track and already publicize information about the identity
and size of depository institutions.\219\ These include depository
institutions subject to the Bureau's supervisory authorities under CFPA
sections 1025 and 1026. The Bureau also publicly identifies the fewer
than 200 large depository institutions subject to its supervisory
authority under CFPA section 1025, and it has procedures for regularly
supervising them.\220\ In light of all these considerations, the Bureau
is prioritizing this proposal to establish a registration system for
identifying those nonbanks that use covered terms or conditions and
monitoring and assessing the associated risks to consumers as discussed
in this part II above.\221\ This proposal does not affect how the
Bureau can apply its functions for monitoring and assessing risks posed
by covered terms and conditions used by depository institutions and
credit unions subject to its authority under CFPA sections 1022, 1025,
and 1026.
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\219\ See, e.g., FDIC Bank Find Suite, <a href="https://banks.data.fdic.gov/bankfind-suite/bankfind">https://banks.data.fdic.gov/bankfind-suite/bankfind</a>; Federal Financial
Institutions Examinations Council National Information Center,
<a href="https://www.ffiec.gov/NPW">https://www.ffiec.gov/NPW</a>; OCC Financial Institutions Lists, <a href="https://www.occ.treas.gov/topics/charters-and-licensing/financial-institution-lists/index-financial-institution-lists.html">https://www.occ.treas.gov/topics/charters-and-licensing/financial-institution-lists/index-financial-institution-lists.html</a>; Credit
Union Locator, <a href="https://mapping.ncua.gov/">https://mapping.ncua.gov/</a>.
\220\ See CFPB, List of Depository Institutions and Depository
Affiliates under CFPB Supervision, <a href="https://www.consumerfinance.gov/compliance/supervision-examinations/institutions/">https://www.consumerfinance.gov/compliance/supervision-examinations/institutions/</a>; CFPB Supervision
and Examination Manual, Overview at 5 (describing Bureau's approach
to setting regular examination schedules for large depository
institutions), <a href="https://files.consumerfinance.gov/f/documents/cfpb_supervision-and-examination-manual_2022-09.pdf">https://files.consumerfinance.gov/f/documents/cfpb_supervision-and-examination-manual_2022-09.pdf</a>.
\221\ In prioritizing this proposal, the Bureau also has
considered other factors, including the following: The Bureau's
existing regulations already require depository institutions to
submit to the Bureau information about their agreements in certain
markets, such as credit cards and prepaid accounts. The Bureau makes
these agreements publicly available at <a href="https://www.consumerfinance.gov/credit-cards/agreements/">https://www.consumerfinance.gov/credit-cards/agreements/</a> and <a href="https://www.consumerfinance.gov/data-research/prepaid-accounts/">https://www.consumerfinance.gov/data-research/prepaid-accounts/</a>. In
addition, CFPA sections 1022 and 1024 do not expressly authorize the
Bureau to establish a registration system for depository
institutions, which are excluded from the Bureau's registration
authority under section 1022(c)(7)(A) and excluded from the scope of
section 1024(b)(7). There is no parallel registration provision in
the Bureau's authorities over depository institutions generally.
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III. Outreach
The Bureau received feedback from external stakeholders in
developing this proposal. The following is a brief summary of that
effort.
A. State Agencies and Tribal Governments
As required by CFPA sections 1022(c)(7) and 1024(b)(7),\222\ the
Bureau consulted with State agencies and Tribal governments, including
agencies involved in supervision of nonbanks and agencies charged with
law enforcement, in crafting the proposed registration requirements and
system.\223\ In developing this proposal, the Bureau considered the
input it received from State agencies and Tribal governments. This
input included concerns State agencies expressed regarding possible
duplication between any registration system the Bureau might build and
existing registration systems. This input also included concerns Tribal
governments expressed regarding maintaining Tribal sovereignty.
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\222\ 12 U.S.C. 5512(c)(7)(C); 12 U.S.C. 5514(b)(7)(D).
\223\ During the rulemaking process for issuing rules under the
Federal consumer financial laws, Bureau policy is to consult with
appropriate Tribal governments. See <a href="https://files.consumerfinance.gov/f/201304_cfpb_consultations.pdf">https://files.consumerfinance.gov/f/201304_cfpb_consultations.pdf</a>.
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B. Federal Regulators
Before proposing a rule under the Federal consumer financial laws,
including CFPA sections 1022(c) and 1024(b), the Bureau must consult
with
[[Page 6926]]
appropriate prudential regulators or other Federal agencies regarding
consistency with prudential, market, or systemic objectives
administered by such agencies.\224\ In developing this proposal, the
Bureau consulted with prudential regulators and other Federal agencies
and considered the input it received.
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\224\ 12 U.S.C. 5512(b)(2)(B).
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IV. Legal Authority
The Bureau is issuing this proposal pursuant to its authority under
the CFPA.\225\
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\225\ Consumer Financial Protection Act of 2010, title X of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-
Frank Act), Public Law, 111-203, 124 Stat. 376 (2010).
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A. CFPA Sections 1022(b) and (c)
CFPA section 1022(b)(1) authorizes the Bureau to prescribe rules
``as may be necessary or appropriate to enable the Bureau to administer
and carry out the purposes and objectives of the Federal consumer
financial laws, and to prevent evasions thereof.'' \226\ Among other
statutes, the CFPA--i.e., title X of the Dodd-Frank Wall Street Reform
and Consumer Protection Act (Dodd-Frank Act)--is a Federal consumer
financial law.\227\ Accordingly, in issuing the proposed rule, the
Bureau would be exercising its authority under CFPA section 1022(b) to
prescribe rules that carry out the purposes and objectives of the CFPA
and prevent evasions thereof. CFPA section 1022(b)(2) prescribes
certain standards for rulemaking that the Bureau must follow in
exercising its authority under section 1022(b)(1).\228\ For a
discussion of the Bureau's standards for rulemaking under CFPA section
1022(b)(2), see part VII below.
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\226\ 12 U.S.C. 5512(b)(1).
\227\ 12 U.S.C. 5481(14) (defining ``Federal consumer financial
law'' to include the provisions of title X of the Dodd-Frank Act).
\228\ 12 U.S.C. 5512(b)(2).
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CFPA sections 1022(c)(1)-(4) authorize the CFPB to prescribe rules
to collect information from covered persons for purposes of monitoring
for risks to consumers in the offering or provision of consumer
financial products or services. More specifically, CFPA section
1022(c)(1) requires the Bureau to support its rulemaking and other
functions by monitoring for risks to consumers in the offering or
provision of consumer financial products or services, including
developments in the markets for such products or services.\229\ CFPA
section 1022(c)(2) authorizes the Bureau authorizes the Bureau to
allocate resources to perform monitoring required by section 1022(c)(1)
by considering ``likely risks and costs to consumers associated with
buying or using a type of consumer financial product or service,''
``understanding by consumers of the risks of a type of consumer
financial product or service,'' ``the legal protections applicable to
the offering or provision of a consumer financial product or service,
including the extent to which the law is likely to adequately protect
consumers,'' ``rates of growth in the offering or provision of a
consumer financial product or service,'' ``the extent, if any, to which
the risks of a consumer financial product or service may
disproportionately affect traditionally underserved consumers,'' and
``the types, number, and other pertinent characteristics of covered
persons that offer or provide the consumer financial product or
service.'' \230\ CFPA section 1022(c)(4)(A) authorizes the Bureau to
conduct monitoring required by section 1022(c)(1) by ``gather[ing]
information from time to time regarding the organization, business
conduct, markets, and activities of covered persons and service
providers.\231\ The Bureau is authorized to gather this information by,
among other things, requiring covered persons participating in markets
for consumer financial products and services to file annual or special
reports, or answers in writing to specific questions, that furnish
information ``as necessary for the Bureau to fulfill the monitoring . .
. responsibilities imposed by Congress.'' \232\ The Bureau may require
such reports to be filed ``in such form and within such reasonable
period of time as the Bureau may prescribe by rule or order. . . .''
\233\
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\229\ 12 U.S.C. 5512(c)(1).
\230\ 12 U.S.C. 5512(c)(2)(A)-(F).
\231\ 12 U.S.C. 5512(c)(4)(A).
\232\ 12 U.S.C. 5512(c)(4)(B)(ii) (``In order to gather
information described in subparagraph (A), the Bureau may . . .
require covered persons and service providers participating in
consumer financial services markets to file with the Bureau, under
oath or otherwise, in such form and within such reasonable period of
time as the Bureau may prescribe by rule or order, annual or special
reports, or answers in writing to specific questions, furnishing
information described in paragraph (4), as necessary for the Bureau
to fulfill the monitoring, assessment, and reporting
responsibilities imposed by Congress.'').
\233\ Id.
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CFPA section 1022(c)(7)(A) further authorizes the Bureau to
``prescribe rules regarding registration requirements applicable to a
covered person, other than an insured depository institution, insured
credit union, or related person.'' \234\ Section 1022(c)(7)(B) provides
that, ``[s]ubject to rules prescribed by the Bureau, the Bureau may
publicly disclose registration information to facilitate the ability of
consumers to identify covered persons that are registered with the
Bureau.'' \235\ The Bureau interprets section 1022(c)(7)(B) as
authorizing it to publish registration information required by Bureau
rule under section 1022(c)(7)(A) so that consumers may identify the
nonbank covered persons on which the Bureau has imposed registration
requirements.
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\234\ 12 U.S.C. 5512(c)(7)(A).
\235\ 12 U.S.C. 5512(c)(7)(B).
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Finally, section 1022(c)(3) authorizes the Bureau to publicly
release information obtained pursuant to CFPA section 1022(c), subject
to limitations specified therein.\236\ Specifically, section 1022(c)(3)
states that the Bureau ``may make public such information obtained by
the Bureau under [section 1022] as is in the public interest, through
aggregated reports or other appropriate formats designed to protect
confidential information in accordance with [specified protections in
section 1022].'' \237\ Information submitted to the Bureau's registry
is protected by, among other things, section 1022(c)(8), which states
that ``[I]n . . . publicly releasing information held by the Bureau, or
requiring covered persons to publicly report information, the Bureau
shall take steps to ensure that proprietary, personal, or confidential
consumer information that is protected from public disclosure under
[the Freedom of Information Act, 5 U.S.C. 552(b)] or [the Privacy Act
of 1974, 5 U.S.C. 552a], or any other provision of law, is not made
public under [the CFPA].'' \238\
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\236\ 12 U.S.C. 5512(c)(3) & 5512(c)(7)(B).
\237\ 12 U.S.C. 5512(c)(3)(B).
\238\ 12 U.S.C. 5512(c)(8).
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B. CFPA Section 1024(b)
As explained above, section 1024(b) of the CFPA authorizes the
Bureau to exercise supervisory authority over certain nonbank covered
persons.\239\ Section 1024(b)(1) requires the Bureau to periodically
require reports and conduct examinations of persons subject to its
supervisory authority to assess compliance with Federal consumer
[[Page 6927]]
financial law, obtain information about the activities and compliance
systems or procedures of persons subject to its supervisory authority,
and detect and assess risks to consumers and to markets for consumer
financial products and services.\240\ Section 1024(b)(2) requires that
the Bureau establish a risk-based nonbank supervision program. In
particular, section 1024(b)(2) requires that the Bureau exercise its
supervisory authority over nonbank covered persons based on its
assessment of risks posed to consumers in the relevant product markets
and geographic markets, and taking into consideration, as applicable:
``(A) the asset size of the covered person; (B) the volume of
transactions involving consumer financial products or services in which
the covered person engages; (C) the risks to consumers created by the
provision of such consumer financial products or services; (D) the
extent to which such institutions are subject to oversight by State
authorities for consumer protection; and (E) any other factors that the
Bureau determines to be relevant to a class of covered persons.'' \241\
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\239\ The nonbank covered persons over which the Bureau has
supervisory authority are listed in CFPA section 1024(a)(1). They
include covered persons that: offer or provide origination,
brokerage, or servicing of loans secured by real estate for use by
consumers primarily for personal, family, or household purposes, or
loan modification or foreclosure relief services in connection with
such loans; are larger participants of a market for consumer
financial products or services, as defined by Bureau rule; the
Bureau has reasonable cause to determine, by order, that the covered
person is engaging, or has engaged, in conduct that poses risks to
consumers with regard to the offering or provision of consumer
financial products or services; offer or provide private education
loans; or offer or provide payday loans. 12 U.S.C. 5514(a)(1).
\240\ 12 U.S.C. 5514(b)(1), provides: ``The Bureau shall require
reports and conduct examinations on a periodic basis of persons
described in subsection (a)(1) for purposes of--(A) assessing
compliance with the requirements of Federal consumer financi
[…truncated; see source link]Indexed from Federal Register on February 1, 2023.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.