Rule2024-13581
Consumer Financial Protection Circular 2024-03: Unlawful and Unenforceable Contract Terms and Conditions
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Published
June 21, 2024
Issuing agencies
Consumer Financial Protection Bureau
Abstract
The Consumer Financial Protection Bureau (CFPB) has issued Consumer Financial Protection Circular 2024-03, titled, "Unlawful and Unenforceable Contract Terms and Conditions." In this circular, the CFPB responds to the question, "Can persons that include unlawful or unenforceable terms and conditions in contracts for consumer financial products and services violate the prohibition on deceptive acts or practices in the Consumer Financial Protection Act (CFPA)?"
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<title>Federal Register, Volume 89 Issue 120 (Friday, June 21, 2024)</title>
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[Federal Register Volume 89, Number 120 (Friday, June 21, 2024)]
[Rules and Regulations]
[Pages 51955-51957]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-13581]
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Rules and Regulations
Federal Register
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This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
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Federal Register / Vol. 89, No. 120 / Friday, June 21, 2024 / Rules
and Regulations
[[Page 51955]]
CONSUMER FINANCIAL PROTECTION BUREAU
12 CFR Chapter X
Consumer Financial Protection Circular 2024-03: Unlawful and
Unenforceable Contract Terms and Conditions
AGENCY: Consumer Financial Protection Bureau.
ACTION: Consumer financial protection circular.
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SUMMARY: The Consumer Financial Protection Bureau (CFPB) has issued
Consumer Financial Protection Circular 2024-03, titled, ``Unlawful and
Unenforceable Contract Terms and Conditions.'' In this circular, the
CFPB responds to the question, ``Can persons that include unlawful or
unenforceable terms and conditions in contracts for consumer financial
products and services violate the prohibition on deceptive acts or
practices in the Consumer Financial Protection Act (CFPA)?''
DATES: The CFPB released this circular on its website on June 4, 2024.
ADDRESSES: Enforcers, and the broader public, can provide feedback and
comments to <a href="/cdn-cgi/l/email-protection#80c3e9f2e3f5ece1f2f3c0e3e6f0e2aee7eff6"><span class="__cf_email__" data-cfemail="6b280219081e070a19182b080d1b09450c041d">[email protected]</span></a>.
FOR FURTHER INFORMATION CONTACT: George Karithanom, Regulatory
Implementation & Guidance Program Analyst, Office of Regulations, at
202-435-7700 or at: <a href="https://reginquiries.consumerfinance.gov/">https://reginquiries.consumerfinance.gov/</a>. If you
require this document in an alternative electronic format, please
contact <a href="/cdn-cgi/l/email-protection#f4b7b2a4b6abb597979187879d969d989d808db497928496da939b82"><span class="__cf_email__" data-cfemail="e5a6a3b5a7baa486868096968c878c898c919ca586839587cb828a93">[email protected]</span></a>.
SUPPLEMENTARY INFORMATION:
Question Presented
Can persons that include unlawful or unenforceable terms and
conditions in contracts for consumer financial products and services
violate the prohibition on deceptive acts or practices in the Consumer
Financial Protection Act (CFPA)?
Response
Yes. ``Covered persons'' and ``service providers'' must comply with
the prohibition on deceptive acts or practices in the CFPA.\1\ The
inclusion of certain terms in contracts for consumer financial products
or services may violate the prohibition when applicable Federal or
State law renders such contractual terms, including those that purport
to waive consumer rights, unlawful or unenforceable.
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\1\ 12 U.S.C. 5481(6), (26), 5531, 5536. For simplicity, the
remainder of this Circular refers to covered persons and service
providers as ``covered persons.''
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Background on Unlawful and Unenforceable Contract Terms
Many Federal laws--including statutes enforced by the CFPB--render
unlawful or unenforceable various contract terms in certain contexts.
For example, as highlighted in a recent CFPB compliance bulletin,\2\
the Consumer Review Fairness Act of 2016 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, and
invalidates these types of contract terms and conditions.\3\ As another
example, Regulation Z, which implements the Truth in Lending Act
(TILA), prohibits the inclusion in a residential mortgage loan or open-
ended consumer credit plan secured by the principal dwelling of terms
requiring arbitration or any other nonjudicial procedure as the method
for resolving any controversy or settling claims arising out of the
transaction.\4\ The Electronic Fund Transfer Act (EFTA) prohibits
contract terms that contain a ``waiver of any right conferred'' by EFTA
and prohibits waivers of any ``cause of action'' under EFTA.\5\ And the
Military Lending Act and its implementing regulations generally
prohibit terms in certain 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 . . . .'' \6\
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\2\ CFPB, Bulletin 2022-05: Unfair and Deceptive Acts or
Practices That Impede Consumer Reviews (Mar. 22, 2022), <a href="https://files.consumerfinance.gov/f/documents/cfpb_bulletin-2022-05_unfair-deceptive-acts-practices-impede-consumer-reviews.pdf">https://files.consumerfinance.gov/f/documents/cfpb_bulletin-2022-05_unfair-deceptive-acts-practices-impede-consumer-reviews.pdf</a>.
\3\ 15 U.S.C. 45b.
\4\ 12 CFR 1026.36(h)(1), implementing 15 U.S.C. 1639c(e)(1).
\5\ 15 U.S.C. 1693l; see also, e.g., Choice Money Transfer, Inc.
d/b/a Small World Money Transfer, ]] 79-83, File No. 2022-CFPB-0009
(Oct. 4, 2022) (consent order) (finding remittance transfer provider
violated section 1693l by including waiver of consumer rights in
disclosure consumers were required to sign); Chime, Inc. d/b/a
Sendwave, ]] 26-29, File No. 2023-CFPB-0012 (Oct. 17, 2023) (consent
order) (finding violation of section 1693l where remittance transfer
provider required consumers to sign a remittance services agreement
containing language limiting consumers' damages and claims for costs
and attorney fees, contrary to the provisions for defendant
liability contained in section 1693m(a)(3)).
\6\ 32 CFR part 232.8(b), implementing 10 U.S.C. 987(e)(2).
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In addition to express prohibitions like these, a recent Federal
district court decision held that the Servicemembers Civil Relief Act
(SCRA) renders unenforceable provisions in contracts with
servicemembers that purport to waive their right to participate in
class actions to enforce the SCRA.\7\ The Federal Trade Commission also
administers laws that forbid certain contractual waivers.\8\ And
certain State laws similarly prohibit or restrict the use of waivers in
consumer contracts.\9\
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\7\ Espin v. Citibank, N.A., No. 5:22-CV-383-BO-RN, 2023 WL
6449909, at *3 (E.D.N.C. Sept. 29, 2023) (denying defendant's motion
to compel arbitration and observing that the SCRA was ``amended to
codify the unwaivable right of servicemembers to bring and
participate in class actions, `notwithstanding any previous
agreement to the contrary' '') (quoting 50 U.S.C. 4042(a)).
\8\ See 16 CFR part 442(a)(2) (FTC's 1984 Credit Practices Rule,
prohibiting 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). The FTC also has interpreted section 604(b)(2)(A) of the
Fair Credit Reporting Act (FCRA) to prohibit the inclusion of a
waiver of consumer rights in a disclosure form required under that
section, observing that ``it is a general principle of law that
benefits provided to citizens by federal statute generally may not
be waived by private agreement unless Congress intended such a
result.'' FTC, Division of Credit Practices, Staff Opinion Letter
(June 12, 1998), 1998 WL 34323756, at *1 (citing Brooklyn Savings
Bank v. O'Neill, 324 U.S. 697 (1945)). In addition, while not an
express prohibition on waivers, the FTC's Preservation of Consumers'
Claims and Defenses rule, commonly known as the ``Holder Rule'' and
also enforced by the CFPB, 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,
thereby emphasizing the importance of preserving consumer rights. 16
CFR part 433.
\9\ For instance, the California Consumer Privacy Act affords
consumers certain rights to know how their information will be used,
instructs businesses not to sell consumers' personal information,
and deems ``void and unenforceable'' any contractual provision
``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.'' 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>; Cal. Civ. Code sec.
1798.192. Further, certain State laws, including those of
California, Illinois, Kansas, and Tennessee, contain outright
prohibitions of waivers of legal protections in general consumer
protection laws. See Cal. Civ. Code. sec. 1751 (barring waivers of
protections under California Consumers Legal Remedies Act); Ill. St.
Ch. 815 sec. 505(10c), Waiver or modification (barring waiver or
modification of protections under consumer fraud and deceptive
practices statute); 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); Tenn.
Stat. 47-18-113(a) (generally prohibiting waivers ``by contract,
agreement, or otherwise'' of provisions of the Tennessee Consumer
Protection Act of 1977).
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[[Page 51956]]
Analysis
The CFPB is issuing this Circular to emphasize that covered persons
who include unlawful or unenforceable terms in their consumer contracts
may violate the CFPA's prohibition on deceptive acts or practices.\10\
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\10\ Covered persons also should comply with other consumer
protection laws enforceable by the CFPB that may apply to their
conduct, including but not limited to EFTA, Regulation E; RESPA,
Regulation X; and TILA, Regulation Z.
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Covered persons may violate the CFPA's prohibition on deceptive
acts or practices if they include terms, including waiver provisions,
in their consumer contracts that are rendered unlawful or unenforceable
by Federal or State law. Under the CFPA, a representation or omission
is deceptive if it is likely to mislead a reasonable consumer and is
material. A representation is ``material'' if it ``involves information
that is important to consumers and, hence, likely to affect their
choice of, or conduct regarding, a product.'' \11\ A contractual
provision stating that a consumer agrees not to exercise a legal right
is likely to affect a consumer's willingness to attempt to exercise
that right in the event of a dispute. Moreover, certain categories of
information, including express representations, are presumptively
material.\12\
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\11\ Novartis Corp. v. FTC, 223 F.3d 783, 786 (D.C. Cir. 2000)
(quoting In re Cliffdale Assocs., Inc., 103 F.T.C. 110, 165 (1984))
(emphasis added).
\12\ See, e.g., CFPB v. Chou Team Realty LLC, Case No. 8:20-cv-
00043-SB-ADS, 2021 WL 4077110, at *4 (C.D. Cal. Aug. 10, 2021)
(citing FTC v. Pantron I Corp., 33 F.3d 1088, 1095-96 (9th Cir.
1994)); FTC v. NCH, Inc., Civ.A. No. CV-S-94-138LDG, 1995 WL 623260,
at *8 (D. Nev. May 25, 1995) (``express representations that are
shown to be false are presumptively material'') (citing Cliffdale
Assocs., 103 F.T.C. at 168, 182).
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In the recent compliance bulletin noted above, the CFPB reminded
covered persons that they could be liable under the CFPA if they
deceive consumers using form contract restrictions on consumer reviews
that are unenforceable.\13\ The CFPB explained that ``including an
unenforceable material term in a consumer contract is deceptive,
because it misleads consumers into believing the contract term is
enforceable,'' and that ``disclaimers in a contract such as `subject to
applicable law' do not cure the misrepresentation caused by the
inclusion of an unenforceable contract term.'' \14\ Similarly,
qualifying a provision that purports to waive a consumer right with
``except where unenforceable'' is unlikely to cure the provision's
misleading or material nature. Neither do disclaimers that are issued
after the fact.\15\
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\13\ CFPB, Bulletin 2022-05: Unfair and Deceptive Acts or
Practices That Impede Consumer Reviews (Mar. 22, 2022), <a href="https://files.consumerfinance.gov/f/documents/cfpb_bulletin-2022-05_unfair-deceptive-acts-practices-impede-consumer-reviews.pdf">https://files.consumerfinance.gov/f/documents/cfpb_bulletin-2022-05_unfair-deceptive-acts-practices-impede-consumer-reviews.pdf</a> (Bulletin 2022-
05).
\14\ Id. at 4-5; cf. Ruth v. Triumph P'ships, 577 F.3d 790, 801-
02 (7th Cir. 2009) (``To threaten to take some action `to the extent
permitted by law[ ]' . . . is to imply that, under some set of
circumstances and to some extent, the law actually permits that
action to be taken.'').
\15\ Bulletin 2022-05 at 5 (citing FTC v. IAB Marketing Assocs.,
LP, 746 F.3d 1228, 1233 (11th Cir. 2014)).
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CFPB supervisory examiners have identified several violations of
the CFPA's prohibition on deception stemming from covered persons' use
of unlawful or unenforceable contract terms and conditions.\16\ In
addition, in several prior enforcement matters, the CFPB has found
covered persons to have violated the CFPA by including in contracts for
consumer financial products or services terms that are unlawful or
unenforceable under Federal or State law, such as waivers that are
prohibited by Federal or State law. For example, the CFPB found that a
respondent bank engaged in a deceptive practice under the CFPA when it
represented to consumers that because they signed a deposit agreement
including broad language directing the bank not to contest legal
process, consumers had waived their right to hold the bank liable for
improperly responding to garnishment notices; in fact, regardless of
the language in the account agreement, consumers had the right to
challenge the garnishments.\17\ In another matter, the CFPB found that
a respondent auto loan servicer violated the CFPA's deception
prohibition when it used loan extension agreements or written
confirmations that included language that created the net misimpression
that consumers could not exercise bankruptcy protection rights, which
was false.\18\ In fact, an agreement to waive an individual's right to
file for bankruptcy is void as against public policy,\19\ rendering
terms that purport to waive such right generally unenforceable. The
CFPB found in a different matter that a respondent non-bank remittance
transfer provider engaged in a deceptive act or practice in violation
of the CFPA when it made misleading statements in disclosures
purporting to limit consumers' error resolution rights, in violation of
EFTA and the Remittance Rule.\20\ And, in a recent report, the CFPB
highlighted that certain student tuition payment plan agreements and
financial responsibility agreements ``include terms and conditions that
purport to waive consumers' legal protections, limit how consumers
enforce their rights, or misrepresent the rights or protections
available to consumers under existing law.'' \21\ Some of these terms
and conditions, such as purported waivers of the right to retain
counsel and the right to seek discharge in bankruptcy proceedings, are
likely unenforceable and thus similarly raise deception risk.
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\16\ See Supervisory Highlights: Summer 2015, at 15, available
at <a href="https://files.consumerfinance.gov/f/201506_cfpb_supervisory-highlights.pdf">https://files.consumerfinance.gov/f/201506_cfpb_supervisory-highlights.pdf</a> (deceptive waivers of borrowers' rights in mortgage
loan agreements that were unenforceable under Regulation Z,
implementing TILA); Supervisory Highlights: Fall 2015, at 17,
available at <a href="https://files.consumerfinance.gov/f/201510_cfpb_supervisory-highlights.pdf">https://files.consumerfinance.gov/f/201510_cfpb_supervisory-highlights.pdf</a> (same); Supervisory
Highlights: Summer 2017, 82 FR 48703, 48708 (Oct. 19, 2017)
(deceptive waivers of borrowers' rights in loss mitigation
agreements that were unenforceable under Regulation Z, implementing
TILA); Supervisory Highlights, Issue 24, Summer 2021, 86 FR 36108,
36117 (July 8, 2021) (deceptive waivers of rights in security deed
riders that were unenforceable under Regulation X, implementing the
Real Estate Settlement Procedures Act); Supervisory Highlights,
Issue 28, Fall 2022, 87 FR 72449, 72455 (Nov. 25, 2022) (deceptive
waiver of borrowers' rights in loan security agreements that was
unenforceable under Regulation Z, implementing TILA).
\17\ In re Bank of America, N.A. (2022-CFPB-0002), <a href="https://www.consumerfinance.gov/enforcement/actions/bank-of-america-na/">https://www.consumerfinance.gov/enforcement/actions/bank-of-america-na/</a>.
\18\ In re Nissan Motor Acceptance Corp. (2020-BCFP-0017),
<a href="https://www.consumerfinance.gov/policy-compliance/enforcement/actions/nissan-motor-acceptance-corporation/">https://www.consumerfinance.gov/policy-compliance/enforcement/actions/nissan-motor-acceptance-corporation/</a>.
\19\ See 11 U.S.C. 524(a) (providing that a bankruptcy discharge
under title 11 voids judgments and operates as an injunction against
the commencement or continuation of an action ``whether or not
discharge of such debt is waived'').
\20\ In re Trans-Fast Remittance LLC, also d/b/a New York Bay
Remittance (2020-BCFP-0010), <a href="https://www.consumerfinance.gov/policy-compliance/enforcement/actions/trans-fast-remittance-llc/">https://www.consumerfinance.gov/policy-compliance/enforcement/actions/trans-fast-remittance-llc/</a>.
\21\ CFPB, Tuition Payment Plans in Higher Education (Sept.
2023), at 29-30, available at <a href="https://files.consumerfinance.gov/f/documents/cfpb_tuition_payment_plan_report_2023-09.pdf">https://files.consumerfinance.gov/f/documents/cfpb_tuition_payment_plan_report_2023-09.pdf</a>.
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As these examples demonstrate, the inclusion of unlawful or
unenforceable terms and conditions in consumer contracts is likely to
mislead a
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reasonable consumer into believing that the terms are lawful and/or
enforceable, when in fact they are not. Further, the representations
made by the presence of such terms are often material, presumptively so
when they are made expressly. In particular, consumers are unlikely to
be aware of the existence of laws that render the terms or conditions
at issue unlawful or unenforceable, so in the event of a dispute, they
are likely to conclude they lawfully agreed to waive their legal rights
or protections after reviewing the contract on their own or when
covered persons point out the existence of these contractual terms and
conditions. Deceptive acts and practices such as these pose risk to
consumers, whose rights are undermined as a result, and distort markets
to the disadvantage of covered persons who abide by the law by
including only lawful terms and conditions in their consumer contracts.
Thus, the inclusion of unlawful or unenforceable terms in consumer
contracts, including unlawful or unenforceable waiver provisions, may
violate the CFPA's prohibition on deceptive acts or practices.
About Consumer Financial Protection Circulars
Consumer Financial Protection Circulars are issued to all parties
with authority to enforce Federal consumer financial law. The CFPB is
the principal Federal regulator responsible for administering Federal
consumer financial law, see 12 U.S.C. 5511, including the Consumer
Financial Protection Act's prohibition on unfair, deceptive, and
abusive acts or practices, 12 U.S.C. 5536(a)(1)(B), and 18 other
``enumerated consumer laws,'' 12 U.S.C. 5481(12). However, these laws
are also enforced by State attorneys general and State regulators, 12
U.S.C. 5552, and prudential regulators including the Federal Deposit
Insurance Corporation, the Office of the Comptroller of the Currency,
the Board of Governors of the Federal Reserve System, and the National
Credit Union Administration. See, e.g., 12 U.S.C. 5516(d), 5581(c)(2)
(exclusive enforcement authority for banks and credit unions with $10
billion or less in assets). Some Federal consumer financial laws are
also enforceable by other Federal agencies, including the Department of
Justice and the Federal Trade Commission, the Farm Credit
Administration, the Department of Transportation, and the Department of
Agriculture. In addition, some of these laws provide for private
enforcement.
Consumer Financial Protection Circulars are intended to promote
consistency in approach across the various enforcement agencies and
parties, pursuant to the CFPB's statutory objective to ensure Federal
consumer financial law is enforced consistently. 12 U.S.C. 5511(b)(4).
Consumer Financial Protection Circulars are also intended to
provide transparency to partner agencies regarding the CFPB's intended
approach when cooperating in enforcement actions. See, e.g., 12 U.S.C.
5552(b) (consultation with CFPB by State attorneys general and
regulators); 12 U.S.C. 5562(a) (joint investigatory work between CFPB
and other agencies).
Consumer Financial Protection Circulars are general statements of
policy under the Administrative Procedure Act. 5 U.S.C. 553(b). They
provide background information about applicable law, articulate
considerations relevant to the Bureau's exercise of its authorities,
and, in the interest of maintaining consistency, advise other parties
with authority to enforce Federal consumer financial law. They do not
restrict the Bureau's exercise of its authorities, impose any legal
requirements on external parties, or create or confer any rights on
external parties that could be enforceable in any administrative or
civil proceeding. The CFPB Director is instructing CFPB staff as
described herein, and the CFPB will then make final decisions on
individual matters based on an assessment of the factual record,
applicable law, and factors relevant to prosecutorial discretion.
Rohit Chopra,
Director, Consumer Financial Protection Bureau.
[FR Doc. 2024-13581 Filed 6-20-24; 8:45 am]
BILLING CODE 4810-AM-P
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