Proposed Rule2025-00633
Prohibited Terms and Conditions in Agreements for Consumer Financial Products or Services (Regulation AA)
Primary source
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Published
January 14, 2025
Issuing agencies
Consumer Financial Protection Bureau
Abstract
The Consumer Financial Protection Bureau (CFPB) is proposing to prohibit certain contractual provisions in agreements for consumer financial products or services. The proposal would prohibit covered persons from including in their contracts any provisions purporting to waive substantive consumer legal rights and protections (or their remedies) granted by State or Federal law. The proposal would also prohibit contract terms that limit free expression, including with threats of account closure, fines, or breach of contract claims, as well as other contract terms. The proposal would also codify certain longstanding prohibitions under the Federal Trade Commission's (FTC) Credit Practices Rule.
Full Text
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<title>Federal Register, Volume 90 Issue 8 (Tuesday, January 14, 2025)</title>
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[Federal Register Volume 90, Number 8 (Tuesday, January 14, 2025)]
[Proposed Rules]
[Pages 3566-3596]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-00633]
[[Page 3565]]
Vol. 90
Tuesday,
No. 8
January 14, 2025
Part VIII
Consumer Financial Protection Bureau
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12 CFR Part 1027
Prohibited Terms and Conditions in Agreements for Consumer Financial
Products or Services (Regulation AA); Proposed Rule
Federal Register / Vol. 90, No. 8 / Tuesday, January 14, 2025 /
Proposed Rules
[[Page 3566]]
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CONSUMER FINANCIAL PROTECTION BUREAU
12 CFR Part 1027
[Docket No. CFPB-2025-0002]
RIN 3170-AB23
Prohibited Terms and Conditions in Agreements for Consumer
Financial Products or Services (Regulation AA)
AGENCY: Consumer Financial Protection Bureau.
ACTION: Proposed rule; request for comment.
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SUMMARY: The Consumer Financial Protection Bureau (CFPB) is proposing
to prohibit certain contractual provisions in agreements for consumer
financial products or services. The proposal would prohibit covered
persons from including in their contracts any provisions purporting to
waive substantive consumer legal rights and protections (or their
remedies) granted by State or Federal law. The proposal would also
prohibit contract terms that limit free expression, including with
threats of account closure, fines, or breach of contract claims, as
well as other contract terms. The proposal would also codify certain
longstanding prohibitions under the Federal Trade Commission's (FTC)
Credit Practices Rule.
DATES: Comments must be received on or before April 1, 2025.
ADDRESSES: You may submit comments, identified by Docket No. CFPB-2025-
0002 or RIN 3170-AB23, 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. A brief summary of
this document will be available at <a href="https://www.regulations.gov/docket/CFPB-2025-0002">https://www.regulations.gov/docket/CFPB-2025-0002</a>.
<bullet> Email: <a href="/cdn-cgi/l/email-protection#36040604031b7866647b1b6473717777765550465418515940"><span class="__cf_email__" data-cfemail="bd8f8d8f8890f3edeff090eff8fafcfcfddedbcddf93dad2cb">[email protected]</span></a>. Include Docket No. CFPB-
2025-0002 or RIN 3170-AB23 in the subject line of the message.
<bullet> Mail/Hand Delivery/Courier: Comment Intake--Prohibited
Terms and Conditions in Agreements for Consumer Financial Products or
Services (Regulation AA), c/o Legal Division Docket Manager, Consumer
Financial Protection Bureau, 1700 G Street NW, Washington, DC 20552.
Instructions: The CFPB encourages the early submission of comments.
All submissions should include the agency name and docket number or
Regulatory Information Number (RIN) for this rulemaking. Commenters are
encouraged to submit comments electronically. In general, all comments
received will be posted without change to <a href="https://www.regulations.gov">https://www.regulations.gov</a>.
All submissions, including attachments and other supporting
materials, will become part of the public record and 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. Submissions will not be edited to
remove any identifying or contact information.
FOR FURTHER INFORMATION CONTACT: George Karithanom, Regulatory
Implementation and Guidance Program Analyst, Office of Regulations, at
202-435-7700. If you require this document in an alternative electronic
format, please contact <a href="/cdn-cgi/l/email-protection#d99a9f899b8698bababcaaaab0bbb0b5b0ada099babfa9bbf7beb6af"><span class="__cf_email__" data-cfemail="3675706674697755555345455f545f5a5f424f765550465418515940">[email protected]</span></a>.
SUPPLEMENTARY INFORMATION:
I. Summary of the Proposed Rule
Consumer finance companies often limit or restrict individual
freedoms and rights by including coercive terms and conditions in
contracts of adhesion. These types of contracts--which are ubiquitous
in transactions for consumer financial products or services--are
drafted by the companies or their lawyers and presented to consumers on
a ``take it or leave it'' basis. Form contracts can create operational
efficiencies for large businesses, but in recent years they have been
used to constrain fundamental freedoms and rights that are recognized
and protected under the U.S. Constitution and statutory and common law.
While the Bill of Rights, with limited exceptions, only protects people
from government actions, jurists have long recognized affirmative
obligations regarding certain private actors,\1\ and scholars and
jurists are increasingly recognizing that corporate intrusion into
historically recognized individual rights poses a similar threat as
government intrusion.\2\ Clauses buried in the fine print of these
contracts can have dramatic consequences for consumers--for instance,
by waiving statutory protections passed by elected officials in Federal
or State government, by surrendering due process rights upon default,
by undermining consumers' right to contract and giving companies the
power to unilaterally amend material terms of the contract at any time,
or by constraining consumers' ability to exercise free speech. These
clauses usually provide little or no benefit to consumers, but they can
be valuable to companies by insulating them from accountability or
advancing managers' political interests.
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\1\ See generally Ganesh Sitaraman, Deplatforming, 113 Yale L.J.
497 (2023).
\2\ See Tunku Varadarajan, The `Common Carrier' Solution to
Social-Media Censorship, Wall St. J. (Jan. 15, 2021), <a href="https://www.wsj.com/articles/the-common-carrier-solution-to-social-media-censorship-11610732343">https://www.wsj.com/articles/the-common-carrier-solution-to-social-media-censorship-11610732343</a> (interviewing Richard Epstein); Biden v.
Knight First Amend. Inst., 141 S. Ct. 1220, 1222-24 (2021) (Thomas,
J., concurring) (raising concerns about the ability of companies to
constrain free speech and recognizing that doctrines involving
common carriers or public accommodation may be an appropriate
solution).
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Federal and State legislatures and regulators have taken action
against these kinds of one-sided terms in consumer contracts. For
instance, the FTC issued in 1984 a rule commonly known as the ``Credit
Practices Rule,'' which prohibited certain creditor remedies in
consumer credit contracts.\3\ Congress has also enacted numerous
statutes limiting companies' ability to use certain one-sided contract
terms, such as through inclusion of anti-waiver provisions in several
consumer financial laws \4\ and passage of the Consumer Review Fairness
Act of 2016, which prohibits companies that use form contracts from
restricting consumers' right to provide negative reviews.\5\ The CFPB
has also recently issued guidance warning companies that they could
violate the law by using unenforceable terms and conditions in their
consumer contracts, including terms and conditions in violation of the
Consumer Review Fairness Act.\6\
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\3\ Credit Practices Rule, 49 FR 7740 (Mar. 1, 1984).
\4\ See, e.g., 10 U.S.C. 987(e)(2) (expressly prohibiting
waivers of right to recourse under any State or Federal law in
contracts with covered servicemembers).
\5\ Public Law 114-258, codified at 15 U.S.C. 45b.
\6\ Consumer Fin. Prot. Bureau, CFPB Consumer Financial
Protection Circular 2024-03, Unlawful and unenforceable contract
terms and conditions, (June 4, 2024), <a href="https://www.consumerfinance.gov/compliance/circulars/consumer-financial-protection-circular-2024-03/">https://www.consumerfinance.gov/compliance/circulars/consumer-financial-protection-circular-2024-03/</a>.
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While defenders of civil liberties rightly focus on the risk of
government infringement on constitutional freedoms, the CFPB is also
concerned about large consumer financial companies' use of contracts of
adhesion to curtail those same rights, especially due process, the
freedom to benefit from a contract, the rule of law as established by
democratically elected officials, and free expression. The CFPB is also
concerned that certain terms used in these contracts deny consumers the
benefits of a free market--one that is ``fair, transparent, and
competitive.'' \7\ Under the CFPA, the CFPB may issue rules applicable
to providers of consumer financial products or services (known as
``covered persons'' under the statute) to identify and prevent
``unfair,
[[Page 3567]]
deceptive, or abusive acts or practices.'' \8\ The CFPB is relying on
this authority in this proposed rule to protect consumers from harms
that often arise from contracts of adhesion used to constrain
fundamental rights and freedoms.
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\7\ 12 U.S.C. 5511(a).
\8\ 12 U.S.C. 5531(b).
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First, the CFPB is proposing to codify the Credit Practices Rule as
applied to covered persons subject to the CFPA. As noted above, the FTC
first issued the Credit Practices Rule in 1984. Although that rule
applied only to creditors within the FTC's jurisdiction, banking
regulators subsequently issued their own credit practices rules
applicable to banks, Federal credit unions, and savings
associations.\9\ The rules issued by the banking regulators were
repealed upon enactment of the CFPA (which transferred those agencies'
consumer financial protection authorities to the CFPB). However, in
2014 the Federal financial regulators--including the CFPB--issued joint
interagency guidance clarifying that financial institutions could
violate the law by including in consumer credit contracts any
provisions prohibited by the Credit Practices Rule.\10\ Thus, in this
proposed rule, the CFPB is codifying the Credit Practices Rule with
regard to all covered persons, and the CFPB does not anticipate that
this provision of the rule will have a substantial material effect on
the market as covered persons are already likely to be in compliance
with these prohibitions.
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\9\ These regulations were previously codified at: 12 CFR 227.11
through 227.16 (part of Regulation AA) (banks); 12 CFR 535.1 through
535.5 (savings associations); 12 CFR 706.1 through 706.5 (Federal
credit unions).
\10\ Board of Governors of the Federal Reserve, et al.
Interagency Guidance Regarding Unfair or Deceptive Credit Practices
(Aug. 22, 2014), <a href="https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20140822a2.pdf">https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20140822a2.pdf</a>. The guidance highlighted
that the repeal of the banking regulators' credit practices rules
``should not be construed as a determination by the Agencies that
the credit practices described in [the] former regulations are
permissible'' and that ``the Agencies may determine that statutory
violations exist even in the absence of a specific regulation
governing the conduct.'' Id. at 2.
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Second, the CFPB is proposing to forbid covered persons from
including in their consumer contracts any terms or conditions that
purport to waive substantive legal rights and protections, that reserve
to the covered person the right to unilaterally amend a material term
of the contract, or that restrain a consumer's lawful free expression.
The CFPB has preliminarily concluded that use of these clauses may
constitute an unfair or deceptive act or practice.
The CFPB requests comment on all aspects of the proposal.
II. Background for Proposed Rule
A. Contracts of Adhesion
In today's consumer economy, contracts of adhesion are inescapable.
In banking, retail, insurance, health care, travel, or virtually any
other sector, they are ubiquitous in everyday transactions. A contract
of adhesion is a standard-form contract for a product or service with a
fixed set of terms or conditions. The contract--which is often lengthy,
complex, and full of boilerplate language or fine print--will have been
drafted by the company and is presented to the consumer on a ``take it
or leave it'' basis. The consumer usually has little ability to read
the contract and no opportunity to negotiate its terms.\11\ If the
consumer wants the product or service offered by the company, they must
accept the contract's terms in totality. The company will use the same
standard-form contract for every consumer with respect to the product
or service at issue and will typically enter into thousands (or even
millions) of versions of the same contract with its consumers.
Altogether, the elements of a contract of adhesion create a deep
imbalance of power between the contracting parties. ``[O]n the one side
there is the ordinary individual and on the other a monopoly or
powerful organi[z]ation with desirable goods or services to supply. The
choice between not making a contract or making it on the only terms
available is no choice at all.'' \12\
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\11\ Todd D. Rakoff, Contracts of Adhesion: An Essay in
Reconstruction, 96 Harv. L. Rev. 1173, 1176-77 (1983) (defining a
contract of adhesion).
\12\ H.B. Sales, Standard Form Contracts, 16 Mod. L. Rev. 318
(1953).
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In the experience of the CFPB, contracts of adhesion are widely
used in the market for consumer financial products and services. When
consumers want to take out a mortgage, apply for a new credit card,
open a checking account, subscribe to a digital payment app, or engage
in any type of routine consumer financial transaction, they are almost
always presented with a standard-form contract. The FTC noted four
decades ago that consumer finance companies ``[u]niversally make use of
standardized forms in extending credit to consumer[s]. These forms are
prepared for creditors or obtained by them, and the completed contract
is presented to the prospective borrower on a `take it or leave it
basis.' '' \13\ More recently, the U.S. Supreme Court observed that
``the times in which consumer contracts were anything other than
adhesive are long past.'' \14\
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\13\ 49 FR 7745.
\14\ AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 346-47
(2011).
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Standard-form contracts have long been used in the consumer
marketplace, and standardization does not necessarily undermine
consumer welfare. Standard-form contracts can lower transaction costs
by making transactions more uniform, efficient, and expedient. Indeed,
given the size and transaction volume of the consumer economy, it would
be impractical for consumer contracts to be drafted and negotiated on
an individual basis. ``The costs of negotiating with each customer
would surely outweigh the benefits that would result from individually
tailored contracts.'' \15\
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\15\ 49 FR 7746.
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But many standard-form contracts are used in consumer transactions
today to do more than just establish the terms for the basic structure
of a business relationship. They are also used to give large
corporations undue economic advantage and constrain the personal
autonomy and freedom of individual consumers. Because companies (and
their lawyers) draft standard-form contracts, they have broad
discretion in what terms and conditions to include. Contracts of
adhesion will, of course, contain the ``deal terms'' of the transaction
between the consumer and the company, which consumers are typically
aware of in contrast to fine print clauses. For example, in a consumer
credit transaction, the contract would include the amount borrowed, the
repayment amount, the interest rate, and the repayment schedule. But
over time, companies have realized that they could also include other
ancillary terms and conditions that limit consumer rights and
protections and shield the company from legal liability. These types of
clauses have little to do with administering the transaction between
the company and consumer, and they are almost always one-sided. They
benefit or insulate the company but provide little, if any, added value
to the consumer.
In particular, with the advent of online contracting, companies are
more readily able to use standard-form contracts to protect their own
economic interests.\16\ Today, many transactions occur electronically,
and online contracting with features such as ``click-through''
contracts are the norm, making
[[Page 3568]]
it easy for consumers to provide their electronic assent to contracts
of adhesion. The electronic medium has encouraged many companies to add
even more fine-print terms into those contracts. ``Because it is now
trivial to attach a complex, one-sided `contract' to virtually any
consumer transaction, more and more companies do so.'' \17\ Electronic
contracting also makes it more difficult for consumers to understand
these contracts. 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. Some terms or conditions
may be de-emphasized. In some cases, 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.\18\
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\16\ Recent research suggests the problem of one-sided contracts
is a growing phenomenon. See e.g., Tim R. Samples et al., TL;DR: The
Law and Linguistics of Social Platform Terms-of-Use, 39 Berkeley
Tech. L.J. 47, 105 (2024).
\17\ Mark A. Lemley, The Benefit of the Bargain, 2023 Wis. L.
Rev. 237, 256 (2023).
\18\ See generally FTC Staff Report, Bringing Dark Patterns to
Light, at 7 (Sept. 1, 2022).
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Given the complexity of fine print terms in contracts of adhesion,
it should come as no surprise that consumers do not really provide
meaningful assent to these terms. As many academic studies have shown,
the vast majority of consumers pay little or no attention to such terms
when reviewing or signing a standard-form contract. In one prominent
study, the authors examined the extent to which potential buyers of
software read End User License Agreements (EULAs), which are contracts
that govern the use of software products. The study tracked nearly
50,000 consumers across 90 software companies, and found that 0.2
percent of consumers access the EULA for at least one second.\19\ Two
recent studies found that online contracts are often unreadable
according to scientific readability standards and lack basic
organizational features like a table of contents or useful headings to
help consumers locate important information in the contract.\20\ To the
extent consumers read a standard-form contract at all, they are likely
to focus on salient terms such as price.\21\
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\19\ Yannis Bakos et al., Does Anyone Read the Fine Print?,
Testing a Law and Economics Approach to Standard Form Contracts, 43
U. Chicago J. of Legal Studies 1, 3 (2014); see also, e.g., 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'').
\20\ Uri Benoliel & Shmuel Becher, The Duty to Read the
Unreadable, 60 B.C. L. Rev. 2255, 2277-78 (2019); Uri Benoliel &
Shmuel Becher, Messy Contracts, 2024 U. of Ill. L. Rev. 893, 917-18
(2024).
\21\ See George L. Priest, A Theory of the Consumer Product
Warranty, 90 Yale L.J. 1297, 1304-06 (1981).
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Nor is it feasible for consumers to comparison-shop for fine print
terms. As an initial matter, many providers in a market may use similar
terms, making comparison-shopping a futile exercise.\22\ ``If 80
percent of creditors include a certain clause in their contracts, for
example, even the consumer who examines contracts from three different
sellers has a less than even chance of finding a contract without the
clause.'' \23\ And even if consumers were to try to compare such terms,
they would often find it difficult to do so because companies draft
them using complex language and terminology.\24\ Moreover, many fine-
print terms relate to consequences that would occur only if the
consumer breaches the contract or a problem with the transaction
otherwise surfaces. Consumers can find it difficult to predict or
envision such scenarios ex ante, meaning that fine-print terms may not
resonate with consumers when they initially enter into an agreement
with a provider.\25\
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\22\ See generally Marcel Kahan & Michael Klausner,
Standardization and Innovation in Corporate Contracting (or ``The
Economics of Boilerplate''), 83 Va. L. Rev. 713 (1997) (discussing
network effects which promote use of inefficient boilerplate); see
also Benoliel and Becher, The Duty to Read the Unreadable, supra
note 20, at 2291-94.
\23\ 49 FR 7746.
\24\ Id. at 7746-47.
\25\ Id. at 7747.
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For decades, courts, regulators, and scholars have warned about the
risks and dangers associated with contracts of adhesion. Perhaps the
most famous such pronouncement is the D.C. Circuit's decision in
Williams v. Walker-Thomas Furniture Co.\26\ In that case, the consumers
had purchased items from a furniture store on a lease-to-own basis, and
the agreement--which was a standard-form contract--provided that title
to the items would remain with the store until monthly payments equaled
the stated value of the items. When the consumers did not make all the
payments, the store sued them to take repossession of the property. The
consumers claimed the contract was unenforceable because it was
unconscionable. Reversing the lower court, the D.C. Circuit explained
that contracts of adhesion can be invalidated on grounds of
unconscionability when they are ``unfair'':
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\26\ 350 F.2d 445 (D.C. Cir. 1965).
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Unconscionability has generally been recognized to include an
absence of meaningful choice on the part of one of the parties
together with contract terms which are unreasonably favorable to the
other party . . . . In many cases the meaningfulness of the choice
is negated by a gross inequality of bargaining power. The manner in
which the contract was entered is also relevant to this
consideration. Did each party to the contract, considering his
obvious education or lack of it, have a reasonable opportunity to
understand the terms of the contract, or were the important terms
hidden in a maze of fine print and minimized by deceptive sales
practices? Ordinarily, one who signs an agreement without full
knowledge of its terms might be held to assume the risk that he has
entered a one-sided bargain. But when a party of little bargaining
power, and hence little real choice, signs a commercially
unreasonable contract with little or no knowledge of its terms, it
is hardly likely that his consent, or even an objective
manifestation of his consent, was ever given to all the terms. In
such a case the usual rule that the terms of the agreement are not
to be questioned should be abandoned and the court should consider
whether the terms of the contract are so unfair that enforcement
should be withheld.\27\
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\27\ Id. at 449-50.
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Unfair boilerplate terms in contracts of adhesion were also the
basis for the FTC's Credit Practices Rule. As discussed in additional
detail below in section IV, the Credit Practices Rule prohibited
lenders from using certain remedial provisions in consumer credit
contracts, including confessions of judgment, waivers of exemption,
wage assignments, and security interests in household goods. Based on
an extensive evidentiary record, the FTC concluded that these clauses
were unlawful because lenders' uses of such clauses were unfair acts or
practices.
This view is also encapsulated in the recently adopted Restatement
of Consumer Contracts, which warns that ``consumer contracts present a
fundamental challenge to the law of contracts, arising from the
asymmetry in information, sophistication, and stakes between the
parties to these contracts--the business and the consumers.'' \28\ On
one side of the transaction ``stands a well-informed and counseled
business party, entering numerous identical transactions, with the
tools and sophistication to understand and draft detailed legal terms
and design practices that serve its commercial goals,'' while on the
other ``stand consumers who are informed only about some core aspects
of the transaction, but rarely about the list of standard terms.'' \29\
The Restatement thus notes that ``[b]ecause consumers rarely read or
review the non-core standard contract terms, . . . the doctrine of
unconscionability is a primary tool against the inclusion of
[[Page 3569]]
intolerable terms in a consumer contract.'' \30\
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\28\ Restatement of the Law, Consumer Contracts, Introduction
(Am. L. Inst. 2024).
\29\ Id.
\30\ Id. section 6 cmt.1.
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B. The Proposed Rule
There are many types of fine print terms and conditions in
contracts of adhesion. The CFPB's proposal does not seek to prescribe
all of these terms. Rather, the CFPB is proposing to re-codify the
Credit Practices Rule under Regulation AA to reinforce the prohibition
of certain contract clauses that, for example, impede on consumers'
right to due process, and is adding to Regulation AA additional
prohibited clauses that implicate other fundamental or constitutional
rights. This includes:
<bullet> Clauses that waive provisions of law designed by
democratically elected officials to benefit or protect consumers.
<bullet> Clauses that reserve a company's discretion to amend a
material term of the contract unilaterally.
<bullet> Clauses that restrain a consumer's free expression by, for
example, limiting a consumer's right to provide a negative review or
even engage in certain disfavored political speech.
While companies may view these clauses as a way to save money or
limit liability, for consumers these clauses have significant impacts--
they implicate fundamental principles of personal freedom and
democratic governance. For example, clauses limiting free expression
restrict citizens' ability to exercise free speech that government
agencies could not prohibit under the First Amendment. Clauses that
permit lenders to take citizens' unsecured property without any due
process or just compensation amounts to a private taking--were the
company a Federal government actor, it would potentially violate the
Due Process and Takings Clauses of the Fifth Amendment. Citizens'
freedom to benefit from a contract is undermined when a counterparty
can unilaterally change the core terms of a contract at any time
without notice and consent. And the rule of law, as established by
democratically elected State and Federal legislatures, is undermined if
large companies can nullify those laws in consumer contracts.
The CFPB has authority to issue rules to prevent unfair or
deceptive acts or practices by providers of consumer financial products
or services (known as ``covered persons'').\31\ Under that authority,
the CFPB proposes to prohibit covered persons from including, using,
enforcing, or otherwise relying on these types of clauses in a contract
for a consumer financial product or service.
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\31\ 12 U.S.C. 5531(b).
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Lastly, one of the reasons for proposing this rule is to grant
State law enforcement new authority to enforce the existing Credit
Practices Rule and the additional prohibitions against national
banks.\32\ State attorneys general cannot yet use the CFPA's
substantial remedies, including Civil Money Penalties,\33\ to stop some
of the largest banks in the country (which are national banks) from,
for example, using confessions of judgment or debanking a consumer for
inappropriate reasons. This rule, if finalized, would grant State
attorneys general that authority pursuant to section 1042(a) of the
CFPA.
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\32\ State attorneys general and regulators usually have
authority to enforce the prohibition against unfair, deceptive, or
abusive acts or practices in the CFPA. 12 U.S.C. 5552(a). However,
State officials may not bring a civil action against a national bank
or Federal savings association for violations of the CFPA, unless it
is under a regulation prescribed by the CFPB. 12 U.S.C.
5552(a)(2)(A) and (B). Thus, while many of the practices in this
rulemaking are already enforceable by the CFPB against national
banks and other covered persons, State officials cannot bring an
action under the CFPA to prevent these practices if used by national
banks until the CFPB codifies the prohibitions by rule.
\33\ 12 U.S.C. 5565(c) (creating penalty authority of up to
$5,000 per violation per day, $25,000 per violation per day if the
violations are ``recklessly'' committed, and $1,000,000 per
violation per day if the violations are ``knowingly'' committed).
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III. Consultation With Other Agencies
In developing this proposed rule, the CFPB has consulted with the
Federal Trade Commission (FTC), as well as with the Board of Governors
of the Federal Reserve System (Board), the Federal Deposit Insurance
Corporation (FDIC), the National Credit Union Administration (NCUA),
and the Office of the Comptroller of the Currency (OCC) on, among other
things, consistency with any prudential, market, or systemic objectives
administered by such agencies.
IV. Scope of Proposed Rule
The proposed rule would generally apply to ``covered persons''
under the CFPA (subject to certain exceptions discussed below). A
covered person is ``(A) any person that engages in offering or
providing a consumer financial product or service; and (B) any
affiliate of a person described in subparagraph (A) if such affiliate
acts as a service provider to such person.'' \34\ The CFPA covers a
broad array of financial products or services offered or provided to
consumers, including (but not limited to) credit, real or personal
property leases, real estate settlement services, deposits, payment
processing, and credit reporting.\35\ Subject to certain exceptions
discussed below, any person offering or providing such a consumer
financial product or service--or an affiliate of such a person acting
as a service provider to the person--would thus be covered by the
proposed rule. Such a person would be subject to the prohibition on
certain credit practices discussed in section V and the prohibition on
certain other terms and conditions in contracts for consumer financial
services discussed in section VI. Notably, the practices re-codified
from the existing Credit Practices Rule in subpart B only apply with
regard to credit transactions, while the additional terms in subpart C
apply to all consumer financial products or services including deposit
accounts, payments, and other services.
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\34\ 12 U.S.C. 5481(6).
\35\ See 12 U.S.C. 5481(15).
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Section 1027.102 of the proposed rule would exempt two categories
of covered persons from the rule:
First, under Sec. 1027.102(a) the rule would not apply to ``any
person to the extent that it is providing a product or service in
circumstances excluded from the CFPB's rulemaking authority pursuant to
12 U.S.C. 5517 or 5519.'' Under those sections, the CFPB may not
exercise its CFPA rulemaking authority over certain persons or
activities (which includes rules issued under 12 U.S.C. 5531). The CFPB
preliminary concludes that this approach is appropriate because the
CFPB lacks authority to apply this rulemaking to such persons or
activities. However, this applies only ``to the extent'' that a person
is beyond the CFPB's rulemaking authority. For example, if a covered
person offers a consumer financial product or service that is excluded
from the CFPB's rulemaking authority under 12 U.S.C. 5517 and another
consumer financial product or service that is not excluded, the
proposed rule would apply to the covered person's offering or provision
of the latter product or service (even though it would not apply to the
former).
Second, under Sec. 1027.102(b), subpart C of the rulemaking (i.e.,
the prohibitions on clauses related to waivers of law, unilateral
amendments, and free expression) would not apply to a ``small
business,'' ``small organization,'' or ``small governmental
jurisdiction'' as those terms are defined in 5 U.S.C. 601. A ``small
business'' has ``the same meaning as the term `small business concern'
under section 3 of the Small Business Act.'' \36\ A ``small business
concern'' is ``one which is independently owned and operated and
[[Page 3570]]
which is not dominant in its field of operation,'' \37\ or which (along
with its affiliates) is at or below the Small Business Administration
(SBA) standard listed in 13 CFR part 121 for its primary industry as
described in 13 CFR 121.107. A ``small organization'' is ``any not-for-
profit enterprise which is independently owned and operated and is not
dominant in its field.'' \38\ A ``small governmental jurisdiction''
means ``governments of cities, counties, towns, townships, villages,
school districts, or special districts, with a population of less than
fifty thousand.'' \39\
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\36\ 5 U.S.C. 601(3).
\37\ 15 U.S.C. 632(a).
\38\ 5 U.S.C. 601(4).
\39\ Id. sec. 601(5).
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The CFPB preliminary concludes that applying subpart C of the
proposed rule to large entities would be appropriate because they are
capable of imposing their terms on consumers and have more resources to
enforce them. Studies have shown that large companies routinely use
such terms,\40\ often applying to thousands or millions of consumers.
Furthermore, the threat of the use of private contracting to oppress by
constraining fundamental freedoms is greater when a consumer is dealing
with a company with more market power and more resources. Large
companies are more likely than small companies to have superior
bargaining power over consumers, giving them more opportunity to impose
one-sided terms in contracts of adhesion. The CFPB intends to monitor
the market and determine whether an expansion of coverage to smaller
entities may be necessary and appropriate at a later time.
---------------------------------------------------------------------------
\40\ See e.g., Samples et. al., TL;DR: The Law and Linguistics
of Social Platform Terms-of-Use, supra note 16, at 105; Andrea J.
Boyack, Abuse of Contract: Boilerplate Erasure of Consumer
Counterparty Rights at 51, <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4756735">https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4756735</a> (Mar. 12, 2024) (forthcoming in the.
Iowa L. Rev.).
---------------------------------------------------------------------------
The CFPB also considered--but is not proposing--an exception for
State or Federal entities. The CFPB is unaware of any government
entities that provide consumer financial products or services with
contracts that include the terms at issue in this proposal. That is
likely the case because doing so could violate various constitutional
constraints on government actors, including the First Amendment right
to free speech, the right to Due Process, the Takings Clause, and the
substantive rights being waived in legal waivers.
The CFPB generally seeks comment on the coverage of the proposed
rule, including whether the scope should be narrowed or expanded and
whether additional exclusions would be appropriate.
V. Prohibited Credit Practices
Overview
Subpart B of the proposed rule would codify for covered persons the
already existing FTC Credit Practices Rule, which renders unlawful
certain remedial provisions in consumer credit contracts.
The FTC first issued the Credit Practices Rule in 1984 pursuant to
its authority to prohibit unfair or deceptive acts or practices.\41\
The banking regulators subsequently issued their own companion credit
practices rules applicable to banks, Federal credit unions, and savings
associations.\42\ The CFPA repealed the rulemaking authority of the
banking regulators under the FTC Act, and the regulators consequently
repealed their rules. However, the banking regulators and the CFPB
issued a joint interagency guidance in 2014 clarifying their
understanding that those credit practices may continue to violate the
prohibition against unfair or deceptive practices in section 5 of the
FTC Act and sections 1031 and 1036 of the CFPA.\43\
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\41\ 49 FR 7740.
\42\ See 50 FR 16695 (Apr. 29, 1985) (Federal Reserve Board); 50
FR 19325 (May 8, 1985) (FHLBB); 52 FR 35060 (Sept. 17, 1987) (NCUA).
\43\ Interagency Guidance Regarding Unfair or Deceptive Credit
Practices, supra note 10.
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The CFPB now proposes to re-codify the Credit Practices Rule for
all covered persons, including those currently subject to the FTC's
Credit Practices Rule and other entities formerly subject to the
companion rules issued by the banking regulators. This proposal is not
expected to change existing business conduct in light of the existing
FTC rule and the fact that financial institutions generally continue to
treat these contract terms as unlawful.
Discussion
The FTC's Credit Practices Rule was based on an extensive
evidentiary record. Over a two-year period, the FTC took testimony from
more than 300 witnesses and subpoenaed the credit files of 12 large
finance companies.\44\ The FTC explained that ``consumers' ability to
avoid certain remedies depends on their ability to shop and compare the
language of different credit contracts.'' However, the FTC also found
that--given the prevalence of standard-form contracts in the consumer
credit industry--``although consumers may be able to bargain over terms
such as the price of credit and the number or size of payments, there
is no bargaining over the boilerplate contract terms that define
creditor remedies.'' \45\ The FTC concluded that these remedies and
practices were unfair because they caused substantial injuries to
consumers that were not reasonably avoidable, and offered no
countervailing benefits to consumers or competition.
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\44\ 49 FR 7741.
\45\ Id. at 7745.
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Specifically (and as discussed in more detail below), the FTC's
Credit Practices Rule prohibits lenders from using any of the following
provisions: a confession of judgment, a waiver of exemption, an
assignment of wages, or a security interest in household goods. The
rule also prohibits lenders from misrepresenting the nature or extent
of cosigner liability to any person or obligating a cosigner unless the
cosigner is informed prior to becoming obligated of the nature of the
cosigner's liability. Finally, the rule prohibits lenders from levying
or collecting any delinquency charge on a payment, when the only
delinquency is attributable to late fees or delinquency charges
assessed on earlier installments, and the payment is otherwise a full
payment for the applicable period and is paid on its due date or within
an applicable grace period.
The Credit Practices Rule does not apply to banks, savings
associations, or Federal credit unions.\46\ However, the FTC Act (at
the time) also required the Federal Reserve Board, the National Credit
Union Administration, and the Federal Home Loan Bank Board (FHLBB)
(later superseded by the Office of Thrift Supervision (OTS)) to issue,
within 60 days after the FTC issued a rule under its authority to
prohibit unfair or deceptive acts or practices, ``substantially similar
regulations prohibiting acts or practices of banks or savings and loan
institutions . . . or Federal credit unions . . ., which are
substantially similar to those prohibited by rules of the [FTC].'' \47\
The Board, NCUA, and FHLBB adopted such regulations in 1985,\48\ and
those rules were codified at 12 CFR parts 227, 706, and 535. In issuing
those rules, the agencies did not make new findings, evidence, or
conclusions. They relied on the extensive findings by the FTC.
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\46\ 15 U.S.C. 45(a)(2).
\47\ See formerly 15 U.S.C. 57a(f)(1).
\48\ See 50 FR 16696 (Apr. 29, 1985) (Federal Reserve Board); 50
FR 19325 (May 8, 1985) (FHLBB); 52 FR 35060 (Sept. 17, 1987) (NCUA).
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In 2010, the CFPA transferred Federal consumer protection functions
from the Board, OTS, NCUA, and other Federal agencies to the CFPB.\49\
The CFPA also repealed the requirement in the FTC Act
[[Page 3571]]
for those agencies to issue companion rules applicable to banks,
Federal credit unions, and thrifts. Those agencies duly repealed their
versions of the Credit Practices Rule.\50\
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\49\ 12 U.S.C. 5581.
\50\ See 81 FR 8133 (Feb. 18, 2016) (Board's repeal of Reg AA);
79 FR 59627 (Oct. 3, 2014) (NCUA's repeal of credit practices rule).
Under the Dodd-Frank Act, the rulemaking authority of the OTS
relating to all Federal savings associations was transferred to the
OCC on July 21, 2011. The OCC did not have authority at any time to
promulgate regulations under section 5 of the FTC Act, either before
or after enactment of the Dodd-Frank Act. For that reason, the OCC
omitted the OTS version of the credit practices rule when it
republished the regulations applicable to Federal savings
associations. 76 FR 48950. (Aug. 9, 2011). Thus, the OTS's credit
practices rule was effectively repealed as of July 21, 2011.
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However, the Federal financial regulators--including the CFPB--also
issued a joint interagency guidance in 2014 clarifying that the repeal
of the credit practices rule for banking institutions did not condone
those credit practices, and that the agencies would remain vigilant
about policing banks for use of the credit practices under their
general authority to prohibit unfair or deceptive acts or practices:
The Agencies are issuing this statement to clarify that the
repeal of credit practices rules applicable to banks, savings
associations, and Federal credit unions should not be construed as a
determination by the Agencies that the credit practices described in
these former regulations are permissible. The regulations were
issued on the basis of extensive findings that identified the unfair
or deceptive practices prohibited in the rules. The Agencies believe
that, depending on the facts and circumstances, if banks, savings
associations, and Federal credit unions engage in the unfair or
deceptive practices described in these former credit practices
rules, such conduct may violate the prohibition against unfair or
deceptive practices in Section 5 of the FTC Act and Sections 1031
and 1036 of the Dodd-Frank Act. The Agencies may determine that
statutory violations exist even in the absence of a specific
regulation governing the conduct.\51\
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\51\ Interagency Guidance Regarding Unfair or Deceptive Credit
Practices, supra note 10.
The CFPB has preliminarily concluded that it would be appropriate
to codify the Credit Practices Rule with respect to covered persons
within its jurisdiction. Many nonbank covered persons are already
subject to the FTC's Credit Practices Rule, and the CFPB has authority
to enforce the Credit Practices Rule against them. Although banks,
Federal credit unions, and savings associations within the CFPB's
jurisdiction are technically not subject to the Credit Practices Rule,
they have been on notice under the 2014 interagency guidance that they
could violate the CFPA's prohibition on unfair or deceptive practices
if they engaged in the practices prohibited by the Credit Practices
Rule, and any private or public enforcer enforcing a State or Federal
law that parallels the FTC Act may have a cause of action under the
same logic as the Credit Practices Rule. Thus, in order to avoid any
confusion or uncertainty about whether covered persons within the
CFPB's jurisdiction may use these credit practices, this proposed rule
would clarify that these credit practices are unlawful for all covered
persons.
The CFPB notes that codifying the Credit Practices Rules for all
covered persons would be consistent with one of the CFPB's primary
objectives under the CFPA--to ensure that ``Federal consumer financial
law is enforced consistently, without regard to the status of a person
as a depository institution, in order to promote fair competition.''
\52\ Presently, nonbank entities remain subject to the Credit Practices
Rule while banks, Federal credit unions, and savings associations are
technically not (although they are of course subject to the 2014
interagency statement). The CFPB preliminarily concludes that any
differential treatment for banks and nonbanks regarding the practices
covered by the rule would serve no regulatory objective and provide no
added benefit for consumers. Since engaging in these practices may
nonetheless violate Federal law (and harm consumers) regardless of the
type of entity, and the banking regulators have made entities under
their supervision aware of that possibility for more than a decade, the
CFPB does not expect that codification of the proposed rule will place
significant additional burdens on entities based on their type of
business. Moreover, the CFPB anticipates that the proposal will clarify
regulatory requirements for all market participants and ensure that
compliance burdens do not vary arbitrarily, which will promote fair
competition.
---------------------------------------------------------------------------
\52\ 12 U.S.C. 5511(b)(4).
---------------------------------------------------------------------------
Description of Prohibited Credit Practices
The credit practices that would be prohibited under this proposed
rule are the same as those described in the FTC's Credit Practices
Rule.\53\
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\53\ Section 1027.201 of the proposed rule includes certain
definitions applicable to subpart B, including cosigner, earnings,
household goods, and obligation. Additionally, under proposed Sec.
1027.205, ``[a]n appropriate State agency may apply to the CFPB for
a determination that (i) There is a State requirement or prohibition
in effect that applies to any transaction to which a provision of
this subpart applies; and (ii) The State requirement or prohibition
affords a level of protection to consumers that is substantially
equivalent to, or greater than, the protection afforded by this
subpart.'' If the CFPB ``makes such a determination, the provision
of this subpart will not be in effect in that State to the extent
specified by the CFPB in its determination, for as long as the State
administers and enforces the State requirement or prohibition
effectively.'' A State agency may apply for an exemption under the
same procedures as those set forth in appendix B to Regulation Z (12
CFR part 1026).
---------------------------------------------------------------------------
Confessions of judgment. Proposed Sec. 1027.202(a) would prohibit
a ``cognovit or confession of judgment (for purposes other than
executory process in the State of Louisiana), warrant of attorney, or
other waiver of the right of notice and the opportunity to be heard in
the event of suit or process thereon.'' The cognovit is a legal device
whereby the consumer, as part of the credit contract, consents in
advance to the creditor obtaining a judgment without prior notice or
hearing. The consumer either confesses judgment in advance of default
or authorizes the creditor or an attorney designated by the creditor to
appear and confess judgment against the consumer.\54\
---------------------------------------------------------------------------
\54\ 49 FR 7748-49.
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Waivers of exemption. Proposed Sec. 1027.202(b) would prohibit an
``executory waiver or a limitation of exemption from attachment,
execution, or other process on real or personal property held, owned
by, or due to the consumer, unless the waiver applies solely to
property subject to a security interest executed in connection with the
obligation.'' Many State laws provide exemptions for certain property
of a debtor from being seized or sold to satisfy the debt. A waiver of
exemption in a credit contract requires a consumer to forfeit or limit
such an exemption and allows such property to be seized and sold to
satisfy the debt.\55\
---------------------------------------------------------------------------
\55\ Id. at 7768-7769.
---------------------------------------------------------------------------
Wage assignments. Proposed Sec. 1027.202(c) would prohibit an
``assignment of wages or other earnings unless: (1) The assignment by
its terms is revocable at the will of the debtor; (2) The assignment is
a payroll deduction plan or preauthorized payment plan, commencing at
the time of the transaction, in which the consumer authorizes a series
of wage deductions as a method of making each payment; or (3) The
assignment applies only to wages or other earnings already earned at
the time of the assignment.'' \56\ A wage assignment is a contractual
transfer by a debtor to a creditor of the
[[Page 3572]]
right to receive wages directly from the debtor's employer. To activate
the assignment, the creditor simply submits it to the debtor's
employer, who then pays all or a percentage of the debtor's wages to
the creditor. The debtor releases the employer from any liability
arising out of the employer's compliance with the wage assignment, and
may waive any requirement that the creditor first establish or allege a
default.\57\
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\56\ Proposed Sec. 1027.201(b) would define ``earnings'' as
``compensation paid or payable to an individual or for the
individual's account for personal services rendered or to be
rendered by the individual, whether denominated as wages, salary,
commission, bonus, or otherwise, including periodic payments
pursuant to a pension, retirement, or disability program.''
\57\ Id. at 7755.
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Security interests in household goods. Proposed Sec. 1027.202(d)
would prohibit a ``nonpossessory security interest in household goods
other than a purchase money security interest.'' A security interest in
household goods grants a creditor the right to seize personal items
from a consumer. The rule (proposed Sec. 1027.201(c)) would define
``household goods'' as ``clothing, furniture, appliances, one
television and one radio, linens, china, crockery, kitchenware, and
personal effects (including wedding rings) of a consumer and a
consumer's dependents.'' \58\
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\58\ The term would not include: (1) Works of art; (2)
Electronic entertainment equipment (except one television and one
radio); (3) Items acquired as antiques; that is, items over one
hundred years of age, including such items that have been repaired
or renovated without changing their original form or character; and
(4) Jewelry (other than wedding rings).
---------------------------------------------------------------------------
Cosigners. Consumers who do not meet a creditor's standards for
creditworthiness may be required to obtain one or more ``cosigners''
who agree to be liable for the debt. A cosigner is required to pay if
the debtor defaults, but the cosigner receives no monetary
consideration for undertaking the obligation.\59\ Proposed Sec.
1027.203(a) would make it unlawful for a covered person ``directly or
indirectly, to misrepresent the nature or extent of cosigner liability
to any person,'' or ``directly or indirectly, to obligate a cosigner
unless the cosigner is informed prior to becoming obligated, which in
the case of open end credit shall mean prior to the time that the
agreement creating the cosigner's liability for future charges is
executed, of the nature of the cosigner's liability.'' Proposed Sec.
1027.203(b) would further require a covered person to provide a
cosigner with a disclosure, consisting of a separate document that
shall contain the following statement and no other prior to the
cosigner being obligated (which in the case of open end credit shall
mean prior to the time that the agreement creating the cosigner's
liability for future charges is executed):\60\
---------------------------------------------------------------------------
\59\ 49 FR at 7773. The proposed rule (section 1027.201(a))
would define a ``cosigner'' as ``a natural person who renders
themself liable for the obligation of another person without
compensation,'' including ``any person whose signature is requested
as a condition to granting credit to another person, or as a
condition for forbearance on collection of another person's
obligation that is in default.'' But the term ``shall not include a
spouse whose signature is required on a credit obligation to perfect
a security interest pursuant to State law.'' Furthermore, ``[a]
person who does not receive goods, services, or money in return for
a credit obligation does not receive compensation within the meaning
of this definition.'' The rulemaking would also state that a person
is a cosigner ``whether or not they are designated as such on a
credit obligation.''
\60\ Under proposed Sec. 1027.203(c), a covered person that
provides the disclosure required by proposed Sec. 1027.203(b) ``may
not be held in violation of paragraph (a) of this section.''
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NOTICE TO COSIGNER
You are being asked to guarantee this debt. Think carefully
before you do. If the borrower doesn't pay the debt, you will have
to. Be sure you can afford to pay if you have to, and that you want
to accept this responsibility.
You may have to pay up to the full amount of the debt if the
borrower does not pay. You may also have to pay late fees or
collection costs, which increase this amount.
The creditor can collect this debt from you without first trying
to collect from the borrower. The creditor can use the same
collection methods against you that can be used against the
borrower, such as suing you, garnishing your wages, etc. If this
debt is ever in default, that fact may become a part of your credit
record.
This notice is not the contract that makes you liable for the
debt.
Pyramiding late charges. Proposed Sec. 1027.204(a) would make it
unlawful, ``[i]n connection with collecting a debt arising out of an
extension of credit to a consumer,'' for a covered person ``directly or
indirectly, to levy or collect any delinquency charge on a payment,
which payment is otherwise a full payment for the applicable period and
is paid on its due date or within an applicable grace period, when the
only delinquency is attributable to late fees or delinquency charges
assessed on earlier installments.'' \61\ This practice is called
``pyramiding'' late charges and occurs when a creditor assesses
multiple delinquency charges due to a single late payment because any
subsequent payments are first applied to the outstanding late charge
and only then to interest and principal. ``In `pyramiding' the
accounting method works in this fashion: If a consumer's payment is due
on the first day of January, for example, and the payment is not made
until the 20th day of that month, the creditor assesses a late charge,
for example, $5. The February payment and all subsequent payments are
made on time. However, by allocating $5 of the February payment to the
January late charge and only the remainder to the February payment, the
creditor causes the February payment to be $5 `short', hence
delinquent. Timely payments in succeeding months are given the same
treatment, so that there is a delinquency or late charge for each
month.'' \62\
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\61\ For purposes of this section, proposed Sec. 1027.204(b)
states that ``collecting a debt means any activity, other than the
use of judicial process, that is intended to bring about or does
bring about repayment of all or part of money due (or alleged to be
due) from a consumer.''
\62\ 49 FR 7771.
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D. Legal Authority
Section 1031(b) of the CFPA provides the CFPB with authority to
prescribe rules to identify and prevent unfair, deceptive, or abusive
acts or practices (UDAAPs). Specifically, section 1031(b) authorizes
the CFPB to prescribe rules ``applicable to a covered person or service
provider identifying as unlawful unfair, deceptive, or abusive acts or
practices in connection with any transaction with a consumer for a
consumer financial product or service, or the offering of a consumer
financial product or service.'' \63\ Section 1031(b) of the Act further
provides that ``[r]ules under this section may include requirements for
the purpose of preventing such acts or practices.'' \64\ The CFPB may
declare an act or practice to be unfair if it ``causes or is likely to
cause substantial injury to consumers which is not reasonably avoidable
by consumers; and such substantial injury is not outweighed by
countervailing benefits to consumers or to competition.'' The CFPB
preliminary concludes that the credit practices it proposes to prohibit
are unfair for the same reasons as the FTC in the Credit Practices
Rule.
---------------------------------------------------------------------------
\63\ 12 U.S.C. 5531(b).
\64\ Id.
---------------------------------------------------------------------------
First, the FTC found ``substantial consumer economic or monetary
injuries from the use of these creditor remedies'' \65\:
---------------------------------------------------------------------------
\65\ 49 FR 7743.
---------------------------------------------------------------------------
<bullet> Confessions of judgment deprive consumers of a notice of
suit or hearing and opportunity to present claims and defenses. And
once obtained, the confessed judgment can be turned into a lien on the
consumer's property.\66\
---------------------------------------------------------------------------
\66\ Id. at 7753-54.
---------------------------------------------------------------------------
<bullet> A waiver of exemption clause or a security interest in
household goods can lead to the consumer losing the basic necessities
of life and requiring the consumer to replace these items or face
destitution.\67\
---------------------------------------------------------------------------
\67\ Id. at 7743-44, see also id. at 7769-70.
---------------------------------------------------------------------------
<bullet> Wage assignment can occur without the due process
safeguards of a hearing
[[Page 3573]]
and an opportunity to present defenses and counterclaims. This can lead
to job loss or severely reduced income, either one of which could
prevent the consumer from providing for his or her family or cause
default on other obligations.\68\
---------------------------------------------------------------------------
\68\ Id. at 7757-59.
---------------------------------------------------------------------------
<bullet> When a creditor seizes household goods pursuant to a non-
purchase money security interest in such goods, debtors lose property
which is of great value to them and little value to the creditor. A
non-purchase money security interest in household goods also enables a
creditor to threaten the loss of all personal property located in the
home, which may lead a debtor to make repayment arrangements that they
would not willingly take but for the security interest.\69\
---------------------------------------------------------------------------
\69\ Id. at 7762-7765.
---------------------------------------------------------------------------
<bullet> Pyramiding of late charges results in the consumer being
unknowingly assessed multiple late charges for a single late payment,
even though subsequent payments are timely made.\70\
---------------------------------------------------------------------------
\70\ Id. at 7772.
---------------------------------------------------------------------------
<bullet> When creditors fail to inform potential cosigners of their
obligations and liability, the cosigners may unexpectedly be subject to
collection tactics when the principal debtor defaults (including the
remedies described above). The sudden liability that can result from
cosigner status can cause over-extension when a consumer is confronted
with a debt, the timing of which cannot be controlled by the cosigner
because it is due to nonpayment by the principal debtor. Because of the
range of potential liabilities, many consumers might not have become
cosigners had they known the likely costs of doing so. Cosigners thus
undertake obligations which they might not have undertaken had they
understood them and suffer economic and other hardship as a result when
called upon to repay.\71\
---------------------------------------------------------------------------
\71\ Id. at 7774. The FTC also noted that where a creditor
affirmatively misrepresents a cosigner's obligations--for example,
by telling the cosigner that they are merely a reference for the
primary debtor--such a statement would be a deceptive act or
practice because it would be misleading and material to a reasonable
consumer. Id. at 7776. The FTC also has taken action against a for-
profit medical school for failing to provide the cosigner notice as
required by the Credit Practices Rule. See FTC v. Human Res. Dev.
Servs. Inc. dba Saint James School of Medicine (St. James Medical
School), No. 22-cv-1919 (N.D. Ill. filed Apr. 14, 2022), <a href="https://www.ftc.gov/legal-library/browse/cases-proceedings/2123034-human-resource-development-services-inc-dba-saint-james-school-medicine-ftc-v">https://www.ftc.gov/legal-library/browse/cases-proceedings/2123034-human-resource-development-services-inc-dba-saint-james-school-medicine-ftc-v</a>. Instead, defendants included a notice that failed to include
the specific language required by the Credit Practices Rule and that
appeared in the middle of the contract. See id.
---------------------------------------------------------------------------
Second, the FTC concluded that these injuries were not reasonably
avoidable, principally because these credit practices were typically
incorporated into standard form contracts ``over most of which there is
no bargaining.'' \72\ The FTC noted that consumers have ``limited
incentives to search out better remedial provisions in credit
contracts.'' \73\ For one thing, the ``substantive similarities of
contracts from different creditors mean that search is less likely to
reveal a different alternative.'' \74\ The FTC also noted that because
these credit remedies are relevant only once a consumer defaults, and
default is relatively infrequent, ``consumers reasonably concentrate
their search on such factors as interest rates and payment terms.''
\75\ The FTC also explained that comparison-shopping for credit
contracts is difficult ``because contracts are written in obscure
technical language, do not use standardized terminology, and may not be
provided before the transaction is consummated.'' \76\ Nor could
consumers avoid these credit remedies by avoiding default. ``When
default occurs, it is most often a response to events such as
unemployment or illness that are not within the borrower's control.
Thus, consumers cannot reasonably avoid the substantial injury these
creditor remedies may inflict.'' \77\
---------------------------------------------------------------------------
\72\ 49 FR 7744.
\73\ Id.
\74\ Id.
\75\ Id.
\76\ Id.
\77\ Id.
---------------------------------------------------------------------------
Third, the FTC concluded that any countervailing benefits from
these practices did not outweigh the substantial injuries. The FTC
explained that even if restrictions on these contract clauses would
result in costs to creditors--for example, increased collection costs,
increased screening costs, larger legal costs, or increases in bad debt
losses--the ``possible magnitude of these costs is diminished by the
fact that the rule leaves untouched a wide variety of more valuable
creditor remedies,'' such as repossession, suit, garnishment, or
acceleration.\78\
---------------------------------------------------------------------------
\78\ Id.
---------------------------------------------------------------------------
The D.C. Circuit subsequently upheld the Credit Practices Rule
against legal challenge, noting that the rule ``was painstakingly
considered and significantly modified in response to the extensive
comments and recommendations received during this long rulemaking
proceeding.'' \79\
---------------------------------------------------------------------------
\79\ Am. Fin. Servs. Ass'n v. FTC., 767 F.2d 957, 963 (D.C. Cir.
1985).
---------------------------------------------------------------------------
Like the prudential regulators in their rules implementing the
Credit Practices Rule, the CFPB preliminarily concludes that these
credit practices are unfair for the same reasons as provided by the
FTC. The FTC relied on an extensive evidentiary basis for its
conclusions, and there is no reason to believe the core findings have
changed since the FTC issued the original rule. Similarly, the findings
were not specific to any given creditor type, and therefore, the CFPB
preliminarily concludes that the FTC's findings apply equally to
entities under the CFPB's jurisdiction carved out of the FTC rule.
Indeed, as described above, many of the principal conclusions by the
FTC--for example, the prevalence of standard-form contracts and the
lack of comparison-shopping--remain true today. At any rate, in the
CFPB's experience, these practices are uncommon (thanks in large part
to the Credit Practices Rule and the interagency guidance). However,
when the CFPB has encountered these practices during exams of
supervised entities, it has cited them as violations of the CFPA. For
example, the CFPB cited as unfair a servicer's practice of applying
borrowers' post-maturity auto-loan payments in a manner that resulted
in the principal balance not being paid off and triggered late
fees.\80\
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\80\ CFPB, Supervisory Highlights: Special Edition Auto Finance,
Fall Issue 35, 7-8 (Oct. 2024) <a href="https://files.consumerfinance.gov/f/documents/cfpb_supervisory-highlights-special-ed-auto-finance_2024-10.pdf">https://files.consumerfinance.gov/f/documents/cfpb_supervisory-highlights-special-ed-auto-finance_2024-10.pdf</a>.
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The CFPB seeks comment on all aspects of the proposed codification
of the Credit Practices Rule applicable to covered persons within the
CFPB's jurisdiction.
VI. Other Prohibited Provisions
Subpart C of the proposed rule would prohibit covered persons from
including three other types of terms and conditions in contracts for
consumer financial products or services: clauses requiring the consumer
to waive substantive consumer legal rights or protections that were
designed to benefit consumers, and their remedies; clauses allowing a
covered person to unilaterally amend a material term of the contract;
and clauses restraining a consumer's lawful free expression.\81\ The
CFPB is proposing to ban these
[[Page 3574]]
clauses under its authority to prohibit unfair or deceptive acts or
practices.
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\81\ Under proposed Sec. 1027.301(b), a covered person would
not be permitted to ``use, enforce, or otherwise rely on'' these
terms or conditions ``in an agreement between a consumer and any
person for a consumer financial product or service.'' This provision
would ensure, for example, that a covered person could not rely on a
prohibited term or condition in an agreement they purchased from
another person.
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A. Clauses Waiving Consumers' Substantive Legal Rights or Protections
Proposed Sec. 1027.301(a)(1) would prohibit covered persons from
including in agreements for consumer financial products or services
``[a]ny term or condition that disclaims or waives, or purports to
disclaim or waive, any substantive State or Federal law designed to
protect or benefit consumers, or their remedies, unless an applicable
statute explicitly deems it waivable.'' The waivers of law covered by
the proposed rule ``include, but are not limited to: (i) waivers of
remedies to consumers for violations of State or Federal laws; and (ii)
waivers of a cause of action to enforce State or Federal laws.'' The
proposed rule would not, however, prohibit clauses with regard to
procedural rights, like venue clauses, arbitration clauses prohibiting
court adjudication, or class action waivers.
There is a large body of substantive Federal and State law--
including statutes designed by legislators and the common law process
developed by courts--to protect or benefit consumers. Congress has
enacted numerous consumer protection laws, including the Federal
consumer financial laws administered by the CFPB (such as the CFPA, the
Truth in Lending Act (TILA), the Fair Credit Reporting Act (FCRA), the
Fair Debt Collection Practices Act (FDCPA), and the Electronic Fund
Transfers Act (EFTA)), the Bankruptcy Code, antitrust laws, and laws
protecting servicemembers (such as the Military Lending Act and the
Servicemembers Civil Relief Act). Many States have also passed
analogous consumer protection or antitrust laws, and in some cases the
protections afforded by State laws exceed those of Federal law.
Consumers also have common law rights to bring claims, including, for
example, for a breach of contract or a tort.
These laws provide substantive protections for consumers. For
instance, the CFPA (among other things) generally prohibits covered
persons from engaging in unfair, deceptive, or abusive acts or
practices in connection with transactions for consumer financial
products or services,\82\ while the enumerated consumer laws codify
specific consumer protections. Many of these laws also expressly grant
consumers the right to privately enforce violations and to seek
remedies, including monetary or injunctive relief. For instance, TILA
provides consumers with a cause of action against ``any creditor who
fails to comply with any requirement imposed under [TILA],'' and makes
such a creditor liable to the consumer for actual damages and certain
statutory damages.\83\
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\82\ 12 U.S.C. 5531.
\83\ 15 U.S.C. 1640(a).
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Many Federal laws--including statutes enforced by the CFPB--also
render consumer-protection provisions unwaivable. For instance, EFTA
prohibits contract terms that contain a ``waiver of any right
conferred'' by EFTA and prohibits waivers of any ``cause of action''
under EFTA.\84\ 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 borrower's right to legal recourse under any otherwise applicable
provision of State or Federal law.'' \85\ The FTC also administers laws
that forbid certain contractual waivers.\86\ And certain State laws
similarly prohibit or restrict the use of waivers in consumer
contracts.\87\
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\84\ 15 U.S.C. 16931.
\85\ 10 U.S.C. 987(e)(2).
\86\ See 16 CFR 444.2(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.
\87\ 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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In the CFPB's experience, however, covered persons sometimes
include waivers of consumer protection laws in contracts for consumer
financial products or services (including when those laws forbid such
waivers). The CFPB has taken both supervisory and enforcement action
against such practices as both unfair and deceptive. For example, in
2013, the CFPB cited two mortgage servicers for the unfair practice of
requiring all borrowers, regardless of their individual circumstances,
to enter into across-the-board waivers of existing claims in order to
obtain a forbearance or loan modification agreement.\88\ In 2021, the
CFPB cited entities for the deceptive practice of requiring borrowers
to agree to a waiver of any equity or right of redemption in the loan
security agreement for cooperative units. Specifically, the waiver
stated that in the event of default, lenders may sell the security at
public or private sale and thereafter hold the security free from any
claim or right whatsoever of the borrower, who waives all rights of
redemption, stay or appraisal which the borrower has or may have under
any rule or statute.\89\ In 2022, the CFPB entered into a consent order
with Bank of America for, among other practices, unfairly requiring
consumers to waive its liability as to consumers' garnishment-related
protections in its deposit agreement and misrepresented to consumers
that they could not go to court to attempt to prevent wrongful
garnishments.\90\ The FTC has also taken action against a for-profit
medical school that attempted to waive consumers' rights under Federal
law.\91\
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\88\ CFPB, Supervisory Highlights: Winter 2013, at 6-7 (Jan.
2014), <a href="https://files.consumerfinance.gov/f/201401_cfpb_supervisory-highlights-winter-2013.pdf">https://files.consumerfinance.gov/f/201401_cfpb_supervisory-highlights-winter-2013.pdf</a>.
\89\ CFPB, Supervisory Highlights: Issue 24, Summer 2021, at 28
(June 2021), <a href="https://files.consumerfinance.gov/f/documents/cfpb_supervisory-highlights_issue-24_2021-06.pdf">https://files.consumerfinance.gov/f/documents/cfpb_supervisory-highlights_issue-24_2021-06.pdf</a>.
\90\ See Consent Order, In re Bank of America, N.A., No. 2022-
CFPB-0002 (May 4, 2022).
\91\ See St. James Medical School, supra note 71. According to
the FTC's complaint, among numerous other things, defendants failed
to include the notice required by the FTC's Holder Rule in their
credit agreements, and also included language attempting to waive
those rights.
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These waiver clauses in contracts of adhesion undermine our system
of constitutional democracy. Our
[[Page 3575]]
government is--as President Abraham Lincoln said--a ``government of the
people, by the people, for the people.'' The United States Constitution
implements that principle by vesting Federal lawmaking powers in the
United States Congress \92\ and reserving other lawmaking powers
(unless prohibited by the Constitution) ``to the States respectively,
or to the people.'' \93\ At both the Federal and State levels,
legislatures are elected by citizens and are empowered to pass laws
that benefit their wellbeing. In enacting such laws, legislatures
necessarily balance competing interests among citizens, and their
legislative judgments and policy choices must be respected unless
constitutionally invalid. Against this system of democratic governance,
waiver-of-law clauses in form contracts of adhesion are distinctly
anti-democratic. They allow companies to use contracts of adhesion to
override laws that have been designed to protect consumers without
meaningful consent by the consumer.
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\92\ U.S. Const. art. 1, section 1.
\93\ U.S. Const. amend. X.
---------------------------------------------------------------------------
This proposed rule would forbid a covered person from using any
clause in a contract for a consumer financial product or service that
requires a consumer to waive substantive consumer rights and legal
protections conferred by State or Federal laws designed to protect or
benefit consumers (unless the law is expressly waivable), or their
remedies. This prohibition would cover waivers of substantive legal
rights as well as waivers of a consumer's right to enforce those laws
(such as a waiver of a cause of action, a cap on statutory damages, or
a time limitation on consumer enforcement of the law). For example, a
contractual clause requiring a consumer to waive certain provisions of
TILA (or to waive the consumer's right to enforce TILA) would be
prohibited under the proposed rule. However, the prohibition would not
apply to waivers of procedural rights (e.g., venue clauses, arbitration
clauses prohibiting court adjudication, or class action waivers).
Although the CFPB also has concerns about such waivers, the CFPB is
focusing on waivers of substantive rights in this proposed rule because
contractual waivers of substantive rights allow companies to invalidate
legislative judgments that certain business practices are unlawful.
The CFPB seeks comment on this proposed prohibition of waiver
clauses.
B. Unilateral Amendment Clauses
Proposed Sec. 1027.301(a)(2) would prohibit covered persons from
including in agreements for consumer financial products or services
``[a]ny term or condition that expressly reserves the covered person's
right to unilaterally change, modify, revise, or add a material term of
a contract for a consumer financial product or service.'' Companies
often include contractual clauses that grant them unfettered discretion
to change or add to the terms of their agreement with the consumer
without adequate notice to or assent from the consumer before the
change becomes effective. Unilateral contract amendments can harm
consumers since any modifications are likely to mainly benefit the
company and the consumer has no option to reject the change. The CFPB
proposes to ban these clauses because they allow covered persons to
circumvent consumers' freedom to benefit from a contract by changing
material terms of an agreement.
The proposal would prohibit any amendment clause in a contract
between a covered person and a consumer for a consumer financial
product or service that grants the covered person the exclusive right
to modify a material term of the contract in the future. By definition,
these unilateral amendment clauses provide no meaningful opportunity
for the consumer to affirmatively accept, negotiate, or reject any
modifications by the company.
Unilateral amendment clauses are typically drafted to provide a
company with discretion to change a term of the contract or to add
terms to the contract. Companies can thus use these clauses to change
fees, dispute resolution procedures, terms of service, or privacy
policies.\94\ ``In fact, unilateral modifications can change any aspect
of a contract.'' \95\ For instance, in recent years, unilateral
amendment clauses have become a popular way for companies to add
arbitration clauses to consumer contracts or to change the rules of the
arbitration process.\96\ And unilateral amendment clauses typically do
not impose limits on when these changes can be made, meaning that a
company may rely on such a clause to modify a contract months or even
years after the agreement was consummated. In short, when a contract
includes a unilateral amendment clause, ``[f]irms can virtually make
any change they wish to their contracts, for whatever reason and at any
time, without properly communicating this change.'' \97\ And changes
implemented unilaterally will typically benefit the company, not the
consumer. ``There is a concern . . . that businesses will initiate
self-serving, opportunistic modifications in standard contract terms
once consumers are already locked into the service.'' \98\
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\94\ See, e.g., David Horton, The Shadow Terms: Contract
Procedure and Unilateral Amendments, 57 UCLA L. Rev. 605, 630-636
(2010); Shmuel I. Becher & Uri Benoliel, Sneak In Contracts, 55 Ga.
L. Rev. 657, 660 (2020).
\95\ Becher & Benoliel, supra n. 94 at 661.
\96\ Adam Levitin, Venmo's Unfair and Abusive Arbitration Opt-
Out Provision, Credit Slips (Apr. 26, 2022), <a href="https://www.creditslips.org/creditslips/2022/04/-venmos-unfair-and-abusive-arbitration-opt-out-provision.html">https://www.creditslips.org/creditslips/2022/04/-venmos-unfair-and-abusive-arbitration-opt-out-provision.html</a>.
\97\ Shmuel I. Becher & Uri Benoliel, Dark Contracts, 64 B.C. L.
Rev. 55, 68 (2023).
\98\ Restatement of the Law, Consumer Contracts, supra note 28,
at section 3 cmt. 1.
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Unilateral amendment clauses are commonly included by companies in
consumer contracts or terms of use. For example, a recent study
examined 100 companies' online terms and conditions for contracts and
relationships with consumers.\99\ The sample set included companies in
retail, computer and browsing services, streaming and entertainment,
financial services, social media, and transportation.\100\ The study
considered both private and public companies.\101\ The study found that
all of the companies' terms and conditions included a unilateral
modification clause.\102\ Only 15 of the companies' terms and
conditions provided for notice to the consumer when the company made a
unilateral change to a material term.\103\ The study also found that
under these clauses, the consumer had no real opportunity to reject the
modifications, short of terminating the transactional relationship with
the company.\104\ Other studies have reached similar conclusions.\105\
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\99\ Boyack, Abuse of Contract: Boilerplate Erasure of Consumer
Counterparty Rights, supra note 40, at 6.
\100\ Id. at 7
\101\ Id.
\102\ Id. at 18.
\103\ Id. at 19.
\104\ Id. at 20.
\105\ Becher & Benoliel, Sneak In Contracts, supra note 94, at
681-682 (finding that more than 95 percent of companies with the 500
top websites used unilateral amendment clauses); Samples et al.,
TL;DR: The Law and Linguistics of Social Platform Terms-of-use,
supra note 16 at 103.
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In the CFPB's experience, unilateral amendment clauses are used by
companies in the consumer finance market, and companies rely on such
clauses to modify agreements in ways that are harmful to consumers.
Unilateral amendments can be especially prejudicial when they thwart a
consumer's expectations about the terms of or performance under a
[[Page 3576]]
contract (including when such a change conflicts with advertising or
marketing about the contract on which the consumer relied in the first
place).
For instance, such clauses are commonly included in credit card
agreements, and the harm arising from unilateral amendments to credit
card agreements was one of the main reasons for congressional enactment
of the Credit Card Accountability, Responsibility, and Disclosure Act
(CARD Act) of 2009.\106\ Prior to the CARD Act's passage, credit card
issuers routinely relied on unilateral amendment clauses to change
fees, interest rates, and payment amounts after a consumer had taken
out a credit card.\107\ The CARD Act was intended to curb the abuses
wrought by these ``[a]ny time any reason'' changes to credit card
agreements.\108\ As implemented by Regulation Z, the CARD Act requires
that when a credit card issuer seeks to make ``a significant change in
account terms,'' it must provide 45 days advance notice of the change
and include in the notice a statement that the consumer ``has the right
to reject the change or changes prior to the effective date of the
changes'' and ``[i]nstructions for rejecting the change or changes, and
a toll-free telephone number that the consumer may use to notify the
creditor of the rejection.'' \109\
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\106\ Public Law 111-24, 123 Stat. 1734 (2009).
\107\ See, e.g., Modernizing Consumer Protection in the
Financial Regulatory System: Strengthening Credit Card Protections:
Hearing Before the S. Comm. on Banking, Housing, and Urban Affairs,
111th Cong. 199 (2009) (statement of Travis B. Plunkett).
\108\ See 155 Cong. Rec. S2150 (daily ed. Feb. 11, 2009)
(statement of Sen. Dodd); see also 15 U.S.C. 1637(i).
\109\ 12 CFR 1026.9(c)(2)(iv).
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However, abuses arising from unilateral amendments remain a problem
in consumer financial services. For example, the CARD Act does not
require a change-in-terms notice for all modifications to a credit card
agreement, and the CFPB recently warned that ``many of the largest
credit card issuers reserved the right to change their rewards program
at any time, for any reason, and in many cases without notice in terms
and conditions typically separate from the cardholder agreements, in
which changes to some terms are restricted and/or require prior
communication.'' \110\ The CFPB noted that such clauses can allow
issuers ``to alter rewards programs or devalue rewards as a safety
valve [for the company], putting consumers at a fundamental
disadvantage.'' \111\
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\110\ Consumer Fin. Prot. Bureau, Issue Spotlight: Credit Card
Rewards, 11 (May 9, 2024) (citing agreements from American Express,
Citi, Chase, and Wells Fargo).
\111\ Id.
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The CFPB is concerned about unilateral amendment clauses because
they undermine the consumer's freedom to benefit from the contract. A
contract is based on the voluntary exchange of promises between the
contracting parties that establish a ``meeting of the minds.'' Thus, as
the Restatement (Second) of Contracts notes, ``the formation of a
contract requires a bargain in which there is a manifestation of mutual
assent to the exchange and a consideration.'' \112\ These same
principles apply not only for the initial contract but any subsequent
modifications.\113\
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\112\ Restatement (Second) of Contracts section 17(1) (1981);
see also, e.g., Specht v. Netscape Commc'ns Corp., 150 F. Supp. 2d
585, 587 (S.D.N.Y. 2001), aff'd, 306 F.3d 17 (2d Cir. 2002)
(``Promises become binding when there is a meeting of the minds and
consideration is exchanged. So it was at King's Bench in common law
England; so it was under the common law in the American colonies; so
it was through more than two centuries of jurisprudence in this
country; and so it is today.)
\113\ See, e.g., Dallas Aerospace, Inc. v. CIS Air Corp., 352
F.3d 775, 783 (2d Cir. 2003) (``[f]undamental to the establishment
of a contract modification is proof of each element requisite to the
formulation of a contract, including mutual assent to its terms'').
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For that reason, courts have generally refused to enforce
unilateral amendment clauses that do not allow for mutual assent.
``Indeed, a party can't unilaterally change the terms of a contract; it
must obtain the other party's consent before doing so. This is because
a revised contract is merely an offer and does not bind the parties
until it is accepted. And generally an offeree cannot actually assent
to an offer unless he knows of its existence.'' \114\ Thus, as noted by
the Restatement of Consumer Contracts, if a company ``can derogate,
without any limitation, from rights and obligations that were stated
when the original assent was manifested, or if the business awards
itself unfettered discretion to specify its obligations under the
original contract, such that the promise the business made to consumers
is lacking sufficient meaningful commitment, the business's promise is
illusory and the contract fails for lack of consideration.'' \115\
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\114\ Douglas v. U.S. Dist. Ct. for Cent. Dist. of California,
495 F.3d 1062, 1066 (9th Cir. 2007); see also, e.g., In re
<a href="http://Zappos.com">Zappos.com</a>, Inc., Customer Data Sec. Breach Litig., 893 F. Supp. 2d
1058, 1066 (D. Nev. 2012); Lovinfosse v. Lowe's Home Centers, LLP,
2024 WL 3732436 (E.D. Va. Aug. 8, 2024).
\115\ Restatement of the Law, Consumer Contracts, supra note 28,
section 5, reporters' notes a.
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As the Restatement of Consumer Contracts further explains, ``courts
have developed a fairly consistent approach to determining the
enforceability of modifications. In particular, the requirements of
notice and opportunity to reject or terminate figure prominently in
courts' reasoning. In almost all cases in which modifications were
enforced and that involve the questions of notice as well as
opportunity to reject or terminate, courts made explicit determinations
that both the requirements of sufficient notice and opportunity to
reject or terminate were satisfied.'' \116\ Thus, under the Restatement
of Consumer Contracts, a modification of a standard-contract term is
binding on a consumer only if the consumer received notice of the
proposed modification and was provided a reasonable opportunity to
reject the change.\117\ For example, the Restatement provides an
example of a ``contract between an airline and a consumer allow[ing]
the airline to modify the frequent-flyer program at its discretion,''
explaining that such a provision would be unenforceable ``if the
airline does not afford the consumer a meaningful opportunity to reject
it.'' \118\
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\116\ Id. section 3, reporters' notes f.
\117\ Id. section 3(a). Under the Restatement, ``[a] consumer
contract governing an ongoing relationship may provide for a
reasonable procedure for adoption of modified terms under which the
business may propose a modification of the standard contract terms
but may not, to the detriment of the consumer, exclude the
application of subsection (a), except that the established procedure
may replace the reasonable opportunity to reject the proposed
modified term with a reasonable opportunity to terminate the
transaction without unreasonable cost, loss of value, or personal
burden.'' Id. section 3(b).
\118\ Id. section 5 illus. 5.
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Consistent with these principles, the proposed rule would prohibit
any clause in a contract for a consumer financial product or service
that provides the company the sole right to modify the contract. The
CFPB recognizes that consumer contracts may need to be modified to
account for changed circumstances after the contract is signed, and
this proposed rule would not prohibit all such modifications. Nothing
in the proposed rule would prohibit companies from implementing
modifications that are consistent with applicable State or Federal
law.\119\ Whether a particular
[[Page 3577]]
modification is consistent with applicable law will depend on the facts
and circumstances and the applicable jurisdiction's common law, and is
beyond the scope of this rulemaking. But the proposed rule would
prohibit companies from relying on a unilateral amendment clause to
make modifications.
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\119\ The CFPB recognizes that there are State or Federal
statutes or regulations setting forth processes for companies to
implement modifications for certain contract terms. For example and
as noted above, the CARD Act and its implementing regulations create
procedures for credit card issuers to implement modifications to a
consumer's account agreement. For certain changes, the CARD Act and
its implementing regulations require a company to provide consumers
with notice and an opportunity to reject a modification. For other
changes, the CARD Act and its implementing regulations affirmatively
state that no advance notice of a modification is required. And the
CARD Act and its implementing regulations are silent on changes for
other terms. Nothing in this proposed rule would displace or affect
those procedures for amending a contract. This rulemaking only
prohibits the use of a contract term to reserve a unilateral right
to amend that the company would not otherwise have by virtue of
State or Federal law or regulation.
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The CFPB seeks comment on this proposed prohibition of unilateral
amendment clauses.
C. Clauses Restraining Consumers' Free Expression
Proposed Sec. 1027.301(a)(3) would prohibit covered persons from
including in contracts for consumer financial products or services
``[a]ny term or condition that limits or restrains, or purports to
limit or restrain, the free and lawful expression of a consumer,''
except that this prohibition would not ``affect[] a covered person's
ability to close an account that is being used to commit fraud or other
illegal activity.'' This prohibition would apply to, for example,
contractual clauses that limit a consumer's ability to make negative
comments about a company or to freely express their political and
religious views. And it would include any contractual mechanism for
enforcing those limits, including fees, reserving rights to close
accounts on that basis (e.g., ``debanking''), or terms that do not
describe a particular remedial consequence but could give rise to a
breach of contract claim. The proposed rule would not, however,
prohibit contract clauses giving covered persons a right to close
accounts based on the use of an account to commit fraud or illegal
activity, because that would not constitute ``lawful expression.''
The First Amendment of the Constitution protects people from, among
other things, laws abridging free speech or prohibiting the free
exercise of religion. The First Amendment ``reflects a profound
national commitment to the principle that debate on public issues
should be uninhibited, robust, and wide-open'' because ``speech
concerning public affairs is more than self-expression; it is the
essence of self-government.'' \120\ Free expression ``is powerful
medicine'' because it ``put[s] the decision as to what views shall be
voiced largely into the hands of each of us, in the hope that use of
such freedom will ultimately produce a more capable citizenry and more
perfect polity and in the belief that no other approach would comport
with the premise of individual dignity and choice upon which our
political system rests.'' \121\ The First Amendment applies even when
speech is disagreeable or offensive. ``In an open, pluralistic, self-
governing society, the expression of an idea cannot be suppressed
simply because some find it offensive, insulting, or even wounding.''
\122\
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\120\ Snyder v. Phelps, 562 U.S. 443, 452 (2011).
\121\ Cohen v. California, 403 U.S. 15, 24 (1971).
\122\ Fulton v. City of Philadelphia, 593 U.S. 522, 615 (2021).
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While government restraints on speech carry obvious risks due to
the coercive power of government, infringement of speech by large
private corporations can be similarly harmful, with the added concern
that these entities are not subject to democratic accountability or
transparency obligations. And in recent decades, many companies have
begun to use contractual terms to prevent individuals from expressing
themselves freely.\123\ In the market for consumer financial products
and services, two such types of clauses are of particular concern to
the CFPB, both of which would be prohibited under the proposed rule.
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\123\ Alan E. Garfield, Promises of Silence: Contract Law and
Freedom of Speech, 83 Cornell L. Rev. 261, 268 (1998).
---------------------------------------------------------------------------
First, some companies have begun including non-disparagement
clauses--also colloquially known as ``gag'' clauses--that restrict
consumers from providing negative reviews of the company's product or
service. Originating in the health care sector, these types of clauses
have migrated to many parts of the economy.\124\ The CFPB is aware of
such abuses in the consumer finance market. For instance, the FTC has
taken action against a credit repair firm for its use of non-
disparagement clauses in violation of the Consumer Review Fairness
Act.\125\ The CFPB is also 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.\126\
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\124\ Eric Goldman, Understanding the Consumer Review Fairness
Act of 2016, 24 Mich. Telecomm. & Tech. L. Rev. 1, 2 (2017).
\125\ FTC v. Grand Teton Professionals, LLC, et al., Case No.
19-cv-933 (D. Conn) (Complaint filed June 17, 2019).
\126\ 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>.
_____________________________________-
Numerous studies and surveys have confirmed the importance of
online reviews across the economy. For example, one prominent study
estimated that a one-star rating increase on <a href="http://Yelp.com">Yelp.com</a> translated to an
increase of five to nine percent in revenues for a restaurant.\127\
Another study found that a one-point boost in a hotel's online ratings
on travel sites is tied to an 11 percent jump in room rates, on
average.\128\ To date, academic research has not focused specifically
on markets for consumer financial products and services. But the CFPB
expects consumer reviews to play an increasing role in helping
consumers choose between financial providers given that many consumers
now seek financial products online, including on shopping platforms
that can simultaneously provide reviews. This can create an incentive
for dishonest market participants to attempt to manipulate the review
process, rather than compete based on the value of their services,
which can frustrate a competitive marketplace.
---------------------------------------------------------------------------
\127\ Michael Luca, Reviews, Reputation, and Revenue: The Case
of <a href="http://Yelp.com">Yelp.com</a>, Harv. Bus. Sch. Working Paper No. 12-016, 14 (2016).
\128\ Chris Anderson, The Impact of Social Media on Lodging
Performance, 12(15) Cornell Hospitality Report 6, 11 (2012).
---------------------------------------------------------------------------
In 2016, Congress unanimously enacted the Consumer Review Fairness
Act,\129\ in response to abuses by companies that restricted consumer
reviews. The Consumer Review Fairness Act generally prohibits non-
disparagement clauses in standard-form consumer contracts. Specifically
(and with certain exceptions), it voids from inception any such
contractual provision that prohibits, restricts, or penalizes ``an
individual who is a party to the form contract'' to engage in a
``written, oral, or pictorial review, performance assessment of, or
other similar analysis of . . . the goods, services, or conduct of a
person.'' \130\ As the legislative history of the statute explains, the
``wide availability'' of consumer reviews ``has caused consumers to
rely on them more heavily as credible indicators of product or service
quality. In turn, businesses have sought to avoid negative reviews . .
. through provisions of form contracts with consumers restricting such
[[Page 3578]]
reviews.'' \131\ Some States have also enacted prohibitions against
non-disparagement or ``gag'' clauses.\132\
---------------------------------------------------------------------------
\129\ 15 U.S.C. 45b.
\130\ Id.
\131\ H. Rept. 114-731, at 5 (2016). The legislative history
also indicates that Congress was concerned that these clauses would
diminish the overall value of consumer reviews, including by
chilling ``negative yet truthful'' reviews. ``Non-disparagement
clauses interfere with the benefits consumers derive from ready
access to `crowd-sourced' reviews of products and services. If such
clauses become widely adopted, negative yet ruthful reviews may be
chilled, undermining the overall credibility of consumer reviews.
The newfound utility of consumer reviews would then be reduced as
trust in their veracity diminishes. H.R. 5111 seeks to curtail non-
disparagement clauses in order to preserve the credibility and value
of online consumer reviews.'' Id. at 5-6.
\132\ Cal. Civil Code sec. 1670.8 (``A contract or proposed
contract for the sale or lease of consumer goods or services may not
include a provision waiving the consumer's right to make any
statement regarding the seller or lessor or its employees or agents,
or concerning the goods or services.''); 815 Ill. Comp. Stat. Ann.
505/2UUU (West) (same); Md. Code, Com. L. sec. 14-1325 (making it an
unfair and deceptive trade practice to include a provision ``waiving
the consumer's right to make any statement concerning [ ] The seller
or lessor; [ ] Employees or agents of the seller or lessor; or [ ]
The consumer goods or services.'').
---------------------------------------------------------------------------
Second, some companies have also used contractual terms to prevent
consumers from engaging in political or religious expression or to
penalize them for doing so. For example, in 2022 PayPal amended its
user agreement to levy a fine or close accounts based on consumers'
exercise of free expression, even if it was unrelated to fraud or other
illegal activity.\133\ In a similar vein, some consumer financial
companies have been accused of ``de-banking'' persons or organizations
based on their political or religious beliefs. For example, several
State regulators recently accused a major bank of ``discriminating
against religious ministries,'' including the bank's closure of the
accounts of a Christian ministry because the bank did not want to serve
the organization's ``business type.'' \134\ State attorneys general
also sent a letter to the same bank about the bank's practice of
``conditioning access to its services on customers having the bank's
preferred religious or political views.'' \135\ Some State legislatures
have also introduced or enacted laws that would prohibit such ``de-
banking.'' \136\
---------------------------------------------------------------------------
\133\ See Emily Manson, After PayPal Revokes Controversial
Misinformation Policy, Major Concerns Remain Over $2,500 Fine (Oct.
27, 2022), <a href="https://www.forbes.com/sites/emilymason/2022/10/27/after-paypal-revokes-controversial-misinformation-policy-major-concerns-remain-over-2500-fine/">https://www.forbes.com/sites/emilymason/2022/10/27/after-paypal-revokes-controversial-misinformation-policy-major-concerns-remain-over-2500-fine/</a>.
\134\ Letter from Andre Sorrell et al. to Brian Moynihan,
<a href="https://treasurer.utah.gov/wp-content/uploads/04-18-2024-Letter-to-BoA-Regarding-Debanking.pdf">https://treasurer.utah.gov/wp-content/uploads/04-18-2024-Letter-to-BoA-Regarding-Debanking.pdf</a> (Apr. 18, 2024).
\135\ Letter from Kris W. Kobach et al. to Brian T. Moynihan,
(Apr. 15, 2024) <a href="https://dojmt.gov/attorney-general-knudsen-demands-action-from-bank-of-america-to-correct-debanking-practices/">https://dojmt.gov/attorney-general-knudsen-demands-action-from-bank-of-america-to-correct-debanking-practices/</a>.
\136\ See, e.g., Tenn. Code Ann. sec. 45-1-128.
---------------------------------------------------------------------------
The CFPB seeks comment on this proposed prohibition of clauses
restraining consumers' lawful free expression.
Legal Authority
The CFPB proposes to prohibit these three types of terms and
conditions in consumer financial products or services because their use
constitutes unfair or deceptive acts or practices.
i. Deceptive Acts or Practices
Under the CFPA, a representation or omission is deceptive if it is
likely to mislead a reasonable consumer and is material.\137\ 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.'' \138\ It is well-established that
material misrepresentations to consumers that are unsupported under
applicable law can be deceptive.\139\ In particular, including an
unenforceable material term in a consumer contract is deceptive,
because it misleads consumers into believing the contract term is
enforceable.
---------------------------------------------------------------------------
\137\ Although the CFPA does not define ``deceptive,'' the CFPB
has adopted the definition set forth by the FTC in its 1983 Policy
Statement on Deception. See FTC Policy Statement on Deception (Oct.
14, 1983), <a href="https://www.ftc.gov/bcp/policystmt/ad-decept.htm">https://www.ftc.gov/bcp/policystmt/ad-decept.htm</a>.
\138\ 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)).
\139\ See, e.g., FTC v. World Media Brokers, 415 F.3d 758, 763
(7th Cir. 2005).
---------------------------------------------------------------------------
As the CFPB recently explained, waiver-of-law provisions in
contracts for consumer financial products or services are often
deceptive when the waivers are unlawful or unenforceable under Federal
or State law.\140\ The inclusion of unlawful or unenforceable terms and
conditions in consumer contracts is likely to mislead a 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. Research indicates providers are incentivized to include
unenforceable terms because consumers tend to assume the terms in their
contracts are enforceable (even if they harm the consumer's interests
or deprive them of legal rights).\141\ 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. Deceptive acts and practices such as these pose
risks 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.
---------------------------------------------------------------------------
\140\ Consumer Financial Protection Circular 2024-03, supra note
6.
\141\ See, e.g., Meirav Furth-Matzkin & Roseanna Sommers,
Consumer Psychology and the Problem of Fine Print Fraud, 72 Stan. L.
Rev. 503, 508-09 (2020).
---------------------------------------------------------------------------
For similar reasons, a contractual provision that restrains a
consumer's free expression in violation of the Consumer Review Fairness
Act would be deceptive. As the CFPB noted in a recent compliance
bulletin, it would generally be deceptive to include a restriction on
consumer reviews in a form contract, given that the restriction would
be void from the inception under the Consumer Review Fairness Act.\142\
Consumers can be expected to read such language to mean what it says:
that they are restricted in their ability to provide consumer reviews.
But that is not the case, since the provision is void under applicable
law. And the option to post candid reviews about products or services
would be material to the many American consumers who do so. Moreover,
enforcing the deception prohibition is particularly important in this
context, given that consumer reviews are a significant driver of
competition in the modern economy.
---------------------------------------------------------------------------
\142\ Consumer Fin. Prot. Bureau, CFPB Bulletin 2022-05: Unfair
and Deceptive Acts or Practices That Impede Consumer Reviews, (Mar.
22, 2022), <a href="https://www.consumerfinance.gov/compliance/supervisory-guidance/cfpb-bulletin-2022-05-unfair-deceptive-acts-or-practices-that-impede-consumer-reviews/">https://www.consumerfinance.gov/compliance/supervisory-guidance/cfpb-bulletin-2022-05-unfair-deceptive-acts-or-practices-that-impede-consumer-reviews/</a>.
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ii. Unfair Acts or Practices
The CFPB may declare an act or practice to be ``unlawful on the
grounds that [it] is unfair'' if the CFPB ``has a reasonable basis to
conclude that (A) the act or practice causes or is likely to cause
substantial injury to consumers which is not reasonably avoidable by
consumers; and (B) such substantial injury is not outweighed by
countervailing benefits to consumers or to competition.'' \143\ The use
of each of the clauses that would be prohibited
[[Page 3579]]
under the proposed rule in contracts for consumer financial products or
services would be an unfair act or practice.
---------------------------------------------------------------------------
\143\ 12 U.S.C. 5531(c).
---------------------------------------------------------------------------
Substantial injury. Each of the three types of clauses causes or
would likely cause substantial injury to consumers.
A contractual clause requiring a consumer to waive the protections
of Federal or State law causes the consumer to forfeit legal rights
designed for their benefit. These laws reflect a legislative judgment
that it is in the public interest for consumers to be protected from
certain business practices. Eliminating these protections through a
consumer contract deprives the consumer of those legal rights.
Consumers can also suffer concrete monetary injury from the inclusion
of waiver-of-law clauses when, as a result of the waiver, they are
exposed to business practices that would have been otherwise illegal,
or, when the waiver reduces the monetary remedy that consumers can
seek. These waivers shift the risk of such business practices from the
company to the consumer. ``Consumers are clearly injured by a system
which forces them to bear the full risk and burden of sales related
abuses.'' \144\ This is particularly the case when a consumer cannot
fully enforce a law because of a waiver-of-law provision. As noted
above, many consumer protection laws grant consumers a statutory cause
of action to enforce the law, enjoin the unlawful practice, and recover
actual and/or statutory damages. When a consumer is contractually
restricted from relying on such a cause of action--or when a waiver
provision limits a company's legal liability or limits the time in
which a consumer can bring a legal action against the company--
consumers are unable to stop the illegal practice and recover damages
from the company. For example, in a 2022 case the CFPB alleged that
Bank of America engaged in unfair acts and practices by using a deposit
agreement that required consumers not to contest legal process and
waive the bank's liability for unlawfully garnishing funds from a
consumer's deposit account. According to the consent decree, in at
least 3,700 instances, the bank's conduct resulted in substantial
injury to affected consumers in the form of garnishment-related fees,
frozen or held funds, and funds turned over to judgment creditors.\145\
---------------------------------------------------------------------------
\144\ FTC, Preservation of Consumers' Claims and Defenses, 40 FR
53506, 53523 (Nov. 18, 1975).
\145\ See Consent Order, In re Bank of America, N.A., No. 2022-
CFPB-0002 (May 4, 2022).
---------------------------------------------------------------------------
Unilateral amendment clauses injure consumers by facilitating
involuntary changes that are a detriment to the consumer (including
monetary detriment), and depriving consumers of the opportunity to
provide meaningful consent to amended terms that may adversely affect
them. As noted above, when a company can derogate from the material
terms of an agreement with a consumer at its own discretion, a contract
becomes illusory and the consumer does not obtain the benefit of the
bargain in the contract they signed initially. They also deprive
consumers of the ability to make a free and informed choice of whether
to contract in the first place because the material terms of the
agreement might change later in unpredictable ways. Furthermore, the
changes effected through such clauses (e.g., diminution of credit-card
rewards) typically inure to the detriment of consumers. In particular,
when a modification undermines a consumer's expectations about the
scope of contract, it resembles a traditional ``bait-and-switch''
scheme that has long been found to be unfair by the FTC.\146\
---------------------------------------------------------------------------
\146\ See FTC Guides Against Bait Advertising, 16 CFR part 238
et seq.; cf. Rossman v. Fleet Bank (R.I.) Nat. Ass'n, 280 F.3d 384,
396-400 (3d Cir. 2002) (credit card issuer soliciting business with
no-annual-fee offer while intending to later impose fee constitutes
a bait-and-switch scheme).
---------------------------------------------------------------------------
In particular, in the credit card market, consumers experience
substantial injury when credit card companies use unilateral amendment
clauses to amend the terms of a reward program without adequate notice
or opportunity to provide meaningful consent. Consumers make decisions
based on expectations about the value of credit card reward
programs,\147\ and so they incur concrete and monetary harm associated
with the use of unilateral amendment clauses to unilaterally decrease
the accrual rates or otherwise downgrade those programs.
---------------------------------------------------------------------------
\147\ See Consumer Fin. Prot. Bureau, Consumer Financial
Protection Circular 2024-07: Design, Marketing, and Administration
of Credit Card Rewards Programs, (Dec. 18, 2024), <a href="https://www.consumerfinance.gov/compliance/circulars/consumer-financial-protection-circular-2024-07-design-marketing-and-administration-of-credit-card-rewards-programs/">https://www.consumerfinance.gov/compliance/circulars/consumer-financial-protection-circular-2024-07-design-marketing-and-administration-of-credit-card-rewards-programs/</a>.
---------------------------------------------------------------------------
Contractual restraints on free expression deprive consumers of
their ability to express themselves freely. This can cause harm when,
for example, a consumer is prohibited from providing a negative review
on or complaining about a faulty product or service. In such cases, the
consumer is deprived of the ability to freely voice themselves about
the quality of a product or service, which in turn deprives other
consumers of the benefit of the negative review or complaint.\148\ When
a contract limits the consumer's ability to speak or act freely on
political or religious matters, it deprives consumers of a fundamental
right to express themselves. It also leaves consumers with the
untenable choice between maintaining access to the financial service in
question or maintaining the right to free speech. While most unfairness
matters involve ``monetary harm,'' the substantial injury prong is met
for any form of injury that is not ``trivial or merely speculative.''
\149\ The CFPB preliminarily concludes that, based on the historical
importance of free speech in the United States, limiting religious,
political, or other forms of free speech is not a trivial consumer
harm.
---------------------------------------------------------------------------
\148\ See, e.g., FTC v. Roca Labs, Inc., 345 F. Supp. 3d 1375,
1393 (M.D. Fla. 2018) (agreeing with the FTC that ``restricting the
flow of information to consumers and the marketplace causes or is
likely to cause substantial injury'').
\149\ FTC Policy Statement on Unfairness (December 17, 1980),
<a href="https://www.ftc.gov/legal-library/browse/ftc-policy-statement-unfairness">https://www.ftc.gov/legal-library/browse/ftc-policy-statement-unfairness</a>.
---------------------------------------------------------------------------
Not reasonably avoidable. The injuries caused by these terms and
conditions in form contracts are not reasonably avoidable by consumers
because consumers are typically unaware they are agreeing to these
terms and conditions, and even if they were, are unable to negotiate
the terms out of the agreement. These clauses are almost always
presented to consumers as ``boilerplate'' or ``fine print'' language in
contracts of adhesion on a ``take it or leave it'' basis. These terms
are drafted by companies (or their lawyers), and consumers are allowed
no opportunity to negotiate or reject them. Nor can consumers
realistically comparison shop for any of these clauses among different
providers, since these contracts typically ``are written in obscure
technical language, do not use standardized terminology, and may not be
provided before the transaction is consummated.'' \150\ Indeed, with
the increasing popularity of digital transactions, standard contract
terms have become more and more complex.\151\ ``The proliferation of
lengthy standard-term contracts, mostly in digital form, makes it
practically impossible for consumers to scrutinize the terms and
evaluate them prior to manifesting assent.'' \152\ There are also
limited incentives for consumers to seek out better terms because these
terms relate to future events that a consumer may not be able to
properly assess at the time they are initially shopping for the product
or service. For example, a
[[Page 3580]]
consumer reviewing a unilateral amendment clause would be unlikely to
predict what kinds of modifications a company might implement under
such a clause. Under these circumstances, it should be unsurprising
that many research studies have confirmed that consumers almost never
read non-core terms in standard-form contracts. As noted above, for
example, one prominent study found that far less than one percent of
consumers can be expected to read such terms.\153\ At any rate, even if
consumers were to review these terms before signing the agreement,
their only opportunity to avoid the terms would be to decline the
agreement in totality. And once the agreement is entered into, these
clauses are implemented by the companies without any involvement by the
consumer.
---------------------------------------------------------------------------
\150\ 49 FR 7744.
\151\ See e.g., Samples et al., supra note 16 at 105.
\152\ Restatement of the law, Consumer Contracts, supra note 28,
at introduction.
\153\ See, e.g., Bakos et al., supra note 19 at 1.
---------------------------------------------------------------------------
Consideration of countervailing benefits. The CFPB is not aware of
any meaningful countervailing benefits to consumers or competition
created by these clauses that would outweigh the associated harms, and
invites commenters to raise any countervailing benefits that the agency
will consider before finalizing any rule. These clauses will typically
not be essential to the transaction and will serve no purpose in the
deal between the company and the consumer. To the contrary, these types
of clauses strip important rights or protections from consumers,
including the right to be aware of and provide meaningful consent to
contract amendments, the right to benefit from legal protections, and
the right to free expression. The CFPB is also not aware of any
research or findings demonstrating that consumers enjoy lower costs or
prices in exchange for these clauses. Nor is the CFPB aware of any
benefits these clauses provide to competition. Indeed, the CFPB
preliminary concludes that these clauses dilute competition by
insulating companies from the rule of law, legal liability, and
negative feedback (or even being compared unfavorably to one's
competitors), and also by allowing companies broad discretion to
fashion rules and procedures to their own liking. And once one firm
adds one of these non-salient fine print terms, other firms in the
market may be incentivized to match, creating a race to the
bottom.\154\
---------------------------------------------------------------------------
\154\ Margaret Jane Radin, Boilerplate: The Fine Print,
Vanishing Rights, and the Rule of Law 108 (2013) (``competition
forces firms to offer progressively worse and more onerous terms'').
---------------------------------------------------------------------------
As noted in the section 1022(b) Analysis below, the CFPB
acknowledges that companies may incur costs associated with the
increased incentive to comply with existing laws if they cannot waive
those laws or sidestep public accountability by blocking criticism. For
purposes of determining legally recognizable countervailing benefits,
it would generally be inappropriate to consider companies' lawbreaking
to be a benefit to consumers or competition. However, even were the
CFPB to consider that foregone cost to companies a countervailing
benefit, those costs are likely to be low, and the CFPB would only
credit those costs to the extent they pass through to consumer prices.
That is because the CFPB considers countervailing benefits to
``consumers or competition,'' not companies, and the analysis is used
to determine whether a practice is ``injurious in its net effects.''
\155\ As noted in the section 1022(b) Analysis, the CFPB does not
anticipate a 100 percent pass-through rate.
---------------------------------------------------------------------------
\155\ See FTC Policy Statement on Unfairness, supra note 149.
---------------------------------------------------------------------------
Taking each of these clauses in turn, with respect to waiver of law
clauses, the CFPB preliminarily concludes that that the harms are not
outweighed by countervailing benefits associated with allowing
companies to include clauses that nullify State and Federal
legislatures' judgment on addressing a consumer harm and tools they
have chosen to enable consumers to vindicate their legal rights. A
consumer protection enacted by a legislature pursuant to a
constitutionally valid process will generally have a legitimate purpose
and a rational basis,\156\ and legislatures generally balance the
benefits and costs and conclude that the legislation is net beneficial
when a law is passed. It would be inappropriate for the CFPB to second-
guess that legislative judgment and conclude that a democratically
passed consumer protection's benefits are outweighed by its costs.
---------------------------------------------------------------------------
\156\ Minnesota v. Clover Leaf Creamery Co., 449 U.S. 456, 461-
63 (1981).
---------------------------------------------------------------------------
Regarding unilateral amendment clauses, the CFPB preliminarily
concludes that the countervailing benefits do not outweigh the harms.
To be sure, companies may need to implement modifications during the
course of an agreement, but consumers do not benefit from having such
changes imposed on them without their awareness and consent. Nor do
such changes benefit competition, since competition is benefited by
consumers being able to consider concrete deals with terms they can
rely on. If firms can change contractual terms at their discretion,
consumers can have no confidence in the scope of consumer contracts and
cannot properly comparison-shop among various providers.
As noted below in the section 1022(b) Analysis, in theory some
firms may be discouraged from offering certain consumer-beneficial
terms if they are not free to change them at a later date (without
providing appropriate notice and obtaining consent). The CFPB generally
does not grant this theoretical countervailing benefit much weight
because the likelihood that unilateral amendment clauses impact the
terms a firm offers is quite small. Firms will still be able to amend
contracts--the only change is they will need to go through an
appropriate process under common law to do so. Moreover, to consider
such a benefit would be to argue that the CFPB should not prohibit a
bait-and-switch scheme because it would deter companies from offering
the ``bait.'' If firms are unwilling to offer terms unless they have
full flexibility to change them, these terms are likely ephemeral
promises anyway.
With respect to restraints on free expression, the CFPB is unaware
of any countervailing benefit to allowing companies to include clauses
that restrict consumers' ability to provide negative feedback or
reviews on the companies, since distorting public reviews of a good or
service does not help consumers and moreover such restrictions are
already illegal in form contracts under the Consumer Review Fairness
Act. Nor do there appear to be benefits to restricting a consumer's
right to engage in constitutionally protected religious or political
activity. While a company's management may disfavor certain speech or
activities, it is not their purview to restrict such activities by
private citizens and it is unclear what pecuniary gain the company
itself would gain by constraining customers' speech involving topics
having nothing to do with the company.
Having said that, there are two theoretical countervailing benefits
to consumers that the CFPB has considered in issuing this proposal.
First, a scammer or fraudster who is a customer of a financial
institution may communicate with other consumers in furtherance of an
illegal scheme to defraud those consumers and induce payment to their
account. In recognition of this potential countervailing benefit, the
unfair practice identified by the CFPB only includes contract terms
that limit ``lawful expression,'' which would not include contract
terms giving covered persons a right to close an account that is being
used to commit
[[Page 3581]]
fraud or other illegal activity. Second, a common argument raised in
debates about platforms and free speech is that a company should not
have to carry the message of its customers if they disagree with the
message.\157\ Putting aside the question of whether companies' and
natural persons' free speech rights should be given equal weight, or
the other merits of such arguments, this rulemaking implicates only
agreements for consumer financial products or services, not terms of
service for social media services or other businesses that provide a
forum for someone else's views.
---------------------------------------------------------------------------
\157\ Moody v. NetChoice, LLC, 603 U.S. 707, 728 (2024) (``We
have repeatedly faced the question whether ordering a party to
provide a forum for someone else's views implicates the First
Amendment. And we have repeatedly held that it does so if, though
only if, the regulated party is engaged in its own expressive
activity, which the mandated access would alter or disrupt. So too
we have held, when applying that principle, that expressive activity
includes presenting a curated compilation of speech originally
created by others.'').
---------------------------------------------------------------------------
Public policy. ``In determining whether an act or practice is
unfair, the Bureau may consider established public policies as evidence
to be considered with all other evidence.'' \158\ Public policy
corroborates that the use of these three contractual clauses would be
an unfair act or practice. As discussed above, evidence suggests that
these clauses undermine principles of democratic governance, freedom of
contract, and freedom of expression. In particular, a prohibition on
unilateral amendment clauses is consistent with the recent Restatement
of Consumer Contracts.\159\ A prohibition on waivers of substantive
rights is consistent with the public policy as determined by State and
Federal legislatures across the country when determining to pass each
individual law. And a prohibition on restraints on free expression
supports a broad conception of the freedom of speech and recognizes
that banking and consumer finance should be treated as public utilities
with a duty to serve.\160\
---------------------------------------------------------------------------
\158\ 12 U.S.C. 5531(c)(2). ``Such public policy considerations
may not serve as a primary basis for such determination.'' Id.
\159\ Restatement of the Law, Consumer Contracts, supra note 28,
sections 3, 5.
\160\ Lev Menand and Morgan Ricks, Rebuilding Banking Law: Banks
as Public Utilities (Sept 2023), <a href="https://cdn.vanderbilt.edu/vu-URL/wp-content/uploads/sites/412/2023/09/14140935/Banking-Full-Report-Final.pdf">https://cdn.vanderbilt.edu/vu-URL/wp-content/uploads/sites/412/2023/09/14140935/Banking-Full-Report-Final.pdf</a>; cf. Biden v. Knight First Amend. Inst., 141 S. Ct. 1220,
1222-24 (2021) (Thomas, J., concurring) (raising concerns about the
ability of companies to constrain free speech and recognizing that
doctrines involving common carriers or public accommodation may be
an appropriate solution).
---------------------------------------------------------------------------
The CFPB seeks comment on all aspects of the proposed prohibition
of these clauses.
VII. Proposed Effective Date and Compliance Date
If finalized, the proposed rule would go into effect 30 days after
publication in the Federal Register. Under proposed Sec. 1027.104,
covered persons subject to the rule would also be required to comply
with the rule by 30 days after publication in the Federal Register.
However, ``if an agreement for a consumer financial product or service
between a covered person and a consumer was executed before [30 days
after publication of the final rule in the Federal Register],''
compliance with the rule would be required by 180 days after
publication of the final rule in the Federal Register.'' An extended
compliance date for pre-existing agreements would be appropriate
because companies may need additional time to review and conform any
pre-existing agreements to the proposed rule. The CFPB is not proposing
to prescribe any particular manner in which a covered person should
conform a pre-existing agreement to this proposed rule. For instance, a
covered person may (subject to applicable law) amend such an agreement
to remove any terms or conditions prohibited by the proposed rule. Or a
covered person may provide adequate notice to a consumer that it will
not enforce a term or condition prohibited by the proposed rule.
VIII. Severability
Under proposed Sec. 1027.103, the CFPB preliminarily intends that,
if any provision of the proposed rule, if adopted as final, or any
application of a provision, is stayed or determined to be invalid, the
remaining provisions or applications are severable and shall continue
in effect.
IX. Dodd-Frank Act Section 1022(b)(2) Analysis
A. Introduction
Overview
In developing this proposed rule, the CFPB considered the potential
benefits, costs, and impacts required by section 1022(b)(2) of the
Dodd-Frank Act. Specifically, section 1022(b)(2) calls for the CFPB to
consider the potential benefits and costs of a regulation to consumers
and covered persons, including the potential reduction of access by
consumers to consumer financial products or services, the impact on
depository institutions and credit unions with $10 billion or less in
total assets as described in section 1026 of the Dodd-Frank Act, and
the impact on consumers in rural areas.\161\
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\161\ 12 U.S.C. 5512(b)(2)(A).
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The CFPB requests comment on the preliminary analysis presented
below, as well as submissions of additional data that could inform the
CFPB's analysis of the benefits, costs, and impacts of the proposed
rule.
The CFPB considers the benefits, costs, and impacts of the proposed
provisions as compared to the status quo that existed prior to the
issuance of this proposed rule. In formulating this baseline, the CFPB
considers economic attributes of the relevant markets and the existing
legal and regulatory structures applicable to covered persons. In
subpart B, the proposed rule would codify the prohibition of certain
credit practices. Bank and nonbank covered persons have generally been
aware that these credit practices are or are likely unlawful in light
of the FTC Credit Practices Rule and joint guidance from the CFPB and
the prudential regulators warning that such practices may violate the
CFPA and FTC Act even in the absence of an express regulatory
prohibition if engaged in by banks, savings associations, and Federal
credit unions. The CFPB therefore anticipates few impacts resulting
from this provision, relative to the baseline for these types of
covered persons and seeks comment regarding the impacts on covered
persons who were not already subject to these laws. subpart C of the
proposed rule would create new restrictions on the terms of covered
persons' contracts for a consumer financial product or service, though
in many cases these terms are also already prohibited, such as non-
disparagement clauses that violate the Consumer Review Fairness Act or
waivers that violate the Military Lending Act. Therefore, subpart C may
result in some substantive changes relative to the baseline. The
estimated costs and benefits of both subparts are considered below. The
CFPB seeks comment on this baseline.
Data
The CFPB notes that in some instances, the data needed to analyze
the potential benefits, costs, and impacts of the proposed rule are not
available or are limited. In particular, data with which to quantify
impacts of the proposed rule are especially limited; for example, data
with which to quantify the incidence of prohibited clauses, incidence
of the use of
[[Page 3582]]
prohibited clauses under baseline,\162\ estimates of investments into
compliance with consumer protection laws that will be induced by the
rulemaking, and estimates of the effect on consumer behavior induced by
the inclusion of prohibited clauses in contract language under
baseline. As a result, portions of this analysis rely in part on
general economic principles and the CFPB's expertise in consumer
financial markets to provide a qualitative discussion of the benefits,
costs, and impacts of the proposed rule. The CFPB seeks comment, data,
or analysis that would improve this analysis.
---------------------------------------------------------------------------
\162\ That is, how often covered persons rely on a prohibited
term in consumer relations under the baseline.
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Statement of Need
Before considering the benefits, costs, and impacts of the proposed
provisions on consumers and covered persons, as required by section
1022(b)(2), the CFPB believes it may be useful to provide the economic
framework through which it is considering those factors in order to
more fully inform the rulemaking, and in particular to describe the
market failures that are the basis for the proposed rule.\163\
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\163\ Although section 1022(b)(2) does not require the CFPB to
provide this background, the CFPB does so as a matter of discretion
to more fully inform the rulemaking.
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In a perfectly competitive market, where consumers were able to
fully understand and appropriately value each term or condition of
their contracts, firms would have strong incentives to offer contracts
that include only terms and conditions that, in expectation, generate
net value that is shared between the firm and their customers. However,
there is strong evidence that consumers rarely read the terms and
conditions and are often unaware of the full implications of the
contracts they sign. Form contracts are often long and complex, and
require sophisticated legal knowledge to understand. Further, consumers
have no meaningful opportunity to negotiate the contracts' terms and
conditions, and therefore have little incentive to spend their limited
time on understanding and valuing the contracts' terms and conditions.
Even if consumers do fully understand the terms and conditions, the
risks and benefits of each clause are often distant in time and
probability and therefore extremely difficult for consumers to
accurately assess. Finally, although the competitiveness of markets for
consumer financial products and services varies from product to
product, the search costs involved in reading, understanding, and
valuing the terms and conditions offered for each product or service a
consumer is considering likely creates sufficient market power for
firms to impose contract terms and conditions that are less favorable
to consumers than would be efficient. That is, the terms and conditions
are likely to, on average, impose costs on consumers that exceed the
benefits to the firms that impose them.
Certain types of terms and conditions also impose negative
externalities on the market as a whole by weakening incentives to
comply with applicable consumer protection laws. For example, firms
sometimes include clauses in their terms and conditions that purport to
waive protections passed by elected officials in Federal or State
government, surrender due process rights upon default, or allow firms
to unilaterally amend the contract at any time. Some firms also seek to
weaken reputational incentives by including clauses that restrict
consumers' free speech.
The proposed rule has two parts. First, it codifies practices on
the use of certain remedies in credit contracts that have long been
understood to be prohibited. Second, it forbids covered persons from
including in their contracts any clause that waives legal rights
designed to protect consumers, any clause that reserves to the covered
person the right to unilaterally amend a material term of the contract,
and any clause that restrains the consumer's free expression.
The first part of the proposed rule-subpart B-would codify the
already existing FTC Credit Practices Rule and is unlikely to have
significant costs for covered persons because the credit practices it
prohibits are generally understood to be prohibited at baseline. Under
this baseline, many covered persons are already subject to the FTC
Credit Practices Rule, and the prohibitions in subpart B would not
result in any change for them, while banks and other prudentially
supervised institutions that have not been covered by the Credit
Practices Rule or its prudential regulator equivalents, repealed
following the enactment of the CFPA, generally understand from the 2014
guidance that the practices that subpart B would codify are likely to
be prohibited. At baseline, some covered persons may face costs related
to residual uncertainty about whether covered persons within the CFPB's
jurisdiction may engage in the prohibited credit practices. For
example, some covered persons may choose to consult legal counsel to
determine whether a certain business practice is permissible. By
reducing confusion or uncertainty about what is prohibited, the
proposed rule may reduce these costs for covered persons.
The second part of the proposed rule--subpart C--addresses the
incentives for covered persons to comply with applicable consumer
financial protection laws. Some consumer finance companies may alter
private enforcement through the terms and conditions included in
contracts of adhesion. The CFPB's economic framework assumes that when
Congress and States have promulgated consumer protection laws that are
applicable to consumer financial products and services (the underlying
laws) they have done so to address a range of market failures. The
underlying laws need enforcement mechanisms to ensure that firms
providing financial products and services conform to these laws. Along
with supervisory or public enforcement by Federal and State regulatory
bodies and commercial incentives to maintain a good reputation, private
enforcement mechanisms play a critical role in ensuring compliance with
the underlying laws. While the CFPB assumes that the underlying laws
address a range of market failures, it also recognizes that compliance
with these underlying laws requires firms to incur costs. For example,
there are costs required to distribute required disclosures, resolve
disputes, or train and monitor employees for compliance with underlying
laws.
The CFPB has preliminarily determined, based on its experience and
expertise in overseeing consumer finance markets, that weakening
consumers' rights, as defined by elected legislatures and courts, is
likely to lead to weaker compliance incentives. The economic costs of
increased compliance would generally be less than the economic benefits
of increased compliance. Thus, the terms and conditions that would be
prohibited by subpart C of the proposed rule are likely to lower
economic welfare by undermining compliance incentives.
The provisions that would be prohibited by subpart C of the
proposed rule generally undermine compliance incentives without
offering any rights or benefits to consumers. Indeed, they generally
constitute unfair or deceptive acts or practices. Many of the
provisions prohibited by subpart C persist in the marketplace due to
the market failures described above. Consumers are generally unaware of
these provisions, cannot understand them, and have no meaningful
opportunity to avoid them. However, even in an idealized marketplace
where consumers were fully informed and firms did not have
[[Page 3583]]
market power, terms and conditions that weaken incentives to comply
with the underlying laws would likely be economically inefficient
because they impose costs on other consumers and firms that are not
parties to the transaction. For example, consumers might sign a
contract of adhesion agreeing to forfeit their right to provide
negative reviews of a firm's product or service either because they
have no meaningful choice or because the product is priced lower than
competing products (and at the time of contracting, the consumer might
focus only on the price, not the right they are giving up), and the
firm might be willing to provide a discount in return for this
agreement to ensure that any deficiencies in their product or service
would not affect their reputation or ability to attract future
customers. However, this restraint on free expression deprives the rest
of the market of valuable information regarding the conduct of the firm
or the quality of its product. This type of clause creates an
additional market failure--insufficient provision of public
information--that cannot be resolved through informed consent or
negotiation.
B. Overview of Economic Effects
This section provides an overview of the economic effects of
subparts B and C of the proposed rule.
Overview of Economic Effects of Subpart B
This subpart would codify the already existing FTC Credit Practices
Rule, which was first issued in 1984 and applies to entities in the
FTC's jurisdiction, and apply it additionally to banks, savings
associations, Federal credit unions, and other covered persons under
the CFPB's jurisdiction. Following the issuance of the FTC's rule,
other prudential regulators issued companion credit practices rules
applicable to banks, savings associations, and Federal credit unions;
the Federal Reserve Board's rule applicable to banks was codified in
Regulation AA. The Dodd-Frank Act repealed the rulemaking authority of
the prudential regulators under the FTC Act and transferred that
authority to the CFPB. The CFPB did not re-codify these rules when it
was created, but issued joint guidance with the prudential regulators
to make clear that the conduct that these rules covered still could
violate the prohibitions against unfair and deceptive acts and
practices under the FTC Act and the Dodd-Frank Act. This subpart
explicitly re-codifies these credit practices rules. Because the
conduct covered under this subpart is already generally understood by
market participants to be unfair and deceptive, the CFPB does not
anticipate that there will be any meaningful economic effects in
response to the re-codification of these rules.
Insofar as there are covered persons who are not currently subject
to the FTC's Credit Practices Rule or within the scope of the
interagency guidance on prohibited credit practices for banks, savings
associations, and Federal credit unions, and therefore do not
understand that the practices are currently prohibited, the
implementation of this proposed rule would standardize credit practices
across lenders of different types. This would require covered persons
not currently in compliance with the requirements of the FTC's Credit
Practices Rule and the former rules promulgated by the prudential
regulators to invest in compliance with the proposed rule, for example,
by removing any clauses with prohibited terms in existing contracts and
including cosigner disclosure forms. For covered persons currently
subject to the FTC's Credit Practices Rule or within the scope of the
interagency guidance--that is, banks, savings associations, Federal
credit unions, and any covered person under FTC jurisdiction--this
would require potential competitors to also comply with the
requirements of the existing and former rules, eliminating any undue
competitive advantage those potential competitors currently hold and
benefiting the covered persons currently refraining from the practices
covered by those rules. From the perspective of the consumer, the
standardization of credit practices across lenders of different types
would reduce search costs. Moreover, as noted in the interagency
guidance, the basis of the prohibited credit practices was their unfair
or deceptive nature; \164\ hence their prohibition across a broader
group of covered persons would benefit consumers by further shielding
them from these practices. On the other hand, it is theoretically
possible that some covered persons would reduce the provision of
certain credit products due to the expanded scope of the proposed rule.
However, even if there are entities that are not covered by the FTC's
rule or the interagency guidance and use these prohibited terms, the
rule is unlikely to affect credit access from those entities given the
FTC's original conclusion that the Credit Practices Rule would ``not
have a major impact on either the price or availability of credit.''
\165\ The magnitude of these effects depends on how many covered
persons would be newly subjected to these requirements. The CFPB
requests any data or comments that would help quantify how many covered
entities would be newly subjected to the requirements of the credit
practices rules as a result of this proposed rule and how many use any
prohibited credit practices under the baseline.\166\
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\164\ See 49 FR 7740 (Mar. 1, 1984); 50 FR 16696 (Apr. 29,
1985); 50 FR 19325 (May 8, 1985); and 52 FR 35060 (Sept. 17, 1987).
\165\ 49 FR 7779. The FTC's post-hoc review on access to credit
came to the same conclusion. 60 FR 24805, 24808 (May 10, 1995).
\166\ Note that these covered persons would be limited to those
that are not subject to the current interagency guidance--which
covers banks, savings associations, and Federal credit unions--as
well as those not subject to FTC jurisdiction.
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Additionally, it is possible that certain providers would attempt
to engage in prohibited credit practices or may be uncertain as to
whether certain business practices are permissible, despite current
guidance from the CFPB and other prudential regulators. This subpart
would reduce any residual confusion or uncertainty about what is
prohibited, which may benefit covered persons. In the event that
covered persons may incorrectly attempt to use these prohibited
practices against consumers, it is possible that this re-codification
incentivizes providers to reduce their use of these prohibited credit
practices and thus reduces any costs incurred by consumers in defending
themselves from these prohibited credit practices.
Overview of Economic Effects of Subpart C
This subpart would prohibit covered persons from including in their
contracts with consumers for consumer financial products or services
(1) clauses that require consumers to waive legal rights designed to
protect consumers, other than rights explicitly made waivable by
relevant consumer laws; (2) clauses that allow a covered person to
unilaterally amend a material term of the contract; and (3) clauses
that restrict consumers' free expression. Collectively, these are
referred to as prohibited terms and conditions. The CFPB considers
these terms and conditions to be (1) deceptive insofar as clauses that
purport to waive legal rights expressly granted by relevant consumer
financial laws, or restrain speech protected by the Consumer Review
Fairness Act are unenforceable but may be presented as if they are
binding; and (2) unfair, as these terms and conditions cause injury
that is not reasonably avoidable by consumers and not
[[Page 3584]]
outweighed by countervailing benefits to consumers or competition.\167\
---------------------------------------------------------------------------
\167\ The CFPB has explained that the use of contract terms that
are unenforceable often amounts to a deceptive act or practice, see
CFPB Circular 2024-03, <a href="https://www.consumerfinance.gov/compliance/circulars/consumer-financial-protection-circular-2024-03/">https://www.consumerfinance.gov/compliance/circulars/consumer-financial-protection-circular-2024-03/</a>. In that
sense, portions of this subpart codify existing interpretation of
the CFPA. Under the Restatement (Second) of Contracts, revised
contract terms are adopted only insofar as consumers receive notice
of material changes, have opportunity to consider changes, and
assent to changes. Unilateral changes to contract terms that lack
notice and meaningful consent by the consumer violate this principle
and are generally found to be unenforceable by courts, as noted
above. Similarly, form contract prohibitions on consumers' free
expression run afoul of the Consumer Review Fairness Act and are
thus unenforceable. Finally, as noted above, the CFPB has taken
enforcement action against covered persons who include in contract
language waivers of consumer rights that are expressly waivable by
statute.
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There are four main effects the adoption of subpart C of this
proposed rule would cause. First, the inclusion of prohibited terms and
conditions at baseline may have an effect on consumer behavior, even
when such terms are unenforceable.\168\ Hence, the implementation of
this rulemaking would likely ease this effect, which in turn would
likely increase the incidence of consumer disputes. This would apply to
formal disputes, where consumers exercise legal rights afforded to them
under consumer financial laws, or to informal disputes, for example, in
situations where a consumer exercises their free expression to lodge
complaints against the covered person in public forums. In either case,
the covered person would generally incur additional costs in countering
such disputes through customer service, in formal legal or arbitration
settings, or in informal settings such as response to consumer
complaints in public forums. Consumers who may have been discouraged
from pursuing valid disputes by the inclusion of prohibited terms in
contracts would benefit from the increased incidence of disputes and
associated relief. Second, insofar as covered persons may rely on
prohibited terms in the event that a dispute arises--including reliance
on unenforceable terms due to any residual uncertainty about the
applicability of such terms--the prohibition of these terms and
conditions in contracts incentivizes covered persons to comply with
existing consumer financial laws. Covered persons would respond to this
incentive by increasing investments in compliance, which in turn
benefits consumers due to the lower likelihood that consumers would
experience a violation of their rights under applicable consumer
financial laws.\169\ Third, the prohibition of unilateral changes in
contract terms would increase the costs of contract changes, which in
turn may change the terms that the covered person would initially offer
beyond the elimination of any prohibited terms. That is, a covered
person who relies on a contract term allowing for unilateral changes
under the baseline would be required to remove this term and instead
comply with applicable Federal or State law in order to implement
modifications.\170\ Insofar as this process is more costly than the
process to change terms under the baseline, the covered person may opt
to change the terms--beyond any prohibited terms--in the initially
offered contract in anticipation of these increased costs.\171\
However, as noted above, unilateral changes may be found to be
unenforceable by courts, absent evidence of sufficient notice and
consumer consent. Hence, this effect will be limited by the
enforceability of such terms under baseline. Finally, there would be
administrative costs associated with identifying and removing any
prohibited terms and conditions from contracts, though this cost is
expected to be a fixed, one-time cost, in general.\172\ The CFPB does
not have systematic data that would allow for the quantification of the
incidence of these terms in consumer contracts nor their actual use in
financial relationships. The CFPB requests any commentary or data that
would help quantify the baseline as well as any costs or benefits
associated with the aforementioned economic effects of the rulemaking.
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\168\ See, e.g., Tess Wilkinson-Ryan, The Perverse Consequences
of Disclosing Standard Terms, 103 Cornell L. Rev., 117-175 (2017).
\169\ For example, any covered persons that rely on waivers of
consumer protection law, including both cause of action and
remedies, under the baseline would be incentivized to increase their
compliance with these laws given the prohibition of these waivers of
law. Note that this incentive effect is not independent of the
incidence of disputes effect described above. Specifically, covered
persons are likely to recognize that the removal of any chilling
effect the prohibited terms may have on consumer behavior would
likely increase dispute incidence, all else equal. To lessen the
probability of a dispute arising, covered persons would be
incentivized to increase compliance with consumer protection laws.
Even with this increased compliance, it is likely that the removal
of the chilling effect would still lead to increased incidence of
disputes.
\170\ The specific process the covered person would have to
follow depends on prevailing State and common law.
\171\ This would have an ambiguous effect on consumers. On one
hand, if as a result of increased costs of changing contracts,
covered persons decide to change or remove terms that consumers
value, this is costly to consumers. On the other hand, consumers
being made aware of changes in contract terms and being offered the
opportunity to consider these changes allows them to better respond
to changes, which benefits them. For example, a covered person that
rewards points on a credit card may lower the value of these points
in the initially offered contract in anticipation of higher costs of
changing the terms at a later date, which is costly for consumers.
However, if the covered person decides to lower the value of these
points after the contract is in force, they would not be able to do
so unilaterally and must notify the consumer in advance, at a
minimum giving the consumer opportunity to consider and respond to
these changes. In response, the consumer may decide to redeem the
points in advance of any devaluation or end the financial
relationship and move to a different provider that offers more
favorable terms. This would benefit the consumer insofar as they
would not necessarily have this opportunity under the baseline.
\172\ Given that the rule prohibits waivers of consumer rights
under Federal or State consumer financial protection laws, it is
possible that future changes in consumer financial protection laws
may require review and editing of contracts. In that sense, this
final effect may also lead to some variable costs for covered
persons in the form of monitoring relevant consumer protection laws
and ensuring that terms and conditions of relevant contracts comply
with these laws. However, it should also be noted that, at baseline,
covered persons must monitor and comply with relevant consumer
protection laws, including any potential changes to relevant laws.
In that sense, the additional cost here would be limited to
reviewing and editing contracts to ensure compliance.
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Insofar as some of these effects increase the marginal costs to
covered persons--e.g., increased costs of compliance with consumer
finance laws or increased costs associated with dispute resolution
which would be ongoing costs, in general, as opposed to being incurred
one-time only--the CFPB believes that most providers would pass through
some portion of these marginal cost increases to consumers.\173\ The
rate at which firms pass through changes in their marginal costs to
consumers through prices charged is called the pass-through rate--e.g.,
a pass-through rate of 100 percent means that the increase in marginal
costs would not be absorbed by providers but rather fully passed
through to consumers through increased prices, while a pass-through
rate of 0 percent means that consumers would not see a price increase.
The pass-through rate depends on many factors, including the
elasticities of demand and supply, the market structure, and the model
of competition. Existing estimates of pass-through rates in the credit
card market are close to zero.\174\ Similarly, research on the effects
of regulation on late payment
[[Page 3585]]
fees and overlimit fees on credit card and interchange fees on debit
cards generally found low to non-existent pass-through rates.\175\
Beyond credit cards and debit cards, there is relatively limited
evidence estimating the pass-through rate on all the relevant consumer
finance markets covered by this rulemaking. The CFPB requests any
comments or data that may aid the evaluation of relevant pass-through
rates.
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\173\ Some of these increased costs--e.g., the cost of changing
contract language to remove prohibited terms--can be considered
fixed costs of business. Economic theory suggests that the profit-
maximizing response of an increase in fixed costs is not to pass
that increase through to consumers.
\174\ See Lawrence Ausubel, The Failure of Competition in the
Credit Card Market, 81 a.m. Econ. Rev. 50 (1991); but see Todd
Zywicki, The Economics of Credit Cards, 3 Chap. L. Rev. 79 (2000);
Daniel Grodzicki, Competition and Customer Acquisition in the U.S.
Credit Card Market (Working Paper, 2015): <a href="https://editorialexpress.com/cgi-bin/conference/download.cgi?db_name=IIOC2015&paper_id=308">https://editorialexpress.com/cgi-bin/conference/download.cgi?db_name=IIOC2015&paper_id=308</a>.
\175\ See Sumit Agarwal, Souphala Chomsisengphet, Neale Mahoney
& Johannes Stroebel, Regulating Consumer Financial Products:
Evidence from Credit Cards, 130 Q. J. of Econ. 1 (2015); Benjamin
Kay, Mark Manuszak & Cindy Vojtech, Bank Profitability and Debit
Card Interchange Regulation: Bank Responses to the Durbin Amendment
(Fed. Reserve Board, Working Paper No. 2014-77, 2014), <a href="https://www.federalreserve.gov/econresdata/feds/2014/files/201477pap.pdf">https://www.federalreserve.gov/econresdata/feds/2014/files/201477pap.pdf</a>.
But see Todd Zywicki, Geoffrey Manne & Julian Morris, Price Controls
on Payment Card Interchange Fees: The U.S. Experience, (Geo. Mason
L. & Econ., Research Paper No. 14-18, 2014), <a href="http://papers.ssrn.com/sol3/Papers.cfm?abstract_id=2446080">http://papers.ssrn.com/sol3/Papers.cfm?abstract_id=2446080</a>.
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C. Potential Costs and Benefits to Covered Persons
This section describes the benefits and costs to covered persons
that the CFPB expects to occur under the proposed rule. Each of the two
subparts of the proposed rule is analyzed in detail separately. The
proposed rule would generally apply to ``covered persons'' under the
CFPA, subject to certain exceptions. A covered person is ``(A) any
person that engages in offering or providing a consumer financial
product or service; and (B) any affiliate of a person described in
subparagraph (A) if such affiliate acts as a service provider to such
person.'' \176\ Section 1027.102 of the proposed rule would exempt two
categories of covered persons from the rule. First, the rule would not
apply to any person that is a `small entity' as that term is defined in
5 U.S.C. 601, including any firm that is at or below the SBA standard
for its primary industry. Second, the rule would not apply to ``any
person to the extent that it is providing a product or service in
circumstances excluded from the CFPB's rulemaking authority pursuant to
12 U.S.C. 5517 or 5519.''
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\176\ 12 U.S.C. 5481.
---------------------------------------------------------------------------
To derive an estimate of the number of affected entities under the
proposed rule using publicly available data, the CFPB used data from
the December 2023 NCUA and FFIEC Call Report Data and the 2017 Economic
Census from the U.S. Census Bureau. Table 1 below presents entity
counts for the North American Industry Classification System (NAICS)
codes that generally align with consumer financial products or
services. The markets defined by NAICS codes may include some entities
that would not qualify as covered persons under the CFPA. It is also
likely that some covered persons may not be counted in table 1. For
example, the financial services they provide may not be their primary
line of business. The CFPB seeks comment on the NAICS codes included in
table 1, and, in particular, on whether there are any industries not
included that contain a significant number of entities that will be
affected by the final rule.
Table 1--Entity Counts for NAICS Codes
----------------------------------------------------------------------------------------------------------------
Number of Estimated
entities number of non-
NAICS name(s) NAICS code(s) operating all SBA entities
year \177\
----------------------------------------------------------------------------------------------------------------
Credit Unions................................. 522110,......................... 4702 500
522120,.........................
522210..........................
Commercial Banking, Savings Institutions, and 522130.......................... 4587 1165
Credit Card Issuing.
Nondepository Credit Intermediation........... 522220,......................... 7403 438
522291,.........................
522292,.........................
522299..........................
Activities Related to Credit Intermediation... 522310,......................... 11252 212
522320,.........................
522390..........................
Activities Related to Real Estate............. 531311,......................... 63564 709
531312,.........................
531320,.........................
531390..........................
Portfolio Management & Investment Advice...... 523920,......................... 34695 542
523930..........................
Passenger Car Leasing......................... 532112.......................... 199 0
Truck, Utility Trailer, and Recreational 532120.......................... 920 0
Vehicle Rental and Leasing.
Consumer Reporting............................ 561450.......................... 284 17
Debt Collection............................... 561440.......................... 2750 116
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Total..................................... ................................ 130,356 3,699
----------------------------------------------------------------------------------------------------------------
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\177\ The Economic Census provides entity counts by revenue bins
that generally do not correspond to the SBA revenue thresholds.
Therefore, the CFPB estimates the number of entities that are above
the small entity thresholds. In particular, for each NAICS code, the
CFPB fits a generalized Pareto distribution to the share of firms in
four revenue bins, as reported in the Economic Census: Under $1MM,
$1-10MM, $10-25MM, and $25MM+. SBA regularly updates its size
thresholds to account for inflation and other factors. The SBA Size
Standards described here reflect the thresholds in effect at the
publication date of this proposed rule. The 2017 Economic Census
data are the most recently available data with entity counts by
annual revenue. See Small Bus. Admin., SBA Size Standards (effective
Mar. 17, 2023), <a href="https://www.sba.gov/document/support-table-size-standards">https://www.sba.gov/document/support-table-size-standards</a>.
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Subpart B of the proposed rule would codify the already existing
FTC Credit Practices Rule, which was first issued in 1984,\178\ and
apply it additionally to banks, savings associations, Federal credit
unions, and other covered persons under the CFPB's jurisdiction.
Because the conduct covered under this subpart is already generally
understood to be unfair and deceptive, the CFPB does not anticipate
that there would be
[[Page 3586]]
any significant economic effects in response to the proposed
codification. However, it is possible that, at baseline, some covered
persons attempt to engage in prohibited credit practices or incur costs
related to determining whether a practice is prohibited. The proposed
rule may therefore modestly benefit covered persons by emphasizing that
these credit practices are prohibited.
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\178\ 49 FR 7740 (Mar. 1, 1984).
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Subpart C of the proposed rule would prohibit covered persons from
including in their contracts with consumers for consumer financial
products or services (i) clauses that require consumers to waive legal
rights designed to protect consumers; (ii) clauses that allow the
covered person to unilaterally amend the contract; and (iii) clauses
that restrict consumers' free expression. This provision would impose
one-time administrative costs associated with reviewing and revising
contracts to identify and remove any prohibited terms and conditions.
Covered persons currently using prohibited terms and conditions would
likely face increased exposure to consumer disputes, including
litigation. In response, covered persons currently using prohibited
terms and conditions would incur costs related to lowering their
exposure to disputes, for example by allocating more resources to
training staff to comply with underlying laws, as well as increased
costs related to countering disputes, either in formal litigation or
arbitration or in informal settings.
Subpart C likely would benefit some covered persons by reducing
uncertainty about the legality of prohibited terms and conditions, as
well as unintentional exposure to enforcement action by the CFPB or
other State and Federal regulators. Covered persons not currently using
terms and conditions that would be prohibited under subpart C may also
benefit from this provision of the proposed rule. In general, firms
that intentionally violate consumer protection laws or under-invest in
compliance obtain a competitive advantage over their more compliant
competitors. For example, firms that successfully deceive consumers
about the true cost or quality of the products or services they offer
by restricting the right of consumers to freely express their
experiences with the provider may gain market share at the expense of
firms that more accurately disclose costs or quality. In some cases,
firms that unlawfully use terms and conditions to limit consumers'
ability to resolve disputes may be able to offer lower prices to
consumers up front, even if the prohibited terms and conditions leave
consumers worse off on average. To the extent that the proposed rule
incentivizes firms using prohibited terms and conditions to increase
their compliance, firms which were previously compliant will benefit.
Clauses that restrict free expression prevent consumers from obtaining
information that would be relevant to their adoption or purchasing
decisions and make it more difficult for high-quality firms to gain
market share. Therefore, the prohibition on clauses restricting free
expression will benefit firms that would gain market share if more
information about consumers' experiences with their competitors was
publicly available.
Potential Costs and Benefits to Covered Persons of Subpart B
Subpart B of the proposed rule would codify the already existing
FTC Credit Practices Rule, which was first issued in 1984, and apply it
additionally to banks, savings associations, Federal credit unions, and
other covered persons under the CFPB's jurisdiction. Because the
conduct covered under this subpart is already generally understood to
be unfair and deceptive and is, in the CFPB's experience, exceedingly
uncommon, the CFPB does not anticipate that there will be any
significant economic effects in response to the proposed codification.
The CFPB seeks comment on whether any covered persons are not
prohibited or discouraged from using these practices at baseline, for
example because they are exempt from FTC authority and outside the
scope of applicable interagency guidance. The CFPB also seeks comment
on the incidence of these practices at baseline, including for any
covered persons not currently prohibited or discouraged from using
them.
Despite the longstanding prohibition on and discouragement of these
practices, it is possible that some covered persons attempt to engage
in such practices or incur costs related to determining whether a
practice is prohibited. The proposed rule may therefore modestly
benefit covered persons by clarifying that these credit practices are
prohibited. For example, it is possible that some covered persons that
would consult outside legal counsel to assess the risks of engaging in
a prohibited credit practice at baseline would no longer do so under
the proposed rule.
The CFPB does not have any data with which to quantify the extent
of uncertainty regarding the credit practices subpart B would prohibit
or the costs, if any, that firms bear as a result of such uncertainty.
Therefore, the CFPB cannot quantify the benefits associated with
reducing uncertainty about the legality of these practices. The CFPB
requests comment or data on cases where covered persons may lack
clarity about the applicability of current rules and guidance on credit
practices, or where such lack of clarity may be resolved by the
proposed rule's codification.
Potential Costs and Benefits to Covered Persons of Subpart C
Subpart C of the proposed rule prohibits covered persons from
including in their contracts with consumers for consumer financial
products or services (i) clauses that require consumers to waive legal
rights designed to protect consumers; (ii) clauses that allow the
covered person to unilaterally amend the contract; and (iii) clauses
that restrict consumers' free expression. The CFPB has preliminarily
determined that these prohibited terms and conditions constitute unfair
or deceptive acts or practices. Based on previous guidance \179\ and
enforcement actions by the CFPB and other State and Federal regulators,
the CFPB believes that some covered persons may already not use the
terms and conditions covered by subpart C because their use may
constitute prohibited UDAAPs or otherwise be unenforceable under common
law or other statutory law.
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\179\ See CFPB Consumer Financial Protection Circular 2024-03
``Unlawful and unenforceable contract terms and conditions'' at
<a href="https://www.consumerfinance.gov/compliance/circulars/consumer-financial-protection-circular-2024-03/">https://www.consumerfinance.gov/compliance/circulars/consumer-financial-protection-circular-2024-03/</a>.
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Costs of Reviewing and Revising Contracts
This provision would impose one-time administrative costs
associated with reviewing and revising contracts to identify and remove
any prohibited terms and conditions. To precisely quantify the costs to
covered persons, the CFPB would need representative data on the
operational costs that covered persons would incur to read and
understand the rule, identify any prohibited terms and conditions in
their contracts, revise any non-compliant contracts, and fully
implement use of the revised contracts. Given that the CFPB is unaware
of the existence of representative data of this kind, the CFPB has made
reasonable efforts to gather information on the one-time costs of
reviewing contracts for compliance with the proposed rule and revising
them if necessary. The following discussion combines available data
with assumptions informed by the CFPB's experience to produce estimated
costs for covered persons of three
[[Page 3587]]
representative sizes. Given the potential for wide variation in use of
terms and conditions covered by proposed subpart C at baseline and the
limited data available, these calculations may not fully quantify the
costs to an individual covered person. That is, the CFPB expects that
some firms would have higher or lower costs than the average costs
described here. The CFPB requests comment on this approach, as well as
any data or analysis that would inform its cost estimates.
In general, the one-time costs of bringing contracts into
compliance with the proposed rule would require four distinct tasks:
(1) understanding the rule; (2) reviewing all contract types to
identify any prohibited terms and conditions; (3) revising any contract
containing a prohibited term and condition; and (4) implementing use of
the revised contracts. As discussed above, the CFPB does not have
representative data on the prevalence of terms and conditions that
would be prohibited under the proposed rule. In order to avoid
underestimating the costs of the proposed rule, the CFPB assumes that
nearly all covered persons not exempt from the proposed rule would need
to review every contract type they use for compliance with the proposed
rule. Further, the CFPB assumes that nearly all contract types would
need to be revised to comply with the proposed rule.\180\ The CFPB
seeks comment or data on the accuracy of these assumptions.
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\180\ For example, the proposed rule would generally require
that unilateral amendment clauses explicitly describe the conditions
under which contracts can be unilaterally amended, such as
notification and options for opting out of the amendment. In the
CFPB's experience, these clauses are common but often do not
adequately inform consumers of their rights. Under the proposed
rule, any contract containing a unilateral amendment clause would
need to be revised.
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The first task would require firms to read the proposed rule and
understand its definitions and requirements. Based on the CFPB's
experience, this would take roughly two hours for the typical firm.
Some firms may have higher costs. For example, some firms may need to
take time to analyze whether they are covered persons subject to the
proposed rule. The CFPB seeks information or analysis on the typical
time burden that would be required to read and understand the proposed
rule.
The second task would require firms to review their contracts for
the presence of terms and conditions that would be prohibited by the
proposed rule. The CFPB understands that the types of terms and
conditions prohibited by the proposed rule are not uncommon and expects
that many covered persons would review their existing contracts for
compliance with the proposed rule. The CFPB expects that firms would
generally be able to complete this task by searching the text of the
contract for a limited set of key words that signify waivers,
amendments to the contract, or restrictions on expression and then
evaluating the relevant clause for compliance. The CFPB expects that
this would take between 60 and 90 minutes per contract, depending on
the number of contracts to review and the sophistication of the firm.
The CFPB seeks comment on the typical time burden that would be
involved in reviewing existing contracts for compliance with the
proposed rule. The CFPB also requests comment on whether any common
terms or conditions that would be prohibited by the proposed rule would
be difficult to identify.
The third task would require firms to revise any existing contracts
containing terms or conditions that would be prohibited by the proposed
rule. Based on academic research and its experience, the CFPB expects
that most contracts contain at least one term or condition that would
need to be revised. The CFPB also expects that many prohibited terms
and conditions would need relatively minor revisions that would not
significantly change the legal risks or business practices of the
firm.\181\ In other cases, firms may need to make complex decisions
about how to revise their contracts. However, the CFPB also expects
that many firms use similar terms and conditions across their
contracts, and that even firms using relatively few contracts would not
need to consider each term in each contract individually. Considering
these factors, the CFPB expects that, on average, revising contracts
for compliance would take between six and eight hours per type of
contract. The CFPB requests comment on the appropriateness of this
estimated burden, especially any data or analysis that would inform an
alternative estimate.
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\181\ For example, the CFPB is aware that some firms have
established policies to notify consumers of changes to their
contracts, despite having clauses which reserve the right to
unilaterally amend the contract without notification. These firms
would generally be able to comply with the proposed rule by
describing this existing policy in the contract. Although this would
require additional commitment to notify consumers of changes, it
would not require the firm to develop or establish a new
notification policy.
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The final task involves implementing the revised consumer
contracts. This is likely to involve updating consumer-facing websites,
notifying existing customers of the changes, collecting and destroying
outdated contracts, and printing out new paper copies of the revised
contract for use in offices. Given the diverse set of industries and
business models covered by the proposed rule, implementation costs are
likely to vary significantly between firms. In addition, these kinds of
printing and updating tasks will likely be incorporated into ongoing
processes and reviews. However, based on its experience the CFPB
expects this task to take approximately two to four hours per contract
on average, depending on the number of contracts and the sophistication
of the firm. The CFPB requests comment on the appropriateness of this
estimated burden, as well as any data or analysis that would inform an
alternative estimate.
The CFPB assesses the average hourly base wage rate for each of
these tasks at $51.21 per hour. This is the mean hourly wage for
employees in four major occupational groups assessed to be most likely
responsible for the compliance process: Management ($59.31/hr); Lawyers
($84.84/hr); Business and Financial Operations ($39.82/hr); and Office
and Administrative Support ($20.88/hr). The average hourly wage of
$51.21 is multiplied by the private industry benefits factor of 1.42 to
get a fully loaded wage rate of $72.72/hr. The CFPB includes these four
occupational groups in order to account for the mix of specialized
employees that are likely to participate in the identification,
revision, and implementation of terms and conditions due to
requirements imposed by the proposed rule. The CFPB assesses that
Office and Administrative Support staff are likely to be responsible
for gathering existing contracts and implementing use of any revised
contracts, potentially including destruction of existing noncompliant
contracts. Employees specialized in business and financial operations
or in legal occupations are likely to be responsible for making
decisions about how noncompliant contracts should be revised. Senior
officers and other managers are likely to review the revised contracts
and may provide additional information. The CFPB seeks comment on the
occupations of staff that would be required to ensure compliance with
proposed subpart C as well as any other information that would inform
its estimate of the average hourly compensation of the necessary
employees.
The direct compliance costs for a given covered person will depend
on its complexity in general, and, most importantly, on the number of
different types of contracts it uses. Table 2 presents the estimated
direct cost for
[[Page 3588]]
covered persons at three different levels of complexity, based on the
assumptions described above. The total cost depends on the number of
covered persons in each of the three representative categories of
complexity. Table 2 also reports estimates of how many of the estimated
number of non-exempt covered persons reported in table 1 may fall into
each category, based on their total revenue as reported in the Economic
Census. Specifically, the CFPB assumes that covered persons with under
$25 million in annual receipts fall within the ``simple'' tier with ten
covered contracts. Covered persons with annual receipts between $25
million and $100 million are assumed to be in the ``intermediate''
complexity tier, with 25 contracts. Covered persons with annual
receipts greater than $100 million are assumed to be in the ``complex''
tier, with 250 contracts. The CFPB believes that revenue is a
reasonable and transparent indicator of the number of contracts used by
covered persons, and is therefore appropriate for estimating the
average time burden and cost to covered entities. The CFPB seeks
information or analysis that could improve its estimates of the number
of contracts used by different types of firms.
The estimates detailed in table 2 are based on the assumption that
most covered persons write their contracts in-house. Covered persons
are likely to obtain compliant contracts from external contract
providers if the benefits of doing so outweigh the costs. External
contract providers, such as law firms or contract vendors, would likely
be able to reduce duplication of time and effort by reviewing and
revising contract terms that are used by many covered persons. If many
covered persons rely on external contract providers to bring their
contracts into compliance with the proposed rule, the total cost may be
significantly lower than the estimate detailed in table 2. The CFPB
requests comment on how covered persons may use external contract
providers to comply with the proposed rule, as well as any data or
analysis that would inform the cost estimates in table 2.
Table 2--Burden and Cost of Reviewing and Revising Contracts
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Intermediate (25
Description of task Simple (10 contracts) contracts) Complex (250 contracts)
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1. Read rule, understand requirement, 2 hours................ 2 hours................ 2 hours.
and analyze definitions.
2. Identify prohibited terms and 15 hours............... 25 hours............... 250 hours.
conditions.
3. Revise contract to eliminate 80 hours............... 200 hours.............. 1,500 hours.
prohibited terms and conditions.
4. Update contracts usage............ 40 hours............... 100 hours.............. 500 hours.
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Total time burden per entity:.... 137 hours.............. 327 hours.............. 2,252 hours.
Avg. wage rate \182\................. $72.72................. $72.72................. $72.72.
Total cost per entity................ $10,000................ $23,800................ $163,800.
Estimated number of entities \183\... 391.................... 900.................... 2,408.
Total estimated time burden:......... 53,567 hours........... 294,300 hours.......... 5,422,816 hours.
Total Estimated cost:................ $3,895,400............. $21,401,500............ $394,430,400.
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Covered persons may also need to periodically review their
contracts for compliance with the proposed rule as applicable State and
Federal laws change. The CFPB understands that most firms review their
contracts periodically at baseline and expects that the proposed rule
would only minimally increase the cost of these periodic reviews above
baseline levels. The CFPB requests comment on how the proposed rule
would change firms' processes for reviewing and updating their form
contracts as well as any data or analysis that would inform estimates
of the cost of those changes.
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\182\ This is the mean hourly wage for employees in four major
occupational groups assessed to be most likely responsible for the
compliance process: Management ($59.31/hr); Lawyer ($84.84/hr);
Business and Financial Operations ($39.82/hr); and O
[…truncated; see source link]Indexed from Federal Register on January 14, 2025.
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.