Can persons that include unlawful or unenforceable terms and conditions in contracts for consumer financial products and services violate the prohibition on deceptive acts or practices in the Consumer Financial Protection Act (CFPA)?
Yes. “Covered persons” and “service providers” must comply with the prohibition on deceptive acts or practices in the CFPA. 1 The inclusion of certain terms in contracts for consumer financial products or services may violate the prohibition when applicable federal or state law renders such contractual terms, including those that purport to waive consumer rights, unlawful or unenforceable.
Many federal laws—including statutes enforced by the CFPB—render unlawful or unenforceable various contract terms in certain contexts. For example, as highlighted in a recent CFPB compliance bulletin, 2 the Consumer Review Fairness Act of 2016 generally prohibits the use of form contracts that limit how consumers communicate their reviews, assessments, or similar analysis of the sale of goods or services, and invalidates these types of contract terms and conditions. 3 As another example, Regulation Z, which implements the Truth-in-Lending Act (TILA), prohibits the inclusion in a residential mortgage loan or open-ended consumer credit plan secured by the principal dwelling of terms requiring arbitration or any other nonjudicial procedure as the method for resolving any controversy or settling claims arising out of the transaction. 4 The Electronic Fund Transfer Act (EFTA) prohibits contract terms that contain a “waiver of any right conferred” by EFTA and prohibits waivers of any “cause of action” under EFTA. 5 And the Military Lending Act and its implementing regulations generally prohibit terms in certain consumer credit contracts that require servicemembers and their dependents to “waive the covered borrower’s right to legal recourse under any otherwise applicable provision of State or Federal law . . . .” 6
In addition to express prohibitions like these, a recent federal district court decision held that the Servicemembers Civil Relief Act (SCRA) renders unenforceable provisions in contracts with servicemembers that purport to waive their right to participate in class actions to enforce the SCRA. 7 The Federal Trade Commission also administers laws that forbid certain contractual waivers. 8 And certain state laws similarly prohibit or restrict the use of waivers in consumer contracts. 9
The CFPB is issuing this Circular to emphasize that covered persons who include unlawful or unenforceable terms in their consumer contracts may violate the CFPA’s prohibition on deceptive acts or practices. 10
Covered persons may violate the CFPA’s prohibition on deceptive acts or practices if they include terms, including waiver provisions, in their consumer contracts that are rendered unlawful or unenforceable by federal or state law. Under the CFPA, a representation or omission is deceptive if it is likely to mislead a reasonable consumer and is material. A representation is “material” if it “involves information that is important to consumers and, hence, likely to affect their choice of, or conduct regarding, a product.” 11 A contractual provision stating that a consumer agrees not to exercise a legal right is likely to affect a consumer’s willingness to attempt to exercise that right in the event of a dispute. Moreover, certain categories of information, including express representations, are presumptively material. 12
In the recent compliance bulletin noted above, the CFPB reminded covered persons that they could be liable under the CFPA if they deceive consumers using form contract restrictions on consumer reviews that are unenforceable. 13 The CFPB explained that “including an unenforceable material term in a consumer contract is deceptive, because it misleads consumers into believing the contract term is enforceable,” and that “disclaimers in a contract such as ‘subject to applicable law’ do not cure the misrepresentation caused by the inclusion of an unenforceable contract term.” 14 Similarly, qualifying a provision that purports to waive a consumer right with “except where unenforceable” is unlikely to cure the provision’s misleading or material nature. Neither do disclaimers that are issued after the fact. 15
CFPB supervisory examiners have identified several violations of the CFPA’s prohibition on deception stemming from covered persons’ use of unlawful or unenforceable contract terms and conditions. 16 In addition, in several prior enforcement matters, the CFPB has found covered persons to have violated the CFPA by including in contracts for consumer financial products or services terms that are unlawful or unenforceable under federal or state law, such as waivers that are prohibited by federal or state law. For example, the CFPB found that a respondent bank engaged in a deceptive practice under the CFPA when it represented to consumers that because they signed a deposit agreement including broad language directing the bank not to contest legal process, consumers had waived their right to hold the bank liable for improperly responding to garnishment notices; in fact, regardless of the language in the account agreement, consumers had the right to challenge the garnishments. 17 In another matter, the CFPB found that a respondent auto loan servicer violated the CFPA’s deception prohibition when it used loan extension agreements or written confirmations that included language that created the net misimpression that consumers could not exercise bankruptcy protection rights, which was false. 18 In fact, an agreement to waive an individual’s right to file for bankruptcy is void as against public policy, 19 rendering terms that purport to waive such right generally unenforceable. The CFPB found in a different matter that a respondent non-bank remittance transfer provider engaged in a deceptive act or practice in violation of the CFPA when it made misleading statements in disclosures purporting to limit consumers’ error resolution rights, in violation of EFTA and the Remittance Rule. 20 And, in a recent report, the CFPB highlighted that certain student tuition payment plan agreements and financial responsibility agreements “include terms and conditions that purport to waive consumers’ legal protections, limit how consumers enforce their rights, or misrepresent the rights or protections available to consumers under existing law.” 21 Some of these terms and conditions, such as purported waivers of the right to retain counsel and the right to seek discharge in bankruptcy proceedings, are likely unenforceable and thus similarly raise deception risk.
As these examples demonstrate, 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. Deceptive acts and practices such as these pose risk to consumers, whose rights are undermined as a result, and distort markets to the disadvantage of covered persons who abide by the law by including only lawful terms and conditions in their consumer contracts.
Thus, the inclusion of unlawful or unenforceable terms in consumer contracts, including unlawful or unenforceable waiver provisions, may violate the CFPA’s prohibition on deceptive acts or practices.
Consumer Financial Protection Circulars are issued to all parties with authority to enforce federal consumer financial law. The Consumer Financial Protection Bureau (CFPB) is the principal federal regulator responsible for administering federal consumer financial law, see 12 U.S.C. 5511, including the Consumer Financial Protection Act’s prohibition on unfair, deceptive, and abusive acts or practices, 12 U.S.C. 5536(a)(1)(B), and 18 other “enumerated consumer laws,” 12 U.S.C. 5481(12). However, these laws are also enforced by state attorneys general and state regulators, 12 U.S.C. 5552, and prudential regulators including the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the National Credit Union Administration. See, e.g., 12 U.S.C. 5516(d), 5581(c)(2) (exclusive enforcement authority for banks and credit unions with $10 billion or less in assets). Some federal consumer financial laws are also enforceable by other federal agencies, including the Department of Justice and the Federal Trade Commission, the Farm Credit Administration, the Department of Transportation, and the Department of Agriculture. In addition, some of these laws provide for private enforcement.
Consumer Financial Protection Circulars are intended to promote consistency in approach across the various enforcement agencies and parties, pursuant to the CFPB’s statutory objective to ensure federal consumer financial law is enforced consistently. 12 U.S.C. 5511(b)(4). Consumer Financial Protection Circulars are also intended to provide transparency to partner agencies regarding the CFPB’s intended approach when cooperating in enforcement actions. See, e.g., 12 U.S.C. 5552(b) (consultation with CFPB by state attorneys general and regulators); 12 U.S.C. 5562(a) (joint investigatory work between CFPB and other agencies).
Consumer Financial Protection Circulars are general statements of policy under the Administrative Procedure Act. 5 U.S.C. 553(b). They provide background information about applicable law, articulate considerations relevant to the Bureau's exercise of its authorities, and, in the interest of maintaining consistency, advise other parties with authority to enforce federal consumer financial law. They do not restrict the Bureau’s exercise of its authorities, impose any legal requirements on external parties, or create or confer any rights on external parties that could be enforceable in any administrative or civil proceeding. The CFPB Director is instructing CFPB staff as described herein, and the CFPB will then make final decisions on individual matters based on an assessment of the factual record, applicable law, and factors relevant to prosecutorial discretion.