CFPB Issues UDAAP Guidance On Contracts for Consumer Financial Products and Services

On June 4, 2024, the Consumer Financial Protection Bureau (“CFPB”) issued a Consumer Financial Protection Circular 2024-03 (“Circular”) warning that the use of unlawful or unenforceable terms and conditions in contracts for consumer financial products or services may violate the prohibition on deceptive acts or practices in the Consumer Financial Protection Act (“CFPA”). In a related press release, CFPB Director Rohit Chopra said, “Federal and state laws ban a host of coercive contract clauses that censor and restrict individual freedoms and rights. The CFPB will take action against companies and individuals that deceptively slip these terms into their fine print.”

Under the CFPA, a representation, omission, act or practice is deceptive when:

1. The representation, omission, act, or practice misleads or is likely to mislead the consumer;
2. The consumer’s interpretation of the representation, omission, act, or practice is reasonable under the circumstances; and
3. The misleading representation, omission, act, or practice is material.

In referencing their Bulletin 2022-05 on consumer reviews, the CFPB highlights that many federal laws invalidate contract terms and conditions that require consumers to waive consumer protections provided under federal law, such as TILA, EFTA, MLA, SCRA. The Circular states that covered persons may violate CFPA by including “unenforceable material terms” and such misleading practice cannot be cured by including a provision like “except where unenforceable” because consumer are misled into believing that a material contract provision is lawful and enforceable when they are not. The CFPB concluded that:

"[C]onsumers 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."

The Circular states that CFPB supervisory examiners have identified violations of the CFPA’s prohibition on deception stemming from covered persons’ use of unlawful or unenforceable contract terms and conditions that claim to limit consumer rights and protections afforded by federal or state law. The CFPB provided examples related to limiting the right to contest garnishments, creating the misimpression that consumers could not exercise bankruptcy protection rights, waivers of the right to retain counsel, and misrepresenting consumer protections available under laws.

In March 2024, the CFPB issued a circular addressing deceptive marketing practices for remittance transfers. In the prior circular, the CFPB addressed concerns with the use of fine print to hide promotional conditions and marketing “free” services. While the CFPB uses “fine print” in its headline, fine print is generally used to describe an agreement where some text is printed in a much smaller font size to obscure important terms or where, similar to the March circular, the prominent marketing text does not include the material conditions and limitations of the product or service, which are instead disclosed in much smaller text in a footnote or below the scroll on the webpage. Despite this misnomer, we suspect the CFPB is addressing consumer protections, liabilities, and waivers that are included in account and loan agreements. These agreements are commonly several pages in length but generally use one font size throughout (usually 9 point or greater) and use bold or ALL CAPS fonts for provisions that may be of special importance to consumers (such as liability, waiver of jury trial, or arbitration provisions).

We recommend that companies review their consumer financial products and services contracts to identify and modify any contract terms that may violate the CFPA’s prohibition on deceptive acts and practices. Note that the CFPB will hold a company liable for misleading and unenforceable contract terms even if the terms are provided by one of the industry’s contract form providers or commonly found in industry contracts. Our attorneys are experienced in reviewing consumer contracts and can help companies mitigate any potential UDAAP concerns.

It is often not an easy task to identify contract terms that violate federal or state laws. Many companies have sought to protect themselves by using prefatory language such as “except where prohibited by law” in situations where the law is unclear as to whether a contract provision is lawful or where the company is using a contract in several states and the contract provision is unlawful in one or more states but not in all states in which the company does business. As stated above, the CFPB will consider such prefatory language to be deceptive. Companies must carefully scrutinize all consumer contracts to identify contract provisions that expressly or implicitly waive consumer rights or increase consumer obligations above what the law may allow, research the legality of such contract provisions, and excise provisions that violate and even arguably violate federal or state law. This is by no means a simple project. Companies will need to engage counsel experienced in consumer financial services law to do that work.

Although some have questioned whether the issuance of this Circular one day after the release of the final rule for the Registry of Nonbank Covered Persons Subject to Certain Agency and Court Orders may mean that the CFPB has decided to abandon finalizing the proposed registry of form contracts used by certain non-banks, we believe that the CFPB has not abandoned the registry. In the proposal for the registry, the CFPB included the following contract terms, some of which may not be covered by the Circular because they are lawful:

• Precluding the consumer from bringing a legal action after a certain period of time;
• Specifying a forum or venue where a consumer must bring a legal action in court;
• Limiting the ability of the consumer to file a legal action seeking relief for other consumers or to seek to participate in a legal action filed by others;
• Limiting liability to the consumer in a legal action including by capping the amount of recovery or type of remedy;
• Waiving a cause of legal action by the consumer, including by stating a person is not responsible to the consumer for a harm or violation of law;
• Limiting the ability of the consumer to make any written, oral, or pictorial review, assessment, complaint, or other similar analysis or statement concerning the offering provision of consumer financial products or services by the supervised registrant;
• Waiving, whether by extinguishing or causing the consumer to relinquish or agree not to assert, any other identified consumer legal protection, including any specified right, defense, or protection afforded to the consumer under Constitutional law, a statute or regulation, or common law; and
• Requiring that a consumer bring any type of legal action in arbitration.