Payments Report: News from Washington, Brought to you by NEACH
VOLUME 2024-4 (JUN 24)
Overview: The Consumer Financial Protection Bureau (“CFPB” or “Bureau”) issued a circular on June 4, 2024 warning against the use of unlawful and unenforceable terms and conditions in contracts for consumer financial products or services. The CFPB’s new policy concludes that inclusion of such terms may violate the Consumer Financial Protection Act’s prohibition on deceptive acts or practices.
Background
For decades unfair and deceptive acts or practices (“UDAP”) were prohibited by the Federal Trade Commission Act (“FTC Act”) and other laws. Over the years, case law, enforcement actions, and regulatory guidance circumscribed the contours of how authorities define unfair or deceptive conduct. In 1980, the FTC issued a policy statement on unfair acts, followed by a 1983 statement on deceptive acts. This area of consumer protection remained stable until the Dodd-Frank Act's enactment in 2010. Title X of the Dodd-Frank Act, known as the Consumer Financial Protection Act of 2010 (“CFPA”), simultaneously created the CFPB and expanded UDAP to include abusive acts or practices (“UDAAP”). The CFPA granted the Bureau broad enforcement power over UDAAP violations in the consumer financial services market.
Deceptive Acts or Practices
Neither the CFPA nor the FTC Act expressly define what constitutes a deceptive act or practice. The FTC established its own standard on deceptive acts in 1983, based in part on precedent set by case law and enforcement actions. In 2012, the CFPB published its UDAAP Examination Manual, which adopts in full the FTC standard for deception. Namely, an act or practice is deceptive when:
- the representation, omission, act, or practice misleads or is likely to mislead the consumer;
- the consumer’s interpretation of the representation, omission, act, or practice is reasonable under the circumstances; and
- the misleading representation, omission, act, or practice is material.
In the view of both the FTC and CFPB, deception is not limited to the actual misleading of consumers but also includes acts that are likely to mislead “reasonable” consumers. As noted in the Bureau’s UDAAP Examination Manual, it does not matter if a majority of the target audience is not misled by a representation or omission so long as a significant minority of such consumers is misled. And misleading conduct is deemed material if it is likely to affect a consumer’s choice or conduct regarding a product, service, or transaction.
CFPB 2024 Circular on Contractual Fine Print Tactics
The CFPB’s circular explains that the use of unlawful or unenforceable terms and conditions in contracts for consumer financial products or services violates the deceptive acts or practices prohibition in the CFPA. According to the Bureau, companies sometimes use this fine print tactic to try to trick consumers into believing they have given up certain legal rights or protections. The Bureau announced the circular as a “warning” that is “part of the CFPB’s broader efforts to ensure freedom and fairness in people’s interactions with financial institutions.”
The circular provides that including unenforceable terms in contracts, such as certain waiver provisions, is deceptive because it misleads consumers into believing these terms are valid. Some statutes provide consumer rights and protections that may not be waived by contract. For example, the Truth in Lending Act prohibits mortgage loan terms that require arbitration or non-judicial procedures to resolve claims arising out of the mortgage on a consumer’s principal dwelling. If a covered mortgage loan includes a mandatory arbitration provision, it is likely void and unenforceable. However, the inclusion of such a provision in a mortgage agreement may mislead a borrower into believing that they may not sue the mortgage lender in court, causing the borrower to forego exercising rights the borrower has under applicable law. Disclaimers like “subject to applicable law” do not correct this deception.
CFPB examiners have found several instances of deception from using unlawful contract terms, including cases involving mortgage borrowers, bank accountholders, auto loan borrowers, and remittance transfer consumers. For example, a bank misled consumers by implying they waived rights to challenge garnishments, and an auto loan servicer falsely suggested consumers could not exercise bankruptcy rights. Such deceptive practices harm consumers and violate the CFPA, the circular says. Companies may be liable even if the unenforceable terms are borrowed from form templates or widely available contracts.
Outlook: This circular builds on previous CFPB initiatives and gives a clear indication of the Bureau’s enforcement priorities. Because UDAAP violations can lead to substantial enforcement actions or potentially to class action lawsuits, the circular raises the stakes on many standard contract terms. Businesses that provide consumer financial products or services should give careful review to their terms and conditions to avoid inadvertently committing UDAAP violations. As with other recent CFPB policy initiatives, this circular may be subjected to significant public scrutiny. Opponents of the policy may argue that the Bureau adopted the policy impermissibly by not engaging in a notice-and-comment rulemaking process. They may also argue that the policy resembles the CFPB’s previous ban on mandatory arbitration clauses for certain financial products/services, which Congress overturned using special procedures at the beginning of the Trump Administration. As such, the Bureau’s adoption of this policy may not be the last word—litigation and/or legislative efforts to overturn it may be pursued.
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