On June 4, the CFPB issued a circular targeting the deceptive use of fine print in consumer financial contracts to include unlawful or unenforceable terms. In a press release issued the same day, the CFPB stressed that these terms may deceive consumers into believing they have relinquished certain rights and protections, guaranteed to them under existing consumer protection laws.
In the circular, the Bureau argued that the inclusion of such terms can constitute a violation of the Consumer Financial Protection Act’s prohibition on deceptive acts or practices. See 12 U.S.C. §§ 5531; 5536. The agency stated that including a material unenforceable term in a consumer contract is deceptive, because it misleads consumers into believing the contract term is enforceable.
According to the Bureau, many consumer contracts contain terms that seemingly restrict consumer rights and protections. It notes that general liability waivers are crafted to shield companies from counterparty lawsuits entirely—provisions that stand contrary to federal and state laws that prohibit such waivers. The Bureau’s circular further reminds market participants that they may face liability even if such unenforceable terms are sourced from standard forms or commonly used contracts.
In recent years, the CFPB has identified multiple instances of deceptive practices in connection with consumer contract terms across various sectors of the economy:
- Mortgages: In the Bureau’s Summer 2015 and Fall 2015 Supervisory Highlights, examiners found deceptive terms in contracts that falsely claimed to waive mortgage borrowers’ irrevocable rights. Similarly, contracts that prohibit fine print clauses compelling homeowners to settle mortgage disputes through arbitration or other non-judicial methods violate TILA.
- Banking: A bank was found to have deceived consumers with contract terms in deposit agreement purportedly waiving the accountholder’s right to hold the bank accountable for mishandling garnishment orders.
- Remittance transfers: The CFPB found that a remittance transfer provider included misleading statements in disclosures that unlawfully limited consumers’ error resolution rights. Generally speaking, the EFTA prohibits contract terms that contain a “waiver of any right conferred” by the statute and prohibits waivers of any “cause of action” under it.
- Auto loans: The CFPB found an auto loan servicer deceptively included language in contracts suggesting consumers could not exercise bankruptcy rights, when, provisions waiving bankruptcy rights are generally void as a matter of public policy.
Putting It Into Practice: The Bureau’s view on this subject is not novel and as discussed above, has been noticed in prior editions of its Supervisory Highlights. But its circular takes on greater importance now that the Bureau is close to finalizing its terms and conditions registry for consumer financial contracts. That registry will require certain nonbank companies to register information about their use of contractual terms that waive or limit consumer rights (previously discussed here). Once this registry is finalized, the Bureau will be able to easily identify which contractual clauses it feels are objectionable and take appropriate regulatory action.