Yesterday, the Consumer Financial Protection Bureau (CFPB or Bureau) proposed a new rule aimed at banning certain contractual provisions in agreements for consumer financial products or services. The CFPB’s proposal targets certain terms and conditions sometimes found in so-called contracts of adhesion or standard-form contracts, including waivers of legal rights and protections, contract terms that limit free expression, and other terms that the CFPB believes undermine consumers’ rights and protections. The proposed rule also seeks to codify certain prohibitions under the Federal Trade Commission’s (FTC) Credit Practices Rule.
The proposed rule would generally apply to “covered persons” under the Consumer Financial Protection Act (CFPA), including any person offering or providing a consumer financial product or service, as well as affiliates acting as service providers. Small businesses, small organizations, or small governmental jurisdictions, as defined by the Small Business Act, would be exempt.
Key Provisions of the Proposed Rule
Prohibition of Specific Contract Terms
The proposed rule would prohibit covered persons from including the following types of clauses in their consumer contracts:
- Waivers of Legal Rights: Clauses that purport to waive substantive consumer legal rights and protections or their remedies granted by state or federal law. The proposed rule would not prohibit clauses with regard to procedural rights, like venue clauses, arbitration clauses, or class action waivers.
- Unilateral Amendments: Clauses that reserve a company’s discretion to amend a material term of the contract unilaterally, including change in terms provisions.
- Restrictions on Free Expression: Clauses that restrain a consumer’s lawful free expression, such as limiting the right to provide a negative review or engage in certain political speech. This would include any contractual mechanism for enforcing those limits, including fees, reserving rights to close accounts on that basis, or terms that do not describe a particular remedial consequence but could give rise to a breach of contract claim. But it would not prohibit contract clauses giving covered persons a right to close accounts based on the use of an account to commit fraud or illegal activity.
Codification of the Credit Practices Rule
The CFPB proposes to codify the Credit Practices Rule (currently applicable only to creditors within the FTC’s jurisdiction) to apply to covered persons subject to the CFPA. The CFPB’s stated aim is “to grant state law enforcement new authority to enforce the existing Credit Practices Rule and the additional prohibitions against national banks.”
The credit practices that would be prohibited under this proposed rule are the same as those described in the FTC’s Credit Practices Rule, including:
- Confessions of judgment: The proposed rule would prohibit a cognovit or confession of judgment (for purposes other than executory process in Louisiana), warrant of attorney, or other waiver of the right of notice and the opportunity to be heard in the event of a lawsuit.
- Waivers of exemption: The proposed rule would prohibit an executory waiver or a limitation of exemption from attachment, execution, or other process on real or personal property held by the consumer, unless the waiver applies solely to property subject to a security interest.
- Wage assignments: The proposed rule would prohibit an assignment of wages unless: (1) The assignment is revocable at the will of the debtor; (2) The assignment is a payroll deduction plan or preauthorized payment plan; or (3) The assignment applies only to wages or other earnings already earned at the time of the assignment.
- Security interests in household goods: The proposed rule would prohibit a nonpossessory security interest in household goods other than a purchase money security interest.
- Cosigners: The proposed rule would make it unlawful for a covered person to misrepresent the nature or extent of cosigner liability. Further, the proposed rule would require a covered person to provide a cosigner notice.
Request for Comments
The CFPB is accepting public comments on the proposed rule until April 1, 2025.