The Consumer Financial Protection Bureau (CFPB or Bureau) has issued a circular warning covered persons that including unlawful or unenforceable terms and conditions in consumer contracts can violate the prohibition on deceptive acts or practices in the Consumer Financial Protection Act (CFPA).
According to the CFPB, a representation or omission is deceptive if it is likely to mislead a reasonable consumer and is material, i.e., “involves information that is important to consumers and, hence, likely to affect their choice of, or conduct regarding, a product.” For example, 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.
Covered persons and service providers, as defined by the CFPA, must comply with the prohibition on deceptive acts or practices in the statute. The inclusion of certain terms in contracts 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.
In the circular, the Bureau provided examples of what it deemed to be deceptive contract terms. The CFPB pointed to a prior consent order finding deposit agreement language deceptive and unfair. In another example, the CFPB found that an auto loan servicer violated the CFPA when it used loan extension agreements or written confirmations that included language that created the misimpression that consumers could not exercise bankruptcy protection rights, when in fact, an agreement to waive an individual’s right to file for bankruptcy is void as against public policy. Lastly, the CFPB found that a remittance transfer provider violated the CFPA when it made misleading statements in disclosures purporting to limit consumers’ error resolution rights, when in fact, that would violate the Electronic Fund Transfer Act and the Remittance Rule.
Also, in a report discussed here, the CFPB highlighted that certain student tuition payment plan agreements and financial responsibility agreements include terms and conditions that, in the CFPB’s view, purport to waive the student’s legal protections or limit how students can enforce their rights. The CFPB found terms and conditions in contracts that included arbitration provisions, waivers of the students’ right to seek discharge and retain their own legal counsel, and misrepresentations of students’ legal right to discharge private student loans in bankruptcy. According to the CFPB, some of these terms are likely unenforceable and raise deception risks.
The CFPB has also stated 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. Similarly, the CFPB said that 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.
Our Take:
While the circular states broad concepts, the examples given by the CFPB make clear that all consumer financial services contracts are subject to scrutiny. We recommend that financial institutions under the CFPB’s purview review their contracts to make sure contractual provisions are fair and not deceptive from the perspective of the CFPB. Although the circular does not address situations where a company uses a multistate contract, financial institutions should have clear disclaimers limiting the applicability of the provision to states where certain conduct is allowed.
