A CFPB Circular from June bears additional scrutiny from across the financial services spectrum. Despite most courts allowing “savings” clauses in contracts, the Consumer Financial Protection Bureau (CFPB) indicates that the inclusion of such provisions that are deemed “unenforceable” would render a contract unfair, deceptive, or abusive (UDAAP).
Under state law, the enforcement of savings clauses is generally upheld unless the contract's invalid provisions are so integral to the agreement that their removal would defeat the contract’s overall purpose. State laws regarding contract enforcement vary, and the treatment of savings clauses can depend on factors such as:
- Public policy: If a provision violates public policy (e.g., certain waiver-of-rights clauses or clauses that violate consumer protection statutes), state courts may refuse to enforce the savings clause.
- Severability: Savings clauses often function as severability clauses, which allow courts to "sever" or remove the offending provisions while keeping the rest of the contract intact, provided doing so does not fundamentally alter the contract’s nature.
CFPB Circular (March 2024):
The CFPB issued this circular to specifically address the inclusion of unenforceable contract clauses in consumer financial contracts. The circular highlights the bureau's stance on limiting the use of such clauses, particularly when the CFPB claims these provisions attempt to mislead consumers into thinking they have fewer rights than they do under federal or state law.
Key aspects of the March CFPB Circular:
- Preemption of unenforceable clauses: The circular states that the inclusion, even if disclaimed elsewhere, may constitute an UDAAP if the clauses conflict with federal law or violate statutory consumer rights.
- Mere inclusion is misleading: The circular discourages the inclusion of clauses that might mislead consumers about their rights, such as waiver-of-class-action clauses, mandatory arbitration provisions that restrict access to courts, or disclaimers of warranties that are guaranteed under consumer protection laws.
- Impact on Reg E Disclosures: Many financial services' companies include language that could arguably conflict with protections on the Electronic Fund Transfer Act (EFTA) and Regulation E. This is particularly complicated given recent CFPB guidance attempting to broaden the protections granted by Regulation E – beyond what was included in the language of the regulation, particularly for “transaction,” as opposed to “access device” fraud. (See my podcast for a discussion of this issue).
- Impact of state decisions: The guidance also references that the inclusion of contract language that has been found unenforceable under state law could also be deemed a UDAAP violation. This is particularly challenging for financial institutions that operate interstate and that rely on preemption of certain state laws.
This circular should be carefully examined by financial services' companies as part of an overall assessment of consumer-facing contracts and disclosures. Traditional use of “savings” clauses will likely be under attack and require a more careful consideration of the risks versus rewards of including aggressive consumer waivers in contracts.
The CFPB explained that “including an unenforceable material term in a consumer contract is deceptive, because it misleads consumers into believing the contract term is enforceable,” and 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."
www.consumerfinance.gov/...
