Today, the Consumer Financial Protection Bureau (“CFPB”) proposed a rule that would establish a public registry of supervised nonbanks’ terms and conditions in “take it or leave it” form contracts that claim to waive or limit consumer rights and protections, like bankruptcy rights, liability amounts, or complaint rights. Larger participants operating in automobile financing (and student loan servicing, consumer reporting, consumer debt collection, and international remittances) would be subject to the rule.
Under the proposed rule, nonbanks subject to the CFPB’s supervisory jurisdiction would need to submit information on terms and conditions in form contracts they use that seek to waive or limit individuals’ rights and other legal protections. That information would be posted in a registry that will be open to the public, including to other consumer financial protection enforcers, like state regulators, state attorneys general and plaintiff’s attorneys.
Some examples of terms and conditions that would be included in the registry are those that:
• Waive servicemembers’ legal protections: The Military Lending Act (MLA) and the Servicemembers Civil Relief Act (SCRA) set limits on the cost of loans for military families and include numerous other important consumer protections. The MLA broadly prohibits waivers of legal protections and arbitration agreements, and the SCRA limits waivers of its protections.
• Undermine credit reporting rights: In contracts for credit monitoring products, some consumer reporting companies may use terms and conditions that seek to block the ability of consumers to pursue legal action, including through class action lawsuits, to remedy alleged violations of the Fair Credit Reporting Act. For example, a term or condition may seek to limit liability to a class of consumers when a consumer reporting company fails to reasonably investigate inaccurate information on numerous consumer reports.
• Limit lender liability for bank fees caused by a lender’s repeated debit attempts: In contracts for short-term small-dollar loans, some companies may seek to waive liability for bank fees that borrowers incur when the lender engages in repeated attempts to debit payments from an account that lacks sufficient funds to cover the debit.
• Mislead consumers by using unenforceable waivers in mortgage contracts: The CFPB claims that its examiners have regularly identified deceptive acts and practices committed through mortgage lenders’ use of waivers and limitations that are inconsistent with the Truth in Lending Act’s restrictions on the use of waivers and limitations in such transactions.
The CFPB’s rule proposes to require nonbanks that are subject to CFPB supervision and that use form contracts to impose terms and conditions that limit or purport to limit consumer rights and legal protections to register with the CFPB. The proposed rule, if finalized, would:
• Identify and collect information on form contract terms and conditions that seek to waive or limit consumer rights and other legal protections: The CFPB would seek information on contract terms and conditions that:
• seek to waive any constitutional, statutory, or common law legal protection, right, or defense;
• restrict the ability of consumers to complain;
• limit the time or place for consumers to bring legal actions;
• limit liability amounts;
• waive class action rights; and
• impose arbitration provisions.
Both company information and information about the use of the terms and conditions would be published.
• Increase market transparency and improve risk-based oversight: When standard terms and conditions seek to limit the ability of consumers to protect themselves, the CFPB claims that increased public oversight is necessary, and the registry would provide support for the CFPB’s monitoring of supervised markets. Specifically, the CFPB claims that collecting and publishing information about the identities of nonbanks and their contract terms and conditions would allow for enhanced risk-based government oversight. Additionally, the CFPB and agencies from all levels of government would be able to consider the information when prioritizing their supervision and enforcement resources.
Apart from specified exceptions, all nonbanks subject to CFPB supervisory jurisdiction, including those operating in payday lending, private student loan origination, and mortgage lending and servicing would be subject to this proposed rule. Larger participants operating in student loan servicing, automobile financing, consumer reporting, consumer debt collection, and international remittances would also be subject to the rule.
The public comment period to the proposed rule will remain open for 60 days following publication of the proposed rule on the CFPB’s website or 30 days following publication of the proposed rule in the Federal Register (estimated to be March 13, 2023), whichever period is longer.
The CFPB proposes that, once issued, the final rule for the proposal would be effective 30 days after it is published in the Federal Register. However, registration would be required by an annual registration date that comes at a later time, after the nonbank registration system implementation date, which is likely to be no earlier than January 2024. The CFPB is also seeking comment on the proposed effective date including whether it should be at a different time, and if so, when and why.
As the proposed rule works toward being finalized, and guidance is issued, we will continue to monitor and assess its impact to the industry.