CFPB Warns Against Including Unlawful Terms in Consumer Contracts
The CFPB warned "covered persons" against including unlawful or unenforceable terms and conditions in contracts for consumer financial products or services. The CFPB stated that doing so could violate the Consumer Financial Protection Act's ("CFPA") prohibition on deceptive acts or practices.
In a Consumer Financial Protection Circular, the CFPB explained that under the CFPA, a representation or omission will be considered deceptive if (i) a reasonable consumer is likely to be misled by the representation or omission and (ii) the representation or omission is material. The CFPB asserted that a representation is material if it "involves information that is important to consumers and, hence, likely to affect their choice of, or conduct regarding, a product." The CFPB also emphasized that certain provisions are presumed to be material, simply by virtue of their inclusion in the contract. The CFPB highlighted a common example of a deceptive or misleading provision, the general liability waiver, which may claim to fully protect companies from lawsuits, despite the fact that most states have laws that treat these waivers as unenforceable.
Further, the CFPB stated that companies may be liable under the CFPA if they borrow the unenforceable terms from templates or other contracts. The CFPB clarified that disclaimers in a contract, including those issued after the fact, are "unlikely to cure the provision’s misleading or material nature."
Commentary
This latest CFPB Circular illustrates the agency's continued focus on all things UDAAP (unfair, deceptive, and abusive acts and practices). The CFPB has taken action regarding deceptive acts and practices on many occasions over the past several years, including with respect to mortgage borrowers, bank accountholders, remittance transfer consumers, and auto loan borrowers. This Circular adds to some prior, but related, CFPB initiatives and guidance, including: (i) a proposed rule issued last year to require certain supervised nonbank companies to register with the CFPB "information about their use of contractual terms that claim to waive or limit consumer rights;" (ii) a CFPB warning to banks and financial companies about the use of form contracts that limit how consumers "communicate their reviews, assessments, or similar analysis of the sale of goods or services;" (iii) a CFPB report concerning certain tuition payment plans that include likely unenforceable terms and conditions; and (iv) a recent CFPB filing of an amicus brief with the US Department of Justice concerning the ability of servicemembers to file lawsuits to enforce the Servicemembers Civil Relief Act "notwithstanding unenforceable fine print in contracts."
In the Circular, the CFPB said that supervisory examiners "have identified several violations of the CFPA's prohibition on deception stemming from covered persons' use of unlawful or unenforceable contract terms and conditions." Take note: the CFPB Director said he is instructing CFPB staff, pursuant to the substance of this Circular, to "make final decisions on individual matters based on an assessment of the factual record, applicable law, and factors relevant to prosecutorial discretion."