On January 13, 2025, the Consumer Financial Protection Bureau (CFPB) issued a notice of proposed rulemaking that would codify the Federal Trade Commission's (FTC) Credit Practices Rule and prohibit the inclusion of three broad categories of clauses in contracts for consumer financial products or services.
This notice is the latest in the CFPB's guidance applying unfair, deceptive, or abusive acts or practices (UDAAP) principles to contractual terms and provisions. In January 2023, the CFPB proposed a rule that would require supervised non-banks using form contracts that include certain waivers of legal rights to register with the CFPB. The rule has not been finalized. In June 2024, the CFPB issued a circular warning that including unlawful and unenforceable contract terms and conditions may constitute a UDAAP violation.
The rule would apply to all "covered persons" under the Consumer Financial Protection Act of 2010 (CFPA), subject to certain exceptions. A covered person under the CFPA is "(A) any person that engages in offering or providing a consumer financial product or service; and (B) any affiliate of a person described in subparagraph (A) if such affiliate acts as a service provider to such person."
The CFPB seeks comments on each provision of the proposed rule. Comments for the proposed rule must be received on or before April 1, 2025.
Credit Practices Rule
The FTC first published the Credit Practices Rule in 1984, and the banking regulators issued their own companion rules applicable to banks. However, the CFPA revoked the rulemaking authority of the banking regulators, and these companion rules were repealed. As a result, banks and credit unions were no longer covered by the Credit Practices Rule or a companion rule. Nevertheless, CFPB guidance has long held that the credit practices prohibited in the companion rules may still violate the CFPB's prohibitions against unfair or deceptive practices when carried out by banks or credit unions. The proposed rule would codify that the Credit Practices Rule applies to all covered persons, whether bank or non-bank.
The CFPB's proposed rule is identical to the FTC's rule. Specifically, the proposed rule would prohibit:
- Confession of judgment.A cognovit or confession of judgment (for purposes other than executory process in the State of Louisiana), warrant of attorney, or other waiver of the right of notice and the opportunity to be heard in the event of a suit or process thereon.
- Waiver of exemption. An executory waiver or limitation of exemption from attachment, execution, or other process on real or personal property held, owned by, or due to the consumer, unless the waiver applies solely to property subject to a security interest executed in connection with the obligation.
- Assignment of wages. An assignment of
wages or other earnings unless:
- (1) The assignment by its terms is revocable at the will of the debtor;
- (2) The assignment is a payroll deduction plan or preauthorized payment plan, commencing at the time of the transaction, in which the consumer authorizes a series of wage deductions as a method of making each payment; or
- (3) The assignment applies only to wages or other earnings already earned at the time of the assignment.
- Security interest in household goods. A nonpossessory security interest in household goods other than a purchase money security interest.
The proposed rule would also cover the following with regard to cosigners:
- Misrepresentation of cosigner liability. Misrepresenting the nature or extent of cosigner liability.
- Uninformed obligation of cosigner liability. Obligating a cosigner unless the cosigner is informed prior to becoming obligated of the nature of his or her liability as a cosigner.
- Required disclosure to cosigners. A covered person would be required to provide a cosigner a disclosure containing specific notice language (covering, in part, the two points above).
Finally, the proposed rule would prohibit covered persons from "pyramiding" late charges – i.e., a creditor assesses multiple delinquency charges due to a single late payment because any subsequent payments are first applied to the outstanding late charge and only then to interest and principal.
Prohibited Contractual Provisions
The proposed rule would prohibit:
- Clauses waiving consumer protection laws. Any clause "that disclaims or waives . . . any substantive State or Federal law designed to protect or benefit consumers, or their remedies, unless an applicable statute explicitly deems it waivable." The proposed rule lists, as examples, waivers of remedies to consumers and waivers of enforcement causes of action. It would cover waivers in connection with the CFPA, the Truth in Lending Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, the Electronic Funds Transfer Act, the Bankruptcy Code, antitrust laws, servicemember protection laws, more stringent state laws, and common law rights to bring claims. The language is purposely broad and likely covers numerous federal and state statutes and common law.
- Unilateral amendment clauses. Any clause "that expressly reserves the covered person's right to unilaterally change, modify, revise, or add a material term of a contract for a consumer financial product or service." The CFPB noted its concern that these clauses allow covered persons "to change fees, dispute resolution procedures, terms of service, or privacy policies." While the CFPB insists that it will not prohibit modifications to contracts generally, it seems skeptical that unilateral amendment clauses sufficiently allow for "mutual assent" and "is concerned . . . because they undermine the consumer's freedom to benefit from the contract." While noting that some statutes, such as the Credit Card Accountability Responsibility and Disclosure Act of 2009, require notices for changes in terms, the CFPB nonetheless finds that "abuses arising from unilateral amendments remain a problem."
- Clauses restraining free expression. Any clause "that limits or restrains, or purports to limit or restrain, the free and lawful expression of a consumer," except that this prohibition would not "affect[] a covered person's ability to close an account that is being used to commit fraud or other illegal activity." The CFPB noted its concern that certain clauses amount to a waiver of First Amendment rights. The CFPB especially singled out two kinds of restrictions: non-disparagement clauses, which restrict a consumer's ability to provide negative reviews of a company's products or services, and clauses that prevent consumers from engaging in political or religious expression, citing as an example a major bank accused of "de-banking" a Christian ministry. However, this category is not limited to these kinds of clauses, and the proposed rule does not include any other limitations aside from the anti-fraud exception and the exceptions discussed below.
Exceptions
As noted above, the proposed rule would apply to all covered persons under the CFPA. However, the proposed rule provides two main exceptions:
- First, the proposed rule would not apply to "any person to the extent that it is providing a product or service in circumstances excluded from the CFPB's rulemaking authority." Thus, if a covered person is providing two products, only one of which is subject to CFPB rulemaking authority, then the proposed rule would only apply to contractual provisions relating to or as applied to the subject product, and not to those relating to or as applied to the excluded product.
- Second, Subpart C, which covers the prohibited contractual
provisions only, would not apply to a "small business,"
"small organization," or "small governmental
jurisdiction" as defined in 5 U.S.C. 601.
- A "small business concern" is "one which is independently owned and operated and which is not dominant in its field of operation," or which (along with its affiliates) is at or below the Small Business Administration (SBA) standard listed in 13 CFR part 121 for its primary industry as described in 13 CFR 121.107.
- A "small organization" is "any not-for-profit enterprise which is independently owned and operated and is not dominant in its field."
- A "small governmental jurisdiction" means "governments of cities, counties, towns, townships, villages, school districts, or special districts, with a population of less than fifty thousand."
Takeaways
The most pressing concern for covered persons is the broad scope of provisions and uncertainty regarding coverage. Many standard consumer financial services (CFS) industry agreements include clauses that could be subject to the proposed rule.
For example, standard consumer-facing financial services agreements reserve the right of the covered person to unilaterally amend the agreement, subject to applicable law. These are often used to allow for changes to, e.g., card agreements, where fees and other material terms may change over the product's lifetime. The CFPB acknowledges that statutory requirements may restrict changes to significant terms. Nevertheless, the CFPB warns against allowing for the unilateral amendment of material terms without defining what "material" means.
Furthermore, a covered person may struggle to determine which federal and state laws are "designed to protect or benefit consumers" for the purpose of the proposed rule. It makes clear that any waiver of law that would limit either a consumer's remedies or a cause of action against a covered person is immediately suspect. Still, it does not limit the scope of the prohibition to such waivers.
Likewise, the CFPB lists, at a minimum, the laws over which it has interpretive and enforcement authority. However, the reference to common law causes of action – such as breach of contract or tort – suggests a particularly broad view of what counts as "designed to protect or benefit consumers, or their remedies." The CFPB at least excludes laws that explicitly allow for the waiver of certain protections. However, certain rights are not necessarily protected by statutory law – for example, the proposed rule's prohibition on clauses that restrain "free and lawful expression" would require familiarity with ongoing First Amendment case law.
The Trump Administration may well revoke this proposed rulemaking. Until then, covered persons may find it advisable to consider which contractual provisions may implicate the proposed rule's prohibitions. Even if the proposed rule remains unfinalized, as with the registry proposed rulemaking, the June 2024 circular remains valid guidance.
We plan to release this week a deeper dive analyzing terms and conditions common to CFS agreements, which the CFPB may consider suspect in light of not only the proposed rule but also its previous actions in this area.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
