Registry of Supervised Nonbanks That Use Form Contracts To Impose Terms and Conditions That Seek To Waive or Limit Consumer Legal Protections

Federal RegisterFeb 1, 2023

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BUREAU OF CONSUMER FINANCIAL PROTECTION

12 CFR Part 1092

[Docket No. CFPB-2023-0002]

RIN 3170-AB14

Registry of Supervised Nonbanks That Use Form Contracts To Impose Terms and Conditions That Seek To Waive or Limit Consumer Legal Protections

AGENCY:

Bureau of Consumer Financial Protection.

ACTION:

Proposed rule with request for public comment.

SUMMARY:

The Consumer Financial Protection Act of 2010 (CFPA) requires the Consumer Financial Protection Bureau (Bureau or CFPB) to monitor markets for consumer financial products and services for risks to consumers in order to support the various statutory functions of the CFPB, and to conduct a risk-based nonbank supervision program for the purpose of assessing compliance with Federal consumer financial law (among other purposes). Pursuant to these authorities, the CFPB is proposing a rule to require that nonbanks subject to its supervisory authority, with limited exceptions, register each year in a nonbank registration system established by the CFPB information about their use of certain terms and conditions in form contracts for consumer financial products and services that pose risks to consumers. In particular, these nonbanks would be required to register if they use specific terms and conditions defined in the proposed rule that attempt to waive consumers' legal protections, to limit how consumers enforce their rights, or to restrict consumers' ability to file complaints or post reviews. To facilitate public awareness and oversight by other regulators including the States, the Bureau is proposing to publish information identifying registrants and their use of these terms and conditions.

DATES:

Comments should be received on or before April 3, 2023.

ADDRESSES:

You may submit comments, identified by Docket No. CFPB-2023-0002 or RIN 3170-AB14, by any of the following methods:

•

Federal eRulemaking Portal: https://www.regulations.gov.

Follow the instructions for submitting comments.

•

Email: 2023-NPRM-ContractsRegistry@cfpb.gov.

Include Docket No. CFPB-2023-0002 or RIN 3170-AB14 in the subject line of the message.

•

Mail/Hand Delivery/Courier:

Comment Intake—Nonbank Registration and Collection of Contract Information, Consumer Financial Protection Bureau, c/o Legal Division Docket Manager, 1700 G Street NW, Washington, DC 20552. Because paper mail in the Washington, DC area and at the Bureau is subject to delay, commenters are encouraged to submit comments electronically.

Instructions:

The Bureau encourages the early submission of comments. All submissions should include the agency name and docket number or Regulatory Information Number (RIN) for this rulemaking. In general, all comments received will be posted without change to

https://www.regulations.gov.

All comments, including attachments and other supporting materials, will become part of the public record and are subject to public disclosure. Proprietary information or sensitive personal information, such as account numbers or Social Security numbers, or names of other individuals, should not be included. Comments will not be edited to remove any identifying or contact information.

FOR FURTHER INFORMATION CONTACT:

Owen Bonheimer, Senior Counsel, Office of Supervision Policy, at 202-435-7700. If you require this document in an alternative electronic format, please contact

CFPB_Accessibility@cfpb.gov.

SUPPLEMENTARY INFORMATION:

I. Summary of the Proposed Rule

The proposal would establish a Bureau system for registration of nonbanks that use covered terms or conditions, as described below, in a new part 1092 in title 12 of the Code of Federal Regulations. Proposed subpart C would require annual registration by most nonbanks subject to the Bureau's supervisory authority under section 1024(a) of the CFPA

when they use certain terms or conditions that seek to waive consumer rights or other legal protections or limit the ability of consumers to enforce or exercise their rights.

With limited exceptions, including an exception for certain small entities,

supervised registrants would be required to register annually in the system by submitting or updating their identifying information as well as information about their use of covered terms or conditions. The Bureau will provide filing instructions with details on how to register, the implementation date for the registration system, and the annual registration date. Under the proposal, the Bureau would publish this information on its website and potentially in other forms, as permitted by applicable law and described further in § 1092.303 of the proposed rule.

12 U.S.C. 5514(a).

For brevity, the proposal refers to these nonbanks as “supervised nonbanks.”

Proposed § 1092.301(h) of the proposed rule would include certain exclusions from the registration requirements, including an exclusion for nonbanks with less than $1 million in annual receipts from offering or providing certain consumer financial products or services that would make the nonbank subject to the Bureau's supervisory authority.

In particular, the Bureau is generally proposing to collect information about supervised nonbanks' use of terms and conditions in form contracts that expressly seek to impose the following limitations on consumer rights and other legal protections applicable to the offering or provision of consumer financial products or services in markets the Bureau supervises: waivers of claims a consumer can bring in a legal action; limits on the company's liability to a consumer; limits on the consumer's ability to bring a legal action by dictating the time frame, forum, or venue for a consumer to bring a legal action; limits on the ability of a consumer to bring or participate in collective legal actions such as class actions; limits on the ability of the consumer to complain or post reviews; certain other waivers of consumer rights or other legal protections; and arbitration agreements. The proposal defines these terms and conditions as covered terms and conditions. Covered terms and conditions would be covered by the proposal whether they are legally enforceable or not.

For brevity, the proposal generally uses the phrase “waivers and limitations” on consumer legal protections broadly, to include terms and conditions that seek to impose waivers and limitations whether or not they are enforceable.

See, e.g., Waiver, Black's Law Dictionary

(11th ed. 2019) (alternate definitions for the relinquishment or abandonment of a right, and for an instrument seeking to have that effect). This broad framing is reflected in the scope of proposed § 1092.301(d), which covers both effective and purported waivers and limitations, as discussed in the section-by-section analysis in part V below.

Consistent with the risks to consumers posed by covered terms and conditions contained in form contracts as described below, Congress, States, the courts, the Bureau, the Federal Trade Commission (FTC), and other governmental bodies periodically have restricted their use in some contexts. In its statutory risk-based nonbank supervision program and in other activities, the Bureau also has identified risks posed by covered terms and conditions contained in form contracts. In addition, some States have begun to require registration and publication of

form contracts in one market (private student lending).

The Bureau is proposing this rule, pursuant to CFPA sections 1022(b) and (c) and section 1024(b), to facilitate the Bureau's market monitoring functions and its risk-based supervisory processes, including by identifying an important subset of non-bank covered persons and the covered terms and conditions they use in form contracts for the consumer financial products or services they offer or provide. In exercise of its authorities discussed in part II.C.3 of the proposal, and consistent with general standards for transparency of government data, the Bureau preliminarily has determined that the Bureau would publish the information it collects as permitted by law and described in the proposed rule. Publishing this information would facilitate public awareness and oversight by other regulators of the use of covered terms and conditions including those that waive or limit consumer protections under State law and Tribal law.

The Bureau proposes to establish the registry to monitor risks to consumers from the use of covered terms or conditions in form contracts in today's marketplace and to inform its various functions, including supervision, enforcement, consumer education, and rulemaking. Most immediately, the information collected by the registry would facilitate the Bureau's prioritization and implementation of examination work in its statutorily-mandated risk-based nonbank supervision program.

II. Background and Rationale for the Proposed Rule

Fair, transparent, and competitive markets for consumer financial products and services depend on fair, transparent, and competitive contracting with consumers. Form contracts are the dominant means of setting terms and conditions for consumer financial products and services in today's marketplace. However, consumers face risks when businesses use form contracts to impose terms and conditions that seek to waive consumer legal protections or to limit how consumers enforce their rights or post complaints or reviews. There is often little choice for people except to sign these form contracts due both to the market pervasiveness of form contracts and the critical role the products and services play in consumers' daily lives.

In recognition of these risks to consumers, over the past several decades, many Federal, State, Tribal, and local laws and regulations have limited the use of these types of terms and conditions, including in form contracts for consumer financial products and services. Examples, discussed in part II.B, include the 1984 FTC Credit Practices Rule, which, among other things, prohibits contract terms purporting to waive State laws protecting consumer assets from seizure by unsecured creditors. In addition, the 2016 Consumer Review Fairness Act generally prohibits the use of form contracts that limit how consumers communicate their reviews, assessments, or similar analysis of the sale of goods or services. Several Federal consumer financial laws the Bureau administers also restrict the use of certain covered terms and conditions in the offering or provision of consumer financial products and services, including in markets where the CFPB exercises supervisory authority. The CFPB preliminarily has determined that a nonbank registration system to continuously and systematically monitor and assess these risks to consumers is needed to support its functions in promoting a fair, transparent, and competitive consumer financial marketplace, including its statutorily-mandated risk-based non-bank supervision program.

CFPA sections 1022(c) and 1024(b), respectively, require the Bureau to monitor for risks to consumers in markets for consumer financial products and services, and to conduct a risk-based supervision program for nonbanks operating in markets the Bureau supervises. As discussed in part II.A below, the use of form contracts to set terms and conditions for consumer financial products and services in general poses a degree of risk to consumers, particularly as to consumer understanding. As elaborated in part II.B, certain terms and conditions that often appear in these form contracts either waive or limit enforcement or exercise of applicable legal protections, or purport to do so. Such waivers of and limitations on applicable legal protections often pose risks to consumers, as evidenced by: (a) examples of Federal laws, State laws, and Tribal laws summarized in part II.B and also discussed in part II.C.2 restricting or invalidating the use of covered terms and conditions in certain contexts; and (b) examples discussed in part II.C.2 suggesting the prevalence of, and potential for consumer harm caused by, the use of covered terms and conditions in markets supervised by the Bureau. The risks that covered terms and conditions pose to consumers vary in degree or magnitude. And the degree to which specific examples would be covered by the proposed rule also may depend on the precise wording and context of their terms and conditions analyzed in light of the specific provisions of the proposed rule. But any time a consumer legal protection is being relinquished or constrained pursuant to a term or condition contained in a form contract, some degree of risk to the consumer arises. For that reason, an assessment of the risk is warranted. Accordingly, for the reasons explained in part II.C and elsewhere in the proposal, the Bureau seeks to collect information to monitor and assess risks posed by covered terms and conditions that supervised nonbanks use to waive or limit applicable legal protections in the offering or providing of consumer financial products or services.

In developing the proposal, the Bureau has considered alternative approaches to achieving these goals, as discussed below including in part II.D and the section-by-section analysis of the proposed rule in part V.

The examples provided in part II illustrate the types of terms and conditions that may pose risks to consumers by purporting to waive or limit legal protections applicable to consumer financial products or services. As noted above, the scope of the proposed rule is informed by these examples but will not necessarily cover each and every one of them or similar examples. The proposed regulation text as further explained in the section-by-section analysis in part V would govern whether the proposed rule would cover a particular term or condition.

A. Use of Form Contracts Poses Risks to Consumer Understanding of Terms and Conditions

Form contracts that establish terms and conditions are a standard feature of markets for consumer financial products or services. In the Bureau's experience and expertise, virtually all consumer financial products and services the Bureau supervises are governed by or operate largely on the basis of a paper or electronic written contract with the consumer, and sometimes on the basis of multiple such contracts. The consumer may enter the contract directly with a provider such as a lender, loan servicer, debt collector, remittance provider, or in some cases, a consumer reporting agency. The contract typically defines how the product or service works and the rights and obligations of the consumer, the provider, and, sometimes, third parties hired by the provider such as a loan servicer or debt collector.

Consumers generally do not choose most contract terms and conditions in their agreements for consumer financial products or services. Form contracts often specify a fixed set of terms and

conditions which the consumer typically must accept in their totality. While form contracts may memorialize certain conspicuous financially “core deal terms,” like price, payment methods, and a few others, other contract terms and conditions appear in fine print among a variety of “non-core standard contract terms” that the business requires.

Restatement (Third) of Consumer Contracts (Tentative Draft No. 2, approved at ALI 2022 Annual Meeting) at 1. For convenience, the proposal refers to this source simply as the Restatement.

This type of contracting is ubiquitous in the modern economy and gives rise to certain risks. According to a leading treatise on contract law published by the American Law Institute, the prevalence of “standard-form” consumer contracts throughout the United States presents a “fundamental challenge . . . arising from the asymmetry in information, sophistication, and stakes between the parties to the contracts—the business and consumers.”

This form of contracting risks turning the overall agreement into what sometimes is referred to as an “adhesion contract.” That name derives from the notion that the consumer must

adhere

to the terms and conditions in the form contract; they are presented to the consumer on a take-it-or-leave-it basis and are non-negotiable by the consumer. A defining characteristic of these terms and conditions is “the absence of meaningful choice on the part of the consumer.”

Id.

at 1.

Id.

sec. 5(b)(2).

Consumers also lack an incentive to review fully the terms and conditions in form contracts that they cannot negotiate. Form contracts often are lengthy, with terms and conditions written by the provider, often in fine print. With the expansion of the digital consumer economy, online contracting with features such as “click-through” contracts are the norm. The terms and conditions in electronic form contracts may not be visible on the page where the consumer is asked to indicate their agreement; consumers may be required to do additional clicking or downloading to view the terms and conditions.

Some terms or conditions may be de-emphasized. In some cases, some companies may also engage in risky digital design practices—termed “dark patterns”—that obscure certain terms and conditions in adhesion contracts or the adhesion contract itself.

See generally, e.g., id.

at 55-62 (discussing numerous court decisions on so-called browsewrap and clickwrap electronic contracting processes).

See generally

FTC Staff Report, “Bringing Dark Patterns to Light” (Sept. 2022) at 7 (“[s]ome dark patterns operate by hiding or obscuring material information from consumers, such as burying key limitations of the product or service in dense Terms of Service documents that consumers don't see before purchase”),

https://www.ftc.gov/system/files/ftc_gov/pdf/sP214800%20Dark%20Patterns%20Report%209.s14.2022%20-%20FINAL.pdf;

Restatement at 116-17 (discussing relationship between the use of dark patterns and risk of procedural unconscionability in the contracting process, discussed in this proposal at part II.B.5).

Studies confirm that consumers rarely read adhesion contracts.

These studies validate conventional wisdom recognized by other academic research.

Moreover, consumers generally focus attention on salient terms such as price and quantity.

As a result, providers of consumer financial products and services may seek to insert terms and conditions that pose risks to consumers who may not notice, until the consumer has a problem that they need to resolve or the terms and conditions face wider public scrutiny. In a recent reported example, a provider of consumer financial products and services inserted a term or condition that purported to provide for a substantial fine on users of a payment processing platform for promoting so-called “misinformation.”

See, e.g.,

Yannis Bakos, Florencia Marotta-Wurgler & David R. Trossen, “Does Anyone Read the Fine Print?, Testing a Law and Economics Approach to Standard Form Contracts,” 43 U. Chicago J. of Legal Studies 1 (2014) (describing study finding one or two of every 1,000 retail software shoppers access the license agreements and that most of those who do access it read no more than a small portion),

https://www.jstor.org/stable/10.1086/674424;

Carl Schneider & Omri Ben-Shahar, “The Failure of Mandated Disclosure,” 159 U. Penn. L. Rev. 647, 671 (2011) (reciting research that “suggests that almost no consumers read [contract] boilerplate, even when it is fully and conspicuously disclosed”),

https://www.jstor.org/stable/41149884#metadata_info_tab_contents;

Uri Benoliel & Shmuel Becher, “The Duty to Read the Unreadable,” Boston Col. L. Rev. 2255, 2270-81 (2019) (discussing empirical research),

https://lira.bc.edu/work/ns/508eab7d-ddca-4829-be55-7aa6be4820b1;

Jeff Sovern, “The Content of Consumer Law Classes III,” 22 J. Consumer L. 1 (2018) (reporting 2018 update to survey finding 57% of professors surveyed rarely or never read contracts),

http://www.jtexconsumerlaw.com/V22N1/V22N1_Classes.pdf.

See generally

Ian Ayres, “The No-Reading Problem in Consumer Contract Law,” 66 Stanford L. Rev. 546 (2014),

https://ianayres.yale.edu/sites/default/files/files/sThe%20No%20sReading%20Problem(2).spdf;

Ian Ayres & Gregory Klass, “Responses: One-Legged Contracting,” 133 Harv. L. Rev. Forum 1 (2019),

https://harvardslawreview.org/wp-content/uploads/2019/11/Ayres-Klass_Online.pdf.

See generally

Robert Hillman & Jeffrey Rachlinski, Standard-Form Contracting in the Electronic Age, 77 N.Y.U. L. Rev. 429, 450-54 (2002) (discussing research on how cognitive factors affect consumer decisions related to terms and conditions in form contracts, including consumer focus on salient terms).

Xinyi Wan, “PayPal's `Misinformation' Fine Sparks Backlash,” Harv. J. L. & Tech. (Nov. 1, 2022) (describing how payment processor updated terms and conditions to claim authority to impose a $2,500 “fine” on consumers for promoting “misinformation” and then removed the update after public criticism),

https://jolt.law.sharvard.edu/digest/paypals-misinformation-fine-sparks-backlash

(last visited Nov. 30, 2022).

In some cases, consumers may have nominal choices, such as to opt-out of a particular term or condition, or they are given notice of certain terms and conditions that they cannot negotiate, or both. And, depending on the facts and circumstances, these choices may be constrained; for example, some negative options may not present a meaningful choice.

Alternatively, a contract may provide a process for the consumer to opt into a term or condition such as a waiver or limitation. Either way, the business, not the consumer, defines the option and drafts the associated terms and conditions. As discussed further below in part II.C, the use of so-called non-core contract terms and conditions seeking to waive or limit consumer legal protections raises questions about a consumer's understanding of these terms and conditions.

FTC Enforcement Policy Statement Regarding Negative Option Marketing, 85 FR 60822, 60823 (Nov. 4, 2021) (discussing how negative option marketing and contracting are “widespread in the marketplace” and that FTC and States “regularly bring cases challenging a variety of harmful negative option practices”).

See also

CFPB, Supervisory Highlights, 87 FR 26727, 26737 (May 5, 2022) (discussing examiner findings of consumer reporting agency using “digital dark patterns” to impose recurring payments that are difficult to cancel).

B. Public Policy Recognizes Risks to Consumers Posed by Contract Terms and Conditions That Seek To Waive or Limit Applicable Legal Protections

Many providers of consumer financial products and services regularly use form contracts to impose one or more contract terms or conditions that may effectively strip consumers of legal protections or diminish their adequacy, either through an express waiver of rights or other legal protections, or a limitation on how consumers may seek to enforce or exercise their rights. In this proposal, the Bureau is focused on terms and conditions in form contracts that expressly seek to impose the following limitations on consumer rights and other legal protections: waivers of claims a consumer can bring in a legal action; limits on the company's liability to a consumer; limits on the consumer's ability to bring a legal action by dictating the time frame, forum, or venue for a consumer to bring a legal action; limits on the

ability of a consumer to bring or participate in collective legal actions such as class actions; limits on the ability of the consumer to complain or post reviews; certain other waivers of consumer rights or other legal protections; and arbitration agreements.

Express waivers, by definition, purport to extinguish legal protections otherwise applicable to consumer financial products and services. Some of these legal protections may afford consumers rights, such as the right to assert claims in a legal action. Even when terms and conditions do not purport to set forth such express waivers, they may impose significant limitations on a consumer's ability to bring a legal action, such as by capping liability or restricting the timing, venue, or forum for a consumer to file a private legal action to enforce an applicable consumer legal protection. These limitations, like waivers, may diminish the adequacy of the consumer legal protections to which they apply. Arbitration agreements also generally foreclose a consumer's choice to bring legal actions in court, sometimes with limited exceptions for individual actions in small claims court. Informal mechanisms, like filing a complaint or posting a review online, provide another mechanism for consumers to assert their rights and to identify business practices that, in some cases, may signify non-compliance with applicable legal protections or their inadequacy. Contract terms and conditions that restrict or limit consumers' ability to take those steps thus also undermine consumers' ability to prevent or obtain relief for violations of their rights.

By eliminating or diminishing private enforcement or exercise of rights, covered terms and conditions risk harming consumers. Indeed, given the limited resources of public regulators, private enforcement and other forms of exercising rights play an important role in incentivizing compliance with the laws applicable to consumer financial products and services. For example, Bureau research suggests that public and private enforcement actions often have not overlapped, such that private enforcement often plays an additive, not duplicative, role in supporting the rule of law.

Even when private and public enforcement overlap, private enforcement can set the stage for public enforcement by identifying risky or unlawful conduct. The Bureau also may consider both private and public enforcement actions as field market intelligence for its supervisory prioritization process discussed in part II.C.2 below.

CFPB, Arbitration Study: Report to Congress, pursuant to Dodd-Frank Wall Street Reform and Consumer Protection Act section 1028(a) (2015) at sec. 1.4.8 (summarizing Bureau research indicating that class action and public enforcement resolutions often do not both address the same claims),

https://www.consumerfinance.gov/data-research/research-reports/arbitration-study-report-to-congress-2015/.

Public policy has long recognized the risk covered terms and conditions pose to consumers. This part II.B discusses below numerous examples of public policies prohibiting or restricting covered terms and conditions, dating back to regulations that the FTC issued before the 2010 CFPA established the Bureau and some of which the Bureau also now enforces. These examples generally confirm that covered terms and conditions pose risks to consumers by undermining or diminishing the adequacy of existing legal protections.

The Bureau requests comment on the risks to consumers indicated by these examples, and requests that commenters provide additional examples of Federal, State, or Tribal laws that prohibit or restrict the use of covered terms and conditions, as well as additional enforcement and supervisory actions applying these prohibitions or restrictions.

To be sure, existing law permits certain contractual waivers or limitations in consumer contracts.

Cf. United States

Mezzanatto,

513 U.S. 196, 203 (1995) (citing presumption that legal rights generally, and in the criminal law context, evidentiary protections, may be voluntarily waived),

cited by Clark

Capital Credit & Collection Services, Inc.,

460 F.3d 1162, 1170 (9th Cir. 2006) (noting exceptions including for waivers that contravene statutory policy). However, as discussed in this part II, several examples in statutes and regulations applicable to supervised nonbanks explicitly restrict when and how waivers can be obtained. And while an expressly-prohibited waiver may risk deceiving consumers as to the nature of their rights (in the face of an express public policy recognizing the importance of the particular right), the risk of such provisions is not limited to this deception, but rather derives from the consumers inability to exercise the affirmative right lost through the contract clause.

1. Consumer Protection Statutes and Regulations Administered by the FTC Including Trade Regulations Enforced by the CFPB

In 1975, the FTC promulgated a trade regulation, titled “Preservation of Consumers' Claims and Defenses” (also known as the Holder in Due Course Rule or the Holder Rule). The Holder Rule requires sellers of goods or services to consumers to include a provision in their finance contracts that ensures that if another person holds the loan or lease a consumer uses to finance acquisition of a good or service from a seller or lessor, then the holder is subject to the same consumer rights and defenses that the consumer had with respect to the seller or lessor.

The FTC adopted this regulation in part to prohibit merchant creditors from including a “waiver of defenses” clause in their installment sale and lease agreements.

“A `waiver of defenses' is the consumer's written agreement that his installment purchase contract may be treated like a promissory note in the event it is sold or assigned to a credit company.”

Absent the Holder Rule, when such a promissory note was assigned to a third-party, the third-party would take it free of any claim or defense the buyer would have against the seller.

16 CFR part 433 (Holder Rule),

https://www.ecfr.gov/current/title-16/chapter-I/subchapter-D/part-433.

A “seller” is a person that, in the ordinary course of business, sells or leases goods or services to consumers. 16 CFR 433.1(j).

See

40 FR 53506, 53507 (Nov. 15, 1975) (issuing final Holder Rule). FTC Staff Guidelines on Trade Regulation Rule Concerning Preservation of Consumers' Claims and Defenses (May 4, 1976) at 5,

https://www.ftc.gov/system/files/documents/rules/holder-due-course-rule/s760504hidcrule.pdf

(last visited Dec. 30, 2022).

Id.

In adopting the Holder Rule, the FTC also acknowledged “widespread public concern about mechanical abrogations of consumer rights”

and noted that associated economic injury “results from terms contained in form contracts” that “consumers rarely comprehend. . . .”

The FTC explained that the “waiver of defenses are presented to consumers on a take-it-or-leave-it basis. These contracts are drafted by sellers and creditors, and they are not susceptible to modification at the point of sale.”

See

40 FR at 53508.

Id.

at 53523.

Id.

at 53524.

The Bureau also enforces the Holder Rule,

which applies in important ways in markets the Bureau supervises described in part II.C.2. For example, the regulation covers many types of consumer automobile finance agreements. As a result, under the rule, a consumer who obtains automobile financing through a dealer has the right to assert claims and defenses that they have against the dealer, as against an indirect automobile finance company, when the dealer sells the financing to that company. The Holder Rule also applies to credit contracts used to finance the sale of services such as trade or vocational school agreements.

In addition, U.S. Department of Education regulations specify that, in certain

circumstances, the holder of certain types of Federal student loans is subject to “all claims and defenses that the borrower could assert against the school with respect to that loan. . . .”

The Bureau included the Holder Rule among the list of enforceable rules and orders it identified upon transfer of authorities to the Bureau in July 2011, pursuant to CFPA section 1063(i).

See

76 FR 43569, 43571 (July 21, 2011),

https://www.gpo.gov/fdsys/pkg/FR-2011-07-21/pdf/2011-18426.pdf.

40 FR at 53524.

34 CFR 682.209(g) (describing rules for FFEL loan program).

See also

34 CFR 685.206 (Direct Loan program borrower defense regulations).

The FTC also addressed the issue of waivers and limitation of consumer rights in form contracts in its 1984 Credit Practices Rule, which the Bureau also enforces.

This trade regulation prohibits, among other practices, the use of contract terms purporting to waive a consumer's State law right to block creditors from seizing personal or real property of the consumer in which they do not hold security interests.

In adopting that rule, the FTC found that “creditors frequently include clauses in their consumer contracts that require consumers to waive [such] statutory protections.”

It determined that such waivers can cause substantial injury because, without these assets, “the consumer can lose the basic necessities of life.”

The FTC also determined that, when entering into contracts, “most consumers are neither aware of the rights they have under [asset seizure] exemption statutes nor of the presence or significance of waiver clauses in their contracts.”

For one thing, the waivers relate to “elements of a transaction that are distant in time and probability.”

As a result, the FTC found consumers could not bargain over this provision or shop for a contract without one.

Yet the FTC found that, when the time comes for collection of a debt, the waivers function as “

in terrorem

collection devices[.]”

76 FR at 43571.

16 CFR 442(a)(2).

49 FR 7740, 7769 (Mar. 1, 1984),

https://archives.federalregister.gov/issue_slice/1984/3/1/7708-7793.pdf#spage=82.

Id.

at 7744.

Id.

at 7770.

Id.

at 7747.

Id.

at 7769.

The 1984 FTC rule also prohibits creditors from using contract terms that waive consumers' due process rights, such as in the event of a future debt collection lawsuit.

The FTC similarly found that consumers either are not aware of or rarely understand the significance of these clauses, which are framed in technical, confounding language and presented in small print; thus, consumers cannot bargain over them or shop for alternatives.

16 CFR 442(a)(1).

49 FR at 7749, 7753.

In addition, Congress, in the 2016 Consumer Review Fairness Act, generally prohibited the use of form contracts that limit how consumers communicate their reviews, assessments, or similar analysis of the sale of goods or services.

The statute also invalidates these types of contract terms and conditions.

As the legislative history noted, these so-called “[g]ag clauses have been imposed by many different types of businesses and come in different forms.”

Congress noted that such clauses may “become widely adopted[.]”

Under the statute, use of these types of contract terms and conditions constitutes an unfair or deceptive act or practice.

The statute specifically authorizes enforcement by the FTC and State attorneys general. The FTC recently brought enforcement actions for violations of this statute by providers of credit repair services and a real estate investment training scheme.

One of the clauses purported to explicitly restrict the filing of complaints with government authorities.

15 U.S.C. 45b(c); Consumer Review Fairness Act of 2016, Public Law 114-258 (Dec. 14, 2016), 130 Stat. 1355.

Id.

at 45b(b). California law also includes a similar protection against these types of terms and conditions in contracts for the sale or lease of consumer goods or services. Cal. Civ. Code 1670.8.

H.R. Rep. No. 114-731 at 5 (Sept. 9, 2016).

Id.

15 U.S.C. 45b(d)(1).

See FTC

Grand Teton Professionals, LLC, et al.,

Case No. 19cv933 (D. Conn) (Complaint filed June 17, 2019), ¶¶ 62-63, 80-82, and 127-35;

FTC & Utah Div. of Cons. Prot.

Zurixx, LLC,

Case No. 19cv713 (D. Utah) (Second Amended Complaint filed Feb. 12, 2021), ¶¶ 115-20, and 150-55.

Zurixx

Second Amended Complaint, ¶ 116.

In early 2022, the Bureau issued a bulletin noting the public policy against that use of these types of terms and conditions. The bulletin warned that their use in contracts for consumer financial products and services also may constitute an unfair, deceptive, or abusive act or practice (UDAAP). The bulletin stated that the Bureau intends to prioritize scrutiny of these provisions in its supervisory and enforcement activities.

CFPB Bulletin 2022-05, “Unfair and Deceptive Acts or Practices That Impede Consumer Reviews,” 87 FR 17143 (Mar. 22, 2022),

https://www.consumerfinance.gov/about-us/newsroom/cfpb-issues-policy-on-contractual-gag-clauses-and-fake-review-fraud/.

Finally, the FTC also administers the Credit Repair Organizations Act (CROA),

which prohibits waivers and attempts to obtain waivers of CROA's legal protections. The FTC has applied CROA to, among other businesses, foreclosure relief services.

See, e.g., FTC

United Credit Adjusters,

Case No. 09-cv-798 (D. N.J.) (consent order entered Feb. 4, 2010, with foreclosure relief firm resolving, among other allegations, an alleged violation of CROA);

FTC

Lalonde,

545 F. Appx. 825 (11th Cir. 2013) (upholding trial court decision finding violations of CROA by firm offering credit repair and foreclosure relief services).

15 U.S.C. 1679f(a)-(b).

2. Federal Consumer Financial Laws Administered by the CFPB

Several other provisions in statutes and regulations the Bureau enforces include prohibitions and restrictions on waivers and limitations on the enforcement of consumer legal protections. These examples also reflect public policy concerns with the risks covered terms and conditions pose to consumers.

Regulation Z implements the Truth-in-Lending Act (TILA) prohibition against including, in a residential mortgage loan or open-ended consumer credit plan secured by the principal dwelling, terms requiring arbitration or any other nonjudicial procedure as the method for resolving any controversy or settling claims arising out of the transaction.

Regulation Z also implements the TILA prohibition against applying or interpreting terms in agreements related to these transactions to bar a consumer from bringing a claim in court in connection with any alleged violation of Federal law.

12 CFR 1026.36(h)(1), implementing 15. U.S.C. 1639c(e)(1). For this reason, the Bureau's 2015 Arbitration Study generally did not study the mortgage market.

See, e.g.,

Arbitration Study sec. 5 n.34, sec. 8 at 8 & n.24.

12 CFR 1026.36(h)(2), implementing 15. U.S.C. 1639c(e)(3).

Several other provisions in the Bureau's consumer mortgage regulations also restrict waivers of specified rights or other protections, such as waivers of the right of rescission of certain mortgage transactions, as well as the right to receive certain disclosures within a certain time period in advance of consummation.

By restricting the circumstances in which these waivers can be lawfully obtained, these regulations illustrate the risks that the waivers pose. For example, mortgage lenders cannot use “[p]rinted forms” for purposes of obtaining a waiver of the right of rescission.

In addition, consumers can only waive most of these protections when necessary to obtain a loan to meet a “bona fide personal financial emergency.”

Federal

regulators have rejected requests to allow such waivers in a broader set of circumstances. For example, in rejecting a request to broaden the exception to the general prohibition against waiving the right of rescission for certain mortgage transactions, the Federal Reserve Board stated in a 1981 rule as follows:

12 CFR 1026.15(e) (rescission); 12 CFR 1026.23(e) (same); 12 CFR 1026.19(a)(3), (e)(1)(v), (f)(1)(iv) (timing requirements for delivery of certain mortgage disclosures); 12 CFR 1026.31(c)(1)(iii) (timing requirement for delivery of certain disclosures for high-cost mortgages); 12 CFR 1024.10(c) (timing requirement for delivery of settlement statement); 12 CFR 1002.14(a)(1) (timing requirement for providing copy of appraisal or other writing valuation in certain mortgage transactions).

12 CFR 1026.15(e).

See

12 CFR 1026.15(e); 12 CFR 1026.23(e); 12 CFR 1026.19(a)(3), (e)(1)(v), (f)(1)(iv); 12 CFR 1026.31(c)(1)(iii).

before accepting a waiver [of the right of rescission], creditors must assure themselves that the reasons given for the waiver are both substantial and credible and that the waiver is in all respects bona fide. This requirement, combined with the prohibition on the use of preprinted forms, will prevent abusive practices, while at the same time permitting consumers to waive the rescission right in appropriate circumstances.

Federal Reserve Board, Credit; Truth in Lending; Revision of Regulation Z, Final Rule, 46 FR 20848, 20872 (Apr. 7, 1981),

https://www.govinfo.gov/content/pkg/FR-1981-04-07/pdf/FR-1981-04-07.pdf#page=190.

More broadly across the markets the Bureau supervises, including when making payments to supervised nonbanks, consumers enjoy important protections afforded by the Electronic Fund Transfer Act (EFTA) and its implementing regulation, Regulation E.

EFTA prohibits contract terms that contain a “waiver of any right conferred” by EFTA.

Recognizing that depriving consumers of a remedy undermines the right itself, EFTA section 914 also prohibits waiver of any “cause of action” under EFTA.

15 U.S.C. 1693

et seq.;

12 CFR part 1005.

15 U.S.C. 1693l.

Id.

3. Federal Consumer Bankruptcy Statute Protections

The Federal bankruptcy statute provides a legal process for liquidating the debts of consumers who cannot repay their debts. A fundamental goal of the bankruptcy laws enacted by Congress is to give debtors a financial “fresh start” from burdensome debts.

The Federal bankruptcy statute generally stays collection on most consumer debts during a bankruptcy proceeding,

which generally can result in discharge of those debts (under Chapter 7 of the Bankruptcy Code

) or a plan to facilitate repayment of those debts (under Chapter 13 of the Bankruptcy Code

). Consumers generally initiate the bankruptcy proceeding, which is overseen by the bankruptcy courts and bankruptcy trustees. The Bureau does not administer or enforce the Bankruptcy Code. However, Federal consumer financial law generally applies to consumer financial product and service providers' communications with consumers and other acts and practices relating to bankruptcy protections and the bankruptcy process.

Local Loan Co.

Hunt,

292 U.S. 234, 244 (1934) (noting that a primary purpose of the bankruptcy law is to “relieve the honest debtor from the weight of oppressive indebtedness, and permit [the debtor] to start afresh . . . ,”

citing Williams

U.S. Fidelity & Guaranty Co.,

236 U.S. 549, 554 (1915), and elaborating that the bankruptcy law “gives the honest but unfortunate debtor . . . a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of pre-existing debt”).

11 U.S.C. 362.

See generally

11 U.S.C. chapter 7.

See generally

11 U.S.C. chapter 13.

See, e.g.,

CFPB, Supervisory Highlights (Fall 2014) at 2.5.5 (describing examiner findings that one or more supervised entities were misrepresenting to consumers that student loans are never dischargeable in bankruptcy); Supervisory Highlights (Fall 2015) at 2.5.3 (same); Supervisory Highlights (Spring 2022) at 2.2.6 (describing examiner findings that certain furnishers violated the Fair Credit Reporting Act by, among other things, failing to promptly update account statutes to reflect the discharge of debt in bankruptcy).

A number of bankruptcy courts long have held that creditors cannot enforce contracts purporting to waive consumers' statutory right to file for bankruptcy protection under the Federal bankruptcy statute.

Relatedly, since 1978, the Federal bankruptcy statute has explicitly stated that, in the event of discharge of a debt in bankruptcy, the debt may be voided “whether or not discharge of such debt is waived” by contract.

As discussed in part II.C.2 below, however, some lenders nevertheless may use contract terms that attempt or purport to limit or waive bankruptcy protections such as these.

See, e.g., In re Weitzen,

3 F. Supp. 698, 699 (S.D.N.Y. 1933) (holding that a contract provision seeking to waive the benefit of bankruptcy is unenforceable because it would “frustrate the object of the Bankruptcy Act,” which would be “nullified in the vast majority of debts arising out of contracts, if this were permissible”);

In re Madison,

184 B.R. 686, 690-692 (E.D. Pa. Bktcy. 1995) (“an agreement not to file bankruptcy is unenforceable because it violates public policy”).

See also

Paul R. Hage, “Border Control: The Enforceability of Contractual Restraints on Bankruptcy Filings, Part 1” (Dec. 14, 2019) (“Courts almost universally agree that the right to file a petition in bankruptcy is fundamental and cannot be waived . . . because of the strong public policy favoring access to bankruptcy relief.”),

https://www.americanbar.sorg/groups/business_law/publications/blt/2019/12/border-control/

(last visited Dec. 2, 2022).

11 U.S.C. 524(a)(1).

See

Bktcy. Reform Act of 1978, Public Law 95-598 (Nov. 6, 1978), 92 Stat. 2549, 2592 (codifying section 524(a)(1) provisions on non-waiver of discharge); H.R. Rep. No. 95-595 (Sept. 8, 1977) at 366 (anti-waiver provision “intended to prevent waiver of discharge of a particular debt from defeating the purposes” of the discharge provision in the bankruptcy statute); S. Rep. No. 95-989 at 80 (July 14, 1978) (same).

4. Federal Statutory Protections for Military Families Including Protections Enforced by the CFPB

Federal law also affords servicemembers other relevant protections when taking out mortgages and installment loans, including from lenders supervised by the Bureau such as mortgage lenders, payday lenders, private student lenders, and automobile finance lenders. The Bureau enforces the Military Lending Act (MLA), which covers many types of consumer credit, including payday and private student loans.

The MLA and its implementing regulations generally prohibit terms in consumer credit contracts that require servicemembers and their dependents to “waive the covered borrower's right to legal recourse under any otherwise applicable provision of State or Federal law . . . .”

The MLA and its implementing regulations also prohibit arbitration agreements in these transactions.

These provisions do not apply, however, to certain consumer credit transactions, such as residential mortgage or automobile finance transactions.

Congress enacted the MLA in 2006 at the recommendation of the Department of Defense, which in a 2006 report on predatory lending to servicemembers noted:

10 U.S.C. 987(f)(6) (authorizing Bureau enforcement of the Military Lending Act).

See also

32 CFR part 232 (regulations implementing the Military Lending Act).

32 CFR 232.8(b), implementing 10 U.S.C. 987(e)(2).

10 U.S.C. 987(e)(3); 32 CFR 232.8(c).

See, e.g.,

32 CFR 232.3(f)(2).

Service[ ]members should maintain full legal recourse against unscrupulous lenders. Loan contracts to Service members should not include mandatory arbitration clauses or onerous notice provisions, and should not require the Service[ ]member to waive his or her right of recourse, such as the right to participate in a plaintiff class. Waiver is not a matter of “choice” in take-it-or-leave-it contracts of adhesion.

Department of Defense Report (Aug. 6, 2006) at 7-8,

https://apps.dtic.mil/sti/pdfs/ADA521462.pdf

(last visited Dec. 2, 2022).

The Bureau has alleged MLA violations with respect to the use of contract terms and conditions prohibited by the MLA, including when short-term small-dollar lenders allegedly provided servicemembers with loans at high rates prohibited by the MLA under contracts that included arbitration agreements.

CFPB

LendUp Loans, LLC,

Case No. 20cv8583 (Complaint filed Dec. 4, 2020) (N.D. Cal.), ¶¶ 13-16 (arbitration count),

https://www.consumerfinance.gov/enforcement/actions/lendup-loans-llc/; CFPB

First Cash, Inc. & Cash America West, Inc.,

Case No. 21cv1251 (Complaint filed Nov. 12, 2021) (N.D. Tex.), ¶¶ 22-25 (same),

https://www.consumerfinance.gov/enforcement/actions/firstcash-inc-and-cash-america-west-inc/; CFPB

MoneyLion Technologies Inc. et al.,

Case No. 22cv8308 (Compliant filed Sept. 29, 2022) (S.D.N.Y.), ¶¶ 65-68 (same),

https://www.consumerfinance.gov/about-us/newsroom/cfpb-sues-moneylion-for-overcharging-

servicemembers-trapping-consumers-in-costly-memberships/.

In addition, the Servicemembers Civil Relief Act (SCRA), among other things, allows servicemembers to reduce interest rates on preservice loans and includes certain protections against default judgments and automobile repossessions.

The SCRA also requires that any time period for servicemembers to file legal action or to enjoy certain defenses in mortgage transactions exclude periods of military service.

The SCRA further imposes specific requirements for any contractual waiver of a right or other protection afforded by the SCRA.

However, in a recent report, the U.S. Government Accountability Office (GAO) found that most of the stakeholders GAO interviewed who have regular contact with servicemembers or their representatives said that “servicemembers do not understand the waivers they are asked to sign[.]”

And, in resolving claims of SCRA violations, the Department of Justice often imposes detailed constraints on how lenders may obtain these waivers in order to further limit risks to consumers.

See

50 U.S.C. 3937 (interest rate cap); 50 U.S.C. 3931 (protections against default judgments); 50 U.S.C. 3952 (protections against automobile repossessions); 50 U.S.C. 3953 (mortgage protections).

50 U.S.C. 3936(a) (tolling of statute of limitations); 50 U.S.C. 3936(b) (excluding period of military service from any time period provided by law for the redemption of real property sold or forfeited to enforce a mortgage obligation).

50 U.S.C. 3918(a)-(c).

GAO Rept. 21-550R, Servicemember Rights: Stakeholders Reported Servicemembers Have Limited Understanding about Waivers of Their Consumer Rights and Protections (June 29, 2021) at 4-7 (reporting that 12 of 15 stakeholders interviewed reported that servicemembers have limited understanding about waivers of their rights and protections under SCRA, and the other three said they did not know or did not respond).

See e.g., United States

Sallie Mae, Inc., et al.,

Case No. 14cv600 (D. Del.), Consent Order (Sept. 29, 2014), ¶¶ 36.c, 37-38 (requiring Department of Justice (DoJ) approval of procedures for obtaining waivers of SCRA legal protections);

United States

3rd Generation, Inc. & California Auto Finance,

Case No. 18cv523 (C.D. Cal.), Consent Order (Mar. 12, 2019), ¶ 10.e;

United States

Westlake Services, LLC,

Case No. 17cv7125 (C.D. Cal.), Settlement Agreement (Sept. 27, 2017), ¶ 10.e;

See also

Tenn. Stat. 47-18-113(c) (specifying conditions for waivers of other consumer protections in Tennessee law).

NNCA Ch. 7 sec. 1103.E.1,

https://www.nnols.org/wp-content/uploads/2022/05/1-5.pdf.

Some State consumer lending laws also generally prohibit waivers, either outright or by provisions rendering them void and unenforceable. Illustrative examples include the Virginia usury statute,

the Louisiana consumer credit law,

and the Nebraska loan brokers statute.

Other State laws generally prohibit waivers for certain types of loan and loan-related

products. For example, the Florida payday lending statute expressly prohibits waiver of its protections, including a mandatory cooling-off period between payoff on an existing payday loan and origination of a new payday loan.

Several other State payday and short-term small-dollar lending statutes include similar prohibitions, whether against waivers generally

or waivers of certain rights such as jury trial waivers not contained in permissible arbitration agreements.

In the automobile lending market, the California automobile sales financing statute and the New Mexico motor vehicle sales financing statute include general prohibitions on waivers, and in the mortgage market, the New Mexico mortgage foreclosure relief statute does the same.

And in the context of secured lending nationwide, Article 9 of the Uniform Commercial Code (UCC)—adopted in both State and Tribal laws—identifies numerous consumer legal protections that may not be waived or varied, including, among others, a prohibition on extrajudicial repossession without breach of the peace.

Article 9 also restricts waivers of other consumer legal protections, including several that apply in the event of default on the loan.

Some State laws also set forth additional applicable legal protections against certain waivers in contracts for the financing of the sale of goods and services.

Va. Code. Ann. 6-2-306, Waiver of rights violative of public policy.

La. R. S. 9:3513 (barring waivers or agreements to forego rights or benefits under Louisiana Consumer Credit Law, except for settlement of a claim disputed in good faith).

Neb. Stat. 45-191.05, Waiver of sections; attempt; prohibited.

Fl. Stat. 560.404(10)(e) (general prohibition on waivers); Fl. Stat. 560.404(19)-(20) (cooling-off period provisions).

See, e.g.,

Ks. Stat. 16a-2-404(10)(d)(iii) (prohibiting use of terms and conditions in which the consumer agrees not to assert a claim or defense arising out of the contract); Oh. Stat. 1321.41(G) (prohibiting short-term loan licensees from requiring the borrower to “waive the borrower's right to legal recourse under any otherwise applicable provision of state or federal law”); Ill. Stat. Ch. 815 sec. 122/4-5(10)(D) (prohibiting “a provision in which the consumer agrees not to assert any claim or defense arising out of the contract”).

Ill. Stat. Ch. 815 sec. 122/4-5(10)(B).

Cal. Civ. Code sec. 2983.7(a) & (c), Prohibition on certain provisions (prohibiting automobile sale finance agreements that contain waivers of claims or defenses of consumers); N.M. Stat. 58-19-12, Waiver (“Any waiver of the provisions of this act shall be unenforceable and void”); N.M. Stat. 47-15-5.G(1) (prohibiting including a provision in a foreclosure consulting contract that “attempts or purports to waive an owner's rights” under the New Mexico foreclosure relief statute).

UCC 9-602, Waiver and Variance of Rights and Duties.

See, e.g.,

CNCA, title 80, sec. 9-602 (Cherokee nation secured lending code restricting waiver and variance of rights),

https://attorneygeneral.cherokee.org/media/5upcrg3j/word-searchable-full-code.pdf. See also

First Nations Development Institute, Model Tribal Consumer Protection Code (2018) Ch. IV—Rental-Purchase Agreements—sec. F.1.e (defining “waiver by the consumer of claims or defenses” as an example of “[p]rohibited rental-purchase agreement terms; practices” in automobile finance agreements); Ch. V—Repossessions of Personal Property—sec. D.4.c (prohibiting any seller from “attempt[ing] to obtain a waiver of this section from any consumer, or to obtain such a waiver”),

https://www.firstnations.org/publications/model-tribal-consumer-protection-code/.

UCC 9-624, Waiver (placing restrictions on waivers of certain rights to notice of disposition of collateral, to require disposition of collateral, and to redeem collateral).

See, e.g.,

CNCA title 80, sec. 9-624.

See, e.g.,

N.J. Stat. 17:16C-38.2.

See also

Nat'l Conf. of Commissioners on Uniform Laws, Revised Model Tribal Secured Transactions Act (May 2017), sec. 9-403(a) (model statute for Tribal use providing that waivers of rights and defenses not enforceable in consumer finance agreements related to sale or lease of goods or services),

https://www.uniformlaws.org/committees/community-home?CommunityKey=1f31aa7f-74be-457e-904b-ba3b6d7d3646#:~:text=The%20Model%20Tribal%20Secured%20Transactions,secured%20credit%20to%20their%20members.

Other provisions of State and Tribal laws prohibit contract terms and conditions that limit how consumers can enforce applicable legal protections. The California automobile sales financing statute, for example, prohibits contract provisions that limit liability for legal remedies available to the consumer.

Tennessee law, for example, prohibits specifying an out-of-state forum for adjudication of claims arising under the Tennessee consumer protection statute.

Minnesota law similarly prohibits specifying an out-of-state forum for resolution of disputes related to certain short-term loans.

Idaho law prohibits contract terms shortening the statute of limitations in some circumstances.

Cherokee Nation law prohibits waiver of numerous provisions in arbitration agreements.

100

Cal. Civ. Code sec. 2983.7(e).

Tenn. Stat. 47-18-113(b).

See, e.g.,

Minn. Stat. 47.601 sec. 2 (prohibiting certain terms and conditions in contracts for short-term loans, including, among others, “a provision choosing a forum for dispute resolution other than the state of Minnesota.”).

See, e.g., DelJack, Inc.

U.S. Bank Nat'l Ass'n,

2012 WL 4482049 at *6-*7 (D. Idaho 2012) (applying Idaho Code 29-110(1) to invalidate attempt to use a standard contract term to shorten statute of limitation). Under Idaho law, “[e]very stipulation or condition in a contract . . . which limits the time within which [any party thereto] may thus enforce [their] rights, is void as it is against the public policy of Idaho.” Idaho Code 29-110(1) (also qualifying that section 110(1) does not apply to arbitration agreement allowing arbitration in Idaho).

100

CNCA title 11, Ch.8, sec. 1304.B & C.

Even when State statutory law may not expressly prohibit or restrict waivers or limitations on how consumers may enforce or exercise their rights, the Restatement of the law of consumer contracts further articulates how the State common law of contracts scrutinizes certain standard terms and conditions for unconscionability. A similar analysis also may be applied under some Tribal laws.

101

The doctrine of unconscionability protects consumers against (1) fundamentally unfair or unreasonably one-sided terms and conditions that are (2) imposed through a contracting process that results in unfair surprise or results from the absence of meaningful choice on the part of the consumer.

102

The common law of contracts describes two distinct aspects of unconscionability: substantive and procedural. As the American Law Institute has explained, when consumer contract terms and conditions are substantively unconscionable, they “undermine the substantive rights consumers acquired under the contract.”

103

Examples of substantively unconscionable terms and conditions include terms and conditions that unreasonably limit either liability for a consumer's loss “by an intentional or negligent act or omission of the business” or “the consumer's ability to pursue or express a complaint or seek reasonable redress for a violation of a legal right.”

104

The Restatement also expressly acknowledges the potential for overlap in circumstances involving terms and conditions that are unconscionable and UDAAPs under the CFPA.

105

101

See, e.g., Green Tree Servicing, LLC

Duncan,

7 a.m. Tribal Law 633, 640 (Navajo Nat'n Sup. Ct. 2008) (applying principles of unconscionability to invalidate an arbitration agreement associated with a mobile home loan),

https://cite.case.law/am-tribal-law/7/633/.

102

Restatement sec. 5.

103

Id.

at 97 (comment on sec. 5(c)(3)).

104

Id.

at secs. 5(c)(1)(B) and 5(c)(2).

105

Id.

at 99 (citing 12 U.S.C. 5531 and 5536(a)).

The Restatement discusses how the doctrine of unconscionability may render several types of contractual waivers and limitations on applicable legal protections unenforceable.

First, terms and conditions in consumer contracts may attempt to waive certain types of liability of the business. Public policy recognizes that these types of contract terms and conditions pose risks to consumers. As the Restatement explains, most State courts deem a contact term to be substantively unconscionable and thus, unenforceable, if it “unreasonably exclude[s] or limit[s] the business's liability or the consumer's remedies that would otherwise be applicable for . . . any loss to the consumer caused by an intentional or negligent act or omission of the business.”

106

Standard contract terms stating that the liability or remedy limitations are specifically agreed upon, or that conduct that would otherwise be regarded by law as negligent is contractually-agreed upon to be non-negligent, do not necessarily render the limit on liability reasonable. Restatement at 93-94.

Second, forum selection clauses often found in consumer contracts may designate a specific judicial forum to hear any ensuing disputes arising out of the contract.

107

In some cases, the designated forum might be so inconvenient as to eliminate the viability of pursuing legal action. The Restatement describes some examples that may pose risks to consumers, including the following:

107

Forum clauses were historically perceived as contrary to public policy and as preventing the proper forum from hearing the dispute. Now, courts generally enforce forum selection clauses unless exceptional circumstances exist.

M/S Bremen

Zapata Off-Shore Corp.,

407 U.S. 1, 15 (1972) (holding that, in an international commercial dispute, “the forum clause should control absent a strong showing that it should be set aside”).

• A business's standard contract terms include a dispute-resolution term specifying a forum in a distant location, such that the consumer would have to bear travel and accommodation expenses exceeding the value of the remedy sought. The dispute-resolution forum requires a non-refundable filing fee exceeding the value of the remedy sought. Either one of these two features unreasonably limits or imposes obstacles to the consumer's ability to enforce legal rights. That result applies to any type of dispute-resolution forum clause in standard terms in a consumer contract that imposes such an unreasonable cost or personal burden, be it a public court or a private arbitration panel.

108

Restatement sec. 5 cmt. 7.

Third, terms and conditions that impose unreasonably short limitations periods may pose risks to consumers by imposing challenges or creating hurdles for consumers in seeking redress. Terms and conditions that limit the period in which a consumer must bring an action to a shorter time period than underlying law may block the consumer from asserting an otherwise viable substantive claim. These terms and conditions reduce the time for a consumer to sue, which may result in fewer actions and otherwise actionable claims prematurely going stale. As noted above, some State laws prohibit these terms and conditions as void and against public policy in some circumstances. Absent an express prohibition in State law, though, the Restatement indicates that courts often enforce these terms and conditions, even when the parties have unequal bargaining power, as long as the resulting time period is reasonable (six months is an oft-mentioned floor).

109

Restatement sec. 5. The Restatement notes (at 98), however, that a business's standard contract terms that require that all claims against the business be made within three months after the conclusion of the transaction may be unenforceable to the extent that it covers claims for “latent defects” (claims not widely relevant to consumer financial products and services).

Cf.

UCC sec. 2-725(1).

Fourth, some arbitration agreements may have features that unreasonably limit the consumer's ability to enforce their rights. The Restatement describes examples, including the following:

• A business's standard contract terms require consumers to resolve disputes through arbitration. If the costs of pursuing individual arbitration make it impractical for consumers to seek redress for breach of the contract, a court may determine that the provision in the contract barring class actions is not enforceable. In those circumstances where costs of pursuing individual arbitration are prohibitive, such arbitration clauses may still be enforceable where the arbitration forum permits class arbitration, but substantively unconscionable otherwise.

110

Restatement at 98 (example 9). The Department of Education also has proposed to prohibit the use of arbitration agreements and class action waivers in connection with Federal student loan programs.

See

Dept. of Educ. Proposed Rule, 87 FR 41878 (July 13, 2022).

• A business's standard contract terms include a class-action waiver and do not specify a choice of forum, thus allowing consumers to resolve disputes in court. A common grievance for consumers entering this contract involves low damages—no more than a few dollars each. Thus, these clauses may unreasonably limit consumers' ability to obtain a remedy for breach.

111

Restatement at 98 (example 8).

While the Restatement expressly does not address “possible preemption under the Federal Arbitration Act,”

112

these examples nonetheless illustrate how arbitration agreements can pose risks to consumers.

112

Id.

at 97.

Fifth, in addition to the Consumer Review Fairness Act discussed above and the Bureau's related policy statement, State law contract principles also illustrate how clauses that seek to restrict consumers from posting negative reviews or filing complaints may pose several risks to consumers. These restrictions may explicitly limit the ability of consumers to obtain informal resolution of a dispute. These restrictions also pose risks to other consumers who may be deprived of the benefits of information about the experiences of other consumers. As the Restatement explains, “[s]uch restrictions undermine the reputation mechanism. In consumer markets, in which legal forms of redress are often impractical or delayed, the existence of a robust reputation mechanism is particularly important. Contractual arrangements that seek to weaken it are therefore against public policy and substantively unconscionable.”

113

When such restrictions are prohibited by law, they “may also be unenforceable under the doctrine of illegality or on grounds of public policy.”

114

113

Id.

at 114;

See also, e.g.,

Consumer Fin. Prot. Bureau,

Buy Now, Pay Later: Market trends and consumer impacts

(Sept. 2022),

https://files.consumerfinance.gov/f/documents/cfpb_buy-now-pay-later-market-trends-consumer-impacts_report_2022-09.pdf

(publishing information obtained through Bureau market monitoring efforts); Consumer Fin. Prot. Bureau,

Consumer Credit Trends: Credit Card Line Decreases

(June 2022),

https://files.consumerfinance.gov/f/documents/cfpb_credit-card-line-decreases_report_2022-06.pdf

(same); Consumer Fin. Prot. Bureau,

Data Point: Checking Account Overdraft at Financial Institutions Served by Core Processors

(Dec. 2021),

https://files.consumerfinance.gov/f/documents/cfpb_overdraft-core-processors_report_2021-12.pdf

(same).

How the Proposed Registry Would Support Market Monitoring

A registry of covered terms and conditions would further the Bureau's market monitoring activities in several ways. As discussed in further detail below, among other things, the registry would assist the Bureau in assessing the impact of the covered terms and conditions on the adequacy of applicable legal protections, and consumer understanding of covered terms and conditions included in form contracts.

132

12. U.S.C. 5512(c)(2).

In particular, and as reflected in Congress' own judgment, the Bureau has a particular interest in exercising its market monitoring authorities to address questions or concerns regarding the “legal protections applicable” to consumer financial products and services “including the extent to which the law is likely to adequately protect consumers. . . .”

133

Numerous legal protections apply to consumer financial products and services. Federal, State, Tribal, and local government bodies have adopted these consumer protections in statutes and regulations. However, these laws may not adequately protect consumers when consumers are required through covered terms and conditions to waive the protections or agree to limits on their enforcement or exercise.

133

12 U.S.C. 5512(c)(2)(C). Inadequate legal protections also create risks the Bureau's monitoring program must consider under section 1022(c)(2)(A).

These types of provisions may simultaneously place consumers at an increased risk of harm from conduct the protections are designed to prevent, while making it more difficult for consumers to remedy those harms by enforcing the protections. Covered terms and conditions pose risks to consumers by potentially reducing deterrence, compliance, and accountability for non-compliance with the underlying legal protections to which they apply. Some of these legal protections are so fundamental that the use of covered terms and conditions is prohibited or restricted by law, as discussed in part II.C.1. As discussed above and in the section 1022(b) impacts analysis, when consumers cannot protect themselves, such as by directly enforcing legal protections or exercising informal mechanisms, there may be an increased risk that these protections will not be followed (less deterrence) and that they will not be remedied when violated (less accountability). These risks may be significant, given the prevalence of covered terms and conditions in supervised markets and the examples of harms identified in supervisory and enforcement actions discussed in part II.C. The proposed registry would allow for fuller and continuous monitoring of these risks, but the information already available suggests these risks warrant increased regulatory oversight of supervised market participants that use covered terms and conditions. Indeed, Federal, State, Tribal, and local regulators can enforce many of the legal protections constrained by covered terms and conditions, or analogous legal protections. The GAO recently recognized, for example, that public enforcement of a Federal statute can be particularly important where private enforcement is constrained by contract.

134

See

GAO Rept. 21-221, Servicemember Rights: Mandatory Arbitration Clauses Have Affected Some Employment and Consumer Claims but the Extent of Their Effects is Unknown (Feb. 2021) at 9-10 (describing instances where arbitration agreements prevented servicemembers from resolving SCRA claims in court, while noting that Federal enforcement under the SCRA is not limited by arbitration agreements).

In addition to the foregoing risks, covered terms and conditions also may create the risk of a UDAAP violation whether they are expressly prohibited under existing statutes or regulations and thus unenforceable or whether no existing law expressly addresses the provision. In the former circumstance, as discussed below, the covered term or condition risks deceiving consumers into thinking the underlying legal protection no longer applies or that they cannot enforce a right, when in fact that is not this case. This misimpression is likely to dissuade consumers from availing themselves of available mechanisms to enforce or otherwise exercise their rights. In the latter circumstance, as also discussed below, the waiver still might constitute an unfair act or practice under Federal or State law. For example, Bureau examiners have found unfairness violations where, although not expressly prohibited under existing law, a waiver substantially injured consumers (through loss of the underlying right), was not reasonably avoidable (for example, because presented in a form contract on a take it or leave it basis), and did not have countervailing benefits to consumers or competition.

135

See

discussion of examples from mortgage market supervision, part II.C.2

infra.

Consumer understanding of the risks described above also is a factor the Bureau has considered in proposing the registry. Because covered terms and conditions are established through an adhesion-type contracting process, as discussed in part II.A above, consumers may not understand the covered terms and conditions or be aware that they have agreed to them and therefore may not recognize the ensuing risks from this agreement.

Of course, the Bureau does not supervise or enforce all consumer legal protections that are applicable to consumer financial products and services it supervises, including both the laws to which covered terms and conditions apply and the laws that may prohibit particular covered terms and conditions. But, even apart from a potential UDAAP violation as described

above, a company that violates other applicable law may have a poor compliance management system and thus may be more likely to violate Federal consumer financial law. And the existence of a covered term or condition in some circumstances may be indicative of a violation of law, since a company that would go to such lengths to include certain terms or conditions in its contracts may be acting in other ways to undermine the underlying rights addressed by the waivers or limitations. Thus, the existence of covered terms and conditions may inform the Bureau's understanding of the adequacy of legal protections, including compliance with Federal consumer financial law, in protecting consumers who buy or use consumer financial products or services.

The Bureau can use that market monitoring information to support a variety of its functions, including through conducting consumer education (where a waiver or limit may risk deceiving consumers, or may be lawful but nevertheless harmful to consumers who lack understanding), bolstering its consumer response function (for example, through better understanding of whether consumer complaints the Bureau receives or does not receive may be driven by covered terms and conditions or the risks they pose), or identifying regulatory voids that it may consider filling through regulation implementing Federal consumer financial law, orders, or guidance (if another important protection is not adequate due to waivers or limitations).

A registry of covered terms and conditions would fill an important information gap on the topic of covered terms and conditions. Currently, there is limited information on the use of covered terms and conditions, especially at the individual provider/product level. Even at the market level, information is limited. The Bureau issued the latest comprehensive national study of one type of covered term or condition—arbitration agreements—in a report to Congress over seven years ago, discussed above. The Bureau requests information from commenters on other studies of the use of covered terms and conditions. The Bureau also has not identified any existing Federal, State, or Tribal system that collects information specifically about the use of covered terms and conditions across markets the Bureau supervises.

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The absence of this data leaves uncertain the degree to which the use of covered terms and conditions is eroding legal protections in many of the markets the Bureau oversees. Collection of that data and filling the gaps in available information on these issues would be important for the Bureau's efforts to monitor for risks to consumers in the offering of consumer financial products or services.

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As noted in this part II.C.2, the Bureau is only aware of existing registration systems that collect and publish limited information about standard contracts in private student loan markets in certain states and mortgage market contracts used for certain federally-related mortgage transactions.

As indicated above, in developing the proposal, the Bureau has considered (among others) the factors listed at CFPA section 1022(c)(2), to the extent relevant here to the allocation of Bureau resources to perform market monitoring. For example, the proposed registry would help the Bureau to monitor the extent to which supervised nonbanks are using covered terms or conditions in form contracts in a manner that allows consumers to understand the risks that covered terms or conditions pose to consumers (

see

CFPA section 1022(c)(2)(B)). The proposed registry would help the Bureau to monitor potential effects of covered terms or conditions on the adequacy of legal protections to which they apply or which apply to them (

see

CFPA section 1022(c)(2)(C)). And relatedly, the proposed registry would help the Bureau to monitor likely risks and costs to consumers from buying or using consumer financial products or services that contain covered terms and conditions (

see

CFPA section 1022(c)(2)(A)).

137

See

12 U.S.C. 5512(c)(2)(A)-(C).

In addition, the information collected in the proposed registry may form the basis of additional focused assessments. For example, the information collected may help the Bureau to identify changes over time in the use of certain covered terms or conditions which may be relevant to assessing the rate of growth in the offering of consumer financial products and services that have different contractual frameworks (

see

CFPB section 1022(c)(2)(D)). In addition, to the extent that supervised nonbanks use covered terms or conditions in offering a consumer financial product or service to traditionally underserved consumers, the registry would enable comparisons to covered terms and conditions used by other supervised nonbanks offering similar consumer financial products or services. That information may help the Bureau to monitor whether the covered terms or conditions may disproportionately affect these consumers (

see

CFPB section 1022(c)(2)(E)). The registry also would enable other comparisons in the degree and type of covered terms and conditions used across supervised nonbanks in a given market and across supervised markets. These comparisons may identify pertinent characteristics of firms that use particular covered terms or conditions or combinations of covered terms or conditions (

see

CFPB section 1022(c)(2)(F)).

138

See

12 U.S.C. 5512(c)(2)(D)-(E).

Accordingly, for the reasons described in this part II., as elaborated elsewhere in the proposal, the Bureau proposes to establish a registration system to collect data on supervised nonbanks' use of covered terms and conditions, allowing it to monitor and assess the risks described above on a continuous basis in supervised markets.

2. The Proposed Registry Would Facilitate the Bureau's Statutorily-Mandated Risk-Based Nonbank Supervision Program

As recently discussed in the Bureau's proposal to register certain orders,

139

one of the Bureau's key responsibilities under the CFPA is the supervision of very large banks, thrifts, and credit unions, and their affiliates, and certain nonbank covered persons. Congress has authorized the Bureau to supervise certain categories of nonbank covered persons under CFPA section 1024.

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Congress provided that the Bureau “shall require reports and conduct examinations on a periodic basis” of nonbank covered persons subject to its supervisory authority for purposes of “assessing compliance with the requirements of Federal consumer financial law”; “obtaining information about the activities and compliance systems or procedures of such person[s]”; and “detecting and assessing risks to consumers and to markets for consumer financial products and services.”

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Pursuant to the CFPA, the Bureau implements a risk-based supervision program under which it prioritizes nonbank covered persons for supervision in accordance with its assessment of risks posed to consumers.

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In making prioritization determinations, the Bureau considers several factors, including “the asset size of the covered person,”

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“the volume of transactions involving consumer financial products or services in which the covered person engages,”

144

“the risks to consumers created by the provision of such consumer financial

products or services,”

145

“the extent to which such institutions are subject to oversight by State authorities for consumer protection,”

146

and “any other factors that the Bureau determines to be relevant to a class of covered persons.”

147

CFPA section 1024(b)(7)(A)-(C) further authorizes the Bureau to prescribe rules to facilitate supervision and assessing and detecting risks to consumers, as well as to ensure that supervised nonbanks “are legitimate entities and are able to perform their obligations to consumers.”

148

Since it began its nonbank supervision program in 2012, the Bureau has provided further explanation to the public about the purposes of the program and how it works.

149

139

See generally

Nonbank Registration—Orders Proposal.

140

12 U.S.C. 5514.

141

12 U.S.C. 5514(b)(1).

142

12 U.S.C. 5514(b)(2).

143

12 U.S.C. 5514(b)(2)(A).

144

12 U.S.C. 5514(b)(2)(B).

145

12 U.S.C. 5514(b)(2)(C).

146

12 U.S.C. 5514(b)(2)(D).

147

12 U.S.C. 5514(b)(2)(E).

148

12 U.S.C. 5514(b)(7)(A)-(C).

149

See, e.g.,

Steve Antonakes and Peggy Twohig, “The CFPB launches its nonbank supervision program” (Jan. 5, 2012),

https://www.consumerfinance.gov/about-us/blog/the-cfpb-launches-its-nonbank-supervision-program/;

Lorelei Salas, “Explainer: What is nonbank supervision? (May 25, 2022),

https://www.consumerfinance.gov/about-us/blog/explainer-what-is-nonbank-supervision/.

How the Proposed Registry Would Facilitate Risk-Based Nonbank Supervision

Under those authorities, the Bureau is proposing the registry to facilitate its assessment of risks to consumers in connection with its nonbank supervision program. The proposed registry can facilitate the Bureau's risk-based nonbank supervision program in a number of ways. For example, as discussed below, the proposed registry can facilitate the Bureau's prioritization of which entities to examine, as well as, relatedly, its identification of entities eligible for examination. The proposed registry also can facilitate the scoping of its examinations.

First, the Bureau can use the information collected on supervised nonbanks' use of covered terms and conditions to inform its prioritization process to determine which entities to examine. Prioritization is a fundamental component of the Bureau's supervision program, which has been designed to conduct slightly more than 100 on-site examinations per year, and less than 1,000 overall exam events per year.

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As discussed in the impacts analysis in part VII of the proposal, the Bureau estimates that there are thousands of nonbanks subject to its supervisory authority under CFPA section 1024(a). Given resource constraints and the number of supervised nonbanks, the Bureau does not regularly examine each of the nonbanks subject to its supervisory authority under CFPA section 1024. Rather, pursuant to CFPA section 1024(b)(2), the Bureau implements a risk-based supervision program, prioritizing which supervised nonbanks it will examine in a given annual period based on information available about the risks they pose to consumers. By incorporating into its supervisory prioritization process the information it collects on supervised registrants' use of covered terms and conditions that pose risks to consumers, the Bureau's risk-based nonbank supervision program would be able to better take into consideration the “risks to consumers created by the provisions” of consumer financial products and services within the meaning of CFPA section 1024(b)(2)(C).

151

150

See

CFPB Annual Performance Plan and Report FY 2022 at Table 2.2.1.1 (on-site exams) & Table 2.2.1.2 (all supervisory events with significant activity),

https://files.consumerfinance.gov/f/documents/cfpb_performance-plan-and-report_fy22.pdf.

151

12 U.S.C. 5514(b)(2)(C).

The Bureau can use the information collected on supervised nonbanks' use of covered terms and conditions to assess potential risks to consumers posed by different covered terms and conditions, and combinations of covered terms and conditions. That assessment can inform its decisions prioritizing which supervised nonbanks to examine. For example, when covered terms and conditions violate anti-waiver and other legal prohibitions in Federal consumer financial law, the proposed registry could highlight where this may be a problem, potentially facilitating prioritization of supervisory action or, in some cases, potentially, enforcement action.

In addition, certain covered terms and conditions, such as non-disparagement clauses, also could be an important companion to the Bureau's existing prioritization process that is based in significant part on consumer complaints. Depending on the wording of these terms and conditions, they may pose varying degrees of risk of suppressing consumer complaints, which could result in an understatement of or gap in complaint information in the Bureau's consumer complaint database. Or they could deter online reviews, which the Bureau also may use as field market intelligence to inform its assessments of risks used for prioritization of its exam work.

In addition, by prioritizing based on the risks specifically posed by covered terms and conditions, the Bureau's risk-based supervision would better account for the limited extent to which this information is available to inform existing oversight by enforcers of Federal consumer financial law, including certain State authorities.

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As discussed below, the universe of nonbanks supervised by the States and the Bureau overlaps but is not coextensive. Even with respect to areas of overlap, existing State registration systems generally do not collect information about the use of supervised entity's covered terms and conditions across the market. States have made only limited use of this option for specific markets. For example, Colorado, Louisiana, Maine, and Illinois recently adopted laws establishing registration systems for private student lenders that obtain their standard loan terms and conditions; the Colorado, Louisiana, and Maine statutes also require the registry to post these terms and conditions on a public website.

153

Accordingly, the proposed rule would facilitate supervision on a topic—the use of covered terms or conditions in form contracts—that otherwise would not be overseen to the same extent by State authorities for consumer protection within the meaning of CFPA section 1024(b)(2)(D).

154

152

See

CFPB Consumer Financial Protection Circular 2022-01, “System of Consumer Financial Protection Circulars to Agencies Enforcing Federal Consumer Financial Law” (June 14, 2022), 87 FR 34868 (June 14, 2022) (discussing role of State attorneys general and State regulators in enforcing Federal consumer financial law as described in CFPA section 1042, codified at 12 U.S.C. 5552).

153

See

Col. Rev. Stat. 5-20-203(2)(b)(V) (requiring private education lenders to annually provide model loan agreements) &

id.

5-20-203(3)(c) (requiring copies of the model loan agreements for each registered private education lender to be posted on a publicly accessible website); La. Rev. Stat. 6:1401-1404 (added by HB 789 enacted June 18, 2022); Me. Rev. Stat. 9-A:15-102.1.B(5) &

id.

15-102.2 (same); Il. Pub. Act. 102-0583 sec. 10(e). These websites are available at

https://coag.gov/office-sections/consumer-protection/consumer-credit-unit/student-loan-servicers-act/private-education-lender-registration/registered-private-education-lenders/, https://www.maine.gov/pfr/consumercredit/student_loan_registry/index.html.

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12 U.S.C. 5514(b)(2)(B) (describing “the extent to which supervised nonbanks are subject to oversight by State authorities for consumer protection” as something for the Bureau to consider in conducting risk-based supervision). As discussed in the section-by-section analysis of the exemption in proposed § 1092.301(h)(5) related to certain small entities, the Bureau also has considered the factors in CFPA section 1022(b)(2)(A) and (B). Other factors, such as risks from the provision of the consumer financial product or service, also are generally discussed throughout this part II.

Second, and relatedly, for those nonbank entities that use covered terms and conditions in offering consumer financial products or services in markets supervised by the Bureau, the proposed registry can facilitate a more efficient process for the Bureau to identify these

nonbank entities. In particular, a registration system that more comprehensively and periodically collects identifying information about many nonbank entities subject to the Bureau's supervisory authority would facilitate the Bureau's nonbank supervision program at the most basic level—identifying who the Bureau could examine. As discussed below there is no comprehensive registry of identifying information for nonbanks subject to the Bureau's supervisory authority across supervised markets. Thus, the identifying information the proposal would collect would, in turn, enhance the Bureau's prioritization process discussed above.

The proposed registry would gather identifying information that would be uniquely useful to the Bureau's supervision of nonbanks. For most nonmortgage markets where the Bureau has supervisory authority, existing registration systems do not necessarily identify all nonbanks based on whether they are subject to Bureau supervisory authority.

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While some States and Indian Tribes require licensing of participants in certain supervised markets, there is no comprehensive list of who participates in these markets. The full scope of State and Tribal licensing requirements across the States and Tribes is not co-extensive with the scope of the Bureau's supervisory authority across these markets, leaving geographic and market gaps where the Bureau supervises but States or Tribes do not license. Moreover, even for institutions that States or Tribes license, the data about them that States and Tribes collect does not consistently establish whether they engage in the specific activities, or volume of such activity, that would make them subject to the Bureau's supervisory authority.

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As a result, for purposes of identifying Bureau-supervised nonbanks, information on providers licensed at the State and Tribal level is both overinclusive (of entities the Bureau does not supervise, such as persons who are not larger participants) and potentially underinclusive (not necessarily covering all markets as defined in the statute in all States).

155

For mortgage markets, there is considerably more information available about who participates and may be subject to the Bureau's supervisory authority, in light of registration and licensing systems for mortgage originators under the SAFE Act (discussed in more detail at

https://files.consumerfinance.gov/f/201203_cfpb_update_SAFE_Act_Exam_Procedures.pdf

), data submission requirements of mortgage originators under the Home Mortgage Disclosure Act (HMDA) in Regulation C at 12 CFR part 1003, and call reports for mortgage servicers and others (described at

https://mortgage.nationwidelicensingsystem.org/slr/common/mcr/Pages/default.aspx (last visited Dec. 5, 2022)

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For the international money transfer market, State registration money services business licensing data often is aligned with the Bureau's supervisory authority to facilitate the Bureau's identification of larger participants.

The Bureau currently may draw upon information about who is licensed at the State and Tribal level to inform its assessment of who may be subject to the Bureau's supervisory authority. However, as described above, that information does not clearly or consistently identify which entities are subject to the Bureau's supervisory authority in many cases. As a result, in many cases, to determine whether it can commence an examination, the Bureau must first collect information directly from individual market participants about the nature, and in the case of markets subject to larger participant rules, the volume of certain consumer financial product and service offerings or associated receipts. This activity can be resource- and time-intensive and can lead to rescheduling of planned exams when the information collected indicates entities are not subject to supervisory authority. A registration system that more comprehensively collects and periodically updates identifying information about many nonbank entities subject to the Bureau's supervisory authority would facilitate the Bureau's nonbank supervision program at the most basic level—identifying who the Bureau could examine.

For that reason, the Bureau also considered proposing a registry that would require registration of all supervised nonbank covered persons, regardless of whether those persons use form contracts that impose covered terms and conditions that pose risks to consumers. However, the Bureau preliminarily has concluded that it is a higher priority to require registration of supervised nonbank covered persons that use covered terms and conditions contained in covered form contracts. The proposed registry therefore has a fundamentally different purpose from a universal registration system. This proposal would focus on identifying the supervised nonbanks offering consumer financial products and services that pose risks to consumers as identified above, rather than identifying all supervised nonbanks regardless of whether they present such risks. In this way, the proposed registry is almost fully distinct from the type of licensing and registration systems typically maintained by States and Tribes, which, as discussed above, generally do not focus on collection of covered terms and conditions contained in covered form contracts. As a result, this approach is even less likely to lead to duplication with State and Tribal licensing and registration systems. The Bureau requests comment on this approach.

Third, the information collected can form a basis for the Bureau to scope and conduct examinations of supervised nonbanks, enhancing its ability to detect and address violations and risks of violations of Federal consumer financial law or compliance management system deficiencies.

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With respect to detecting and addressing violations, if the Bureau scheduled an examination at an entity who had registered its use of a covered term or condition that appeared to be prohibited by Federal consumer financial law, the Bureau likely would incorporate the use of this term or condition into the scope of an exam. More broadly, if the entity registered other covered terms and conditions, an examination could review and assess risks to consumers related to how the entity established, used, and applied these terms or conditions, including in the contracting process or in response to consumer complaints. That review could inform examiners' conclusions concerning the presence of a UDAAP, a risk of a UDAAP, or a compliance management system concern. Examiners also could coordinate with other regulators about their findings, especially if they implicate consumer legal protections administered by the other regulators. In addition, prior to an examination, examiners could consult the registry and review any non-disparagement clause, which may inform how the examiners scope and conduct a review of consumer complaints. In these and other ways discussed in this proposal, by developing its examination scope based on the information it collects on supervised registrants' use of covered terms and conditions that pose risks to consumers, the Bureau's risk-based nonbank supervision program would be able to better take into consideration the “risks to consumers created by the provisions” of consumer financial products and services within the meaning of CFPA section 1024(b)(2)(C).

158

157

See generally

CFPB Bulletin 2021-01, “Changes to Types of Supervisory Communications” (Mar. 31, 2021) (describing scope of Bureau supervisory communications as including findings of violations of laws the Bureau enforces, risks of violation, and compliance management system concerns),

https://files.consumerfinance.gov/f/documents/cfpb_bulletin_2021-01_changes-to-types-of-supervisory-communications_2021-03.pdf.

158

12 U.S.C. 5514(b)(2)(C).

Covered Terms and Conditions Are Prevalent in Markets Supervised by the Bureau

As discussed below, enforcement and supervisory findings in markets the Bureau supervises illustrate how covered terms and conditions used by nonbanks pose risks to consumers. The proposed registry would facilitate review and assessment of these types of risks more broadly throughout the Bureau's non-bank supervision program, as discussed above.

Mortgage Markets

While the TILA and Regulation Z provisions discussed at the outset of part II.B.2 above may protect consumers against certain waivers and limitations on private enforcement in the mortgage market, the Bureau has routinely highlighted for the public examiner findings over the past decade that some mortgage originators and servicers have been engaging in acts and practices inconsistent with this prohibition and that the examiners found constituted UDAAPs.

159

In addition, even before the June 1, 2013 effective date of this provision of Regulation Z,

160

examiners found that two mortgage servicers engaged in an unfair practice in connection with the use of “across-the-board waivers of existing claims” in a “take it or leave it” loss mitigation agreements for forbearance or loan modification.

161

159

See, e.g.,

Supervisory Highlights (Fall 2022) at 2.6.2; Supervisory Highlights (Summer 2021) at 2.6.3; Supervisory Highlights (Summer 2017) at 2.6.2; Supervisory Highlights (Fall 2015) at 2.4.2; Supervisory Highlights (Summer 2015) at 2.4.5.