# Prohibited Terms and Conditions in Agreements for Consumer Financial Products or Services (Regulation AA)

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URL: https://www.frixlaw.com/law-library/documents/fr%3A2025-00633

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** January 14, 2025
- **Citation:** 90 FR 3566

## Text

CONSUMER FINANCIAL PROTECTION BUREAU
12 CFR Part 1027
[Docket No. CFPB-2025-0002]
RIN 3170-AB23
Prohibited Terms and Conditions in Agreements for Consumer Financial Products or Services (Regulation AA)

AGENCY:

Consumer Financial Protection Bureau.

ACTION:

Proposed rule; request for comment.

SUMMARY:

The Consumer Financial Protection Bureau (CFPB) is proposing to prohibit certain contractual provisions in agreements for consumer financial products or services. The proposal would prohibit covered persons from including in their contracts any provisions purporting to waive substantive consumer legal rights and protections (or their remedies) granted by State or Federal law. The proposal would also prohibit contract terms that limit free expression, including with threats of account closure, fines, or breach of contract claims, as well as other contract terms. The proposal would also codify certain longstanding prohibitions under the Federal Trade Commission's (FTC) Credit Practices Rule.

DATES:

Comments must be received on or before April 1, 2025.

ADDRESSES:

You may submit comments, identified by Docket No. CFPB-2025-0002 or RIN 3170-AB23, by any of the following methods:

•
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments. A brief summary of this document will be available at
https://www.regulations.gov/docket/CFPB-2025-0002.

•
Email: 2025-NPRM-REGAA@cfpb.gov
. Include Docket No. CFPB-2025-0002 or RIN 3170-AB23 in the subject line of the message.

•
Mail/Hand Delivery/Courier:
Comment Intake—Prohibited Terms and Conditions in Agreements for Consumer Financial Products or Services (Regulation AA), c/o Legal Division Docket Manager, Consumer Financial Protection Bureau, 1700 G Street NW, Washington, DC 20552.

Instructions:
The CFPB encourages the early submission of comments. All submissions should include the agency name and docket number or Regulatory Information Number (RIN) for this rulemaking. Commenters are encouraged to submit comments electronically. In general, all comments received will be posted without change to
https://www.regulations.gov.

All submissions, including attachments and other supporting materials, will become part of the public record and 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. Submissions will not be edited to remove any identifying or contact information.

FOR FURTHER INFORMATION CONTACT:

George Karithanom, Regulatory Implementation and Guidance Program Analyst, Office of Regulations, 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

Consumer finance companies often limit or restrict individual freedoms and rights by including coercive terms and conditions in contracts of adhesion. These types of contracts—which are ubiquitous in transactions for consumer financial products or services—are drafted by the companies or their lawyers and presented to consumers on a “take it or leave it” basis. Form contracts can create operational efficiencies for large businesses, but in recent years they have been used to constrain fundamental freedoms and rights that are recognized and protected under the U.S. Constitution and statutory and common law. While the Bill of Rights, with limited exceptions, only protects people from government actions, jurists have long recognized affirmative obligations regarding certain private actors,
1

and scholars and jurists are increasingly recognizing that corporate intrusion into historically recognized individual rights poses a similar threat as government intrusion.
2

Clauses buried in the fine print of these contracts can have dramatic consequences for consumers—for instance, by waiving statutory protections passed by elected officials in Federal or State government, by surrendering due process rights upon default, by undermining consumers' right to contract and giving companies the power to unilaterally amend material terms of the contract at any time, or by constraining consumers' ability to exercise free speech. These clauses usually provide little or no benefit to consumers, but they can be valuable to companies by insulating them from accountability or advancing managers' political interests.

1

See generally Ganesh
Sitaraman,
Deplatforming,
113 Yale L.J. 497 (2023).

2

See
Tunku Varadarajan,
The `Common Carrier' Solution to Social-Media Censorship,
Wall St. J. (Jan. 15, 2021),
https://www.wsj.com/articles/the-common-carrier-solution-to-social-media-censorship-11610732343
(interviewing Richard Epstein);
Biden
v.
Knight First Amend. Inst.,
141 S. Ct. 1220, 1222-24 (2021) (Thomas, J., concurring) (raising concerns about the ability of companies to constrain free speech and recognizing that doctrines involving common carriers or public accommodation may be an appropriate solution).

Federal and State legislatures and regulators have taken action against these kinds of one-sided terms in consumer contracts. For instance, the FTC issued in 1984 a rule commonly known as the “Credit Practices Rule,” which prohibited certain creditor remedies in consumer credit contracts.
3

Congress has also enacted numerous statutes limiting companies' ability to use certain one-sided contract terms, such as through inclusion of anti-waiver provisions in several consumer financial laws
4

and passage of the Consumer Review Fairness Act of 2016, which prohibits companies that use form contracts from restricting consumers' right to provide negative reviews.
5

The CFPB has also recently issued guidance warning companies that they could violate the law by using unenforceable terms and conditions in their consumer contracts, including terms and conditions in violation of the Consumer Review Fairness Act.
6

3
Credit Practices Rule, 49 FR 7740 (Mar. 1, 1984).

4

See, e.g.,
10 U.S.C. 987(e)(2) (expressly prohibiting waivers of right to recourse under any State or Federal law in contracts with covered servicemembers).

5
Public Law 114-258, codified at 15 U.S.C. 45b.

6
Consumer Fin. Prot. Bureau,
CFPB Consumer Financial Protection Circular 2024-03, Unlawful and unenforceable contract terms and conditions,
(June 4, 2024),
https://www.consumerfinance.gov/compliance/circulars/consumer-financial-protection-circular-2024-03/.

While defenders of civil liberties rightly focus on the risk of government infringement on constitutional freedoms, the CFPB is also concerned about large consumer financial companies' use of contracts of adhesion to curtail those same rights, especially due process, the freedom to benefit from a contract, the rule of law as established by democratically elected officials, and free expression. The CFPB is also concerned that certain terms used in these contracts deny consumers the benefits of a free market—one that is “fair, transparent, and competitive.”
7

Under the CFPA, the CFPB may issue rules applicable to providers of consumer financial products or services (known as “covered persons” under the statute) to identify and prevent “unfair,

deceptive, or abusive acts or practices.”
8

The CFPB is relying on this authority in this proposed rule to protect consumers from harms that often arise from contracts of adhesion used to constrain fundamental rights and freedoms.

7
12 U.S.C. 5511(a).

8
12 U.S.C. 5531(b).

First, the CFPB is proposing to codify the Credit Practices Rule as applied to covered persons subject to the CFPA. As noted above, the FTC first issued the Credit Practices Rule in 1984. Although that rule applied only to creditors within the FTC's jurisdiction, banking regulators subsequently issued their own credit practices rules applicable to banks, Federal credit unions, and savings associations.
9

The rules issued by the banking regulators were repealed upon enactment of the CFPA (which transferred those agencies' consumer financial protection authorities to the CFPB). However, in 2014 the Federal financial regulators—including the CFPB—issued joint interagency guidance clarifying that financial institutions could violate the law by including in consumer credit contracts any provisions prohibited by the Credit Practices Rule.
10

Thus, in this proposed rule, the CFPB is codifying the Credit Practices Rule with regard to all covered persons, and the CFPB does not anticipate that this provision of the rule will have a substantial material effect on the market as covered persons are already likely to be in compliance with these prohibitions.

9
These regulations were previously codified at: 12 CFR 227.11 through 227.16 (part of Regulation AA) (banks); 12 CFR 535.1 through 535.5 (savings associations); 12 CFR 706.1 through 706.5 (Federal credit unions).

10
Board of Governors of the Federal Reserve, et al.
Interagency Guidance Regarding Unfair or Deceptive Credit Practices
(Aug. 22, 2014),
https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20140822a2.pdf.
The guidance highlighted that the repeal of the banking regulators' credit practices rules “should not be construed as a determination by the Agencies that the credit practices described in [the] former regulations are permissible” and that “the Agencies may determine that statutory violations exist even in the absence of a specific regulation governing the conduct.”
Id.
at 2.

Second, the CFPB is proposing to forbid covered persons from including in their consumer contracts any terms or conditions that purport to waive substantive legal rights and protections, that reserve to the covered person the right to unilaterally amend a material term of the contract, or that restrain a consumer's lawful free expression. The CFPB has preliminarily concluded that use of these clauses may constitute an unfair or deceptive act or practice.

The CFPB requests comment on all aspects of the proposal.

II. Background for Proposed Rule

A. Contracts of Adhesion

In today's consumer economy, contracts of adhesion are inescapable. In banking, retail, insurance, health care, travel, or virtually any other sector, they are ubiquitous in everyday transactions. A contract of adhesion is a standard-form contract for a product or service with a fixed set of terms or conditions. The contract—which is often lengthy, complex, and full of boilerplate language or fine print—will have been drafted by the company and is presented to the consumer on a “take it or leave it” basis. The consumer usually has little ability to read the contract and no opportunity to negotiate its terms.
11

If the consumer wants the product or service offered by the company, they must accept the contract's terms in totality. The company will use the same standard-form contract for every consumer with respect to the product or service at issue and will typically enter into thousands (or even millions) of versions of the same contract with its consumers. Altogether, the elements of a contract of adhesion create a deep imbalance of power between the contracting parties. “[O]n the one side there is the ordinary individual and on the other a monopoly or powerful organi[z]ation with desirable goods or services to supply. The choice between not making a contract or making it on the only terms available is no choice at all.”
12

11
Todd D. Rakoff,
Contracts of Adhesion: An Essay in Reconstruction,
96 Harv. L. Rev. 1173, 1176-77 (1983) (defining a contract of adhesion).

12
H.B. Sales,
Standard Form Contracts,
16 Mod. L. Rev. 318 (1953).

In the experience of the CFPB, contracts of adhesion are widely used in the market for consumer financial products and services. When consumers want to take out a mortgage, apply for a new credit card, open a checking account, subscribe to a digital payment app, or engage in any type of routine consumer financial transaction, they are almost always presented with a standard-form contract. The FTC noted four decades ago that consumer finance companies “[u]niversally make use of standardized forms in extending credit to consumer[s]. These forms are prepared for creditors or obtained by them, and the completed contract is presented to the prospective borrower on a `take it or leave it basis.' ”
13

More recently, the U.S. Supreme Court observed that “the times in which consumer contracts were anything other than adhesive are long past.”
14

13
49 FR 7745.

14

AT&T Mobility LLC
v.
Concepcion,
563 U.S. 333, 346-47 (2011).

Standard-form contracts have long been used in the consumer marketplace, and standardization does not necessarily undermine consumer welfare. Standard-form contracts can lower transaction costs by making transactions more uniform, efficient, and expedient. Indeed, given the size and transaction volume of the consumer economy, it would be impractical for consumer contracts to be drafted and negotiated on an individual basis. “The costs of negotiating with each customer would surely outweigh the benefits that would result from individually tailored contracts.”
15

15
49 FR 7746.

But many standard-form contracts are used in consumer transactions today to do more than just establish the terms for the basic structure of a business relationship. They are also used to give large corporations undue economic advantage and constrain the personal autonomy and freedom of individual consumers. Because companies (and their lawyers) draft standard-form contracts, they have broad discretion in what terms and conditions to include. Contracts of adhesion will, of course, contain the “deal terms” of the transaction between the consumer and the company, which consumers are typically aware of in contrast to fine print clauses. For example, in a consumer credit transaction, the contract would include the amount borrowed, the repayment amount, the interest rate, and the repayment schedule. But over time, companies have realized that they could also include other ancillary terms and conditions that limit consumer rights and protections and shield the company from legal liability. These types of clauses have little to do with administering the transaction between the company and consumer, and they are almost always one-sided. They benefit or insulate the company but provide little, if any, added value to the consumer.

In particular, with the advent of online contracting, companies are more readily able to use standard-form contracts to protect their own economic interests.
16

Today, many transactions occur electronically, and online contracting with features such as “click-through” contracts are the norm, making

it easy for consumers to provide their electronic assent to contracts of adhesion. The electronic medium has encouraged many companies to add even more fine-print terms into those contracts. “Because it is now trivial to attach a complex, one-sided `contract' to virtually any consumer transaction, more and more companies do so.”
17

Electronic contracting also makes it more difficult for consumers to understand these contracts. 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, 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.
18

16
Recent research suggests the problem of one-sided contracts is a growing phenomenon.
See e.g.,
Tim R. Samples et al.,
TL;DR: The Law and Linguistics of Social Platform Terms-of-Use,
39 Berkeley Tech. L.J. 47, 105 (2024).

17
Mark A. Lemley,
The Benefit of the Bargain,
2023 Wis. L. Rev. 237, 256 (2023).

18

See generally
FTC Staff Report,
Bringing Dark Patterns to Light,
at 7 (Sept. 1, 2022).

Given the complexity of fine print terms in contracts of adhesion, it should come as no surprise that consumers do not really provide meaningful assent to these terms. As many academic studies have shown, the vast majority of consumers pay little or no attention to such terms when reviewing or signing a standard-form contract. In one prominent study, the authors examined the extent to which potential buyers of software read End User License Agreements (EULAs), which are contracts that govern the use of software products. The study tracked nearly 50,000 consumers across 90 software companies, and found that 0.2 percent of consumers access the EULA for at least one second.
19

Two recent studies found that online contracts are often unreadable according to scientific readability standards and lack basic organizational features like a table of contents or useful headings to help consumers locate important information in the contract.
20

To the extent consumers read a standard-form contract at all, they are likely to focus on salient terms such as price.
21

19
Yannis Bakos et al.,
Does Anyone Read the Fine Print?, Testing a Law and Economics Approach to Standard Form Contracts,
43 U. Chicago J. of Legal Studies 1, 3 (2014);
see also, e.g.,
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”).

20
Uri Benoliel & Shmuel Becher,
The Duty to Read the Unreadable,
60 B.C. L. Rev. 2255, 2277-78 (2019); Uri Benoliel & Shmuel Becher,
Messy Contracts,
2024 U. of Ill. L. Rev. 893, 917-18 (2024).

21

See
George L. Priest,
A Theory of the Consumer Product Warranty,
90 Yale L.J. 1297, 1304-06 (1981).

Nor is it feasible for consumers to comparison-shop for fine print terms. As an initial matter, many providers in a market may use similar terms, making comparison-shopping a futile exercise.
22

“If 80 percent of creditors include a certain clause in their contracts, for example, even the consumer who examines contracts from three different sellers has a less than even chance of finding a contract without the clause.”
23

And even if consumers were to try to compare such terms, they would often find it difficult to do so because companies draft them using complex language and terminology.
24

Moreover, many fine-print terms relate to consequences that would occur only if the consumer breaches the contract or a problem with the transaction otherwise surfaces. Consumers can find it difficult to predict or envision such scenarios ex ante, meaning that fine-print terms may not resonate with consumers when they initially enter into an agreement with a provider.
25

22

See generally
Marcel Kahan & Michael Klausner,
Standardization and Innovation in Corporate Contracting (or “The Economics of Boilerplate”),
83 Va. L. Rev. 713 (1997) (discussing network effects which promote use of inefficient boilerplate);
see also
Benoliel and Becher,
The Duty to Read the Unreadable, supra
note 20, at 2291-94.

23
49 FR 7746.

24

Id.
at 7746-47.

25

Id.
at 7747.

For decades, courts, regulators, and scholars have warned about the risks and dangers associated with contracts of adhesion. Perhaps the most famous such pronouncement is the D.C. Circuit's decision in
Williams
v.
Walker-Thomas Furniture Co.
26

In that case, the consumers had purchased items from a furniture store on a lease-to-own basis, and the agreement—which was a standard-form contract—provided that title to the items would remain with the store until monthly payments equaled the stated value of the items. When the consumers did not make all the payments, the store sued them to take repossession of the property. The consumers claimed the contract was unenforceable because it was unconscionable. Reversing the lower court, the D.C. Circuit explained that contracts of adhesion can be invalidated on grounds of unconscionability when they are “unfair”:

26
350 F.2d 445 (D.C. Cir. 1965).

Unconscionability has generally been recognized to include an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party . . . . In many cases the meaningfulness of the choice is negated by a gross inequality of bargaining power. The manner in which the contract was entered is also relevant to this consideration. Did each party to the contract, considering his obvious education or lack of it, have a reasonable opportunity to understand the terms of the contract, or were the important terms hidden in a maze of fine print and minimized by deceptive sales practices? Ordinarily, one who signs an agreement without full knowledge of its terms might be held to assume the risk that he has entered a one-sided bargain. But when a party of little bargaining power, and hence little real choice, signs a commercially unreasonable contract with little or no knowledge of its terms, it is hardly likely that his consent, or even an objective manifestation of his consent, was ever given to all the terms. In such a case the usual rule that the terms of the agreement are not to be questioned should be abandoned and the court should consider whether the terms of the contract are so unfair that enforcement should be withheld.
27

27

Id.
at 449-50.

Unfair boilerplate terms in contracts of adhesion were also the basis for the FTC's Credit Practices Rule. As discussed in additional detail below in section IV, the Credit Practices Rule prohibited lenders from using certain remedial provisions in consumer credit contracts, including confessions of judgment, waivers of exemption, wage assignments, and security interests in household goods. Based on an extensive evidentiary record, the FTC concluded that these clauses were unlawful because lenders' uses of such clauses were unfair acts or practices.

This view is also encapsulated in the recently adopted Restatement of Consumer Contracts, which warns that “consumer contracts present a fundamental challenge to the law of contracts, arising from the asymmetry in information, sophistication, and stakes between the parties to these contracts—the business and the consumers.”
28

On one side of the transaction “stands a well-informed and counseled business party, entering numerous identical transactions, with the tools and sophistication to understand and draft detailed legal terms and design practices that serve its commercial goals,” while on the other “stand consumers who are informed only about some core aspects of the transaction, but rarely about the list of standard terms.”
29

The Restatement thus notes that “[b]ecause consumers rarely read or review the non-core standard contract terms, . . . the doctrine of unconscionability is a primary tool against the inclusion of

intolerable terms in a consumer contract.”
30

28
Restatement of the Law, Consumer Contracts, Introduction (Am. L. Inst. 2024).

29

Id.

30

Id.
section 6 cmt.1.

B. The Proposed Rule

There are many types of fine print terms and conditions in contracts of adhesion. The CFPB's proposal does not seek to prescribe all of these terms. Rather, the CFPB is proposing to re-codify the Credit Practices Rule under Regulation AA to reinforce the prohibition of certain contract clauses that, for example, impede on consumers' right to due process, and is adding to Regulation AA additional prohibited clauses that implicate other fundamental or constitutional rights. This includes:

• Clauses that waive provisions of law designed by democratically elected officials to benefit or protect consumers.

• Clauses that reserve a company's discretion to amend a material term of the contract unilaterally.

• Clauses that restrain a consumer's free expression by, for example, limiting a consumer's right to provide a negative review or even engage in certain disfavored political speech.

While companies may view these clauses as a way to save money or limit liability, for consumers these clauses have significant impacts—they implicate fundamental principles of personal freedom and democratic governance. For example, clauses limiting free expression restrict citizens' ability to exercise free speech that government agencies could not prohibit under the First Amendment. Clauses that permit lenders to take citizens' unsecured property without any due process or just compensation amounts to a private taking—were the company a Federal government actor, it would potentially violate the Due Process and Takings Clauses of the Fifth Amendment. Citizens' freedom to benefit from a contract is undermined when a counterparty can unilaterally change the core terms of a contract at any time without notice and consent. And the rule of law, as established by democratically elected State and Federal legislatures, is undermined if large companies can nullify those laws in consumer contracts.

The CFPB has authority to issue rules to prevent unfair or deceptive acts or practices by providers of consumer financial products or services (known as “covered persons”).
31

Under that authority, the CFPB proposes to prohibit covered persons from including, using, enforcing, or otherwise relying on these types of clauses in a contract for a consumer financial product or service.

31
12 U.S.C. 5531(b).

Lastly, one of the reasons for proposing this rule is to grant State law enforcement new authority to enforce the existing Credit Practices Rule and the additional prohibitions against national banks.
32

State attorneys general cannot yet use the CFPA's substantial remedies, including Civil Money Penalties,
33

to stop some of the largest banks in the country (which are national banks) from, for example, using confessions of judgment or debanking a consumer for inappropriate reasons. This rule, if finalized, would grant State attorneys general that authority pursuant to section 1042(a) of the CFPA.

32
State attorneys general and regulators usually have authority to enforce the prohibition against unfair, deceptive, or abusive acts or practices in the CFPA. 12 U.S.C. 5552(a). However, State officials
may not
bring a civil action against a national bank or Federal savings association for violations of the CFPA,
unless
it is under a regulation prescribed by the CFPB. 12 U.S.C. 5552(a)(2)(A) and (B). Thus, while many of the practices in this rulemaking are already enforceable by the CFPB against national banks and other covered persons, State officials cannot bring an action under the CFPA to prevent these practices if used by national banks until the CFPB codifies the prohibitions by rule.

33
12 U.S.C. 5565(c) (creating penalty authority of up to $5,000 per violation per day, $25,000 per violation per day if the violations are “recklessly” committed, and $1,000,000 per violation per day if the violations are “knowingly” committed).

III. Consultation With Other Agencies

In developing this proposed rule, the CFPB has consulted with the Federal Trade Commission (FTC), as well as with the Board of Governors of the Federal Reserve System (Board), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), and the Office of the Comptroller of the Currency (OCC) on, among other things, consistency with any prudential, market, or systemic objectives administered by such agencies.

IV. Scope of Proposed Rule

The proposed rule would generally apply to “covered persons” under the CFPA (subject to certain exceptions discussed below). A covered person is “(A) any person that engages in offering or providing a consumer financial product or service; and (B) any affiliate of a person described in subparagraph (A) if such affiliate acts as a service provider to such person.”
34

The CFPA covers a broad array of financial products or services offered or provided to consumers, including (but not limited to) credit, real or personal property leases, real estate settlement services, deposits, payment processing, and credit reporting.
35

Subject to certain exceptions discussed below, any person offering or providing such a consumer financial product or service—or an affiliate of such a person acting as a service provider to the person—would thus be covered by the proposed rule. Such a person would be subject to the prohibition on certain credit practices discussed in section V and the prohibition on certain other terms and conditions in contracts for consumer financial services discussed in section VI. Notably, the practices re-codified from the existing Credit Practices Rule in subpart B only apply with regard to credit transactions, while the additional terms in subpart C apply to all consumer financial products or services including deposit accounts, payments, and other services.

34
12 U.S.C. 5481(6).

35

See
12 U.S.C. 5481(15).

Section 1027.102 of the proposed rule would exempt two categories of covered persons from the rule:

First, under § 1027.102(a) the rule would not apply to “any person to the extent that it is providing a product or service in circumstances excluded from the CFPB's rulemaking authority pursuant to 12 U.S.C. 5517 or 5519.” Under those sections, the CFPB may not exercise its CFPA rulemaking authority over certain persons or activities (which includes rules issued under 12 U.S.C. 5531). The CFPB preliminary concludes that this approach is appropriate because the CFPB lacks authority to apply this rulemaking to such persons or activities. However, this applies only “to the extent” that a person is beyond the CFPB's rulemaking authority. For example, if a covered person offers a consumer financial product or service that is excluded from the CFPB's rulemaking authority under 12 U.S.C. 5517 and another consumer financial product or service that is not excluded, the proposed rule would apply to the covered person's offering or provision of the latter product or service (even though it would not apply to the former).

Second, under § 1027.102(b), subpart C of the rulemaking (
i.e.,
the prohibitions on clauses related to waivers of law, unilateral amendments, and free expression) would not apply to a “small business,” “small organization,” or “small governmental jurisdiction” as those terms are defined in 5 U.S.C. 601. A “small business” has “the same meaning as the term `small business concern' under section 3 of the Small Business Act.”
36

A “small business concern” is “one which is independently owned and operated and

which is not dominant in its field of operation,”
37

or which (along with its affiliates) is at or below the Small Business Administration (SBA) standard listed in 13 CFR part 121 for its primary industry as described in 13 CFR 121.107. A “small organization” is “any not-for-profit enterprise which is independently owned and operated and is not dominant in its field.”
38

A “small governmental jurisdiction” means “governments of cities, counties, towns, townships, villages, school districts, or special districts, with a population of less than fifty thousand.”
39

36
5 U.S.C. 601(3).

37
15 U.S.C. 632(a).

38
5 U.S.C. 601(4).

39

Id.
sec. 601(5).

The CFPB preliminary concludes that applying subpart C of the proposed rule to large entities would be appropriate because they are capable of imposing their terms on consumers and have more resources to enforce them. Studies have shown that large companies routinely use such terms,
40

often applying to thousands or millions of consumers. Furthermore, the threat of the use of private contracting to oppress by constraining fundamental freedoms is greater when a consumer is dealing with a company with more market power and more resources. Large companies are more likely than small companies to have superior bargaining power over consumers, giving them more opportunity to impose one-sided terms in contracts of adhesion. The CFPB intends to monitor the market and determine whether an expansion of coverage to smaller entities may be necessary and appropriate at a later time.

40

See e.g.,
Samples et. al.,
TL;DR: The Law and Linguistics of Social Platform Terms-of-Use, supra
note 16, at 105; Andrea J. Boyack,
Abuse of Contract: Boilerplate Erasure of Consumer Counterparty Rights
at 51,
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4756735
(Mar. 12, 2024) (forthcoming in the. Iowa L. Rev.).

The CFPB also considered—but is not proposing—an exception for State or Federal entities. The CFPB is unaware of any government entities that provide consumer financial products or services with contracts that include the terms at issue in this proposal. That is likely the case because doing so could violate various constitutional constraints on government actors, including the First Amendment right to free speech, the right to Due Process, the Takings Clause, and the substantive rights being waived in legal waivers.

The CFPB generally seeks comment on the coverage of the proposed rule, including whether the scope should be narrowed or expanded and whether additional exclusions would be appropriate.

V. Prohibited Credit Practices

Overview

Subpart B of the proposed rule would codify for covered persons the already existing FTC Credit Practices Rule, which renders unlawful certain remedial provisions in consumer credit contracts.

The FTC first issued the Credit Practices Rule in 1984 pursuant to its authority to prohibit unfair or deceptive acts or practices.
41

The banking regulators subsequently issued their own companion credit practices rules applicable to banks, Federal credit unions, and savings associations.
42

The CFPA repealed the rulemaking authority of the banking regulators under the FTC Act, and the regulators consequently repealed their rules. However, the banking regulators and the CFPB issued a joint interagency guidance in 2014 clarifying their understanding that those credit practices may continue to violate the prohibition against unfair or deceptive practices in section 5 of the FTC Act and sections 1031 and 1036 of the CFPA.
43

41
49 FR 7740.

42

See
50 FR 16695 (Apr. 29, 1985) (Federal Reserve Board); 50 FR 19325 (May 8, 1985) (FHLBB); 52 FR 35060 (Sept. 17, 1987) (NCUA).

43

Interagency Guidance Regarding Unfair or Deceptive Credit Practices, supra
note 10.

The CFPB now proposes to re-codify the Credit Practices Rule for all covered persons, including those currently subject to the FTC's Credit Practices Rule and other entities formerly subject to the companion rules issued by the banking regulators. This proposal is not expected to change existing business conduct in light of the existing FTC rule and the fact that financial institutions generally continue to treat these contract terms as unlawful.

Discussion

The FTC's Credit Practices Rule was based on an extensive evidentiary record. Over a two-year period, the FTC took testimony from more than 300 witnesses and subpoenaed the credit files of 12 large finance companies.
44

The FTC explained that “consumers' ability to avoid certain remedies depends on their ability to shop and compare the language of different credit contracts.” However, the FTC also found that—given the prevalence of standard-form contracts in the consumer credit industry—“although consumers may be able to bargain over terms such as the price of credit and the number or size of payments, there is no bargaining over the boilerplate contract terms that define creditor remedies.”
45

The FTC concluded that these remedies and practices were unfair because they caused substantial injuries to consumers that were not reasonably avoidable, and offered no countervailing benefits to consumers or competition.

44
49 FR 7741.

45

Id.
at 7745.

Specifically (and as discussed in more detail below), the FTC's Credit Practices Rule prohibits lenders from using any of the following provisions: a confession of judgment, a waiver of exemption, an assignment of wages, or a security interest in household goods. The rule also prohibits lenders from misrepresenting the nature or extent of cosigner liability to any person or obligating a cosigner unless the cosigner is informed prior to becoming obligated of the nature of the cosigner's liability. Finally, the rule prohibits lenders from levying or collecting any delinquency charge on a payment, when the only delinquency is attributable to late fees or delinquency charges assessed on earlier installments, and the payment is otherwise a full payment for the applicable period and is paid on its due date or within an applicable grace period.

The Credit Practices Rule does not apply to banks, savings associations, or Federal credit unions.
46

However, the FTC Act (at the time) also required the Federal Reserve Board, the National Credit Union Administration, and the Federal Home Loan Bank Board (FHLBB) (later superseded by the Office of Thrift Supervision (OTS)) to issue, within 60 days after the FTC issued a rule under its authority to prohibit unfair or deceptive acts or practices, “substantially similar regulations prohibiting acts or practices of banks or savings and loan institutions . . . or Federal credit unions . . ., which are substantially similar to those prohibited by rules of the [FTC].”
47

The Board, NCUA, and FHLBB adopted such regulations in 1985,
48

and those rules were codified at 12 CFR parts 227, 706, and 535. In issuing those rules, the agencies did not make new findings, evidence, or conclusions. They relied on the extensive findings by the FTC.

46
15 U.S.C. 45(a)(2).

47

See
formerly 15 U.S.C. 57a(f)(1).

48

See
50 FR 16696 (Apr. 29, 1985) (Federal Reserve Board); 50 FR 19325 (May 8, 1985) (FHLBB); 52 FR 35060 (Sept. 17, 1987) (NCUA).

In 2010, the CFPA transferred Federal consumer protection functions from the Board, OTS, NCUA, and other Federal agencies to the CFPB.
49

The CFPA also repealed the requirement in the FTC Act

for those agencies to issue companion rules applicable to banks, Federal credit unions, and thrifts. Those agencies duly repealed their versions of the Credit Practices Rule.
50

49
12 U.S.C. 5581.

50

See
81 FR 8133 (Feb. 18, 2016) (Board's repeal of Reg AA); 79 FR 59627 (Oct. 3, 2014) (NCUA's repeal of credit practices rule). Under the Dodd-Frank Act, the rulemaking authority of the OTS relating to all Federal savings associations was transferred to the OCC on July 21, 2011. The OCC did not have authority at any time to promulgate regulations under section 5 of the FTC Act, either before or after enactment of the Dodd-Frank Act. For that reason, the OCC omitted the OTS version of the credit practices rule when it republished the regulations applicable to Federal savings associations. 76 FR 48950. (Aug. 9, 2011). Thus, the OTS's credit practices rule was effectively repealed as of July 21, 2011.

However, the Federal financial regulators—including the CFPB—also issued a joint interagency guidance in 2014 clarifying that the repeal of the credit practices rule for banking institutions did not condone those credit practices, and that the agencies would remain vigilant about policing banks for use of the credit practices under their general authority to prohibit unfair or deceptive acts or practices:

The Agencies are issuing this statement to clarify that the repeal of credit practices rules applicable to banks, savings associations, and Federal credit unions should not be construed as a determination by the Agencies that the credit practices described in these former regulations are permissible. The regulations were issued on the basis of extensive findings that identified the unfair or deceptive practices prohibited in the rules. The Agencies believe that, depending on the facts and circumstances, if banks, savings associations, and Federal credit unions engage in the unfair or deceptive practices described in these former credit practices rules, such conduct may violate the prohibition against unfair or deceptive practices in Section 5 of the FTC Act and Sections 1031 and 1036 of the Dodd-Frank Act. The Agencies may determine that statutory violations exist even in the absence of a specific regulation governing the conduct.
51

51

Interagency Guidance Regarding Unfair or Deceptive Credit Practices, supra
note 10.

The CFPB has preliminarily concluded that it would be appropriate to codify the Credit Practices Rule with respect to covered persons within its jurisdiction. Many nonbank covered persons are already subject to the FTC's Credit Practices Rule, and the CFPB has authority to enforce the Credit Practices Rule against them. Although banks, Federal credit unions, and savings associations within the CFPB's jurisdiction are technically not subject to the Credit Practices Rule, they have been on notice under the 2014 interagency guidance that they could violate the CFPA's prohibition on unfair or deceptive practices if they engaged in the practices prohibited by the Credit Practices Rule, and any private or public enforcer enforcing a State or Federal law that parallels the FTC Act may have a cause of action under the same logic as the Credit Practices Rule. Thus, in order to avoid any confusion or uncertainty about whether covered persons within the CFPB's jurisdiction may use these credit practices, this proposed rule would clarify that these credit practices are unlawful for all covered persons.

The CFPB notes that codifying the Credit Practices Rules for all covered persons would be consistent with one of the CFPB's primary objectives under the CFPA—to ensure that “Federal consumer financial law is enforced consistently, without regard to the status of a person as a depository institution, in order to promote fair competition.”
52

Presently, nonbank entities remain subject to the Credit Practices Rule while banks, Federal credit unions, and savings associations are technically not (although they are of course subject to the 2014 interagency statement). The CFPB preliminarily concludes that any differential treatment for banks and nonbanks regarding the practices covered by the rule would serve no regulatory objective and provide no added benefit for consumers. Since engaging in these practices may nonetheless violate Federal law (and harm consumers) regardless of the type of entity, and the banking regulators have made entities under their supervision aware of that possibility for more than a decade, the CFPB does not expect that codification of the proposed rule will place significant additional burdens on entities based on their type of business. Moreover, the CFPB anticipates that the proposal will clarify regulatory requirements for all market participants and ensure that compliance burdens do not vary arbitrarily, which will promote fair competition.

52
12 U.S.C. 5511(b)(4).

Description of Prohibited Credit Practices

The credit practices that would be prohibited under this proposed rule are the same as those described in the FTC's Credit Practices Rule.
53

53
Section 1027.201 of the proposed rule includes certain definitions applicable to subpart B, including cosigner, earnings, household goods, and obligation. Additionally, under proposed § 1027.205, “[a]n appropriate State agency may apply to the CFPB for a determination that (i) There is a State requirement or prohibition in effect that applies to any transaction to which a provision of this subpart applies; and (ii) The State requirement or prohibition affords a level of protection to consumers that is substantially equivalent to, or greater than, the protection afforded by this subpart.” If the CFPB “makes such a determination, the provision of this subpart will not be in effect in that State to the extent specified by the CFPB in its determination, for as long as the State administers and enforces the State requirement or prohibition effectively.” A State agency may apply for an exemption under the same procedures as those set forth in appendix B to Regulation Z (12 CFR part 1026).

Confessions of judgment.
Proposed § 1027.202(a) would prohibit a “cognovit or confession of judgment (for purposes other than executory process in the State of Louisiana), warrant of attorney, or other waiver of the right of notice and the opportunity to be heard in the event of suit or process thereon.” The cognovit is a legal device whereby the consumer, as part of the credit contract, consents in advance to the creditor obtaining a judgment without prior notice or hearing. The consumer either confesses judgment in advance of default or authorizes the creditor or an attorney designated by the creditor to appear and confess judgment against the consumer.
54

54
49 FR 7748-49.

Waivers of exemption.
Proposed § 1027.202(b) would prohibit an “executory waiver or a limitation of exemption from attachment, execution, or other process on real or personal property held, owned by, or due to the consumer, unless the waiver applies solely to property subject to a security interest executed in connection with the obligation.” Many State laws provide exemptions for certain property of a debtor from being seized or sold to satisfy the debt. A waiver of exemption in a credit contract requires a consumer to forfeit or limit such an exemption and allows such property to be seized and sold to satisfy the debt.
55

55

Id.
at 7768-7769.

Wage assignments.
Proposed § 1027.202(c) would prohibit an “assignment of wages or other earnings unless: (1) The assignment by its terms is revocable at the will of the debtor; (2) The assignment is a payroll deduction plan or preauthorized payment plan, commencing at the time of the transaction, in which the consumer authorizes a series of wage deductions as a method of making each payment; or (3) The assignment applies only to wages or other earnings already earned at the time of the assignment.”
56

A wage assignment is a contractual transfer by a debtor to a creditor of the

right to receive wages directly from the debtor's employer. To activate the assignment, the creditor simply submits it to the debtor's employer, who then pays all or a percentage of the debtor's wages to the creditor. The debtor releases the employer from any liability arising out of the employer's compliance with the wage assignment, and may waive any requirement that the creditor first establish or allege a default.
57

56
Proposed § 1027.201(b) would define “earnings” as “compensation paid or payable to an individual or for the individual's account for personal services rendered or to be rendered by the individual, whether denominated as wages, salary, commission, bonus, or otherwise, including periodic payments pursuant to a pension, retirement, or disability program.”

57

Id.
at 7755.

Security interests in household goods.
Proposed § 1027.202(d) would prohibit a “nonpossessory security interest in household goods other than a purchase money security interest.” A security interest in household goods grants a creditor the right to seize personal items from a consumer. The rule (proposed § 1027.201(c)) would define “household goods” as “clothing, furniture, appliances, one television and one radio, linens, china, crockery, kitchenware, and personal effects (including wedding rings) of a consumer and a consumer's dependents.”
58

58
The term would not include: (1) Works of art; (2) Electronic entertainment equipment (except one television and one radio); (3) Items acquired as antiques; that is, items over one hundred years of age, including such items that have been repaired or renovated without changing their original form or character; and (4) Jewelry (other than wedding rings).

Cosigners.
Consumers who do not meet a creditor's standards for creditworthiness may be required to obtain one or more “cosigners” who agree to be liable for the debt. A cosigner is required to pay if the debtor defaults, but the cosigner receives no monetary consideration for undertaking the obligation.
59

Proposed § 1027.203(a) would make it unlawful for a covered person “directly or indirectly, to misrepresent the nature or extent of cosigner liability to any person,” or “directly or indirectly, to obligate a cosigner unless the cosigner is informed prior to becoming obligated, which in the case of open end credit shall mean prior to the time that the agreement creating the cosigner's liability for future charges is executed, of the nature of the cosigner's liability.” Proposed § 1027.203(b) would further require a covered person to provide a cosigner with a disclosure, consisting of a separate document that shall contain the following statement and no other prior to the cosigner being obligated (which in the case of open end credit shall mean prior to the time that the agreement creating the cosigner's liability for future charges is executed):
60

59
49 FR at 7773. The proposed rule (section 1027.201(a)) would define a “cosigner” as “a natural person who renders themself liable for the obligation of another person without compensation,” including “any person whose signature is requested as a condition to granting credit to another person, or as a condition for forbearance on collection of another person's obligation that is in default.” But the term “shall not include a spouse whose signature is required on a credit obligation to perfect a security interest pursuant to State law.” Furthermore, “[a] person who does not receive goods, services, or money in return for a credit obligation does not receive compensation within the meaning of this definition.” The rulemaking would also state that a person is a cosigner “whether or not they are designated as such on a credit obligation.”

60
Under proposed § 1027.203(c), a covered person that provides the disclosure required by proposed § 1027.203(b) “may not be held in violation of paragraph (a) of this section.”

NOTICE TO COSIGNER

You are being asked to guarantee this debt. Think carefully before you do. If the borrower doesn't pay the debt, you will have to. Be sure you can afford to pay if you have to, and that you want to accept this responsibility.

You may have to pay up to the full amount of the debt if the borrower does not pay. You may also have to pay late fees or collection costs, which increase this amount.

The creditor can collect this debt from you without first trying to collect from the borrower. The creditor can use the same collection methods against you that can be used against the borrower, such as suing you, garnishing your wages, etc. If this debt is ever in default, that fact may become a part of
your
credit record.

This notice is not the contract that makes you liable for the debt.

Pyramiding late charges.
Proposed § 1027.204(a) would make it unlawful, “[i]n connection with collecting a debt arising out of an extension of credit to a consumer,” for a covered person “directly or indirectly, to levy or collect any delinquency charge on a payment, which payment is otherwise a full payment for the applicable period and is paid on its due date or within an applicable grace period, when the only delinquency is attributable to late fees or delinquency charges assessed on earlier installments.”
61

This practice is called “pyramiding” late charges and occurs when a creditor assesses multiple delinquency charges due to a single late payment because any subsequent payments are first applied to the outstanding late charge and only then to interest and principal. “In `pyramiding' the accounting method works in this fashion: If a consumer's payment is due on the first day of January, for example, and the payment is not made until the 20th day of that month, the creditor assesses a late charge, for example, $5. The February payment and all subsequent payments are made on time. However, by allocating $5 of the February payment to the January late charge and only the remainder to the February payment, the creditor causes the February payment to be $5 `short', hence delinquent. Timely payments in succeeding months are given the same treatment, so that there is a delinquency or late charge for each month.”
62

61
For purposes of this section, proposed § 1027.204(b) states that “collecting a debt means any activity, other than the use of judicial process, that is intended to bring about or does bring about repayment of all or part of money due (or alleged to be due) from a consumer.”

62
49 FR 7771.

D. Legal Authority

Section 1031(b) of the CFPA provides the CFPB with authority to prescribe rules to identify and prevent unfair, deceptive, or abusive acts or practices (UDAAPs). Specifically, section 1031(b) authorizes the CFPB to prescribe rules “applicable to a covered person or service provider identifying as unlawful unfair, deceptive, or abusive acts or practices in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service.”
63

Section 1031(b) of the Act further provides that “[r]ules under this section may include requirements for the purpose of preventing such acts or practices.”
64

The CFPB may declare an act or practice to be unfair if it “causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers; and such substantial injury is not outweighed by countervailing benefits to consumers or to competition.” The CFPB preliminary concludes that the credit practices it proposes to prohibit are unfair for the same reasons as the FTC in the Credit Practices Rule.

63
12 U.S.C. 5531(b).

64

Id.

First, the FTC found “substantial consumer economic or monetary injuries from the use of these creditor remedies”
65

:

65
49 FR 7743.

• Confessions of judgment deprive consumers of a notice of suit or hearing and opportunity to present claims and defenses. And once obtained, the confessed judgment can be turned into a lien on the consumer's property.
66

66

Id.
at 7753-54.

• A waiver of exemption clause or a security interest in household goods can lead to the consumer losing the basic necessities of life and requiring the consumer to replace these items or face destitution.
67

67

Id.
at 7743-44,
see also id.
at 7769-70.

• Wage assignment can occur without the due process safeguards of a hearing

and an opportunity to present defenses and counterclaims. This can lead to job loss or severely reduced income, either one of which could prevent the consumer from providing for his or her family or cause default on other obligations.
68

68

Id.
at 7757-59.

• When a creditor seizes household goods pursuant to a non-purchase money security interest in such goods, debtors lose property which is of great value to them and little value to the creditor. A non-purchase money security interest in household goods also enables a creditor to threaten the loss of all personal property located in the home, which may lead a debtor to make repayment arrangements that they would not willingly take but for the security interest.
69

69

Id.
at 7762-7765.

• Pyramiding of late charges results in the consumer being unknowingly assessed multiple late charges for a single late payment, even though subsequent payments are timely made.
70

70

Id.
at 7772.

• When creditors fail to inform potential cosigners of their obligations and liability, the cosigners may unexpectedly be subject to collection tactics when the principal debtor defaults (including the remedies described above). The sudden liability that can result from cosigner status can cause over-extension when a consumer is confronted with a debt, the timing of which cannot be controlled by the cosigner because it is due to nonpayment by the principal debtor. Because of the range of potential liabilities, many consumers might not have become cosigners had they known the likely costs of doing so. Cosigners thus undertake obligations which they might not have undertaken had they understood them and suffer economic and other hardship as a result when called upon to repay.
71

71

Id.
at 7774. The FTC also noted that where a creditor affirmatively misrepresents a cosigner's obligations—for example, by telling the cosigner that they are merely a reference for the primary debtor—such a statement would be a deceptive act or practice because it would be misleading and material to a reasonable consumer.
Id.
at 7776. The FTC also has taken action against a for-profit medical school for failing to provide the cosigner notice as required by the Credit Practices Rule.
See FTC
v.
Human Res. Dev. Servs. Inc. dba Saint James School of Medicine
(
St. James Medical School
), No. 22-cv-1919 (N.D. Ill. filed Apr. 14, 2022),
https://www.ftc.gov/legal-library/browse/cases-proceedings/2123034-human-resource-development-services-inc-dba-saint-james-school-medicine-ftc-v.
Instead, defendants included a notice that failed to include the specific language required by the Credit Practices Rule and that appeared in the middle of the contract.
See id.

Second, the FTC concluded that these injuries were not reasonably avoidable, principally because these credit practices were typically incorporated into standard form contracts “over most of which there is no bargaining.”
72

The FTC noted that consumers have “limited incentives to search out better remedial provisions in credit contracts.”
73

For one thing, the “substantive similarities of contracts from different creditors mean that search is less likely to reveal a different alternative.”
74

The FTC also noted that because these credit remedies are relevant only once a consumer defaults, and default is relatively infrequent, “consumers reasonably concentrate their search on such factors as interest rates and payment terms.”
75

The FTC also explained that comparison-shopping for credit contracts is difficult “because contracts are written in obscure technical language, do not use standardized terminology, and may not be provided before the transaction is consummated.”
76

Nor could consumers avoid these credit remedies by avoiding default. “When default occurs, it is most often a response to events such as unemployment or illness that are not within the borrower's control. Thus, consumers cannot reasonably avoid the substantial injury these creditor remedies may inflict.”
77

72
49 FR 7744.

73

Id.

74

Id.

75

Id.

76

Id.

77

Id.

Third, the FTC concluded that any countervailing benefits from these practices did not outweigh the substantial injuries. The FTC explained that even if restrictions on these contract clauses would result in costs to creditors—for example, increased collection costs, increased screening costs, larger legal costs, or increases in bad debt losses—the “possible magnitude of these costs is diminished by the fact that the rule leaves untouched a wide variety of more valuable creditor remedies,” such as repossession, suit, garnishment, or acceleration.
78

78

Id.

The D.C. Circuit subsequently upheld the Credit Practices Rule against legal challenge, noting that the rule “was painstakingly considered and significantly modified in response to the extensive comments and recommendations received during this long rulemaking proceeding.”
79

79

Am. Fin. Servs. Ass'n
v.
FTC.,
767 F.2d 957, 963 (D.C. Cir. 1985).

Like the prudential regulators in their rules implementing the Credit Practices Rule, the CFPB preliminarily concludes that these credit practices are unfair for the same reasons as provided by the FTC. The FTC relied on an extensive evidentiary basis for its conclusions, and there is no reason to believe the core findings have changed since the FTC issued the original rule. Similarly, the findings were not specific to any given creditor type, and therefore, the CFPB preliminarily concludes that the FTC's findings apply equally to entities under the CFPB's jurisdiction carved out of the FTC rule. Indeed, as described above, many of the principal conclusions by the FTC—for example, the prevalence of standard-form contracts and the lack of comparison-shopping—remain true today. At any rate, in the CFPB's experience, these practices are uncommon (thanks in large part to the Credit Practices Rule and the interagency guidance). However, when the CFPB has encountered these practices during exams of supervised entities, it has cited them as violations of the CFPA. For example, the CFPB cited as unfair a servicer's practice of applying borrowers' post-maturity auto-loan payments in a manner that resulted in the principal balance not being paid off and triggered late fees.
80

80
CFPB,
Supervisory Highlights: Special Edition Auto Finance,
Fall Issue 35, 7-8 (Oct. 2024)
https://files.consumerfinance.gov/f/documents/cfpb_supervisory-highlights-special-ed-auto-finance_2024-10.pdf.

The CFPB seeks comment on all aspects of the proposed codification of the Credit Practices Rule applicable to covered persons within the CFPB's jurisdiction.

VI. Other Prohibited Provisions

Subpart C of the proposed rule would prohibit covered persons from including three other types of terms and conditions in contracts for consumer financial products or services: clauses requiring the consumer to waive substantive consumer legal rights or protections that were designed to benefit consumers, and their remedies; clauses allowing a covered person to unilaterally amend a material term of the contract; and clauses restraining a consumer's lawful free expression.
81

The CFPB is proposing to ban these

clauses under its authority to prohibit unfair or deceptive acts or practices.

81
Under proposed § 1027.301(b), a covered person would not be permitted to “use, enforce, or otherwise rely on” these terms or conditions “in an agreement between a consumer and any person for a consumer financial product or service.” This provision would ensure, for example, that a covered person could not rely on a prohibited term or condition in an agreement they purchased from another person.

A. Clauses Waiving Consumers' Substantive Legal Rights or Protections

Proposed § 1027.301(a)(1) would prohibit covered persons from including in agreements for consumer financial products or services “[a]ny term or condition that disclaims or waives, or purports to disclaim or waive, any substantive State or Federal law designed to protect or benefit consumers, or their remedies, unless an applicable statute explicitly deems it waivable.” The waivers of law covered by the proposed rule “include, but are not limited to: (i) waivers of remedies to consumers for violations of State or Federal laws; and (ii) waivers of a cause of action to enforce State or Federal laws.” The proposed rule would not, however, prohibit clauses with regard to procedural rights, like venue clauses, arbitration clauses prohibiting court adjudication, or class action waivers.

There is a large body of substantive Federal and State law—including statutes designed by legislators and the common law process developed by courts—to protect or benefit consumers. Congress has enacted numerous consumer protection laws, including the Federal consumer financial laws administered by the CFPB (such as the CFPA, the Truth in Lending Act (TILA), the Fair Credit Reporting Act (FCRA), the Fair Debt Collection Practices Act (FDCPA), and the Electronic Fund Transfers Act (EFTA)), the Bankruptcy Code, antitrust laws, and laws protecting servicemembers (such as the Military Lending Act and the Servicemembers Civil Relief Act). Many States have also passed analogous consumer protection or antitrust laws, and in some cases the protections afforded by State laws exceed those of Federal law. Consumers also have common law rights to bring claims, including, for example, for a breach of contract or a tort.

These laws provide substantive protections for consumers. For instance, the CFPA (among other things) generally prohibits covered persons from engaging in unfair, deceptive, or abusive acts or practices in connection with transactions for consumer financial products or services,
82

while the enumerated consumer laws codify specific consumer protections. Many of these laws also expressly grant consumers the right to privately enforce violations and to seek remedies, including monetary or injunctive relief. For instance, TILA provides consumers with a cause of action against “any creditor who fails to comply with any requirement imposed under [TILA],” and makes such a creditor liable to the consumer for actual damages and certain statutory damages.
83

82
12 U.S.C. 5531.

83
15 U.S.C. 1640(a).

Many Federal laws—including statutes enforced by the CFPB—also render consumer-protection provisions unwaivable. For instance, EFTA prohibits contract terms that contain a “waiver of any right conferred” by EFTA and prohibits waivers of any “cause of action” under EFTA.
84

The Military Lending Act and its implementing regulations generally prohibit terms in certain consumer credit contracts that require servicemembers and their dependents to “waive the borrower's right to legal recourse under any otherwise applicable provision of State or Federal law.”
85

The FTC also administers laws that forbid certain contractual waivers.
86

And certain State laws similarly prohibit or restrict the use of waivers in consumer contracts.
87

84
15 U.S.C. 16931.

85
10 U.S.C. 987(e)(2).

86
See 16 CFR 444.2(a)(2) (FTC's 1984 Credit Practices Rule, prohibiting 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). The FTC also has interpreted section 604(b)(2)(A) of the Fair Credit Reporting Act (FCRA) to prohibit the inclusion of a waiver of consumer rights in a disclosure form required under that section, observing that “it is a general principle of law that benefits provided to citizens by federal statute generally may not be waived by private agreement unless Congress intended such a result.” FTC, Division of Credit Practices, Staff Opinion Letter (June 12, 1998), 1998 WL 34323756, at *1 (citing
Brooklyn Savings Bank
v.
O'Neill,
324 U.S. 697 (1945)). In addition, while not an express prohibition on waivers, the FTC's Preservation of Consumers' Claims and Defenses rule, commonly known as the “Holder Rule” and also enforced by the CFPB, 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, thereby emphasizing the importance of preserving consumer rights. 16 CFR part 433.

87
For instance, the California Consumer Privacy Act affords consumers certain rights to know how their information will be used, instructs businesses not to sell consumers' personal information, and deems “void and unenforceable” any contractual provision “that purports to waive or limit in any way rights under this title, including, but not limited to, any right to a remedy or means of enforcement.”
See generally
Cal. Civ. Code sec. 1798.100
et seq.
described at
https://oag.ca.gov/privacy/ccpa
; Cal. Civ. Code sec. 1798.192. Further, certain State laws, including those of California, Illinois, Kansas, and Tennessee, contain outright prohibitions of waivers of legal protections in general consumer protection laws. See Cal. Civ. Code. sec. 1751 (barring waivers of protections under California Consumers Legal Remedies Act); Ill. St. Ch. 815 sec. 505(10c), Waiver or modification (barring waiver or modification of protections under consumer fraud and deceptive practices statute); Kan. Stat. 50-625(a), Waiver (generally prohibiting waivers of rights or benefits under the Kansas Consumer Protection Act, unless otherwise specified in the statute); Tenn. Stat. 47-18-113(a) (generally prohibiting waivers “by contract, agreement, or otherwise” of provisions of the Tennessee Consumer Protection Act of 1977).

In the CFPB's experience, however, covered persons sometimes include waivers of consumer protection laws in contracts for consumer financial products or services (including when those laws forbid such waivers). The CFPB has taken both supervisory and enforcement action against such practices as both unfair and deceptive. For example, in 2013, the CFPB cited two mortgage servicers for the unfair practice of requiring all borrowers, regardless of their individual circumstances, to enter into across-the-board waivers of existing claims in order to obtain a forbearance or loan modification agreement.
88

In 2021, the CFPB cited entities for the deceptive practice of requiring borrowers to agree to a waiver of any equity or right of redemption in the loan security agreement for cooperative units. Specifically, the waiver stated that in the event of default, lenders may sell the security at public or private sale and thereafter hold the security free from any claim or right whatsoever of the borrower, who waives all rights of redemption, stay or appraisal which the borrower has or may have under any rule or statute.
89

In 2022, the CFPB entered into a consent order with Bank of America for, among other practices, unfairly requiring consumers to waive its liability as to consumers' garnishment-related protections in its deposit agreement and misrepresented to consumers that they could not go to court to attempt to prevent wrongful garnishments.
90

The FTC has also taken action against a for-profit medical school that attempted to waive consumers' rights under Federal law.
91

88
CFPB,
Supervisory Highlights: Winter 2013,
at 6-7 (Jan. 2014),
https://files.consumerfinance.gov/f/201401_cfpb_supervisory-highlights-winter-2013.pdf.

89
CFPB,
Supervisory Highlights: Issue 24, Summer 2021,
at 28 (June 2021),
https://files.consumerfinance.gov/f/documents/cfpb_supervisory-highlights_issue-24_2021-06.pdf.

90
See Consent Order, In re Bank of America, N.A., No. 2022-CFPB-0002 (May 4, 2022).

91

See St. James Medical School, supra
note 71. According to the FTC's complaint, among numerous other things, defendants failed to include the notice required by the FTC's Holder Rule in their credit agreements, and also included language attempting to waive those rights.

These waiver clauses in contracts of adhesion undermine our system of constitutional democracy. Our

government is—as President Abraham Lincoln said—a “government of the people, by the people, for the people.” The United States Constitution implements that principle by vesting Federal lawmaking powers in the United States Congress
92

and reserving other lawmaking powers (unless prohibited by the Constitution) “to the States respectively, or to the people.”
93

At both the Federal and State levels, legislatures are elected by citizens and are empowered to pass laws that benefit their wellbeing. In enacting such laws, legislatures necessarily balance competing interests among citizens, and their legislative judgments and policy choices must be respected unless constitutionally invalid. Against this system of democratic governance, waiver-of-law clauses in form contracts of adhesion are distinctly anti-democratic. They allow companies to use contracts of adhesion to override laws that have been designed to protect consumers without meaningful consent by the consumer.

92
U.S. Const. art. 1, section 1.

93
U.S. Const. amend. X.

This proposed rule would forbid a covered person from using any clause in a contract for a consumer financial product or service that requires a consumer to waive substantive consumer rights and legal protections conferred by State or Federal laws designed to protect or benefit consumers (unless the law is expressly waivable), or their remedies. This prohibition would cover waivers of substantive legal rights as well as waivers of a consumer's right to enforce those laws (such as a waiver of a cause of action, a cap on statutory damages, or a time limitation on consumer enforcement of the law). For example, a contractual clause requiring a consumer to waive certain provisions of TILA (or to waive the consumer's right to enforce TILA) would be prohibited under the proposed rule. However, the prohibition would not apply to waivers of procedural rights (
e.g.,
venue clauses, arbitration clauses prohibiting court adjudication, or class action waivers). Although the CFPB also has concerns about such waivers, the CFPB is focusing on waivers of substantive rights in this proposed rule because contractual waivers of substantive rights allow companies to invalidate legislative judgments that certain business practices are unlawful.

The CFPB seeks comment on this proposed prohibition of waiver clauses.

B. Unilateral Amendment Clauses

Proposed § 1027.301(a)(2) would prohibit covered persons from including in agreements for consumer financial products or services “[a]ny term or condition that expressly reserves the covered person's right to unilaterally change, modify, revise, or add a material term of a contract for a consumer financial product or service.” Companies often include contractual clauses that grant them unfettered discretion to change or add to the terms of their agreement with the consumer without adequate notice to or assent from the consumer before the change becomes effective. Unilateral contract amendments can harm consumers since any modifications are likely to mainly benefit the company and the consumer has no option to reject the change. The CFPB proposes to ban these clauses because they allow covered persons to circumvent consumers' freedom to benefit from a contract by changing material terms of an agreement.

The proposal would prohibit any amendment clause in a contract between a covered person and a consumer for a consumer financial product or service that grants the covered person the exclusive right to modify a material term of the contract in the future. By definition, these unilateral amendment clauses provide no meaningful opportunity for the consumer to affirmatively accept, negotiate, or reject any modifications by the company.

Unilateral amendment clauses are typically drafted to provide a company with discretion to change a term of the contract or to add terms to the contract. Companies can thus use these clauses to change fees, dispute resolution procedures, terms of service, or privacy policies.
94

“In fact, unilateral modifications can change any aspect of a contract.”
95

For instance, in recent years, unilateral amendment clauses have become a popular way for companies to add arbitration clauses to consumer contracts or to change the rules of the arbitration process.
96

And unilateral amendment clauses typically do not impose limits on when these changes can be made, meaning that a company may rely on such a clause to modify a contract months or even years after the agreement was consummated. In short, when a contract includes a unilateral amendment clause, “[f]irms can virtually make any change they wish to their contracts, for whatever reason and at any time, without properly communicating this change.”
97

And changes implemented unilaterally will typically benefit the company, not the consumer. “There is a concern . . . that businesses will initiate self-serving, opportunistic modifications in standard contract terms once consumers are already locked into the service.”
98

94
See,
e.g.,
David Horton,
The Shadow Terms: Contract Procedure and Unilateral Amendments,
57 UCLA L. Rev. 605, 630-636 (2010); Shmuel I. Becher & Uri Benoliel,
Sneak In Contracts,
55 Ga. L. Rev. 657, 660 (2020).

95
Becher & Benoliel, supra n. 94 at 661.

96
Adam Levitin,
Venmo's Unfair and Abusive Arbitration Opt-Out Provision,
Credit Slips (Apr. 26, 2022),
https://www.creditslips.org/creditslips/2022/04/-venmos-unfair-and-abusive-arbitration-opt-out-provision.html.

97
Shmuel I. Becher & Uri Benoliel,
Dark Contracts,
64 B.C. L. Rev. 55, 68 (2023).

98
Restatement of the Law, Consumer Contracts,
supra
note 28, at section 3 cmt. 1.

Unilateral amendment clauses are commonly included by companies in consumer contracts or terms of use. For example, a recent study examined 100 companies' online terms and conditions for contracts and relationships with consumers.
99

The sample set included companies in retail, computer and browsing services, streaming and entertainment, financial services, social media, and transportation.
100

The study considered both private and public companies.
101

The study found that all of the companies' terms and conditions included a unilateral modification clause.
102

Only 15 of the companies' terms and conditions provided for notice to the consumer when the company made a unilateral change to a material term.
103

The study also found that under these clauses, the consumer had no real opportunity to reject the modifications, short of terminating the transactional relationship with the company.
104

Other studies have reached similar conclusions.
105

99
Boyack,
Abuse of Contract: Boilerplate Erasure of Consumer Counterparty Rights, supra
note 40, at 6.

100

Id.
at 7

101

Id.

102

Id.
at 18.

103

Id.
at 19.

104

Id.
at 20.

105
Becher & Benoliel,
Sneak In Contracts, supra
note 94, at 681-682 (finding that more than 95 percent of companies with the 500 top websites used unilateral amendment clauses); Samples et al.,
TL;DR: The Law and Linguistics of Social Platform Terms-of-use, supra
note 16 at 103.

In the CFPB's experience, unilateral amendment clauses are used by companies in the consumer finance market, and companies rely on such clauses to modify agreements in ways that are harmful to consumers. Unilateral amendments can be especially prejudicial when they thwart a consumer's expectations about the terms of or performance under a

contract (including when such a change conflicts with advertising or marketing about the contract on which the consumer relied in the first place).

For instance, such clauses are commonly included in credit card agreements, and the harm arising from unilateral amendments to credit card agreements was one of the main reasons for congressional enactment of the Credit Card Accountability, Responsibility, and Disclosure Act (CARD Act) of 2009.
106

Prior to the CARD Act's passage, credit card issuers routinely relied on unilateral amendment clauses to change fees, interest rates, and payment amounts after a consumer had taken out a credit card.
107

The CARD Act was intended to curb the abuses wrought by these “[a]ny time any reason” changes to credit card agreements.
108

As implemented by Regulation Z, the CARD Act requires that when a credit card issuer seeks to make “a significant change in account terms,” it must provide 45 days advance notice of the change and include in the notice a statement that the consumer “has the right to reject the change or changes prior to the effective date of the changes” and “[i]nstructions for rejecting the change or changes, and a toll-free telephone number that the consumer may use to notify the creditor of the rejection.”
109

106
Public Law 111-24, 123 Stat. 1734 (2009).

107

See, e.g.,
Modernizing Consumer Protection in the Financial Regulatory System: Strengthening Credit Card Protections: Hearing Before the S. Comm. on Banking, Housing, and Urban Affairs, 111th Cong. 199 (2009) (statement of Travis B. Plunkett).

108
See 155 Cong. Rec. S2150 (daily ed. Feb. 11, 2009) (statement of Sen. Dodd); see also 15 U.S.C. 1637(i).

109
12 CFR 1026.9(c)(2)(iv).

However, abuses arising from unilateral amendments remain a problem in consumer financial services. For example, the CARD Act does not require a change-in-terms notice for all modifications to a credit card agreement, and the CFPB recently warned that “many of the largest credit card issuers reserved the right to change their rewards program at any time, for any reason, and in many cases without notice in terms and conditions typically separate from the cardholder agreements, in which changes to some terms are restricted and/or require prior communication.”
110

The CFPB noted that such clauses can allow issuers “to alter rewards programs or devalue rewards as a safety valve [for the company], putting consumers at a fundamental disadvantage.”
111

110
Consumer Fin. Prot. Bureau,
Issue Spotlight: Credit Card Rewards,
11 (May 9, 2024) (citing agreements from American Express, Citi, Chase, and Wells Fargo).

111

Id.

The CFPB is concerned about unilateral amendment clauses because they undermine the consumer's freedom to benefit from the contract. A contract is based on the voluntary exchange of promises between the contracting parties that establish a “meeting of the minds.” Thus, as the Restatement (Second) of Contracts notes, “the formation of a contract requires a bargain in which there is a manifestation of mutual assent to the exchange and a consideration.”
112

These same principles apply not only for the initial contract but any subsequent modifications.
113

112
Restatement (Second) of Contracts section 17(1) (1981);
see also, e.g., Specht
v.
Netscape Commc'ns Corp.,
150 F. Supp. 2d 585, 587 (S.D.N.Y. 2001), aff'd, 306 F.3d 17 (2d Cir. 2002) (“Promises become binding when there is a meeting of the minds and consideration is exchanged. So it was at King's Bench in common law England; so it was under the common law in the American colonies; so it was through more than two centuries of jurisprudence in this country; and so it is today.)

113
See,
e.g., Dallas Aerospace, Inc.
v.
CIS Air Corp.,
352 F.3d 775, 783 (2d Cir. 2003) (“[f]undamental to the establishment of a contract modification is proof of each element requisite to the formulation of a contract, including mutual assent to its terms”).

For that reason, courts have generally refused to enforce unilateral amendment clauses that do not allow for mutual assent. “Indeed, a party can't unilaterally change the terms of a contract; it must obtain the other party's consent before doing so. This is because a revised contract is merely an offer and does not bind the parties until it is accepted. And generally an offeree cannot actually assent to an offer unless he knows of its existence.”
114

Thus, as noted by the Restatement of Consumer Contracts, if a company “can derogate, without any limitation, from rights and obligations that were stated when the original assent was manifested, or if the business awards itself unfettered discretion to specify its obligations under the original contract, such that the promise the business made to consumers is lacking sufficient meaningful commitment, the business's promise is illusory and the contract fails for lack of consideration.”
115

114

Douglas
v.
U.S. Dist. Ct. for Cent. Dist. of California,
495 F.3d 1062, 1066 (9th Cir. 2007);
see also, e.g., In re Zappos.com, Inc., Customer Data Sec. Breach Litig.,
893 F. Supp. 2d 1058, 1066 (D. Nev. 2012);
Lovinfosse
v.
Lowe's Home Centers, LLP,
2024 WL 3732436 (E.D. Va. Aug. 8, 2024).

115
Restatement of the Law, Consumer Contracts,
supra
note 28, section 5, reporters' notes a.

As the Restatement of Consumer Contracts further explains, “courts have developed a fairly consistent approach to determining the enforceability of modifications. In particular, the requirements of notice and opportunity to reject or terminate figure prominently in courts' reasoning. In almost all cases in which modifications were enforced and that involve the questions of notice as well as opportunity to reject or terminate, courts made explicit determinations that both the requirements of sufficient notice and opportunity to reject or terminate were satisfied.”
116

Thus, under the Restatement of Consumer Contracts, a modification of a standard-contract term is binding on a consumer only if the consumer received notice of the proposed modification and was provided a reasonable opportunity to reject the change.
117

For example, the Restatement provides an example of a “contract between an airline and a consumer allow[ing] the airline to modify the frequent-flyer program at its discretion,” explaining that such a provision would be unenforceable “if the airline does not afford the consumer a meaningful opportunity to reject it.”
118

116

Id.
section 3, reporters' notes f.

117

Id.
section 3(a). Under the Restatement, “[a] consumer contract governing an ongoing relationship may provide for a reasonable procedure for adoption of modified terms under which the business may propose a modification of the standard contract terms but may not, to the detriment of the consumer, exclude the application of subsection (a), except that the established procedure may replace the reasonable opportunity to reject the proposed modified term with a reasonable opportunity to terminate the transaction without unreasonable cost, loss of value, or personal burden.”
Id.
section 3(b).

118

Id.
section 5 illus. 5.

Consistent with these principles, the proposed rule would prohibit any clause in a contract for a consumer financial product or service that provides the company the sole right to modify the contract. The CFPB recognizes that consumer contracts may need to be modified to account for changed circumstances after the contract is signed, and this proposed rule would not prohibit all such modifications. Nothing in the proposed rule would prohibit companies from implementing modifications that are consistent with applicable State or Federal law.
119

Whether a particular

modification is consistent with applicable law will depend on the facts and circumstances and the applicable jurisdiction's common law, and is beyond the scope of this rulemaking. But the proposed rule would prohibit companies from relying on a unilateral amendment clause to make modifications.

119
The CFPB recognizes that there are State or Federal statutes or regulations setting forth processes for companies to implement modifications for certain contract terms. For example and as noted above, the CARD Act and its implementing regulations create procedures for credit card issuers to implement modifications to a consumer's account agreement. For certain changes, the CARD Act and its implementing regulations require a company to provide consumers with notice and an opportunity to reject a modification. For other changes, the CARD Act and its implementing regulations affirmatively state that no advance notice of a modification is required. And

the CARD Act and its implementing regulations are silent on changes for other terms. Nothing in this proposed rule would displace or affect those procedures for amending a contract. This rulemaking only prohibits the use of a contract term to reserve a unilateral right to amend that the company would not otherwise have by virtue of State or Federal law or regulation.

The CFPB seeks comment on this proposed prohibition of unilateral amendment clauses.

C. Clauses Restraining Consumers' Free Expression

Proposed § 1027.301(a)(3) would prohibit covered persons from including in contracts for consumer financial products or services “[a]ny term or condition that limits or restrains, or purports to limit or restrain, the free and lawful expression of a consumer,” except that this prohibition would not “affect[] a covered person's ability to close an account that is being used to commit fraud or other illegal activity.” This prohibition would apply to, for example, contractual clauses that limit a consumer's ability to make negative comments about a company or to freely express their political and religious views. And it would include any contractual mechanism for enforcing those limits, including fees, reserving rights to close accounts on that basis (
e.g.,
“debanking”), or terms that do not describe a particular remedial consequence but could give rise to a breach of contract claim. The proposed rule would not, however, prohibit contract clauses giving covered persons a right to close accounts based on the use of an account to commit fraud or illegal activity, because that would not constitute “lawful expression.”

The First Amendment of the Constitution protects people from, among other things, laws abridging free speech or prohibiting the free exercise of religion. The First Amendment “reflects a profound national commitment to the principle that debate on public issues should be uninhibited, robust, and wide-open” because “speech concerning public affairs is more than self-expression; it is the essence of self-government.”
120

Free expression “is powerful medicine” because it “put[s] the decision as to what views shall be voiced largely into the hands of each of us, in the hope that use of such freedom will ultimately produce a more capable citizenry and more perfect polity and in the belief that no other approach would comport with the premise of individual dignity and choice upon which our political system rests.”
121

The First Amendment applies even when speech is disagreeable or offensive. “In an open, pluralistic, self-governing society, the expression of an idea cannot be suppressed simply because some find it offensive, insulting, or even wounding.”
122

120

Snyder
v.
Phelps,
562 U.S. 443, 452 (2011).

121

Cohen
v.
California,
403 U.S. 15, 24 (1971).

122

Fulton
v.
City of Philadelphia,
593 U.S. 522, 615 (2021).

While government restraints on speech carry obvious risks due to the coercive power of government, infringement of speech by large private corporations can be similarly harmful, with the added concern that these entities are not subject to democratic accountability or transparency obligations. And in recent decades, many companies have begun to use contractual terms to prevent individuals from expressing themselves freely.
123

In the market for consumer financial products and services, two such types of clauses are of particular concern to the CFPB, both of which would be prohibited under the proposed rule.

123
Alan E. Garfield,
Promises of Silence: Contract Law and Freedom of Speech,
83 Cornell L. Rev. 261, 268 (1998).

First, some companies have begun including non-disparagement clauses—also colloquially known as “gag” clauses—that restrict consumers from providing negative reviews of the company's product or service. Originating in the health care sector, these types of clauses have migrated to many parts of the economy.
124

The CFPB is aware of such abuses in the consumer finance market. For instance, the FTC has taken action against a credit repair firm for its use of non-disparagement clauses in violation of the Consumer Review Fairness Act.
125

The CFPB is also aware of reports that a nonbank mortgage lender had imposed certain non-disparagement provisions in certain loan modification agreements associated with settlement of pending legal claims, until committing to the New York State financial regulator to stop doing so.
126

124
Eric Goldman,
Understanding the Consumer Review Fairness Act of 2016,
24 Mich. Telecomm. & Tech. L. Rev. 1, 2 (2017).

125

FTC
v.
Grand Teton Professionals
, LLC, et al., Case No. 19-cv-933 (D. Conn) (Complaint filed June 17, 2019).

126
Peter Rudegeair, Michelle Conlin,
Exclusive: Ocwen Financial to stop gagging homeowners in mortgage deals,

Reuters.com
(June 3, 2014),
https://www.reuters.com/article/us-banks-mortgages/exclusive-ocwen-financial-to-stop-gagging-homeowners-in-mortgage-deals-idUSKBN0EE1XG20140603
(last visited Dec. 2, 2022); Brena Swanson,
Ocwen will stop using mortgage gag orders,

Housingwire.com
(June 3, 2014),
https://www.housingwire.com/articles/30196-ocwen-will-stop-using-mortgage-gag-orders/.

Numerous studies and surveys have confirmed the importance of online reviews across the economy. For example, one prominent study estimated that a one-star rating increase on
Yelp.com
translated to an increase of five to nine percent in revenues for a restaurant.
127

Another study found that a one-point boost in a hotel's online ratings on travel sites is tied to an 11 percent jump in room rates, on average.
128

To date, academic research has not focused specifically on markets for consumer financial products and services. But the CFPB expects consumer reviews to play an increasing role in helping consumers choose between financial providers given that many consumers now seek financial products online, including on shopping platforms that can simultaneously provide reviews. This can create an incentive for dishonest market participants to attempt to manipulate the review process, rather than compete based on the value of their services, which can frustrate a competitive marketplace.

127
Michael Luca,
Reviews, Reputation, and Revenue: The Case of Yelp.com,
Harv. Bus. Sch. Working Paper No. 12-016, 14 (2016).

128
Chris Anderson,
The Impact of Social Media on Lodging Performance,
12(15) Cornell Hospitality Report 6, 11 (2012).

In 2016, Congress unanimously enacted the Consumer Review Fairness Act,
129

in response to abuses by companies that restricted consumer reviews. The Consumer Review Fairness Act generally prohibits non-disparagement clauses in standard-form consumer contracts. Specifically (and with certain exceptions), it voids from inception any such contractual provision that prohibits, restricts, or penalizes “an individual who is a party to the form contract” to engage in a “written, oral, or pictorial review, performance assessment of, or other similar analysis of . . . the goods, services, or conduct of a person.”
130

As the legislative history of the statute explains, the “wide availability” of consumer reviews “has caused consumers to rely on them more heavily as credible indicators of product or service quality. In turn, businesses have sought to avoid negative reviews . . . through provisions of form contracts with consumers restricting such

reviews.”
131

Some States have also enacted prohibitions against non-disparagement or “gag” clauses.
132

129
15 U.S.C. 45b.

130

Id.

131
H. Rept. 114-731, at 5 (2016). The legislative history also indicates that Congress was concerned that these clauses would diminish the overall value of consumer reviews, including by chilling “negative yet truthful” reviews. “Non-disparagement clauses interfere with the benefits consumers derive from ready access to `crowd-sourced' reviews of products and services. If such clauses become widely adopted, negative yet ruthful reviews may be chilled, undermining the overall credibility of consumer reviews. The newfound utility of consumer reviews would then be reduced as trust in their veracity diminishes. H.R. 5111 seeks to curtail non-disparagement clauses in order to preserve the credibility and value of online consumer reviews.”
Id.
at 5-6.

132
Cal. Civil Code sec. 1670.8 (“A contract or proposed contract for the sale or lease of consumer goods or services may not include a provision waiving the consumer's right to make any statement regarding the seller or lessor or its employees or agents, or concerning the goods or services.”); 815 Ill. Comp. Stat. Ann. 505/2UUU (West) (same); Md. Code, Com. L. sec. 14-1325 (making it an unfair and deceptive trade practice to include a provision “waiving the consumer's right to make any statement concerning [ ] The seller or lessor; [ ] Employees or agents of the seller or lessor; or [ ] The consumer goods or services.”).

Second, some companies have also used contractual terms to prevent consumers from engaging in political or religious expression or to penalize them for doing so. For example, in 2022 PayPal amended its user agreement to levy a fine or close accounts based on consumers' exercise of free expression, even if it was unrelated to fraud or other illegal activity.
133

In a similar vein, some consumer financial companies have been accused of “de-banking” persons or organizations based on their political or religious beliefs. For example, several State regulators recently accused a major bank of “discriminating against religious ministries,” including the bank's closure of the accounts of a Christian ministry because the bank did not want to serve the organization's “business type.”
134

State attorneys general also sent a letter to the same bank about the bank's practice of “conditioning access to its services on customers having the bank's preferred religious or political views.”
135

Some State legislatures have also introduced or enacted laws that would prohibit such “de-banking.”
136

133
See Emily Manson,
After PayPal Revokes Controversial Misinformation Policy, Major Concerns Remain Over $2,500
Fine (Oct. 27, 2022),
https://www.forbes.com/sites/emilymason/2022/10/27/after-paypal-revokes-controversial-misinformation-policy-major-concerns-remain-over-2500-fine/.

134
Letter from Andre Sorrell et al. to Brian Moynihan,
https://treasurer.utah.gov/wp-content/uploads/04-18-2024-Letter-to-BoA-Regarding-Debanking.pdf
(Apr. 18, 2024).

135
Letter from Kris W. Kobach et al. to Brian T. Moynihan, (Apr. 15, 2024)
https://dojmt.gov/attorney-general-knudsen-demands-action-from-bank-of-america-to-correct-debanking-practices/.

136
See,
e.g.,
Tenn. Code Ann. sec. 45-1-128.

The CFPB seeks comment on this proposed prohibition of clauses restraining consumers' lawful free expression.

Legal Authority

The CFPB proposes to prohibit these three types of terms and conditions in consumer financial products or services because their use constitutes unfair or deceptive acts or practices.

i. Deceptive Acts or Practices

Under the CFPA, a representation or omission is deceptive if it is likely to mislead a reasonable consumer and is material.
137

A representation is “material” if it “involves information that is important to consumers and, hence, likely to affect their choice of, or conduct regarding, a product.”
138

It is well-established that material misrepresentations to consumers that are unsupported under applicable law can be deceptive.
139

In particular, including an unenforceable material term in a consumer contract is deceptive, because it misleads consumers into believing the contract term is enforceable.

137
Although the CFPA does not define “deceptive,” the CFPB has adopted the definition set forth by the FTC in its 1983 Policy Statement on Deception.
See
FTC Policy Statement on Deception (Oct. 14, 1983),
https://www.ftc.gov/bcp/policystmt/ad-decept.htm.

138

Novartis Corp.
v.
FTC,
223 F.3d 783, 786 (D.C. Cir. 2000) (quoting
In re Cliffdale Assocs., Inc.,
103 F.T.C. 110, 165 (1984)).

139

See, e.g., FTC
v.
World Media Brokers,
415 F.3d 758, 763 (7th Cir. 2005).

As the CFPB recently explained, waiver-of-law provisions in contracts for consumer financial products or services are often deceptive when the waivers are unlawful or unenforceable under Federal or State law.
140

The inclusion of unlawful or unenforceable terms and conditions in consumer contracts is likely to mislead a reasonable consumer into believing that the terms are lawful and/or enforceable, when in fact they are not. Further, the representations made by the presence of such terms are often material, presumptively so when they are made expressly. In particular, consumers are unlikely to be aware of the existence of laws that render the terms or conditions at issue unlawful or unenforceable, so in the event of a dispute, they are likely to conclude they lawfully agreed to waive their legal rights or protections after reviewing the contract on their own or when covered persons point out the existence of these contractual terms and conditions. Research indicates providers are incentivized to include unenforceable terms because consumers tend to assume the terms in their contracts are enforceable (even if they harm the consumer's interests or deprive them of legal rights).
141

A contractual provision stating that a consumer agrees not to exercise a legal right is likely to affect a consumer's willingness to attempt to exercise that right in the event of a dispute. Deceptive acts and practices such as these pose risks to consumers, whose rights are undermined as a result, and distort markets to the disadvantage of covered persons who abide by the law by including only lawful terms and conditions in their consumer contracts.

140

Consumer Financial Protection Circular 2024-03, supra
note 6.

141

See, e.g.,
Meirav Furth-Matzkin & Roseanna Sommers,
Consumer Psychology and the Problem of Fine Print Fraud,
72 Stan. L. Rev. 503, 508-09 (2020).

For similar reasons, a contractual provision that restrains a consumer's free expression in violation of the Consumer Review Fairness Act would be deceptive. As the CFPB noted in a recent compliance bulletin, it would generally be deceptive to include a restriction on consumer reviews in a form contract, given that the restriction would be void from the inception under the Consumer Review Fairness Act.
142

Consumers can be expected to read such language to mean what it says: that they are restricted in their ability to provide consumer reviews. But that is not the case, since the provision is void under applicable law. And the option to post candid reviews about products or services would be material to the many American consumers who do so. Moreover, enforcing the deception prohibition is particularly important in this context, given that consumer reviews are a significant driver of competition in the modern economy.

142
Consumer Fin. Prot. Bureau,
CFPB Bulletin 2022-05: Unfair and Deceptive Acts or Practices That Impede Consumer Reviews,
(Mar. 22, 2022),
https://www.consumerfinance.gov/compliance/supervisory-guidance/cfpb-bulletin-2022-05-unfair-deceptive-acts-or-practices-that-impede-consumer-reviews/.

ii. Unfair Acts or Practices

The CFPB may declare an act or practice to be “unlawful on the grounds that [it] is unfair” if the CFPB “has a reasonable basis to conclude that (A) the act or practice causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers; and (B) such substantial injury is not outweighed by countervailing benefits to consumers or to competition.”
143

The use of each of the clauses that would be prohibited

under the proposed rule in contracts for consumer financial products or services would be an unfair act or practice.

143
12 U.S.C. 5531(c).

Substantial injury.
Each of the three types of clauses causes or would likely cause substantial injury to consumers.

A contractual clause requiring a consumer to waive the protections of Federal or State law causes the consumer to forfeit legal rights designed for their benefit. These laws reflect a legislative judgment that it is in the public interest for consumers to be protected from certain business practices. Eliminating these protections through a consumer contract deprives the consumer of those legal rights. Consumers can also suffer concrete monetary injury from the inclusion of waiver-of-law clauses when, as a result of the waiver, they are exposed to business practices that would have been otherwise illegal, or, when the waiver reduces the monetary remedy that consumers can seek. These waivers shift the risk of such business practices from the company to the consumer. “Consumers are clearly injured by a system which forces them to bear the full risk and burden of sales related abuses.”
144

This is particularly the case when a consumer cannot fully enforce a law because of a waiver-of-law provision. As noted above, many consumer protection laws grant consumers a statutory cause of action to enforce the law, enjoin the unlawful practice, and recover actual and/or statutory damages. When a consumer is contractually restricted from relying on such a cause of action—or when a waiver provision limits a company's legal liability or limits the time in which a consumer can bring a legal action against the company—consumers are unable to stop the illegal practice and recover damages from the company. For example, in a 2022 case the CFPB alleged that Bank of America engaged in unfair acts and practices by using a deposit agreement that required consumers not to contest legal process and waive the bank's liability for unlawfully garnishing funds from a consumer's deposit account. According to the consent decree, in at least 3,700 instances, the bank's conduct resulted in substantial injury to affected consumers in the form of garnishment-related fees, frozen or held funds, and funds turned over to judgment creditors.
145

144
FTC,
Preservation of Consumers' Claims and Defenses,
40 FR 53506, 53523 (Nov. 18, 1975).

145

See
Consent Order,
In re Bank of America, N.A.,
No. 2022-CFPB-0002 (May 4, 2022).

Unilateral amendment clauses injure consumers by facilitating involuntary changes that are a detriment to the consumer (including monetary detriment), and depriving consumers of the opportunity to provide meaningful consent to amended terms that may adversely affect them. As noted above, when a company can derogate from the material terms of an agreement with a consumer at its own discretion, a contract becomes illusory and the consumer does not obtain the benefit of the bargain in the contract they signed initially. They also deprive consumers of the ability to make a free and informed choice of whether to contract in the first place because the material terms of the agreement might change later in unpredictable ways. Furthermore, the changes effected through such clauses (
e.g.,
diminution of credit-card rewards) typically inure to the detriment of consumers. In particular, when a modification undermines a consumer's expectations about the scope of contract, it resembles a traditional “bait-and-switch” scheme that has long been found to be unfair by the FTC.
146

146

See
FTC Guides Against Bait Advertising, 16 CFR part 238
et seq.; cf. Rossman
v.
Fleet Bank (R.I.) Nat. Ass'n,
280 F.3d 384, 396-400 (3d Cir. 2002) (credit card issuer soliciting business with no-annual-fee offer while intending to later impose fee constitutes a bait-and-switch scheme).

In particular, in the credit card market, consumers experience substantial injury when credit card companies use unilateral amendment clauses to amend the terms of a reward program without adequate notice or opportunity to provide meaningful consent. Consumers make decisions based on expectations about the value of credit card reward programs,
147

and so they incur concrete and monetary harm associated with the use of unilateral amendment clauses to unilaterally decrease the accrual rates or otherwise downgrade those programs.

147

See
Consumer Fin. Prot. Bureau,
Consumer Financial Protection Circular 2024-07: Design, Marketing, and Administration of Credit Card Rewards Programs,
(Dec. 18, 2024),
https://www.consumerfinance.gov/compliance/circulars/consumer-financial-protection-circular-2024-07-design-marketing-and-administration-of-credit-card-rewards-programs/.

Contractual restraints on free expression deprive consumers of their ability to express themselves freely. This can cause harm when, for example, a consumer is prohibited from providing a negative review on or complaining about a faulty product or service. In such cases, the consumer is deprived of the ability to freely voice themselves about the quality of a product or service, which in turn deprives other consumers of the benefit of the negative review or complaint.
148

When a contract limits the consumer's ability to speak or act freely on political or religious matters, it deprives consumers of a fundamental right to express themselves. It also leaves consumers with the untenable choice between maintaining access to the financial service in question or maintaining the right to free speech. While most unfairness matters involve “monetary harm,” the substantial injury prong is met for any form of injury that is not “trivial or merely speculative.”
149

The CFPB preliminarily concludes that, based on the historical importance of free speech in the United States, limiting religious, political, or other forms of free speech is not a trivial consumer harm.

148

See, e.g., FTC
v.
Roca Labs, Inc.,
345 F. Supp. 3d 1375, 1393 (M.D. Fla. 2018) (agreeing with the FTC that “restricting the flow of information to consumers and the marketplace causes or is likely to cause substantial injury”).

149
FTC Policy Statement on Unfairness (December 17, 1980),
https://www.ftc.gov/legal-library/browse/ftc-policy-statement-unfairness.

Not reasonably avoidable.
The injuries caused by these terms and conditions in form contracts are not reasonably avoidable by consumers because consumers are typically unaware they are agreeing to these terms and conditions, and even if they were, are unable to negotiate the terms out of the agreement. These clauses are almost always presented to consumers as “boilerplate” or “fine print” language in contracts of adhesion on a “take it or leave it” basis. These terms are drafted by companies (or their lawyers), and consumers are allowed no opportunity to negotiate or reject them. Nor can consumers realistically comparison shop for any of these clauses among different providers, since these contracts typically “are written in obscure technical language, do not use standardized terminology, and may not be provided before the transaction is consummated.”
150

Indeed, with the increasing popularity of digital transactions, standard contract terms have become more and more complex.
151

“The proliferation of lengthy standard-term contracts, mostly in digital form, makes it practically impossible for consumers to scrutinize the terms and evaluate them prior to manifesting assent.”
152

There are also limited incentives for consumers to seek out better terms because these terms relate to future events that a consumer may not be able to properly assess at the time they are initially shopping for the product or service. For example, a

consumer reviewing a unilateral amendment clause would be unlikely to predict what kinds of modifications a company might implement under such a clause. Under these circumstances, it should be unsurprising that many research studies have confirmed that consumers almost never read non-core terms in standard-form contracts. As noted above, for example, one prominent study found that far less than one percent of consumers can be expected to read such terms.
153

At any rate, even if consumers were to review these terms before signing the agreement, their only opportunity to avoid the terms would be to decline the agreement in totality. And once the agreement is entered into, these clauses are implemented by the companies without any involvement by the consumer.

150
49 FR 7744.

151
See
e.g.,
Samples et al.,
supra
note 16 at 105.

152
Restatement of the law, Consumer Contracts,
supra
note 28, at introduction.

153

See, e.g.,
Bakos et al., supra note 19 at 1.

Consideration of countervailing benefits.
The CFPB is not aware of any meaningful countervailing benefits to consumers or competition created by these clauses that would outweigh the associated harms, and invites commenters to raise any countervailing benefits that the agency will consider before finalizing any rule. These clauses will typically not be essential to the transaction and will serve no purpose in the deal between the company and the consumer. To the contrary, these types of clauses strip important rights or protections from consumers, including the right to be aware of and provide meaningful consent to contract amendments, the right to benefit from legal protections, and the right to free expression. The CFPB is also not aware of any research or findings demonstrating that consumers enjoy lower costs or prices in exchange for these clauses. Nor is the CFPB aware of any benefits these clauses provide to competition. Indeed, the CFPB preliminary concludes that these clauses dilute competition by insulating companies from the rule of law, legal liability, and negative feedback (or even being compared unfavorably to one's competitors), and also by allowing companies broad discretion to fashion rules and procedures to their own liking. And once one firm adds one of these non-salient fine print terms, other firms in the market may be incentivized to match, creating a race to the bottom.
154

154
Margaret Jane Radin,
Boilerplate: The Fine Print, Vanishing Rights, and the Rule of Law
108 (2013) (“competition forces firms to offer progressively worse and more onerous terms”).

As noted in the section 1022(b) Analysis below, the CFPB acknowledges that companies may incur costs associated with the increased incentive to comply with existing laws if they cannot waive those laws or sidestep public accountability by blocking criticism. For purposes of determining legally recognizable countervailing benefits, it would generally be inappropriate to consider companies' lawbreaking to be a benefit to consumers or competition. However, even were the CFPB to consider that foregone cost to companies a countervailing benefit, those costs are likely to be low, and the CFPB would only credit those costs to the extent they pass through to consumer prices. That is because the CFPB considers countervailing benefits to “consumers or competition,” not companies, and the analysis is used to determine whether a practice is “injurious in its net effects.”
155

As noted in the section 1022(b) Analysis, the CFPB does not anticipate a 100 percent pass-through rate.

155
See FTC Policy Statement on Unfairness,
supra
note 149.

Taking each of these clauses in turn, with respect to waiver of law clauses, the CFPB preliminarily concludes that that the harms are not outweighed by countervailing benefits associated with allowing companies to include clauses that nullify State and Federal legislatures' judgment on addressing a consumer harm and tools they have chosen to enable consumers to vindicate their legal rights. A consumer protection enacted by a legislature pursuant to a constitutionally valid process will generally have a legitimate purpose and a rational basis,
156

and legislatures generally balance the benefits and costs and conclude that the legislation is net beneficial when a law is passed. It would be inappropriate for the CFPB to second-guess that legislative judgment and conclude that a democratically passed consumer protection's benefits are outweighed by its costs.

156

Minnesota
v.
Clover Leaf Creamery Co.,
449 U.S. 456, 461-63 (1981).

Regarding unilateral amendment clauses, the CFPB preliminarily concludes that the countervailing benefits do not outweigh the harms. To be sure, companies may need to implement modifications during the course of an agreement, but consumers do not benefit from having such changes imposed on them without their awareness and consent. Nor do such changes benefit competition, since competition is benefited by consumers being able to consider concrete deals with terms they can rely on. If firms can change contractual terms at their discretion, consumers can have no confidence in the scope of consumer contracts and cannot properly comparison-shop among various providers.

As noted below in the section 1022(b) Analysis, in theory some firms may be discouraged from offering certain consumer-beneficial terms if they are not free to change them at a later date (without providing appropriate notice and obtaining consent). The CFPB generally does not grant this theoretical countervailing benefit much weight because the likelihood that unilateral amendment clauses impact the terms a firm offers is quite small. Firms will still be able to amend contracts—the only change is they will need to go through an appropriate process under common law to do so. Moreover, to consider such a benefit would be to argue that the CFPB should not prohibit a bait-and-switch scheme because it would deter companies from offering the “bait.” If firms are unwilling to offer terms unless they have full flexibility to change them, these terms are likely ephemeral promises anyway.

With respect to restraints on free expression, the CFPB is unaware of any countervailing benefit to allowing companies to include clauses that restrict consumers' ability to provide negative feedback or reviews on the companies, since distorting public reviews of a good or service does not help consumers and moreover such restrictions are already illegal in form contracts under the Consumer Review Fairness Act. Nor do there appear to be benefits to restricting a consumer's right to engage in constitutionally protected religious or political activity. While a company's management may disfavor certain speech or activities, it is not their purview to restrict such activities by private citizens and it is unclear what pecuniary gain the company itself would gain by constraining customers' speech involving topics having nothing to do with the company.

Having said that, there are two theoretical countervailing benefits to consumers that the CFPB has considered in issuing this proposal. First, a scammer or fraudster who is a customer of a financial institution may communicate with other consumers in furtherance of an illegal scheme to defraud those consumers and induce payment to their account. In recognition of this potential countervailing benefit, the unfair practice identified by the CFPB only includes contract terms that limit “lawful expression,” which would not include contract terms giving covered persons a right to close an account that is being used to commit

fraud or other illegal activity. Second, a common argument raised in debates about platforms and free speech is that a company should not have to carry the message of its customers if they disagree with the message.
157

Putting aside the question of whether companies' and natural persons' free speech rights should be given equal weight, or the other merits of such arguments, this rulemaking implicates only agreements for consumer financial products or services, not terms of service for social media services or other businesses that provide a forum for someone else's views.

157

Moody
v.
NetChoice, LLC,
603 U.S. 707, 728 (2024) (“We have repeatedly faced the question whether ordering a party to provide a forum for someone else's views implicates the First Amendment. And we have repeatedly held that it does so if, though only if, the regulated party is engaged in its own expressive activity, which the mandated access would alter or disrupt. So too we have held, when applying that principle, that expressive activity includes presenting a curated compilation of speech originally created by others.”).

Public policy.
“In determining whether an act or practice is unfair, the Bureau may consider established public policies as evidence to be considered with all other evidence.”
158

Public policy corroborates that the use of these three contractual clauses would be an unfair act or practice. As discussed above, evidence suggests that these clauses undermine principles of democratic governance, freedom of contract, and freedom of expression. In particular, a prohibition on unilateral amendment clauses is consistent with the recent Restatement of Consumer Contracts.
159

A prohibition on waivers of substantive rights is consistent with the public policy as determined by State and Federal legislatures across the country when determining to pass each individual law. And a prohibition on restraints on free expression supports a broad conception of the freedom of speech and recognizes that banking and consumer finance should be treated as public utilities with a duty to serve.
160

158
12 U.S.C. 5531(c)(2). “Such public policy considerations may not serve as a primary basis for such determination.”
Id.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2025-00633. Public record. Not legal advice.