On January 11, 2023, the Consumer Financial Protection Bureau (the “CFPB” or “Bureau”) announced a proposed rule to establish a public registry and require nonbanks supervised by the agency to register their use of certain terms and conditions contained in “take it or leave it” form contracts for consumer financial products or services that “attempt to waive consumers’ legal protections,” “limit how consumers enforce their rights,” or “restrict consumers’ ability to file complaints or post reviews” (the “Proposed Rule”). The purpose of Proposed Rule’s registration system is to allow the CFPB to prioritize oversight of nonbanks that use the covered terms and conditions based on the agency’s perception these provisions pose risks for consumers.
The CFPB seeks public comment on the practical utility of collecting and publishing this information as well as ways to minimize the burden of the information collection on respondents. The comment period closes on April 3, 2023.
The Proposed Rule
The Proposed Rule would require annual registration by most nonbanks subject to the CFPB’s jurisdiction, with limited exceptions. “Specifically, a “supervised nonbank” would be defined to mean a nonbank covered person that is subject to supervision and examination by the Bureau, except to the extent that such person engages in conduct or functions that are excluded from the Bureau’s supervisory authority pursuant to 12 U.S.C. 5517 or 5519. A “supervised nonbank” would include any nonbank covered person that (1) offers or provides a residential mortgage-related product or service, any private educational consumer loan, or any consumer payday loan, (2) is a larger participant engaged in consumer reporting, consumer debt collection, student loan servicing, international money transfers, and auto financing, or (3) is subject to a CFPB order issued pursuant to 12 U.S.C. 5514(a)(1)(C).
Those excluded from the scope of the Proposed Rule would include, among others, persons subject to CFPB supervision and examination solely in the capacity of a service provider; natural persons; persons with less than $1 million in annual receipts resulting from offering or providing all consumer financial products and services as relevant to the activities noted in (1) through (3) above. Also exempt from the rule would be a person that has not, together with its affiliates, engaged in more than de minimis use of covered terms and conditions (i.e., fewer than 1,000 times in the previous calendar year) and a person that used covered terms or conditions in covered form contracts in the previous calendar year solely by entering into contracts for residential mortgages on a form made publicly available on the Internet required for insurance or guarantee by a Federal agency or purchase by Fannie Mae, Freddie Mac, or Ginnie Mae.
Under the Proposed Rule, a “covered term or condition” would be subject to the rule’s reporting requirements. A “covered term or condition” would be defined as “any clause, term, or condition that expressly purports to establish a covered limitation on consumer legal protections applicable to the offering or provision of any consumer financial product or service.” In turn, “covered limitation on consumer legal protections” would be defined to mean any covered term or condition in a covered form contract:
- Precluding the consumer from bringing a legal action after a certain period of time;
- Specifying a forum or venue where a consumer must bring a legal action in court;
- Limiting the ability of the consumer to file a legal action seeking relief for other consumers or to seek to participate in a legal action filed by others;
- Limiting liability to the consumer in a legal action including by capping the amount of recovery or type of remedy;
- Waiving a cause of legal action by the consumer, including by stating a person is not responsible to the consumer for a harm or violation of law;
- Limiting the ability of the consumer to make any written, oral, or pictorial review, assessment, complaint, or other similar analysis or statement concerning the offering or provision of consumer financial products or services by the supervised registrant;
- Waiving, whether by extinguishing or causing the consumer to relinquish or agree not to assert, any other identified consumer legal protection, including any specified right, defense, or protection afforded to the consumer under Constitutional law, a statute or regulation, or common law; or
- Requiring that a consumer bring any type of legal action in arbitration.
In the Proposed Rule, the CFPB acknowledges that there may be overlap in the types of covered terms and conditions, so some contract provisions may fall into more than one category. The Proposed Rule currently proposes to limit the collection of terms and conditions that expressly attempt to establish the covered limitation. Any contract containing a covered term would be considered a “form contract” provided it was (1) included in the original contract draft presented to the consumer, (2) was not negotiated between the parties, (3) is intended for repeated use in transactions between the company and consumers and contains a covered term or condition.
Supervised nonbanks covered by the Proposed Rule would be required to collect and submit this information through the CFPB’s registration system. Under the Proposed Rule, the registry of terms and conditions would be publicly available, rather than limited to government regulators or CFPB staff. The CFPB supports the public availably of this data on the grounds that it will lead to more informed consumers and provide other regulators the opportunity to identify covered terms and conditions that are explicitly prohibited by the laws they enforce or supervise. The proposed format for the registry is similar to another recent CFPB proposed rule which proposes to establish a public registry of regulatory actions involving certain nonbanks subject to CFPB supervision. We previously discussed this proposed rule in another blog post.
CFPB’s Request for Comment on the Proposed Rule
The CFPB is seeking comment on a range of issues related to the Proposed Rule, including:
- The prevalence of the covered terms and conditions;
- Potential impacts of collecting and publishing this information;
- Reasons why the information should not be publicly disclosed;
- The burden of collecting and filing these provisions;
- The use of form contracts purchased from third parties; and
- Other entities that may be affected by the proposed rule.
The period for public comment ends on April 3, 2023.
Is the establishment of a Public Registry likely?
The CFPB currently has thirty-seven (37) rules that have been proposed but not implemented, of which only five of were proposed since the start of the Biden Administration. Most notably, neither the CFPB’s proposed rule for small business lending data collection from September 1, 2021 or its proposed rule for credit card late fees and late payments from June 22, 2022 have been finalized. Since the substance of this rule is limited to the collection and publication of contract terms, rather than the prohibition of any behavior, enactment might be more likely. The recent Fifth Circuit decision in Community Financial Services found the CFPB’s funding structure unconstitutional and vacated the agency’s Payday Lending Rule on those grounds. Accordingly, any rule promulgated by the CFPB would likely be susceptible to legal challenges.
The Bureau’s focus on seeking public disclosure of covered terms and conditions reflects a continued focus on the content of form contracts used in connection with consumer finance products and services of nonbanks. The public nature of the registry could lead to increased scrutiny of contract provisions from the Bureau, other regulators, and the public, increasing reputational risk to covered entities as well as the likelihood of heightened enforcement activity by Federal and State regulators. Accordingly, entities that would be subject to the Proposed Rule’s requirements should carefully review the Proposed Rule and consider commenting thereon.