Last week, the Consumer Financial Protection Bureau (CFPB) issued a Circular warning that use of unlawful or unenforceable contractual terms for consumer financial products or services may violate the prohibition against deceptive acts or practices (the âDâ in âUDAAPâ) in the Consumer Financial Protection Act (âCFPAâ). The CFPB intends to take action against companies and individuals that deceptively slip these terms into their fine print.
As a quick review, a representation, omission, act, or practice is deceptive when:
- The representation, omission, act, or practice misleads or is likely to mislead the consumer;
- The consumerâs interpretation of the representation, omission, act, or practice is reasonable under the circumstances; and
- The misleading representation, omission, act, or practice is material.
Many federal laws invalidate contractual terms that require consumers to waive consumer protections provided under federal law, such as EFTA, SCRA, and TILA. The Circular states that covered persons may violate CFPA by including âunenforceable material terms,â and this cannot be cured by including a provision like âexcept where unenforceableâ because consumers are misled into believing that a contractual provision is lawful when it is not. In the CFPBâs view, consumers are unlikely to be aware of a law that would hold contractual terms unlawful, so if there is a dispute, they are likely to incorrectly conclude they lawfully agreed to waive their rights or protections, making it a deceptive practice.
Per the Circular, CFPB examiners have identified violations of the CFPAâs prohibition on deception stemming from using unlawful or unenforceable contract terms that claim to limit consumer rights and protections afforded by federal or state law. The CFPB provided examples of limiting the right to contest garnishments, creating the misimpression that consumers could not exercise bankruptcy protection rights, waivers of the right to retain counsel, and misrepresenting consumer protections available under laws.
In light of this, you may want to consider reviewing your consumer financial products and services contracts to identify and modify any contract terms that may violate the CFPAâs prohibition on deceptive acts and practices. Note that under this standard banks could be deceptive even if the terms used are provided by one of the industryâs contract form providers or commonly found in industry contracts.
It is common to use language such as âexcept where prohibited by lawâ in situations where the law is unclear as to whether a contract provision is lawful or where a bank is using a contract in several states and the contract provision is unlawful in one or more states but not in all states. As stated above, the CFPB will consider this language deceptive. While burdensome, in light of this Circular, youâll have to consider scrutinizing consumer contracts to identify contract provisions that expressly or implicitly waive consumer rights or increase consumer obligations above what the law may allow and confirm their legality.