The Consumer Financial Protection Bureau yesterday issued a new circular warning companies in the financial services industry against including unlawful or unenforceable terms in contracts for consumer financial products and services. This move is part of the CFPB’s ongoing efforts to protect consumer rights and ensure fair practices in the financial industry.
The CFPB emphasizes that including unlawful or unenforceable terms in consumer contracts can violate the Consumer Financial Protection Act (CFPA). “A common example is the general liability waiver, which purports to fully insulate companies from suits even though most states have laws that create hosts of exemptions to these waivers,” the CFPB said. Such terms often mislead consumers into believing they have waived certain legal rights, which can be deceptive and materially affect their decisions.
Examples of Unlawful Terms:
- Military Lending Act: Prohibits terms in consumer credit contracts that require servicemembers and their dependents to waive their right to legal recourse.
- Truth in Lending Act (TILA): Prohibits terms in mortgage contracts that force homeowners into arbitration or other nonjudicial procedures.
- Electronic Fund Transfer Act (EFTA): Prohibits waivers of rights conferred by the act, including error resolution rights.
The CFPB has taken action against several financial institutions for deceptive practices related to unenforceable contract terms:
- Mortgage Borrowers: Identified deceptive terms that purported to waive non-waivable rights.
- Bank Accountholders: Found banks using terms that falsely claimed to waive consumers’ rights to challenge garnishment orders.
- Remittance Transfers: Discovered misleading statements in disclosures that purported to limit error resolution rights.
- Auto Loan Borrowers: Identified deceptive language suggesting consumers could not exercise bankruptcy rights, which is against public policy.
This circular builds on the CFPB’s previous initiatives to promote transparency and fairness:
- Proposed Rule: Requires certain nonbank companies to register information about their use of contractual terms that limit consumer rights.
- Consumer Reviews: Warns against contract terms that silence consumers from posting honest reviews.
- Tuition Payment Plans: Highlights likely unenforceable terms in student financial agreements.
- Servicemembers’ Rights: Filed an amicus brief to support servicemembers’ ability to enforce their rights under the Servicemembers Civil Relief Act.
