Statement of CFPB Director Rohit Chopra on Proposed Registry of Supervised Nonbanks that Use Form Contracts to Impose Terms and Conditions that Seek to Waive or Limit Consumer Legal Protections
Today, the CFPB is proposing to create a registry of contract terms that financial companies use to censor their customers and force individuals into surrendering their legal rights.
When purchasing a product, downloading an app, or signing up for a service, Americans are routinely required to click a checkbox to agree to “terms of service” or to sign contracts with boilerplate fine print. Typically, a company and its lawyers draft these contracts. They are not subject to negotiation with a consumer. Instead, they are “take it or leave it” form contracts.
Due to this dynamic, many contracts are one-sided and favor the company over the consumer. For example, some consumer contracts have included “gag clauses,” which forbid a consumer from posting a negative online review or filing a complaint. More recently, we have seen one company seeking to include language in its “acceptable use” agreement that gives the company the ability to “fine” individuals for their speech.
While financial companies routinely take consumers to court, many consumer contracts may include language that waives a consumer’s right to file a lawsuit. Waivers of liability, for instance, try to shift responsibility for harm from the company to the consumer, in an attempt to prevent consumers from suing when they are injured. For example, if a lender negligently tells a consumer reporting company that a consumer’s loan is delinquent—a falsehood that would potentially cut off the consumer’s access to credit, housing, and jobs—the lender may try to throw out any litigation by claiming to be protected by the waiver it included in the contract.
The proposed rule also provides numerous examples of contract clauses that seek to take away other legal rights enshrined in federal, state, and tribal law, including laws that protect consumers across markets for consumer financial products and services.
A few years ago, Congress enacted the Consumer Review Fairness Act, which prohibited “gag clauses” in certain form contracts. And the CFPB reiterated the Act’s protections in a recent compliance bulletin. This follows a rich tradition in the US of ensuring that standard form contracts are free of coercive and onerous terms so that consumers can have confidence to enter into a form contract. In 1984, the Federal Trade Commission instituted the Credit Practices Rule , which banned the use of many unfair contract terms in consumer finance, like “confessions of judgment,” where a consumer must essentially agree in advance to plead guilty automatically when faced with a creditor’s collection lawsuit. Prior to creation of the CFPB, the rule was also adopted by the Federal Reserve Board and the National Credit Union Administration.
Because of this asymmetry in power between the company and the consumer, there has been renewed interest in consumer contracts here in the US. Jurisdictions around the world also have sought to regulate one-sided contracts or specific contract terms.
Looking abroad, a few months ago, Australia enacted a new law penalizing the use of unfair contract terms in form contracts. Japan and the United Kingdom have limits on the use of one-sided consumer contracts. Many countries in the European Union also have laws identifying prohibited or presumptively unfair contract terms.
Here at home, the American Law Institute recently restated that consumers can challenge not only unconscionable contracts but also the use of specific terms and conditions adopted as a result of a deceptive act or practice. And statutes and regulations at all levels of the US, as well as some Tribal laws, also prohibit, void, or restrict the use of certain terms to waive or limit consumer protections.
The CFPB’s proposed rule would require nonbank financial companies subject to the CFPB’s supervisory jurisdiction to register their use of contract terms that seek to waive or limit consumer rights and legal protections. Our proposal has a number of key features:
First, the registry would help regulators and law enforcement more easily detect when companies are offering products and services using prohibited, void, and restricted contract terms described above. This would be especially useful to state and tribal regulators with limited resources to alert or take action against companies violating the law.
Second, the registry would assist the CFPB and the public to understand the types of terms and conditions that are in use in today’s marketplace, and their effect on the adequacy of underlying consumer financial protection laws that are being waived or limited. This would allow the CFPB and others to study the use of these terms, along with their risks and benefits, to inform our research, consumer education, and other functions.
Finally, the registry would inform how the CFPB conducts its supervision of nonbank financial companies. While banks and credit unions are subject to routine examination by regulators, many nonbank companies are not. The CFPB would use data from the registry to identify supervised nonbanks and the risks their terms and conditions pose, prioritize which firms to examine, and plan the scope of those exams.