[Federal Register Volume 88, Number 21 (Wednesday, February 1, 2023)]
[Proposed Rules]
[Pages 6906-6969]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-00704]
[[Page 6905]]
Vol. 88
Wednesday,
No. 21
February 1, 2023
Part III
Bureau of Consumer Financial Protection
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12 CFR Part 1092
Registry of Supervised Nonbanks That Use Form Contracts To Impose Terms
and Conditions That Seek To Waive or Limit Consumer Legal Protections;
Proposed Rule
Federal Register / Vol. 88, No. 21 / Wednesday, February 1, 2023 /
Proposed Rules
[[Page 6906]]
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BUREAU OF CONSUMER FINANCIAL PROTECTION
12 CFR Part 1092
[Docket No. CFPB-2023-0002]
RIN 3170-AB14
Registry of Supervised Nonbanks That Use Form Contracts To Impose
Terms and Conditions That Seek To Waive or Limit Consumer Legal
Protections
AGENCY: Bureau of Consumer Financial Protection.
ACTION: Proposed rule with request for public comment.
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SUMMARY: The Consumer Financial Protection Act of 2010 (CFPA) requires
the Consumer Financial Protection Bureau (Bureau or CFPB) to monitor
markets for consumer financial products and services for risks to
consumers in order to support the various statutory functions of the
CFPB, and to conduct a risk-based nonbank supervision program for the
purpose of assessing compliance with Federal consumer financial law
(among other purposes). Pursuant to these authorities, the CFPB is
proposing a rule to require that nonbanks subject to its supervisory
authority, with limited exceptions, register each year in a nonbank
registration system established by the CFPB information about their use
of certain terms and conditions in form contracts for consumer
financial products and services that pose risks to consumers. In
particular, these nonbanks would be required to register if they use
specific terms and conditions defined in the proposed rule that attempt
to waive consumers' legal protections, to limit how consumers enforce
their rights, or to restrict consumers' ability to file complaints or
post reviews. To facilitate public awareness and oversight by other
regulators including the States, the Bureau is proposing to publish
information identifying registrants and their use of these terms and
conditions.
DATES: Comments should be received on or before April 3, 2023.
ADDRESSES: You may submit comments, identified by Docket No. CFPB-2023-
0002 or RIN 3170-AB14, by any of the following methods:
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
Email: [email protected]. Include
Docket No. CFPB-2023-0002 or RIN 3170-AB14 in the subject line of the
message.
Mail/Hand Delivery/Courier: Comment Intake--Nonbank
Registration and Collection of Contract Information, Consumer Financial
Protection Bureau, c/o Legal Division Docket Manager, 1700 G Street NW,
Washington, DC 20552. Because paper mail in the Washington, DC area and
at the Bureau is subject to delay, commenters are encouraged to submit
comments electronically.
Instructions: The Bureau encourages the early submission of
comments. All submissions should include the agency name and docket
number or Regulatory Information Number (RIN) for this rulemaking. In
general, all comments received will be posted without change to https://www.regulations.gov.
All comments, including attachments and other supporting materials,
will become part of the public record and are 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. Comments will not be edited to
remove any identifying or contact information.
FOR FURTHER INFORMATION CONTACT: Owen Bonheimer, Senior Counsel, Office
of Supervision Policy, at 202-435-7700. If you require this document in
an alternative electronic format, please contact
[email protected].
SUPPLEMENTARY INFORMATION:
I. Summary of the Proposed Rule
The proposal would establish a Bureau system for registration of
nonbanks that use covered terms or conditions, as described below, in a
new part 1092 in title 12 of the Code of Federal Regulations. Proposed
subpart C would require annual registration by most nonbanks subject to
the Bureau's supervisory authority under section 1024(a) of the CFPA
\1\ when they use certain terms or conditions that seek to waive
consumer rights or other legal protections or limit the ability of
consumers to enforce or exercise their rights.\2\ With limited
exceptions, including an exception for certain small entities,\3\
supervised registrants would be required to register annually in the
system by submitting or updating their identifying information as well
as information about their use of covered terms or conditions. The
Bureau will provide filing instructions with details on how to
register, the implementation date for the registration system, and the
annual registration date. Under the proposal, the Bureau would publish
this information on its website and potentially in other forms, as
permitted by applicable law and described further in Sec. 1092.303 of
the proposed rule.
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\1\ 12 U.S.C. 5514(a).
\2\ For brevity, the proposal refers to these nonbanks as
``supervised nonbanks.''
\3\ Proposed Sec. 1092.301(h) of the proposed rule would
include certain exclusions from the registration requirements,
including an exclusion for nonbanks with less than $1 million in
annual receipts from offering or providing certain consumer
financial products or services that would make the nonbank subject
to the Bureau's supervisory authority.
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In particular, the Bureau is generally proposing to collect
information about supervised nonbanks' use of terms and conditions in
form contracts that expressly seek to impose the following limitations
on consumer rights and other legal protections applicable to the
offering or provision of consumer financial products or services in
markets the Bureau supervises: waivers of claims a consumer can bring
in a legal action; limits on the company's liability to a consumer;
limits on the consumer's ability to bring a legal action by dictating
the time frame, forum, or venue for a consumer to bring a legal action;
limits on the ability of a consumer to bring or participate in
collective legal actions such as class actions; limits on the ability
of the consumer to complain or post reviews; certain other waivers of
consumer rights or other legal protections; and arbitration agreements.
The proposal defines these terms and conditions as covered terms and
conditions. Covered terms and conditions would be covered by the
proposal whether they are legally enforceable or not.\4\
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\4\ For brevity, the proposal generally uses the phrase
``waivers and limitations'' on consumer legal protections broadly,
to include terms and conditions that seek to impose waivers and
limitations whether or not they are enforceable. See, e.g., Waiver,
Black's Law Dictionary (11th ed. 2019) (alternate definitions for
the relinquishment or abandonment of a right, and for an instrument
seeking to have that effect). This broad framing is reflected in the
scope of proposed Sec. 1092.301(d), which covers both effective and
purported waivers and limitations, as discussed in the section-by-
section analysis in part V below.
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Consistent with the risks to consumers posed by covered terms and
conditions contained in form contracts as described below, Congress,
States, the courts, the Bureau, the Federal Trade Commission (FTC), and
other governmental bodies periodically have restricted their use in
some contexts. In its statutory risk-based nonbank supervision program
and in other activities, the Bureau also has identified risks posed by
covered terms and conditions contained in form contracts. In addition,
some States have begun to require registration and publication of
[[Page 6907]]
form contracts in one market (private student lending).
The Bureau is proposing this rule, pursuant to CFPA sections
1022(b) and (c) and section 1024(b), to facilitate the Bureau's market
monitoring functions and its risk-based supervisory processes,
including by identifying an important subset of non-bank covered
persons and the covered terms and conditions they use in form contracts
for the consumer financial products or services they offer or provide.
In exercise of its authorities discussed in part II.C.3 of the
proposal, and consistent with general standards for transparency of
government data, the Bureau preliminarily has determined that the
Bureau would publish the information it collects as permitted by law
and described in the proposed rule. Publishing this information would
facilitate public awareness and oversight by other regulators of the
use of covered terms and conditions including those that waive or limit
consumer protections under State law and Tribal law.
The Bureau proposes to establish the registry to monitor risks to
consumers from the use of covered terms or conditions in form contracts
in today's marketplace and to inform its various functions, including
supervision, enforcement, consumer education, and rulemaking. Most
immediately, the information collected by the registry would facilitate
the Bureau's prioritization and implementation of examination work in
its statutorily-mandated risk-based nonbank supervision program.
II. Background and Rationale for the Proposed Rule
Fair, transparent, and competitive markets for consumer financial
products and services depend on fair, transparent, and competitive
contracting with consumers. Form contracts are the dominant means of
setting terms and conditions for consumer financial products and
services in today's marketplace. However, consumers face risks when
businesses use form contracts to impose terms and conditions that seek
to waive consumer legal protections or to limit how consumers enforce
their rights or post complaints or reviews. There is often little
choice for people except to sign these form contracts due both to the
market pervasiveness of form contracts and the critical role the
products and services play in consumers' daily lives.
In recognition of these risks to consumers, over the past several
decades, many Federal, State, Tribal, and local laws and regulations
have limited the use of these types of terms and conditions, including
in form contracts for consumer financial products and services.
Examples, discussed in part II.B, include the 1984 FTC Credit Practices
Rule, which, among other things, prohibits contract terms purporting to
waive State laws protecting consumer assets from seizure by unsecured
creditors. In addition, the 2016 Consumer Review Fairness Act generally
prohibits the use of form contracts that limit how consumers
communicate their reviews, assessments, or similar analysis of the sale
of goods or services. Several Federal consumer financial laws the
Bureau administers also restrict the use of certain covered terms and
conditions in the offering or provision of consumer financial products
and services, including in markets where the CFPB exercises supervisory
authority. The CFPB preliminarily has determined that a nonbank
registration system to continuously and systematically monitor and
assess these risks to consumers is needed to support its functions in
promoting a fair, transparent, and competitive consumer financial
marketplace, including its statutorily-mandated risk-based non-bank
supervision program.
CFPA sections 1022(c) and 1024(b), respectively, require the Bureau
to monitor for risks to consumers in markets for consumer financial
products and services, and to conduct a risk-based supervision program
for nonbanks operating in markets the Bureau supervises. As discussed
in part II.A below, the use of form contracts to set terms and
conditions for consumer financial products and services in general
poses a degree of risk to consumers, particularly as to consumer
understanding. As elaborated in part II.B, certain terms and conditions
that often appear in these form contracts either waive or limit
enforcement or exercise of applicable legal protections, or purport to
do so. Such waivers of and limitations on applicable legal protections
often pose risks to consumers, as evidenced by: (a) examples of Federal
laws, State laws, and Tribal laws summarized in part II.B and also
discussed in part II.C.2 restricting or invalidating the use of covered
terms and conditions in certain contexts; and (b) examples discussed in
part II.C.2 suggesting the prevalence of, and potential for consumer
harm caused by, the use of covered terms and conditions in markets
supervised by the Bureau. The risks that covered terms and conditions
pose to consumers vary in degree or magnitude. And the degree to which
specific examples would be covered by the proposed rule also may depend
on the precise wording and context of their terms and conditions
analyzed in light of the specific provisions of the proposed rule. But
any time a consumer legal protection is being relinquished or
constrained pursuant to a term or condition contained in a form
contract, some degree of risk to the consumer arises. For that reason,
an assessment of the risk is warranted. Accordingly, for the reasons
explained in part II.C and elsewhere in the proposal, the Bureau seeks
to collect information to monitor and assess risks posed by covered
terms and conditions that supervised nonbanks use to waive or limit
applicable legal protections in the offering or providing of consumer
financial products or services.\5\ In developing the proposal, the
Bureau has considered alternative approaches to achieving these goals,
as discussed below including in part II.D and the section-by-section
analysis of the proposed rule in part V.
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\5\ The examples provided in part II illustrate the types of
terms and conditions that may pose risks to consumers by purporting
to waive or limit legal protections applicable to consumer financial
products or services. As noted above, the scope of the proposed rule
is informed by these examples but will not necessarily cover each
and every one of them or similar examples. The proposed regulation
text as further explained in the section-by-section analysis in part
V would govern whether the proposed rule would cover a particular
term or condition.
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A. Use of Form Contracts Poses Risks to Consumer Understanding of Terms
and Conditions
Form contracts that establish terms and conditions are a standard
feature of markets for consumer financial products or services. In the
Bureau's experience and expertise, virtually all consumer financial
products and services the Bureau supervises are governed by or operate
largely on the basis of a paper or electronic written contract with the
consumer, and sometimes on the basis of multiple such contracts. The
consumer may enter the contract directly with a provider such as a
lender, loan servicer, debt collector, remittance provider, or in some
cases, a consumer reporting agency. The contract typically defines how
the product or service works and the rights and obligations of the
consumer, the provider, and, sometimes, third parties hired by the
provider such as a loan servicer or debt collector.
Consumers generally do not choose most contract terms and
conditions in their agreements for consumer financial products or
services. Form contracts often specify a fixed set of terms and
[[Page 6908]]
conditions which the consumer typically must accept in their totality.
While form contracts may memorialize certain conspicuous financially
``core deal terms,'' like price, payment methods, and a few others,
other contract terms and conditions appear in fine print among a
variety of ``non-core standard contract terms'' that the business
requires.\6\
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\6\ Restatement (Third) of Consumer Contracts (Tentative Draft
No. 2, approved at ALI 2022 Annual Meeting) at 1. For convenience,
the proposal refers to this source simply as the Restatement.
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This type of contracting is ubiquitous in the modern economy and
gives rise to certain risks. According to a leading treatise on
contract law published by the American Law Institute, the prevalence of
``standard-form'' consumer contracts throughout the United States
presents a ``fundamental challenge . . . arising from the asymmetry in
information, sophistication, and stakes between the parties to the
contracts--the business and consumers.'' \7\ This form of contracting
risks turning the overall agreement into what sometimes is referred to
as an ``adhesion contract.'' That name derives from the notion that the
consumer must adhere to the terms and conditions in the form contract;
they are presented to the consumer on a take-it-or-leave-it basis and
are non-negotiable by the consumer. A defining characteristic of these
terms and conditions is ``the absence of meaningful choice on the part
of the consumer.'' \8\
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\7\ Id. at 1.
\8\ Id. sec. 5(b)(2).
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Consumers also lack an incentive to review fully the terms and
conditions in form contracts that they cannot negotiate. Form contracts
often are lengthy, with terms and conditions written by the provider,
often in fine print. With the expansion of the digital consumer
economy, online contracting with features such as ``click-through''
contracts are the norm. 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.\9\ Some terms
or conditions may be de-emphasized. In some cases, some 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.\10\
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\9\ See generally, e.g., id. at 55-62 (discussing numerous court
decisions on so-called browsewrap and clickwrap electronic
contracting processes).
\10\ See generally FTC Staff Report, ``Bringing Dark Patterns to
Light'' (Sept. 2022) at 7 (``[s]ome dark patterns operate by hiding
or obscuring material information from consumers, such as burying
key limitations of the product or service in dense Terms of Service
documents that consumers don't see before purchase''), https://www.ftc.gov/system/files/ftc_gov/pdf/sP214800%20Dark%20Patterns%20Report%209.s14.2022%20-%20FINAL.pdf;
Restatement at 116-17 (discussing relationship between the use of
dark patterns and risk of procedural unconscionability in the
contracting process, discussed in this proposal at part II.B.5).
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Studies confirm that consumers rarely read adhesion contracts.\11\
These studies validate conventional wisdom recognized by other academic
research.\12\ Moreover, consumers generally focus attention on salient
terms such as price and quantity.\13\ As a result, providers of
consumer financial products and services may seek to insert terms and
conditions that pose risks to consumers who may not notice, until the
consumer has a problem that they need to resolve or the terms and
conditions face wider public scrutiny. In a recent reported example, a
provider of consumer financial products and services inserted a term or
condition that purported to provide for a substantial fine on users of
a payment processing platform for promoting so-called
``misinformation.'' \14\
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\11\ See, e.g., Yannis Bakos, Florencia Marotta-Wurgler & David
R. Trossen, ``Does Anyone Read the Fine Print?, Testing a Law and
Economics Approach to Standard Form Contracts,'' 43 U. Chicago J. of
Legal Studies 1 (2014) (describing study finding one or two of every
1,000 retail software shoppers access the license agreements and
that most of those who do access it read no more than a small
portion), https://www.jstor.org/stable/10.1086/674424; 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''), https://www.jstor.org/stable/41149884#metadata_info_tab_contents; Uri
Benoliel & Shmuel Becher, ``The Duty to Read the Unreadable,''
Boston Col. L. Rev. 2255, 2270-81 (2019) (discussing empirical
research), https://lira.bc.edu/work/ns/508eab7d-ddca-4829-be55-7aa6be4820b1; Jeff Sovern, ``The Content of Consumer Law Classes
III,'' 22 J. Consumer L. 1 (2018) (reporting 2018 update to survey
finding 57% of professors surveyed rarely or never read contracts),
http://www.jtexconsumerlaw.com/V22N1/V22N1_Classes.pdf.
\12\ See generally Ian Ayres, ``The No-Reading Problem in
Consumer Contract Law,'' 66 Stanford L. Rev. 546 (2014), https://ianayres.yale.edu/sites/default/files/files/sThe%20No%20sReading%20Problem(2).spdf; Ian Ayres & Gregory Klass,
``Responses: One-Legged Contracting,'' 133 Harv. L. Rev. Forum 1
(2019), https://harvardslawreview.org/wp-content/uploads/2019/11/Ayres-Klass_Online.pdf.
\13\ See generally Robert Hillman & Jeffrey Rachlinski,
Standard-Form Contracting in the Electronic Age, 77 N.Y.U. L. Rev.
429, 450-54 (2002) (discussing research on how cognitive factors
affect consumer decisions related to terms and conditions in form
contracts, including consumer focus on salient terms).
\14\ Xinyi Wan, ``PayPal's `Misinformation' Fine Sparks
Backlash,'' Harv. J. L. & Tech. (Nov. 1, 2022) (describing how
payment processor updated terms and conditions to claim authority to
impose a $2,500 ``fine'' on consumers for promoting
``misinformation'' and then removed the update after public
criticism), https://jolt.law.sharvard.edu/digest/paypals-misinformation-fine-sparks-backlash (last visited Nov. 30, 2022).
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In some cases, consumers may have nominal choices, such as to opt-
out of a particular term or condition, or they are given notice of
certain terms and conditions that they cannot negotiate, or both. And,
depending on the facts and circumstances, these choices may be
constrained; for example, some negative options may not present a
meaningful choice.\15\ Alternatively, a contract may provide a process
for the consumer to opt into a term or condition such as a waiver or
limitation. Either way, the business, not the consumer, defines the
option and drafts the associated terms and conditions. As discussed
further below in part II.C, the use of so-called non-core contract
terms and conditions seeking to waive or limit consumer legal
protections raises questions about a consumer's understanding of these
terms and conditions.
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\15\ FTC Enforcement Policy Statement Regarding Negative Option
Marketing, 85 FR 60822, 60823 (Nov. 4, 2021) (discussing how
negative option marketing and contracting are ``widespread in the
marketplace'' and that FTC and States ``regularly bring cases
challenging a variety of harmful negative option practices''). See
also CFPB, Supervisory Highlights, 87 FR 26727, 26737 (May 5, 2022)
(discussing examiner findings of consumer reporting agency using
``digital dark patterns'' to impose recurring payments that are
difficult to cancel).
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B. Public Policy Recognizes Risks to Consumers Posed by Contract Terms
and Conditions That Seek To Waive or Limit Applicable Legal Protections
Many providers of consumer financial products and services
regularly use form contracts to impose one or more contract terms or
conditions that may effectively strip consumers of legal protections or
diminish their adequacy, either through an express waiver of rights or
other legal protections, or a limitation on how consumers may seek to
enforce or exercise their rights. In this proposal, the Bureau is
focused on terms and conditions in form contracts that expressly seek
to impose the following limitations on consumer rights and other legal
protections: waivers of claims a consumer can bring in a legal action;
limits on the company's liability to a consumer; limits on the
consumer's ability to bring a legal action by dictating the time frame,
forum, or venue for a consumer to bring a legal action; limits on the
[[Page 6909]]
ability of a consumer to bring or participate in collective legal
actions such as class actions; limits on the ability of the consumer to
complain or post reviews; certain other waivers of consumer rights or
other legal protections; and arbitration agreements.
Express waivers, by definition, purport to extinguish legal
protections otherwise applicable to consumer financial products and
services. Some of these legal protections may afford consumers rights,
such as the right to assert claims in a legal action. Even when terms
and conditions do not purport to set forth such express waivers, they
may impose significant limitations on a consumer's ability to bring a
legal action, such as by capping liability or restricting the timing,
venue, or forum for a consumer to file a private legal action to
enforce an applicable consumer legal protection. These limitations,
like waivers, may diminish the adequacy of the consumer legal
protections to which they apply. Arbitration agreements also generally
foreclose a consumer's choice to bring legal actions in court,
sometimes with limited exceptions for individual actions in small
claims court. Informal mechanisms, like filing a complaint or posting a
review online, provide another mechanism for consumers to assert their
rights and to identify business practices that, in some cases, may
signify non-compliance with applicable legal protections or their
inadequacy. Contract terms and conditions that restrict or limit
consumers' ability to take those steps thus also undermine consumers'
ability to prevent or obtain relief for violations of their rights.
By eliminating or diminishing private enforcement or exercise of
rights, covered terms and conditions risk harming consumers. Indeed,
given the limited resources of public regulators, private enforcement
and other forms of exercising rights play an important role in
incentivizing compliance with the laws applicable to consumer financial
products and services. For example, Bureau research suggests that
public and private enforcement actions often have not overlapped, such
that private enforcement often plays an additive, not duplicative, role
in supporting the rule of law.\16\ Even when private and public
enforcement overlap, private enforcement can set the stage for public
enforcement by identifying risky or unlawful conduct. The Bureau also
may consider both private and public enforcement actions as field
market intelligence for its supervisory prioritization process
discussed in part II.C.2 below.
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\16\ CFPB, Arbitration Study: Report to Congress, pursuant to
Dodd-Frank Wall Street Reform and Consumer Protection Act section
1028(a) (2015) at sec. 1.4.8 (summarizing Bureau research indicating
that class action and public enforcement resolutions often do not
both address the same claims), https://www.consumerfinance.gov/data-research/research-reports/arbitration-study-report-to-congress-2015/.
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Public policy has long recognized the risk covered terms and
conditions pose to consumers. This part II.B discusses below numerous
examples of public policies prohibiting or restricting covered terms
and conditions, dating back to regulations that the FTC issued before
the 2010 CFPA established the Bureau and some of which the Bureau also
now enforces. These examples generally confirm that covered terms and
conditions pose risks to consumers by undermining or diminishing the
adequacy of existing legal protections.\17\ The Bureau requests comment
on the risks to consumers indicated by these examples, and requests
that commenters provide additional examples of Federal, State, or
Tribal laws that prohibit or restrict the use of covered terms and
conditions, as well as additional enforcement and supervisory actions
applying these prohibitions or restrictions.
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\17\ To be sure, existing law permits certain contractual
waivers or limitations in consumer contracts. Cf. United States v.
Mezzanatto, 513 U.S. 196, 203 (1995) (citing presumption that legal
rights generally, and in the criminal law context, evidentiary
protections, may be voluntarily waived), cited by Clark v. Capital
Credit & Collection Services, Inc., 460 F.3d 1162, 1170 (9th Cir.
2006) (noting exceptions including for waivers that contravene
statutory policy). However, as discussed in this part II, several
examples in statutes and regulations applicable to supervised
nonbanks explicitly restrict when and how waivers can be obtained.
And while an expressly-prohibited waiver may risk deceiving
consumers as to the nature of their rights (in the face of an
express public policy recognizing the importance of the particular
right), the risk of such provisions is not limited to this
deception, but rather derives from the consumers inability to
exercise the affirmative right lost through the contract clause.
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1. Consumer Protection Statutes and Regulations Administered by the FTC
Including Trade Regulations Enforced by the CFPB
In 1975, the FTC promulgated a trade regulation, titled
``Preservation of Consumers' Claims and Defenses'' (also known as the
Holder in Due Course Rule or the Holder Rule). The Holder Rule 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.\18\ The FTC adopted this regulation in part to
prohibit merchant creditors from including a ``waiver of defenses''
clause in their installment sale and lease agreements.\19\ ``A `waiver
of defenses' is the consumer's written agreement that his installment
purchase contract may be treated like a promissory note in the event it
is sold or assigned to a credit company.'' \20\ Absent the Holder Rule,
when such a promissory note was assigned to a third-party, the third-
party would take it free of any claim or defense the buyer would have
against the seller.
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\18\ 16 CFR part 433 (Holder Rule), https://www.ecfr.gov/current/title-16/chapter-I/subchapter-D/part-433. A ``seller'' is a
person that, in the ordinary course of business, sells or leases
goods or services to consumers. 16 CFR 433.1(j).
\19\ See 40 FR 53506, 53507 (Nov. 15, 1975) (issuing final
Holder Rule). FTC Staff Guidelines on Trade Regulation Rule
Concerning Preservation of Consumers' Claims and Defenses (May 4,
1976) at 5, https://www.ftc.gov/system/files/documents/rules/holder-due-course-rule/s760504hidcrule.pdf (last visited Dec. 30, 2022).
\20\ Id.
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In adopting the Holder Rule, the FTC also acknowledged ``widespread
public concern about mechanical abrogations of consumer rights'' \21\
and noted that associated economic injury ``results from terms
contained in form contracts'' that ``consumers rarely comprehend. . .
.'' \22\ The FTC explained that the ``waiver of defenses are presented
to consumers on a take-it-or-leave-it basis. These contracts are
drafted by sellers and creditors, and they are not susceptible to
modification at the point of sale.'' \23\
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\21\ See 40 FR at 53508.
\22\ Id. at 53523.
\23\ Id. at 53524.
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The Bureau also enforces the Holder Rule,\24\ which applies in
important ways in markets the Bureau supervises described in part
II.C.2. For example, the regulation covers many types of consumer
automobile finance agreements. As a result, under the rule, a consumer
who obtains automobile financing through a dealer has the right to
assert claims and defenses that they have against the dealer, as
against an indirect automobile finance company, when the dealer sells
the financing to that company. The Holder Rule also applies to credit
contracts used to finance the sale of services such as trade or
vocational school agreements.\25\ In addition, U.S. Department of
Education regulations specify that, in certain
[[Page 6910]]
circumstances, the holder of certain types of Federal student loans is
subject to ``all claims and defenses that the borrower could assert
against the school with respect to that loan. . . .'' \26\
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\24\ The Bureau included the Holder Rule among the list of
enforceable rules and orders it identified upon transfer of
authorities to the Bureau in July 2011, pursuant to CFPA section
1063(i). See 76 FR 43569, 43571 (July 21, 2011), https://www.gpo.gov/fdsys/pkg/FR-2011-07-21/pdf/2011-18426.pdf.
\25\ 40 FR at 53524.
\26\ 34 CFR 682.209(g) (describing rules for FFEL loan program).
See also 34 CFR 685.206 (Direct Loan program borrower defense
regulations).
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The FTC also addressed the issue of waivers and limitation of
consumer rights in form contracts in its 1984 Credit Practices Rule,
which the Bureau also enforces.\27\ This trade regulation prohibits,
among other practices, 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.\28\ In adopting that rule, the FTC found that ``creditors
frequently include clauses in their consumer contracts that require
consumers to waive [such] statutory protections.'' \29\ It determined
that such waivers can cause substantial injury because, without these
assets, ``the consumer can lose the basic necessities of life.'' \30\
The FTC also determined that, when entering into contracts, ``most
consumers are neither aware of the rights they have under [asset
seizure] exemption statutes nor of the presence or significance of
waiver clauses in their contracts.'' \31\ For one thing, the waivers
relate to ``elements of a transaction that are distant in time and
probability.'' \32\ As a result, the FTC found consumers could not
bargain over this provision or shop for a contract without one.\33\ Yet
the FTC found that, when the time comes for collection of a debt, the
waivers function as ``in terrorem collection devices[.]'' \34\
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\27\ 76 FR at 43571.
\28\ 16 CFR 442(a)(2).
\29\ 49 FR 7740, 7769 (Mar. 1, 1984), https://archives.federalregister.gov/issue_slice/1984/3/1/7708-7793.pdf#spage=82.
\30\ Id. at 7744.
\31\ Id. at 7770.
\32\ Id. at 7747.
\33\ Id.
\34\ Id. at 7769.
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The 1984 FTC rule also prohibits creditors from using contract
terms that waive consumers' due process rights, such as in the event of
a future debt collection lawsuit.\35\ The FTC similarly found that
consumers either are not aware of or rarely understand the significance
of these clauses, which are framed in technical, confounding language
and presented in small print; thus, consumers cannot bargain over them
or shop for alternatives.\36\
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\35\ 16 CFR 442(a)(1).
\36\ 49 FR at 7749, 7753.
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In addition, Congress, in the 2016 Consumer Review Fairness Act,
generally prohibited the use of form contracts that limit how consumers
communicate their reviews, assessments, or similar analysis of the sale
of goods or services.\37\ The statute also invalidates these types of
contract terms and conditions.\38\ As the legislative history noted,
these so-called ``[g]ag clauses have been imposed by many different
types of businesses and come in different forms.'' \39\ Congress noted
that such clauses may ``become widely adopted[.]'' \40\ Under the
statute, use of these types of contract terms and conditions
constitutes an unfair or deceptive act or practice.\41\ The statute
specifically authorizes enforcement by the FTC and State attorneys
general. The FTC recently brought enforcement actions for violations of
this statute by providers of credit repair services and a real estate
investment training scheme.\42\ One of the clauses purported to
explicitly restrict the filing of complaints with government
authorities.\43\
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\37\ 15 U.S.C. 45b(c); Consumer Review Fairness Act of 2016,
Public Law 114-258 (Dec. 14, 2016), 130 Stat. 1355.
\38\ Id. at 45b(b). California law also includes a similar
protection against these types of terms and conditions in contracts
for the sale or lease of consumer goods or services. Cal. Civ. Code
1670.8.
\39\ H.R. Rep. No. 114-731 at 5 (Sept. 9, 2016).
\40\ Id.
\41\ 15 U.S.C. 45b(d)(1).
\42\ See FTC v. Grand Teton Professionals, LLC, et al., Case No.
19cv933 (D. Conn) (Complaint filed June 17, 2019), ]] 62-63, 80-82,
and 127-35; FTC & Utah Div. of Cons. Prot. v. Zurixx, LLC, Case No.
19cv713 (D. Utah) (Second Amended Complaint filed Feb. 12, 2021), ]]
115-20, and 150-55.
\43\ Zurixx Second Amended Complaint, ] 116.
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In early 2022, the Bureau issued a bulletin noting the public
policy against that use of these types of terms and conditions. The
bulletin warned that their use in contracts for consumer financial
products and services also may constitute an unfair, deceptive, or
abusive act or practice (UDAAP). The bulletin stated that the Bureau
intends to prioritize scrutiny of these provisions in its supervisory
and enforcement activities.\44\
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\44\ CFPB Bulletin 2022-05, ``Unfair and Deceptive Acts or
Practices That Impede Consumer Reviews,'' 87 FR 17143 (Mar. 22,
2022), https://www.consumerfinance.gov/about-us/newsroom/cfpb-issues-policy-on-contractual-gag-clauses-and-fake-review-fraud/.
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Finally, the FTC also administers the Credit Repair Organizations
Act (CROA),\45\ which prohibits waivers and attempts to obtain waivers
of CROA's legal protections. The FTC has applied CROA to, among other
businesses, foreclosure relief services.\46\
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\45\ See, e.g., FTC v. United Credit Adjusters, Case No. 09-cv-
798 (D. N.J.) (consent order entered Feb. 4, 2010, with foreclosure
relief firm resolving, among other allegations, an alleged violation
of CROA); FTC v. Lalonde, 545 F. Appx. 825 (11th Cir. 2013)
(upholding trial court decision finding violations of CROA by firm
offering credit repair and foreclosure relief services).
\46\ 15 U.S.C. 1679f(a)-(b).
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2. Federal Consumer Financial Laws Administered by the CFPB
Several other provisions in statutes and regulations the Bureau
enforces include prohibitions and restrictions on waivers and
limitations on the enforcement of consumer legal protections. These
examples also reflect public policy concerns with the risks covered
terms and conditions pose to consumers.
Regulation Z implements the Truth-in-Lending Act (TILA) prohibition
against including, in a residential mortgage loan or open-ended
consumer credit plan secured by the principal dwelling, terms requiring
arbitration or any other nonjudicial procedure as the method for
resolving any controversy or settling claims arising out of the
transaction.\47\ Regulation Z also implements the TILA prohibition
against applying or interpreting terms in agreements related to these
transactions to bar a consumer from bringing a claim in court in
connection with any alleged violation of Federal law.\48\
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\47\ 12 CFR 1026.36(h)(1), implementing 15. U.S.C. 1639c(e)(1).
For this reason, the Bureau's 2015 Arbitration Study generally did
not study the mortgage market. See, e.g., Arbitration Study sec. 5
n.34, sec. 8 at 8 & n.24.
\48\ 12 CFR 1026.36(h)(2), implementing 15. U.S.C. 1639c(e)(3).
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Several other provisions in the Bureau's consumer mortgage
regulations also restrict waivers of specified rights or other
protections, such as waivers of the right of rescission of certain
mortgage transactions, as well as the right to receive certain
disclosures within a certain time period in advance of
consummation.\49\ By restricting the circumstances in which these
waivers can be lawfully obtained, these regulations illustrate the
risks that the waivers pose. For example, mortgage lenders cannot use
``[p]rinted forms'' for purposes of obtaining a waiver of the right of
rescission.\50\ In addition, consumers can only waive most of these
protections when necessary to obtain a loan to meet a ``bona fide
personal financial emergency.'' \51\ Federal
[[Page 6911]]
regulators have rejected requests to allow such waivers in a broader
set of circumstances. For example, in rejecting a request to broaden
the exception to the general prohibition against waiving the right of
rescission for certain mortgage transactions, the Federal Reserve Board
stated in a 1981 rule as follows:
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\49\ 12 CFR 1026.15(e) (rescission); 12 CFR 1026.23(e) (same);
12 CFR 1026.19(a)(3), (e)(1)(v), (f)(1)(iv) (timing requirements for
delivery of certain mortgage disclosures); 12 CFR 1026.31(c)(1)(iii)
(timing requirement for delivery of certain disclosures for high-
cost mortgages); 12 CFR 1024.10(c) (timing requirement for delivery
of settlement statement); 12 CFR 1002.14(a)(1) (timing requirement
for providing copy of appraisal or other writing valuation in
certain mortgage transactions).
\50\ 12 CFR 1026.15(e).
\51\ See 12 CFR 1026.15(e); 12 CFR 1026.23(e); 12 CFR
1026.19(a)(3), (e)(1)(v), (f)(1)(iv); 12 CFR 1026.31(c)(1)(iii).
before accepting a waiver [of the right of rescission],
creditors must assure themselves that the reasons given for the
waiver are both substantial and credible and that the waiver is in
all respects bona fide. This requirement, combined with the
prohibition on the use of preprinted forms, will prevent abusive
practices, while at the same time permitting consumers to waive the
rescission right in appropriate circumstances.\52\
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\52\ Federal Reserve Board, Credit; Truth in Lending; Revision
of Regulation Z, Final Rule, 46 FR 20848, 20872 (Apr. 7, 1981),
https://www.govinfo.gov/content/pkg/FR-1981-04-07/pdf/FR-1981-04-07.pdf#page=190.
More broadly across the markets the Bureau supervises, including
when making payments to supervised nonbanks, consumers enjoy important
protections afforded by the Electronic Fund Transfer Act (EFTA) and its
implementing regulation, Regulation E.\53\ EFTA prohibits contract
terms that contain a ``waiver of any right conferred'' by EFTA.\54\
Recognizing that depriving consumers of a remedy undermines the right
itself, EFTA section 914 also prohibits waiver of any ``cause of
action'' under EFTA.\55\
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\53\ 15 U.S.C. 1693 et seq.; 12 CFR part 1005.
\54\ 15 U.S.C. 1693l.
\55\ Id.
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3. Federal Consumer Bankruptcy Statute Protections
The Federal bankruptcy statute provides a legal process for
liquidating the debts of consumers who cannot repay their debts. A
fundamental goal of the bankruptcy laws enacted by Congress is to give
debtors a financial ``fresh start'' from burdensome debts.\56\ The
Federal bankruptcy statute generally stays collection on most consumer
debts during a bankruptcy proceeding,\57\ which generally can result in
discharge of those debts (under Chapter 7 of the Bankruptcy Code \58\)
or a plan to facilitate repayment of those debts (under Chapter 13 of
the Bankruptcy Code \59\). Consumers generally initiate the bankruptcy
proceeding, which is overseen by the bankruptcy courts and bankruptcy
trustees. The Bureau does not administer or enforce the Bankruptcy
Code. However, Federal consumer financial law generally applies to
consumer financial product and service providers' communications with
consumers and other acts and practices relating to bankruptcy
protections and the bankruptcy process.\60\
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\56\ Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934) (noting
that a primary purpose of the bankruptcy law is to ``relieve the
honest debtor from the weight of oppressive indebtedness, and permit
[the debtor] to start afresh . . . ,'' citing Williams v. U.S.
Fidelity & Guaranty Co., 236 U.S. 549, 554 (1915), and elaborating
that the bankruptcy law ``gives the honest but unfortunate debtor .
. . a new opportunity in life and a clear field for future effort,
unhampered by the pressure and discouragement of pre-existing
debt'').
\57\ 11 U.S.C. 362.
\58\ See generally 11 U.S.C. chapter 7.
\59\ See generally 11 U.S.C. chapter 13.
\60\ See, e.g., CFPB, Supervisory Highlights (Fall 2014) at
2.5.5 (describing examiner findings that one or more supervised
entities were misrepresenting to consumers that student loans are
never dischargeable in bankruptcy); Supervisory Highlights (Fall
2015) at 2.5.3 (same); Supervisory Highlights (Spring 2022) at 2.2.6
(describing examiner findings that certain furnishers violated the
Fair Credit Reporting Act by, among other things, failing to
promptly update account statutes to reflect the discharge of debt in
bankruptcy).
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A number of bankruptcy courts long have held that creditors cannot
enforce contracts purporting to waive consumers' statutory right to
file for bankruptcy protection under the Federal bankruptcy
statute.\61\ Relatedly, since 1978, the Federal bankruptcy statute has
explicitly stated that, in the event of discharge of a debt in
bankruptcy, the debt may be voided ``whether or not discharge of such
debt is waived'' by contract.\62\ As discussed in part II.C.2 below,
however, some lenders nevertheless may use contract terms that attempt
or purport to limit or waive bankruptcy protections such as these.
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\61\ See, e.g., In re Weitzen, 3 F. Supp. 698, 699 (S.D.N.Y.
1933) (holding that a contract provision seeking to waive the
benefit of bankruptcy is unenforceable because it would ``frustrate
the object of the Bankruptcy Act,'' which would be ``nullified in
the vast majority of debts arising out of contracts, if this were
permissible''); In re Madison, 184 B.R. 686, 690-692 (E.D. Pa.
Bktcy. 1995) (``an agreement not to file bankruptcy is unenforceable
because it violates public policy''). See also Paul R. Hage,
``Border Control: The Enforceability of Contractual Restraints on
Bankruptcy Filings, Part 1'' (Dec. 14, 2019) (``Courts almost
universally agree that the right to file a petition in bankruptcy is
fundamental and cannot be waived . . . because of the strong public
policy favoring access to bankruptcy relief.''), https://www.americanbar.sorg/groups/business_law/publications/blt/2019/12/border-control/ (last visited Dec. 2, 2022).
\62\ 11 U.S.C. 524(a)(1). See Bktcy. Reform Act of 1978, Public
Law 95-598 (Nov. 6, 1978), 92 Stat. 2549, 2592 (codifying section
524(a)(1) provisions on non-waiver of discharge); H.R. Rep. No. 95-
595 (Sept. 8, 1977) at 366 (anti-waiver provision ``intended to
prevent waiver of discharge of a particular debt from defeating the
purposes'' of the discharge provision in the bankruptcy statute); S.
Rep. No. 95-989 at 80 (July 14, 1978) (same).
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4. Federal Statutory Protections for Military Families Including
Protections Enforced by the CFPB
Federal law also affords servicemembers other relevant protections
when taking out mortgages and installment loans, including from lenders
supervised by the Bureau such as mortgage lenders, payday lenders,
private student lenders, and automobile finance lenders. The Bureau
enforces the Military Lending Act (MLA), which covers many types of
consumer credit, including payday and private student loans.\63\ The
MLA and its implementing regulations generally prohibit terms in
consumer credit contracts that require servicemembers and their
dependents to ``waive the covered borrower's right to legal recourse
under any otherwise applicable provision of State or Federal law . . .
.'' \64\ The MLA and its implementing regulations also prohibit
arbitration agreements in these transactions.\65\ These provisions do
not apply, however, to certain consumer credit transactions, such as
residential mortgage or automobile finance transactions.\66\ Congress
enacted the MLA in 2006 at the recommendation of the Department of
Defense, which in a 2006 report on predatory lending to servicemembers
noted:
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\63\ 10 U.S.C. 987(f)(6) (authorizing Bureau enforcement of the
Military Lending Act). See also 32 CFR part 232 (regulations
implementing the Military Lending Act).
\64\ 32 CFR 232.8(b), implementing 10 U.S.C. 987(e)(2).
\65\ 10 U.S.C. 987(e)(3); 32 CFR 232.8(c).
\66\ See, e.g., 32 CFR 232.3(f)(2).
Service[ ]members should maintain full legal recourse against
unscrupulous lenders. Loan contracts to Service members should not
include mandatory arbitration clauses or onerous notice provisions,
and should not require the Service[ ]member to waive his or her
right of recourse, such as the right to participate in a plaintiff
class. Waiver is not a matter of ``choice'' in take-it-or-leave-it
contracts of adhesion.\67\
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\67\ Department of Defense Report (Aug. 6, 2006) at 7-8, https://apps.dtic.mil/sti/pdfs/ADA521462.pdf (last visited Dec. 2, 2022).
The Bureau has alleged MLA violations with respect to the use of
contract terms and conditions prohibited by the MLA, including when
short-term small-dollar lenders allegedly provided servicemembers with
loans at high rates prohibited by the MLA under contracts that included
arbitration agreements.\68\
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\68\ CFPB v. LendUp Loans, LLC, Case No. 20cv8583 (Complaint
filed Dec. 4, 2020) (N.D. Cal.), ]] 13-16 (arbitration count),
https://www.consumerfinance.gov/enforcement/actions/lendup-loans-llc/; CFPB v. First Cash, Inc. & Cash America West, Inc., Case No.
21cv1251 (Complaint filed Nov. 12, 2021) (N.D. Tex.), ]] 22-25
(same), https://www.consumerfinance.gov/enforcement/actions/firstcash-inc-and-cash-america-west-inc/; CFPB v. MoneyLion
Technologies Inc. et al., Case No. 22cv8308 (Compliant filed Sept.
29, 2022) (S.D.N.Y.), ]] 65-68 (same), https://www.consumerfinance.gov/about-us/newsroom/cfpb-sues-moneylion-for-overcharging-servicemembers-trapping-consumers-in-costly-memberships/.
[[Page 6912]]
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In addition, the Servicemembers Civil Relief Act (SCRA), among
other things, allows servicemembers to reduce interest rates on
preservice loans and includes certain protections against default
judgments and automobile repossessions.\69\ The SCRA also requires that
any time period for servicemembers to file legal action or to enjoy
certain defenses in mortgage transactions exclude periods of military
service.\70\ The SCRA further imposes specific requirements for any
contractual waiver of a right or other protection afforded by the
SCRA.\71\ However, in a recent report, the U.S. Government
Accountability Office (GAO) found that most of the stakeholders GAO
interviewed who have regular contact with servicemembers or their
representatives said that ``servicemembers do not understand the
waivers they are asked to sign[.]'' \72\ And, in resolving claims of
SCRA violations, the Department of Justice often imposes detailed
constraints on how lenders may obtain these waivers in order to further
limit risks to consumers.\73\
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\69\ See 50 U.S.C. 3937 (interest rate cap); 50 U.S.C. 3931
(protections against default judgments); 50 U.S.C. 3952 (protections
against automobile repossessions); 50 U.S.C. 3953 (mortgage
protections).
\70\ 50 U.S.C. 3936(a) (tolling of statute of limitations); 50
U.S.C. 3936(b) (excluding period of military service from any time
period provided by law for the redemption of real property sold or
forfeited to enforce a mortgage obligation).
\71\ 50 U.S.C. 3918(a)-(c).
\72\ GAO Rept. 21-550R, Servicemember Rights: Stakeholders
Reported Servicemembers Have Limited Understanding about Waivers of
Their Consumer Rights and Protections (June 29, 2021) at 4-7
(reporting that 12 of 15 stakeholders interviewed reported that
servicemembers have limited understanding about waivers of their
rights and protections under SCRA, and the other three said they did
not know or did not respond).
\73\ See e.g., United States v. Sallie Mae, Inc., et al., Case
No. 14cv600 (D. Del.), Consent Order (Sept. 29, 2014), ]] 36.c, 37-
38 (requiring Department of Justice (DoJ) approval of procedures for
obtaining waivers of SCRA legal protections); United States v. 3rd
Generation, Inc. & California Auto Finance, Case No. 18cv523 (C.D.
Cal.), Consent Order (Mar. 12, 2019), ] 10.e; United States v.
Westlake Services, LLC, Case No. 17cv7125 (C.D. Cal.), Settlement
Agreement (Sept. 27, 2017), ] 10.e; see also generally DoJ SCRA
settlement agreements, https://www.justice.gov/servicemembers/servicemembers-civil-relief-act-scra.
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5. State Laws and Tribal Laws
As discussed in this part II.B.5 and also in part II.C below, a
number of State laws and Tribal laws specifically prohibit or restrict
contractual waivers of or certain limits on enforcement and exercise of
important consumer legal protections. These State and Tribal laws
reflect a judgment that waivers and other such limitations may
undermine the adequacy of legal protections. Some of these legal
protections are so fundamental that waiving or otherwise limiting their
enforcement or exercise through consumer contracts is prohibited under
State or Tribal law. Other State and Tribal laws set specific standards
for waivers of certain consumer legal protections or limits on their
enforcement or exercise. These anti-waiver prohibitions, waiver
restrictions, and prohibitions and restrictions on other limits on
enforcement and exercise of legal protections appear in a variety of
State laws and Tribal laws, including some of those that prohibit
unfair and deceptive acts and practices, some consumer lending
statutes, and other statutes setting forth specific types of
protections, as well as in the general principles of State common law
of contracts. While not summarized in detail in this part II.B, other
similar prohibitions also appear in regulations and ordinances adopted
at the local level.\74\
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\74\ See, e.g., New York City Admin. Code sec. 20-701(4)
(providing that ``the degree to which terms of the transaction
require consumers to waive legal rights'' shall be a factor in
considering whether to regulate an act or practice in connection
with the extension of consumer credit or the collection of consumer
debt as a prohibited unconscionable trade practice); S.F. Police
Code sec. 2704 (prohibiting attempts by mortgage modification
consultants to induce real property owners to waive rights under
municipal mortgage modification regulations); City of Los Angeles
Muni. Code sec. 47.107 (same).
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For example, the California Consumer Privacy Act affords consumers
certain rights to know how their information is used and to instruct
businesses not to sell personal information of the consumer.\75\ That
statute further states that ``[a]ny provision of a contract or
agreement of any kind, including a representative action waiver, 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, shall be deemed contrary to public policy and shall be
void and unenforceable.'' \76\ California's consumer credit reporting
agencies statute includes a similar anti-waiver provision.\77\
Similarly, the Model Tribal Consumer Protection Code also encourages
Indian Tribes to establish privacy protections that are non-
waivable.\78\
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\75\ See generally Cal. Civ. Code sec. 1798.100 et seq.
described at https://oag.ca.gov/privacy/ccpa.
\76\ Cal. Civ. Code sec. 1798.192.
\77\ Cal. Civ. Code sec. 1785.36.
\78\ First Nations Development Institute, Model Tribal Consumer
Protection Code (2018) Ch. II--Privacy Protection--section D
(``[a]ny waiver of a provision of this title is contrary to public
policy and is void and unenforceable''), https://www.firstnations.org/publications/model-tribal-consumer-protection-code/ (last visited Dec. 5, 2022).
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In addition, several State and Tribal laws specifically prohibit or
restrict waivers of protections against unfair and deceptive acts and
practices. Michigan law defines prohibited unfair, unconscionable, or
deceptive methods, acts, or practices to include ``[e]ntering into a
consumer transaction in which the consumer waives or purports to waive
a right, benefit, or immunity provided by law, unless the waiver is
clearly stated and the consumer has specifically consented to it.''
\79\ Texas law prohibits waivers of consumer legal protections under
the State deceptive trade practices statute as contrary to public
policy, unenforceable, and void unless certain conditions are met and
``the consumer is not in a significantly disparate bargaining
position.'' \80\ Other State laws contain outright prohibitions of
waivers of legal protections in general consumer protection laws.
Illustrative examples include the laws of California,\81\ Illinois,\82\
Kansas,\83\ and Tennessee.\84\ Finally, the Navajo Nation unfair trade
practices statute broadly prohibits acts or practices that take
advantages of a lack of consumer understanding of contract terms to an
unreasonably unfair degree.\85\
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\79\ Mich. Code 445.903 sec 3(1)(t).
\80\ Tex. Bus. & Com. Code sec. 17.42.
\81\ Cal. Civ. Code. sec. 1751 (barring waivers of protections
under California Consumers Legal Remedies Act).
\82\ Ill. St. Ch. 815 sec. 505(10c), Waiver or modification
(barring waiver or modification of protections under consumer fraud
and deceptive practices statute).
\83\ 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).
\84\ Tenn. Stat. 47-18-113(a) (generally prohibiting waivers
``by contract, agreement, or otherwise'' of provisions of the
Tennessee Consumer Protection Act of 1977). See also Tenn. Stat. 47-
18-113(c) (specifying conditions for waivers of other consumer
protections in Tennessee law).
\85\ NNCA Ch. 7 sec. 1103.E.1, https://www.nnols.org/wp-content/uploads/2022/05/1-5.pdf.
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Some State consumer lending laws also generally prohibit waivers,
either outright or by provisions rendering them void and unenforceable.
Illustrative examples include the Virginia usury statute,\86\ the
Louisiana consumer credit law,\87\ and the Nebraska loan brokers
statute.\88\ Other State laws generally prohibit waivers for certain
types of loan and loan-related
[[Page 6913]]
products. For example, the Florida payday lending statute expressly
prohibits waiver of its protections, including a mandatory cooling-off
period between payoff on an existing payday loan and origination of a
new payday loan.\89\ Several other State payday and short-term small-
dollar lending statutes include similar prohibitions, whether against
waivers generally \90\ or waivers of certain rights such as jury trial
waivers not contained in permissible arbitration agreements.\91\ In the
automobile lending market, the California automobile sales financing
statute and the New Mexico motor vehicle sales financing statute
include general prohibitions on waivers, and in the mortgage market,
the New Mexico mortgage foreclosure relief statute does the same.\92\
And in the context of secured lending nationwide, Article 9 of the
Uniform Commercial Code (UCC)--adopted in both State and Tribal laws--
identifies numerous consumer legal protections that may not be waived
or varied, including, among others, a prohibition on extrajudicial
repossession without breach of the peace.\93\ Article 9 also restricts
waivers of other consumer legal protections, including several that
apply in the event of default on the loan.\94\ Some State laws also set
forth additional applicable legal protections against certain waivers
in contracts for the financing of the sale of goods and services.\95\
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\86\ Va. Code. Ann. 6-2-306, Waiver of rights violative of
public policy.
\87\ La. R. S. 9:3513 (barring waivers or agreements to forego
rights or benefits under Louisiana Consumer Credit Law, except for
settlement of a claim disputed in good faith).
\88\ Neb. Stat. 45-191.05, Waiver of sections; attempt;
prohibited.
\89\ Fl. Stat. 560.404(10)(e) (general prohibition on waivers);
Fl. Stat. 560.404(19)-(20) (cooling-off period provisions).
\90\ See, e.g., Ks. Stat. 16a-2-404(10)(d)(iii) (prohibiting use
of terms and conditions in which the consumer agrees not to assert a
claim or defense arising out of the contract); Oh. Stat. 1321.41(G)
(prohibiting short-term loan licensees from requiring the borrower
to ``waive the borrower's right to legal recourse under any
otherwise applicable provision of state or federal law''); Ill.
Stat. Ch. 815 sec. 122/4-5(10)(D) (prohibiting ``a provision in
which the consumer agrees not to assert any claim or defense arising
out of the contract'').
\91\ Ill. Stat. Ch. 815 sec. 122/4-5(10)(B).
\92\ Cal. Civ. Code sec. 2983.7(a) & (c), Prohibition on certain
provisions (prohibiting automobile sale finance agreements that
contain waivers of claims or defenses of consumers); N.M. Stat. 58-
19-12, Waiver (``Any waiver of the provisions of this act shall be
unenforceable and void''); N.M. Stat. 47-15-5.G(1) (prohibiting
including a provision in a foreclosure consulting contract that
``attempts or purports to waive an owner's rights'' under the New
Mexico foreclosure relief statute).
\93\ UCC 9-602, Waiver and Variance of Rights and Duties. See,
e.g., CNCA, title 80, sec. 9-602 (Cherokee nation secured lending
code restricting waiver and variance of rights), https://attorneygeneral.cherokee.org/media/5upcrg3j/word-searchable-full-code.pdf. See also First Nations Development Institute, Model Tribal
Consumer Protection Code (2018) Ch. IV--Rental-Purchase Agreements--
sec. F.1.e (defining ``waiver by the consumer of claims or
defenses'' as an example of ``[p]rohibited rental-purchase agreement
terms; practices'' in automobile finance agreements); Ch. V--
Repossessions of Personal Property--sec. D.4.c (prohibiting any
seller from ``attempt[ing] to obtain a waiver of this section from
any consumer, or to obtain such a waiver''), https://www.firstnations.org/publications/model-tribal-consumer-protection-code/.
\94\ UCC 9-624, Waiver (placing restrictions on waivers of
certain rights to notice of disposition of collateral, to require
disposition of collateral, and to redeem collateral). See, e.g.,
CNCA title 80, sec. 9-624.
\95\ See, e.g., N.J. Stat. 17:16C-38.2. See also Nat'l Conf. of
Commissioners on Uniform Laws, Revised Model Tribal Secured
Transactions Act (May 2017), sec. 9-403(a) (model statute for Tribal
use providing that waivers of rights and defenses not enforceable in
consumer finance agreements related to sale or lease of goods or
services), https://www.uniformlaws.org/committees/community-
home?CommunityKey=1f31aa7f-74be-457e-904b-
ba3b6d7d3646#:~:text=The%20Model%20Tribal%20Secured%20Transactions,se
cured%20credit%20to%20their%20members.
---------------------------------------------------------------------------
Other provisions of State and Tribal laws prohibit contract terms
and conditions that limit how consumers can enforce applicable legal
protections. The California automobile sales financing statute, for
example, prohibits contract provisions that limit liability for legal
remedies available to the consumer.\96\ Tennessee law, for example,
prohibits specifying an out-of-state forum for adjudication of claims
arising under the Tennessee consumer protection statute.\97\ Minnesota
law similarly prohibits specifying an out-of-state forum for resolution
of disputes related to certain short-term loans.\98\ Idaho law
prohibits contract terms shortening the statute of limitations in some
circumstances.\99\ Cherokee Nation law prohibits waiver of numerous
provisions in arbitration agreements.\100\
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\96\ Cal. Civ. Code sec. 2983.7(e).
\97\ Tenn. Stat. 47-18-113(b).
\98\ See, e.g., Minn. Stat. 47.601 sec. 2 (prohibiting certain
terms and conditions in contracts for short-term loans, including,
among others, ``a provision choosing a forum for dispute resolution
other than the state of Minnesota.'').
\99\ See, e.g., DelJack, Inc. v. U.S. Bank Nat'l Ass'n, 2012 WL
4482049 at *6-*7 (D. Idaho 2012) (applying Idaho Code 29-110(1) to
invalidate attempt to use a standard contract term to shorten
statute of limitation). Under Idaho law, ``[e]very stipulation or
condition in a contract . . . which limits the time within which
[any party thereto] may thus enforce [their] rights, is void as it
is against the public policy of Idaho.'' Idaho Code 29-110(1) (also
qualifying that section 110(1) does not apply to arbitration
agreement allowing arbitration in Idaho).
\100\ CNCA title 11, Ch.8, sec. 1304.B & C.
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Even when State statutory law may not expressly prohibit or
restrict waivers or limitations on how consumers may enforce or
exercise their rights, the Restatement of the law of consumer contracts
further articulates how the State common law of contracts scrutinizes
certain standard terms and conditions for unconscionability. A similar
analysis also may be applied under some Tribal laws.\101\ The doctrine
of unconscionability protects consumers against (1) fundamentally
unfair or unreasonably one-sided terms and conditions that are (2)
imposed through a contracting process that results in unfair surprise
or results from the absence of meaningful choice on the part of the
consumer.\102\ The common law of contracts describes two distinct
aspects of unconscionability: substantive and procedural. As the
American Law Institute has explained, when consumer contract terms and
conditions are substantively unconscionable, they ``undermine the
substantive rights consumers acquired under the contract.'' \103\
Examples of substantively unconscionable terms and conditions include
terms and conditions that unreasonably limit either liability for a
consumer's loss ``by an intentional or negligent act or omission of the
business'' or ``the consumer's ability to pursue or express a complaint
or seek reasonable redress for a violation of a legal right.'' \104\
The Restatement also expressly acknowledges the potential for overlap
in circumstances involving terms and conditions that are unconscionable
and UDAAPs under the CFPA.\105\
---------------------------------------------------------------------------
\101\ See, e.g., Green Tree Servicing, LLC v. Duncan, 7 a.m.
Tribal Law 633, 640 (Navajo Nat'n Sup. Ct. 2008) (applying
principles of unconscionability to invalidate an arbitration
agreement associated with a mobile home loan), https://cite.case.law/am-tribal-law/7/633/.
\102\ Restatement sec. 5.
\103\ Id. at 97 (comment on sec. 5(c)(3)).
\104\ Id. at secs. 5(c)(1)(B) and 5(c)(2).
\105\ Id. at 99 (citing 12 U.S.C. 5531 and 5536(a)).
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The Restatement discusses how the doctrine of unconscionability may
render several types of contractual waivers and limitations on
applicable legal protections unenforceable.
First, terms and conditions in consumer contracts may attempt to
waive certain types of liability of the business. Public policy
recognizes that these types of contract terms and conditions pose risks
to consumers. As the Restatement explains, most State courts deem a
contact term to be substantively unconscionable and thus,
unenforceable, if it ``unreasonably exclude[s] or limit[s] the
business's liability or the consumer's remedies that would otherwise be
applicable for . . . any loss to the consumer caused by an intentional
or negligent act or omission of the business.'' \106\
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\106\ Standard contract terms stating that the liability or
remedy limitations are specifically agreed upon, or that conduct
that would otherwise be regarded by law as negligent is
contractually-agreed upon to be non-negligent, do not necessarily
render the limit on liability reasonable. Restatement at 93-94.
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[[Page 6914]]
Second, forum selection clauses often found in consumer contracts
may designate a specific judicial forum to hear any ensuing disputes
arising out of the contract.\107\ In some cases, the designated forum
might be so inconvenient as to eliminate the viability of pursuing
legal action. The Restatement describes some examples that may pose
risks to consumers, including the following:
---------------------------------------------------------------------------
\107\ Forum clauses were historically perceived as contrary to
public policy and as preventing the proper forum from hearing the
dispute. Now, courts generally enforce forum selection clauses
unless exceptional circumstances exist. M/S Bremen v. Zapata Off-
Shore Corp., 407 U.S. 1, 15 (1972) (holding that, in an
international commercial dispute, ``the forum clause should control
absent a strong showing that it should be set aside'').
---------------------------------------------------------------------------
A business's standard contract terms include a dispute-
resolution term specifying a forum in a distant location, such that the
consumer would have to bear travel and accommodation expenses exceeding
the value of the remedy sought. The dispute-resolution forum requires a
non-refundable filing fee exceeding the value of the remedy sought.
Either one of these two features unreasonably limits or imposes
obstacles to the consumer's ability to enforce legal rights. That
result applies to any type of dispute-resolution forum clause in
standard terms in a consumer contract that imposes such an unreasonable
cost or personal burden, be it a public court or a private arbitration
panel.\108\
---------------------------------------------------------------------------
\108\ Restatement sec. 5 cmt. 7.
---------------------------------------------------------------------------
Third, terms and conditions that impose unreasonably short
limitations periods may pose risks to consumers by imposing challenges
or creating hurdles for consumers in seeking redress. Terms and
conditions that limit the period in which a consumer must bring an
action to a shorter time period than underlying law may block the
consumer from asserting an otherwise viable substantive claim. These
terms and conditions reduce the time for a consumer to sue, which may
result in fewer actions and otherwise actionable claims prematurely
going stale. As noted above, some State laws prohibit these terms and
conditions as void and against public policy in some circumstances.
Absent an express prohibition in State law, though, the Restatement
indicates that courts often enforce these terms and conditions, even
when the parties have unequal bargaining power, as long as the
resulting time period is reasonable (six months is an oft-mentioned
floor).\109\
---------------------------------------------------------------------------
\109\ Restatement sec. 5. The Restatement notes (at 98),
however, that a business's standard contract terms that require that
all claims against the business be made within three months after
the conclusion of the transaction may be unenforceable to the extent
that it covers claims for ``latent defects'' (claims not widely
relevant to consumer financial products and services). Cf. UCC sec.
2-725(1).
---------------------------------------------------------------------------
Fourth, some arbitration agreements may have features that
unreasonably limit the consumer's ability to enforce their rights. The
Restatement describes examples, including the following:
A business's standard contract terms require consumers to
resolve disputes through arbitration. If the costs of pursuing
individual arbitration make it impractical for consumers to seek
redress for breach of the contract, a court may determine that the
provision in the contract barring class actions is not enforceable. In
those circumstances where costs of pursuing individual arbitration are
prohibitive, such arbitration clauses may still be enforceable where
the arbitration forum permits class arbitration, but substantively
unconscionable otherwise.\110\
---------------------------------------------------------------------------
\110\ Restatement at 98 (example 9). The Department of Education
also has proposed to prohibit the use of arbitration agreements and
class action waivers in connection with Federal student loan
programs. See Dept. of Educ. Proposed Rule, 87 FR 41878 (July 13,
2022).
---------------------------------------------------------------------------
A business's standard contract terms include a class-
action waiver and do not specify a choice of forum, thus allowing
consumers to resolve disputes in court. A common grievance for
consumers entering this contract involves low damages--no more than a
few dollars each. Thus, these clauses may unreasonably limit consumers'
ability to obtain a remedy for breach.\111\
---------------------------------------------------------------------------
\111\ Restatement at 98 (example 8).
---------------------------------------------------------------------------
While the Restatement expressly does not address ``possible
preemption under the Federal Arbitration Act,'' \112\ these examples
nonetheless illustrate how arbitration agreements can pose risks to
consumers.
---------------------------------------------------------------------------
\112\ Id. at 97.
---------------------------------------------------------------------------
Fifth, in addition to the Consumer Review Fairness Act discussed
above and the Bureau's related policy statement, State law contract
principles also illustrate how clauses that seek to restrict consumers
from posting negative reviews or filing complaints may pose several
risks to consumers. These restrictions may explicitly limit the ability
of consumers to obtain informal resolution of a dispute. These
restrictions also pose risks to other consumers who may be deprived of
the benefits of information about the experiences of other consumers.
As the Restatement explains, ``[s]uch restrictions undermine the
reputation mechanism. In consumer markets, in which legal forms of
redress are often impractical or delayed, the existence of a robust
reputation mechanism is particularly important. Contractual
arrangements that seek to weaken it are therefore against public policy
and substantively unconscionable.'' \113\ When such restrictions are
prohibited by law, they ``may also be unenforceable under the doctrine
of illegality or on grounds of public policy.'' \114\
---------------------------------------------------------------------------
\113\ Id. at 114; see also id. at 98-99 (discussing example
where a business includes in its standard-form contract a clause
that charges a high monetary penalty every time a consumer posts a
negative review of the business online or obligates the consumer to
indemnify the business for any loss caused by the negative
review.'').
\114\ Id. at 107.
---------------------------------------------------------------------------
C. Need for Registry of Supervised Nonbanks That Use Form Contracts To
Impose Terms and Conditions That Seek To Waive or Limit Consumer Legal
Protections
Accordingly, and in light of the considerations described in part
II.C.1 below, the Bureau is proposing to collect information described
in this rule to learn more about the business practices of supervised
nonbanks that use the covered terms and conditions, and to monitor for
associated risks to consumers that would inform the Bureau's evaluation
of how it can utilize its functions to address those risks. Most
immediately, as further described in part II.C.2 below, the proposal
would facilitate the Bureau's risk-based nonbank supervision program,
including through facilitating the assessment and detection of risks to
consumers posed by covered terms and conditions. In addition, to
support the public interest in promoting public understanding of the
use of covered terms and conditions, as discussed in part II.C.3 below,
the Bureau is proposing to make information collected public as
described in Sec. 1092.303 of the proposed rule. The proposal is thus
authorized under the Bureau's monitoring, supervisory, and related
nonbank registration authorities, described below and in part IV of the
proposal. The proposed registry also would further these goals in ways
that existing registration systems do not.
This proposal reflects a priority on establishing a system by rule
for the collection of information on the use of covered terms and
conditions from supervised nonbanks as a subset of covered persons. One
of the reasons for prioritizing coverage of supervised nonbanks is the
need to identify them, as discussed in part II.C.2 below. As discussed
in the impacts analysis in part VII of the proposal, the Bureau
estimates that there are thousands of nonbanks subject to its
supervisory authority
[[Page 6915]]
under CFPA section 1024(a). In addition, there is no comprehensive
registry of identifying information for nonbanks subject to the
Bureau's supervisory authority across supervised markets. Finally, in
light of resource constraints, the Bureau does not regularly examine
each of the thousands of nonbanks subject to its supervisory authority
under CFPA section 1024. Rather, under CFPA section 1024(b)(2), the
Bureau must implement a risk-based program for supervision of these
nonbanks. By contrast, Federal prudential regulators track and already
publicize information about the identity and size of depository
institutions.\115\ These include depository institutions subject to the
Bureau's supervisory authorities under CFPA sections 1025 and 1026. The
Bureau also publicly identifies the fewer than 200 large depository
institutions subject to its supervisory authority under CFPA section
1025, and it has procedures for regularly supervising them.\116\ In
light of all these considerations, the Bureau is prioritizing this
proposal to establish a registration system for identifying those
nonbanks that use covered terms or conditions and monitoring and
assessing the associated risks to consumers as discussed in this part
II above.\117\ This proposal does not affect how the Bureau can apply
its functions for monitoring and assessing risks posed by covered terms
and conditions used by depository institutions and credit unions
subject to its authority under CFPA sections 1022, 1025, and 1026.
---------------------------------------------------------------------------
\115\ See, e.g., FDIC Bank Find Suite, https://banks.data.fdic.gov/bankfind-suite/bankfind; Federal Financial
Institutions Examinations Council National Information Center,
https://www.ffiec.gov/NPW; OCC Financial Institutions Lists, https://www.occ.treas.gov/topics/charters-and-licensing/financial-institution-lists/index-financial-institution-lists.html; Credit
Union Locator, https://mapping.ncua.gov/.
\116\ See CFPB, List of Depository Institutions and Depository
Affiliates under CFPB Supervision, https://www.consumerfinance.gov/compliance/supervision-examinations/institutions/; CFPB Supervision
and Examination Manual, Overview at 5 (describing Bureau's approach
to setting regular examination schedules for large depository
institutions), https://files.consumerfinance.gov/f/documents/cfpb_supervision-and-examination-manual_2022-09.pdf.
\117\ In prioritizing this proposal, the Bureau also has
considered other factors, including the following: The Bureau's
existing regulations already require depository institutions to
submit to the Bureau information about their agreements in certain
markets, such as credit cards and prepaid accounts. The Bureau makes
these agreements publicly available at https://www.consumerfinance.gov/credit-cards/agreements/ and https://www.consumerfinance.gov/data-research/prepaid-accounts/. In
addition, CFPA sections 1022 and 1024 do not expressly authorize the
Bureau to establish a registration system for depository
institutions, which are excluded from the Bureau's registration
authority under section 1022(c)(7)(A) and excluded from the scope of
section 1024(b)(7). There is no parallel registration provision in
the Bureau's authorities over depository institutions generally.
---------------------------------------------------------------------------
1. The Proposed Registry Would Support the Bureau in Fulfilling Its
Statutory Mandate To Monitor Risks to Consumers in Markets for Consumer
Financial Products and Services
As recently discussed in the Bureau's proposal to register certain
orders,\118\ Congress established the Bureau to regulate (among other
things) the offering and provision of consumer financial products and
services under the Federal consumer financial laws, and it granted the
Bureau authority to ensure that the Bureau could achieve that
mission.\119\ But it also understood that the Bureau could not fully
and effectively achieve that mission unless it developed a clear window
into the markets for and persons involved in offering and providing
such products and services. To that end, Congress mandated that the
Bureau ``shall monitor for risks to consumers in the offering or
provision of consumer financial products or services, including
developments in markets for such products or services.'' \120\
---------------------------------------------------------------------------
\118\ See generally CFPB, Proposed Rule, Registry of Nonbank
Covered Persons Subject to Certain Agency and Court Orders (Dec. 12,
2022), (``Nonbank Registration--Orders Proposal''), https://files.consumerfinance.gov/f/documents/cfpb_proposed-rule__registry-of-nonbank-covered-persons_2022.pdf.
\119\ See 12 U.S.C. 5511.
\120\ See 12 U.S.C. 5512(c)(1).
---------------------------------------------------------------------------
Notably, Congress directed the Bureau to engage in such monitoring
``to support its rulemaking and other functions,'' \121\ instructing
the Bureau to use monitoring to inform all of its work. Congress
separately described the Bureau's ``primary functions'' as ``conducting
financial education programs''; ``collecting, investigating, and
responding to consumer complaints''; ``collecting, researching,
monitoring, and publishing information relevant to the functioning of
markets for consumer financial products and services to identify risks
to consumers and the proper functioning of such markets'';
``supervising covered persons for compliance with Federal consumer
financial law, and taking appropriate enforcement action to address
violations of Federal consumer financial law''; ``issuing rules,
orders, and guidance implementing Federal consumer financial law''; and
``performing such support activities as may be necessary or useful to
facilitate the other functions of the Bureau.'' \122\ Put simply,
Congress envisioned that the Bureau would use its market monitoring
work to inform its activities, all with the express purpose of
``ensuring that all consumers have access to markets for consumer
financial products and services and that markets for consumer financial
products and services are fair, transparent, and competitive.'' \123\
---------------------------------------------------------------------------
\121\ Id.
\122\ 12 U.S.C. 5511(c).
\123\ 12 U.S.C. 5511(a).
---------------------------------------------------------------------------
To achieve these ends, Congress took care to ensure that the Bureau
had the tools necessary to effectively monitor for risks in the markets
for consumer financial products and services. It granted the Bureau
authority ``to gather information from time to time regarding the
organization, business conduct, markets, and activities of covered
persons and service providers.'' \124\ In particular, Congress
authorized the Bureau to ``require covered persons and service
providers participating in markets for consumer financial products and
services to file with the Bureau, under oath or otherwise, in such form
and within such reasonable period of time as the Bureau may prescribe
by rule or order, annual or special reports, or answers in writing to
specific questions,'' that would furnish the Bureau with such
information ``as necessary for the Bureau to fulfill the monitoring . .
. responsibilities imposed by Congress.'' \125\
---------------------------------------------------------------------------
\124\ 12 U.S.C. 5512(c)(4)(A).
\125\ 12 U.S.C. 5512(c)(4)(B)(ii).
---------------------------------------------------------------------------
To assist the Bureau in allocating resources to perform its
monitoring, Congress also identified a non-exhaustive list of factors
that the Bureau may consider, including ``likely risks and costs to
consumers associated with buying or using a type of consumer financial
product or service''; \126\ ``understanding by consumers of the risks
of a type of consumer financial product or service''; \127\ ``the legal
protections applicable to the offering or provision of a consumer
financial product or service, including the extent to which the law is
likely to adequately protect consumers''; \128\ ``the extent, if any,
to which the risks of a consumer financial product or service may
disproportionately affect traditionally underserved consumers''; \129\
and ``the types, number, and other pertinent characteristics of covered
persons that offer or provide the consumer financial product or
service.'' \130\
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\126\ 12 U.S.C. 5512(c)(2)(A).
\127\ 12 U.S.C. 5512(c)(2)(B).
\128\ 12 U.S.C. 5512(c)(2)(C).
\129\ 12 U.S.C. 5512(c)(2)(E).
\130\ 12 U.S.C. 5512(c)(2)(F).
---------------------------------------------------------------------------
The Bureau takes its market monitoring obligations seriously, and
it
[[Page 6916]]
has incorporated valuable insights gained to date from such monitoring
in conducting the multiple functions assigned to it under the CFPA,
including its supervisory and enforcement efforts, as well as its
rulemaking, consumer education, and other functions.\131\ As discussed
in further detail below, this proposed rule seeks to continue and build
upon that commitment by creating a registry of covered terms and
conditions to accomplish a number of goals, with a particular focus on
monitoring for risks to consumers related to the use of form contracts
containing terms and conditions that waive or limit consumer legal
protections.
---------------------------------------------------------------------------
\131\ See, e.g., CFPB Semiannual Regulatory Agenda, 87 FR 5326,
5328 (Jan. 31, 2022) (``The Bureau's market monitoring work assists
in identifying issues for potential future rulemaking work.'');
Payday, Vehicle, and Certain High-Cost Installment Loans, 82 FR
54472, 54475, 54488, 54498 (Nov. 17, 2017) (citing information
obtained through Bureau market monitoring efforts); Arbitration
Agreements, 82 FR 33210, 33220 (July 19, 2017) (same). See also,
e.g., Consumer Fin. Prot. Bureau, Buy Now, Pay Later: Market trends
and consumer impacts (Sept. 2022), https://files.consumerfinance.gov/f/documents/cfpb_buy-now-pay-later-market-trends-consumer-impacts_report_2022-09.pdf (publishing information
obtained through Bureau market monitoring efforts); Consumer Fin.
Prot. Bureau, Consumer Credit Trends: Credit Card Line Decreases
(June 2022), https://files.consumerfinance.gov/f/documents/cfpb_credit-card-line-decreases_report_2022-06.pdf (same); Consumer
Fin. Prot. Bureau, Data Point: Checking Account Overdraft at
Financial Institutions Served by Core Processors (Dec. 2021),
https://files.consumerfinance.gov/f/documents/cfpb_overdraft-core-processors_report_2021-12.pdf (same). See also, e.g., Consumer Fin.
Prot. Bureau, Buy Now, Pay Later: Market trends and consumer impacts
(Sept. 2022), https://files.consumerfinance.gov/f/documents/cfpb_buy-now-pay-later-market-trends-consumer-impacts_report_2022-09.pdf (publishing information obtained through Bureau market
monitoring efforts); Consumer Fin. Prot. Bureau, Consumer Credit
Trends: Credit Card Line Decreases (June 2022), https://files.consumerfinance.gov/f/documents/cfpb_credit-card-line-decreases_report_2022-06.pdf (same); Consumer Fin. Prot. Bureau,
Data Point: Checking Account Overdraft at Financial Institutions
Served by Core Processors (Dec. 2021), https://files.consumerfinance.gov/f/documents/cfpb_overdraft-core-processors_report_2021-12.pdf (same).
---------------------------------------------------------------------------
How the Proposed Registry Would Support Market Monitoring
A registry of covered terms and conditions would further the
Bureau's market monitoring activities in several ways. As discussed in
further detail below, among other things, the registry would assist the
Bureau in assessing the impact of the covered terms and conditions on
the adequacy of applicable legal protections, and consumer
understanding of covered terms and conditions included in form
contracts.\132\
---------------------------------------------------------------------------
\132\ 12. U.S.C. 5512(c)(2).
---------------------------------------------------------------------------
In particular, and as reflected in Congress' own judgment, the
Bureau has a particular interest in exercising its market monitoring
authorities to address questions or concerns regarding the ``legal
protections applicable'' to consumer financial products and services
``including the extent to which the law is likely to adequately protect
consumers. . . .'' \133\ Numerous legal protections apply to consumer
financial products and services. Federal, State, Tribal, and local
government bodies have adopted these consumer protections in statutes
and regulations. However, these laws may not adequately protect
consumers when consumers are required through covered terms and
conditions to waive the protections or agree to limits on their
enforcement or exercise.
---------------------------------------------------------------------------
\133\ 12 U.S.C. 5512(c)(2)(C). Inadequate legal protections also
create risks the Bureau's monitoring program must consider under
section 1022(c)(2)(A).
---------------------------------------------------------------------------
These types of provisions may simultaneously place consumers at an
increased risk of harm from conduct the protections are designed to
prevent, while making it more difficult for consumers to remedy those
harms by enforcing the protections. Covered terms and conditions pose
risks to consumers by potentially reducing deterrence, compliance, and
accountability for non-compliance with the underlying legal protections
to which they apply. Some of these legal protections are so fundamental
that the use of covered terms and conditions is prohibited or
restricted by law, as discussed in part II.C.1. As discussed above and
in the section 1022(b) impacts analysis, when consumers cannot protect
themselves, such as by directly enforcing legal protections or
exercising informal mechanisms, there may be an increased risk that
these protections will not be followed (less deterrence) and that they
will not be remedied when violated (less accountability). These risks
may be significant, given the prevalence of covered terms and
conditions in supervised markets and the examples of harms identified
in supervisory and enforcement actions discussed in part II.C. The
proposed registry would allow for fuller and continuous monitoring of
these risks, but the information already available suggests these risks
warrant increased regulatory oversight of supervised market
participants that use covered terms and conditions. Indeed, Federal,
State, Tribal, and local regulators can enforce many of the legal
protections constrained by covered terms and conditions, or analogous
legal protections. The GAO recently recognized, for example, that
public enforcement of a Federal statute can be particularly important
where private enforcement is constrained by contract.\134\
---------------------------------------------------------------------------
\134\ See GAO Rept. 21-221, Servicemember Rights: Mandatory
Arbitration Clauses Have Affected Some Employment and Consumer
Claims but the Extent of Their Effects is Unknown (Feb. 2021) at 9-
10 (describing instances where arbitration agreements prevented
servicemembers from resolving SCRA claims in court, while noting
that Federal enforcement under the SCRA is not limited by
arbitration agreements).
---------------------------------------------------------------------------
In addition to the foregoing risks, covered terms and conditions
also may create the risk of a UDAAP violation whether they are
expressly prohibited under existing statutes or regulations and thus
unenforceable or whether no existing law expressly addresses the
provision. In the former circumstance, as discussed below, the covered
term or condition risks deceiving consumers into thinking the
underlying legal protection no longer applies or that they cannot
enforce a right, when in fact that is not this case. This misimpression
is likely to dissuade consumers from availing themselves of available
mechanisms to enforce or otherwise exercise their rights. In the latter
circumstance, as also discussed below, the waiver still might
constitute an unfair act or practice under Federal or State law. For
example, Bureau examiners have found unfairness violations where,
although not expressly prohibited under existing law, a waiver
substantially injured consumers (through loss of the underlying right),
was not reasonably avoidable (for example, because presented in a form
contract on a take it or leave it basis), and did not have
countervailing benefits to consumers or competition.\135\
---------------------------------------------------------------------------
\135\ See discussion of examples from mortgage market
supervision, part II.C.2 infra.
---------------------------------------------------------------------------
Consumer understanding of the risks described above also is a
factor the Bureau has considered in proposing the registry. Because
covered terms and conditions are established through an adhesion-type
contracting process, as discussed in part II.A above, consumers may not
understand the covered terms and conditions or be aware that they have
agreed to them and therefore may not recognize the ensuing risks from
this agreement.
Of course, the Bureau does not supervise or enforce all consumer
legal protections that are applicable to consumer financial products
and services it supervises, including both the laws to which covered
terms and conditions apply and the laws that may prohibit particular
covered terms and conditions. But, even apart from a potential UDAAP
violation as described
[[Page 6917]]
above, a company that violates other applicable law may have a poor
compliance management system and thus may be more likely to violate
Federal consumer financial law. And the existence of a covered term or
condition in some circumstances may be indicative of a violation of
law, since a company that would go to such lengths to include certain
terms or conditions in its contracts may be acting in other ways to
undermine the underlying rights addressed by the waivers or
limitations. Thus, the existence of covered terms and conditions may
inform the Bureau's understanding of the adequacy of legal protections,
including compliance with Federal consumer financial law, in protecting
consumers who buy or use consumer financial products or services.
The Bureau can use that market monitoring information to support a
variety of its functions, including through conducting consumer
education (where a waiver or limit may risk deceiving consumers, or may
be lawful but nevertheless harmful to consumers who lack
understanding), bolstering its consumer response function (for example,
through better understanding of whether consumer complaints the Bureau
receives or does not receive may be driven by covered terms and
conditions or the risks they pose), or identifying regulatory voids
that it may consider filling through regulation implementing Federal
consumer financial law, orders, or guidance (if another important
protection is not adequate due to waivers or limitations).
A registry of covered terms and conditions would fill an important
information gap on the topic of covered terms and conditions.
Currently, there is limited information on the use of covered terms and
conditions, especially at the individual provider/product level. Even
at the market level, information is limited. The Bureau issued the
latest comprehensive national study of one type of covered term or
condition--arbitration agreements--in a report to Congress over seven
years ago, discussed above. The Bureau requests information from
commenters on other studies of the use of covered terms and conditions.
The Bureau also has not identified any existing Federal, State, or
Tribal system that collects information specifically about the use of
covered terms and conditions across markets the Bureau supervises.\136\
The absence of this data leaves uncertain the degree to which the use
of covered terms and conditions is eroding legal protections in many of
the markets the Bureau oversees. Collection of that data and filling
the gaps in available information on these issues would be important
for the Bureau's efforts to monitor for risks to consumers in the
offering of consumer financial products or services.
---------------------------------------------------------------------------
\136\ As noted in this part II.C.2, the Bureau is only aware of
existing registration systems that collect and publish limited
information about standard contracts in private student loan markets
in certain states and mortgage market contracts used for certain
federally-related mortgage transactions.
---------------------------------------------------------------------------
As indicated above, in developing the proposal, the Bureau has
considered (among others) the factors listed at CFPA section
1022(c)(2), to the extent relevant here to the allocation of Bureau
resources to perform market monitoring. For example, the proposed
registry would help the Bureau to monitor the extent to which
supervised nonbanks are using covered terms or conditions in form
contracts in a manner that allows consumers to understand the risks
that covered terms or conditions pose to consumers (see CFPA section
1022(c)(2)(B)). The proposed registry would help the Bureau to monitor
potential effects of covered terms or conditions on the adequacy of
legal protections to which they apply or which apply to them (see CFPA
section 1022(c)(2)(C)). And relatedly, the proposed registry would help
the Bureau to monitor likely risks and costs to consumers from buying
or using consumer financial products or services that contain covered
terms and conditions (see CFPA section 1022(c)(2)(A)).\137\
---------------------------------------------------------------------------
\137\ See 12 U.S.C. 5512(c)(2)(A)-(C).
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In addition, the information collected in the proposed registry may
form the basis of additional focused assessments. For example, the
information collected may help the Bureau to identify changes over time
in the use of certain covered terms or conditions which may be relevant
to assessing the rate of growth in the offering of consumer financial
products and services that have different contractual frameworks (see
CFPB section 1022(c)(2)(D)). In addition, to the extent that supervised
nonbanks use covered terms or conditions in offering a consumer
financial product or service to traditionally underserved consumers,
the registry would enable comparisons to covered terms and conditions
used by other supervised nonbanks offering similar consumer financial
products or services. That information may help the Bureau to monitor
whether the covered terms or conditions may disproportionately affect
these consumers (see CFPB section 1022(c)(2)(E)). The registry also
would enable other comparisons in the degree and type of covered terms
and conditions used across supervised nonbanks in a given market and
across supervised markets. These comparisons may identify pertinent
characteristics of firms that use particular covered terms or
conditions or combinations of covered terms or conditions (see CFPB
section 1022(c)(2)(F)).\138\
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\138\ See 12 U.S.C. 5512(c)(2)(D)-(E).
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Accordingly, for the reasons described in this part II., as
elaborated elsewhere in the proposal, the Bureau proposes to establish
a registration system to collect data on supervised nonbanks' use of
covered terms and conditions, allowing it to monitor and assess the
risks described above on a continuous basis in supervised markets.
2. The Proposed Registry Would Facilitate the Bureau's Statutorily-
Mandated Risk-Based Nonbank Supervision Program
As recently discussed in the Bureau's proposal to register certain
orders,\139\ one of the Bureau's key responsibilities under the CFPA is
the supervision of very large banks, thrifts, and credit unions, and
their affiliates, and certain nonbank covered persons. Congress has
authorized the Bureau to supervise certain categories of nonbank
covered persons under CFPA section 1024.\140\ Congress provided that
the Bureau ``shall require reports and conduct examinations on a
periodic basis'' of nonbank covered persons subject to its supervisory
authority for purposes of ``assessing compliance with the requirements
of Federal consumer financial law''; ``obtaining information about the
activities and compliance systems or procedures of such person[s]'';
and ``detecting and assessing risks to consumers and to markets for
consumer financial products and services.'' \141\ Pursuant to the CFPA,
the Bureau implements a risk-based supervision program under which it
prioritizes nonbank covered persons for supervision in accordance with
its assessment of risks posed to consumers.\142\ In making
prioritization determinations, the Bureau considers several factors,
including ``the asset size of the covered person,'' \143\ ``the volume
of transactions involving consumer financial products or services in
which the covered person engages,'' \144\ ``the risks to consumers
created by the provision of such consumer financial
[[Page 6918]]
products or services,'' \145\ ``the extent to which such institutions
are subject to oversight by State authorities for consumer
protection,'' \146\ and ``any other factors that the Bureau determines
to be relevant to a class of covered persons.'' \147\ CFPA section
1024(b)(7)(A)-(C) further authorizes the Bureau to prescribe rules to
facilitate supervision and assessing and detecting risks to consumers,
as well as to ensure that supervised nonbanks ``are legitimate entities
and are able to perform their obligations to consumers.'' \148\ Since
it began its nonbank supervision program in 2012, the Bureau has
provided further explanation to the public about the purposes of the
program and how it works.\149\
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\139\ See generally Nonbank Registration--Orders Proposal.
\140\ 12 U.S.C. 5514.
\141\ 12 U.S.C. 5514(b)(1).
\142\ 12 U.S.C. 5514(b)(2).
\143\ 12 U.S.C. 5514(b)(2)(A).
\144\ 12 U.S.C. 5514(b)(2)(B).
\145\ 12 U.S.C. 5514(b)(2)(C).
\146\ 12 U.S.C. 5514(b)(2)(D).
\147\ 12 U.S.C. 5514(b)(2)(E).
\148\ 12 U.S.C. 5514(b)(7)(A)-(C).
\149\ See, e.g., Steve Antonakes and Peggy Twohig, ``The CFPB
launches its nonbank supervision program'' (Jan. 5, 2012), https://www.consumerfinance.gov/about-us/blog/the-cfpb-launches-its-nonbank-supervision-program/; Lorelei Salas, ``Explainer: What is nonbank
supervision? (May 25, 2022), https://www.consumerfinance.gov/about-us/blog/explainer-what-is-nonbank-supervision/.
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How the Proposed Registry Would Facilitate Risk-Based Nonbank
Supervision
Under those authorities, the Bureau is proposing the registry to
facilitate its assessment of risks to consumers in connection with its
nonbank supervision program. The proposed registry can facilitate the
Bureau's risk-based nonbank supervision program in a number of ways.
For example, as discussed below, the proposed registry can facilitate
the Bureau's prioritization of which entities to examine, as well as,
relatedly, its identification of entities eligible for examination. The
proposed registry also can facilitate the scoping of its examinations.
First, the Bureau can use the information collected on supervised
nonbanks' use of covered terms and conditions to inform its
prioritization process to determine which entities to examine.
Prioritization is a fundamental component of the Bureau's supervision
program, which has been designed to conduct slightly more than 100 on-
site examinations per year, and less than 1,000 overall exam events per
year.\150\ As discussed in the impacts analysis in part VII of the
proposal, the Bureau estimates that there are thousands of nonbanks
subject to its supervisory authority under CFPA section 1024(a). Given
resource constraints and the number of supervised nonbanks, the Bureau
does not regularly examine each of the nonbanks subject to its
supervisory authority under CFPA section 1024. Rather, pursuant to CFPA
section 1024(b)(2), the Bureau implements a risk-based supervision
program, prioritizing which supervised nonbanks it will examine in a
given annual period based on information available about the risks they
pose to consumers. By incorporating into its supervisory prioritization
process the information it collects on supervised registrants' use of
covered terms and conditions that pose risks to consumers, the Bureau's
risk-based nonbank supervision program would be able to better take
into consideration the ``risks to consumers created by the provisions''
of consumer financial products and services within the meaning of CFPA
section 1024(b)(2)(C).\151\
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\150\ See CFPB Annual Performance Plan and Report FY 2022 at
Table 2.2.1.1 (on-site exams) & Table 2.2.1.2 (all supervisory
events with significant activity), https://files.consumerfinance.gov/f/documents/cfpb_performance-plan-and-report_fy22.pdf.
\151\ 12 U.S.C. 5514(b)(2)(C).
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The Bureau can use the information collected on supervised
nonbanks' use of covered terms and conditions to assess potential risks
to consumers posed by different covered terms and conditions, and
combinations of covered terms and conditions. That assessment can
inform its decisions prioritizing which supervised nonbanks to examine.
For example, when covered terms and conditions violate anti-waiver and
other legal prohibitions in Federal consumer financial law, the
proposed registry could highlight where this may be a problem,
potentially facilitating prioritization of supervisory action or, in
some cases, potentially, enforcement action.
In addition, certain covered terms and conditions, such as non-
disparagement clauses, also could be an important companion to the
Bureau's existing prioritization process that is based in significant
part on consumer complaints. Depending on the wording of these terms
and conditions, they may pose varying degrees of risk of suppressing
consumer complaints, which could result in an understatement of or gap
in complaint information in the Bureau's consumer complaint database.
Or they could deter online reviews, which the Bureau also may use as
field market intelligence to inform its assessments of risks used for
prioritization of its exam work.
In addition, by prioritizing based on the risks specifically posed
by covered terms and conditions, the Bureau's risk-based supervision
would better account for the limited extent to which this information
is available to inform existing oversight by enforcers of Federal
consumer financial law, including certain State authorities.\152\ As
discussed below, the universe of nonbanks supervised by the States and
the Bureau overlaps but is not coextensive. Even with respect to areas
of overlap, existing State registration systems generally do not
collect information about the use of supervised entity's covered terms
and conditions across the market. States have made only limited use of
this option for specific markets. For example, Colorado, Louisiana,
Maine, and Illinois recently adopted laws establishing registration
systems for private student lenders that obtain their standard loan
terms and conditions; the Colorado, Louisiana, and Maine statutes also
require the registry to post these terms and conditions on a public
website.\153\ Accordingly, the proposed rule would facilitate
supervision on a topic--the use of covered terms or conditions in form
contracts--that otherwise would not be overseen to the same extent by
State authorities for consumer protection within the meaning of CFPA
section 1024(b)(2)(D).\154\
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\152\ See CFPB Consumer Financial Protection Circular 2022-01,
``System of Consumer Financial Protection Circulars to Agencies
Enforcing Federal Consumer Financial Law'' (June 14, 2022), 87 FR
34868 (June 14, 2022) (discussing role of State attorneys general
and State regulators in enforcing Federal consumer financial law as
described in CFPA section 1042, codified at 12 U.S.C. 5552).
\153\ See Col. Rev. Stat. 5-20-203(2)(b)(V) (requiring private
education lenders to annually provide model loan agreements) & id.
5-20-203(3)(c) (requiring copies of the model loan agreements for
each registered private education lender to be posted on a publicly
accessible website); La. Rev. Stat. 6:1401-1404 (added by HB 789
enacted June 18, 2022); Me. Rev. Stat. 9-A:15-102.1.B(5) & id. 15-
102.2 (same); Il. Pub. Act. 102-0583 sec. 10(e). These websites are
available at https://coag.gov/office-sections/consumer-protection/consumer-credit-unit/student-loan-servicers-act/private-education-lender-registration/registered-private-education-lenders/, https://www.maine.gov/pfr/consumercredit/student_loan_registry/index.html.
\154\ 12 U.S.C. 5514(b)(2)(B) (describing ``the extent to which
supervised nonbanks are subject to oversight by State authorities
for consumer protection'' as something for the Bureau to consider in
conducting risk-based supervision). As discussed in the section-by-
section analysis of the exemption in proposed Sec. 1092.301(h)(5)
related to certain small entities, the Bureau also has considered
the factors in CFPA section 1022(b)(2)(A) and (B). Other factors,
such as risks from the provision of the consumer financial product
or service, also are generally discussed throughout this part II.
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Second, and relatedly, for those nonbank entities that use covered
terms and conditions in offering consumer financial products or
services in markets supervised by the Bureau, the proposed registry can
facilitate a more efficient process for the Bureau to identify these
[[Page 6919]]
nonbank entities. In particular, a registration system that more
comprehensively and periodically collects identifying information about
many nonbank entities subject to the Bureau's supervisory authority
would facilitate the Bureau's nonbank supervision program at the most
basic level--identifying who the Bureau could examine. As discussed
below there is no comprehensive registry of identifying information for
nonbanks subject to the Bureau's supervisory authority across
supervised markets. Thus, the identifying information the proposal
would collect would, in turn, enhance the Bureau's prioritization
process discussed above.
The proposed registry would gather identifying information that
would be uniquely useful to the Bureau's supervision of nonbanks. For
most nonmortgage markets where the Bureau has supervisory authority,
existing registration systems do not necessarily identify all nonbanks
based on whether they are subject to Bureau supervisory authority.\155\
While some States and Indian Tribes require licensing of participants
in certain supervised markets, there is no comprehensive list of who
participates in these markets. The full scope of State and Tribal
licensing requirements across the States and Tribes is not co-extensive
with the scope of the Bureau's supervisory authority across these
markets, leaving geographic and market gaps where the Bureau supervises
but States or Tribes do not license. Moreover, even for institutions
that States or Tribes license, the data about them that States and
Tribes collect does not consistently establish whether they engage in
the specific activities, or volume of such activity, that would make
them subject to the Bureau's supervisory authority.\156\ As a result,
for purposes of identifying Bureau-supervised nonbanks, information on
providers licensed at the State and Tribal level is both overinclusive
(of entities the Bureau does not supervise, such as persons who are not
larger participants) and potentially underinclusive (not necessarily
covering all markets as defined in the statute in all States).
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\155\ For mortgage markets, there is considerably more
information available about who participates and may be subject to
the Bureau's supervisory authority, in light of registration and
licensing systems for mortgage originators under the SAFE Act
(discussed in more detail at https://files.consumerfinance.gov/f/201203_cfpb_update_SAFE_Act_Exam_Procedures.pdf), data submission
requirements of mortgage originators under the Home Mortgage
Disclosure Act (HMDA) in Regulation C at 12 CFR part 1003, and call
reports for mortgage servicers and others (described at https://mortgage.nationwidelicensingsystem.org/slr/common/mcr/Pages/default.aspx (last visited Dec. 5, 2022)).
\156\ For the international money transfer market, State
registration money services business licensing data often is aligned
with the Bureau's supervisory authority to facilitate the Bureau's
identification of larger participants.
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The Bureau currently may draw upon information about who is
licensed at the State and Tribal level to inform its assessment of who
may be subject to the Bureau's supervisory authority. However, as
described above, that information does not clearly or consistently
identify which entities are subject to the Bureau's supervisory
authority in many cases. As a result, in many cases, to determine
whether it can commence an examination, the Bureau must first collect
information directly from individual market participants about the
nature, and in the case of markets subject to larger participant rules,
the volume of certain consumer financial product and service offerings
or associated receipts. This activity can be resource- and time-
intensive and can lead to rescheduling of planned exams when the
information collected indicates entities are not subject to supervisory
authority. A registration system that more comprehensively collects and
periodically updates identifying information about many nonbank
entities subject to the Bureau's supervisory authority would facilitate
the Bureau's nonbank supervision program at the most basic level--
identifying who the Bureau could examine.
For that reason, the Bureau also considered proposing a registry
that would require registration of all supervised nonbank covered
persons, regardless of whether those persons use form contracts that
impose covered terms and conditions that pose risks to consumers.
However, the Bureau preliminarily has concluded that it is a higher
priority to require registration of supervised nonbank covered persons
that use covered terms and conditions contained in covered form
contracts. The proposed registry therefore has a fundamentally
different purpose from a universal registration system. This proposal
would focus on identifying the supervised nonbanks offering consumer
financial products and services that pose risks to consumers as
identified above, rather than identifying all supervised nonbanks
regardless of whether they present such risks. In this way, the
proposed registry is almost fully distinct from the type of licensing
and registration systems typically maintained by States and Tribes,
which, as discussed above, generally do not focus on collection of
covered terms and conditions contained in covered form contracts. As a
result, this approach is even less likely to lead to duplication with
State and Tribal licensing and registration systems. The Bureau
requests comment on this approach.
Third, the information collected can form a basis for the Bureau to
scope and conduct examinations of supervised nonbanks, enhancing its
ability to detect and address violations and risks of violations of
Federal consumer financial law or compliance management system
deficiencies.\157\ With respect to detecting and addressing violations,
if the Bureau scheduled an examination at an entity who had registered
its use of a covered term or condition that appeared to be prohibited
by Federal consumer financial law, the Bureau likely would incorporate
the use of this term or condition into the scope of an exam. More
broadly, if the entity registered other covered terms and conditions,
an examination could review and assess risks to consumers related to
how the entity established, used, and applied these terms or
conditions, including in the contracting process or in response to
consumer complaints. That review could inform examiners' conclusions
concerning the presence of a UDAAP, a risk of a UDAAP, or a compliance
management system concern. Examiners also could coordinate with other
regulators about their findings, especially if they implicate consumer
legal protections administered by the other regulators. In addition,
prior to an examination, examiners could consult the registry and
review any non-disparagement clause, which may inform how the examiners
scope and conduct a review of consumer complaints. In these and other
ways discussed in this proposal, by developing its examination scope
based on the information it collects on supervised registrants' use of
covered terms and conditions that pose risks to consumers, the Bureau's
risk-based nonbank supervision program would be able to better take
into consideration the ``risks to consumers created by the provisions''
of consumer financial products and services within the meaning of CFPA
section 1024(b)(2)(C).\158\
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\157\ See generally CFPB Bulletin 2021-01, ``Changes to Types of
Supervisory Communications'' (Mar. 31, 2021) (describing scope of
Bureau supervisory communications as including findings of
violations of laws the Bureau enforces, risks of violation, and
compliance management system concerns), https://files.consumerfinance.gov/f/documents/cfpb_bulletin_2021-01_changes-to-types-of-supervisory-communications_2021-03.pdf.
\158\ 12 U.S.C. 5514(b)(2)(C).
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[[Page 6920]]
Covered Terms and Conditions Are Prevalent in Markets Supervised by the
Bureau
As discussed below, enforcement and supervisory findings in markets
the Bureau supervises illustrate how covered terms and conditions used
by nonbanks pose risks to consumers. The proposed registry would
facilitate review and assessment of these types of risks more broadly
throughout the Bureau's non-bank supervision program, as discussed
above.
Mortgage Markets
While the TILA and Regulation Z provisions discussed at the outset
of part II.B.2 above may protect consumers against certain waivers and
limitations on private enforcement in the mortgage market, the Bureau
has routinely highlighted for the public examiner findings over the
past decade that some mortgage originators and servicers have been
engaging in acts and practices inconsistent with this prohibition and
that the examiners found constituted UDAAPs.\159\ In addition, even
before the June 1, 2013 effective date of this provision of Regulation
Z,\160\ examiners found that two mortgage servicers engaged in an
unfair practice in connection with the use of ``across-the-board
waivers of existing claims'' in a ``take it or leave it'' loss
mitigation agreements for forbearance or loan modification.\161\
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\159\ See, e.g., Supervisory Highlights (Fall 2022) at 2.6.2;
Supervisory Highlights (Summer 2021) at 2.6.3; Supervisory
Highlights (Summer 2017) at 2.6.2; Supervisory Highlights (Fall
2015) at 2.4.2; Supervisory Highlights (Summer 2015) at 2.4.5. See
also Lyons v. PNC Bank, N.A., 26 F.4th 180, 191 (4th Cir. 2022)
(holding that an arbitration agreement related to a mortgage
transaction was unenforceable in light of the restriction in TILA
discussed in part II.B.2 above).
\160\ 12 CFR 1026.36(h).
\161\ Supervisory Highlights (Winter 2013) at 2.1.2 (covering
results of supervision work completed between July and October
2013).
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In addition, the Bureau's supervisory authority over the mortgage
market extends to nonbanks that offer or provide ``loan modification or
foreclosure relief services'' in connection with residential
mortgages.\162\ Some nonbanks offering these products and services have
used terms and conditions that pose risks. For example, as noted
earlier, the FTC has taken action against a credit repair firm for its
use of non-disparagement clauses in violation of a Federal
statute.\163\ In addition, the Bureau is 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.\164\
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\162\ 12 U.S.C. 5514(a)(1)(A).
\163\ FTC v. Grand Teton Professionals, LLC, et al., Case No.
19cv933 (D. Conn) (Complaint filed June 17, 2019).
\164\ 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/ (last visited Dec. 8, 2022).
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Other Credit Markets (Payday Lending, Private Student Lending, and
Automobile Finance) \165\
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\165\ The Bureau supervises the automobile finance market
pursuant to its rule defining larger participants in that market.
See 12 U.S.C. 5514(a)(1)(B) & 5514(a)(2); 12 CFR 1090.108.
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The potential for significant prevalence in the use of contract
terms and conditions seeking to waive or limit applicable legal
protections in the automobile finance, private student lending, and
short-term small-dollar markets is supported by the following examples:
Automobile finance lender engaged in a deceptive act or
practice by using a contract term that created the impression consumers
could not exercise a right to file bankruptcy when in fact consumers
could file for bankruptcy in light of the public policy voiding waivers
of individual's right to file for bankruptcy.\166\
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\166\ In re Nissan Motor Acceptance Corporation, Admin. Proc.
2020-BCFP-0017 (Consent order filed Oct. 13, 2020), ] 46 et seq.,
https://files.consumerfinance.gov/f/documents/cfpb_nissan-motor-acceptance-corporation_consent-order_2020-10.pdf.
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Private student lenders and servicers enjoined from
enforcing borrower certifications in contracts entered into before
filing for bankruptcy on the ground that such prepetition waivers of
dischargeability in bankruptcy are unenforceable as against public
policy.\167\
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\167\ In re Homaidan v Sallie Mae, Inc. Navient Sol'n, LLC,
Navient Cred. Fin. Corp., 640 B.R. 810, 848 (E.D.N.Y. Bktcy. 2022).
See also In re Mazloom, 2022 WL 950932 at *5 (N.D.N.Y. Bktcy. 2022)
(``Courts are rightfully concerned that lenders would consistently
take advantage of unsophisticated or desperate debtors by including
pre-petition waivers of dischargeability in all loan agreements,
thus vitiating one of the core protections of the bankruptcy
process.''); Lichtenstein v. Barbanel, 161 F. Appx. 461, 467 (6th
Cir. 2005) (collecting earlier cases); Klingman v. Levinson, 831
F.2d 1292, 1296 n.3 (7th Cir. 1987) (``For public policy reasons, a
debtor may not contract away the right to a discharge in
bankruptcy.''), cited by In re Palmer, 2021 WL 1259258 at *10 (N.D.
Ohio Bktcy. 2021) (holding ``stipulation contained in the [student
loan] Credit Agreement's boilerplate language is legally
insufficient to determine nondischargeability in a later-filed
bankruptcy case'').
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Institutional private student lender violated the Holder
Rule where it failed to include the notice required under that rule,
and attempted to waive consumers' legal rights by including a contract
clause purporting to ``waive any claim or cause of action of any kind
whatsoever that they may have'' against the lender education
institution.\168\
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\168\ FTC v. Hum. Resc. Dev. Svcs., Inc., d/b/a Saint James
Schools of Medicine and HRDS et al., Case No. 22cv1919 (N.D. Ill.)
(Complaint filed Apr. 14, 2022), ]] 28, 43-48 (citing violation of
the Holder Rule); id. Stipulated Order dated Apr. 14, 2022)
(settlement of allegations).
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Short-term small-dollar lender allegedly used contract
term excluding lender liability for fees imposed by the borrower's bank
as a result of lender's payment practices.\169\
---------------------------------------------------------------------------
\169\ See, e.g., Klarna Pay Later in 4 Agreement (Oct. 26, 2022)
(provision labelled ``Fees Imposed By Your Financial Institution or
Card Issuer'' stating that lender ``do[es] not have any liability to
[consumer] for such fees''), https://cdn.klarna.com/1.0/shared/content/legal/terms/0/en_us/sliceitinx (last accessed Dec. 5, 2022).
Cf. Perks et al. v. Activehours, Inc. d/b/a Earnin, Case No.
19cv5543 (N.D. Cal. 2019) (Complaint filed Sept. 3, 2019), ] 52,
https://www.govinfo.gov/app/details/USCOURTS-cand-5_19-cv-05543/context. That matter resulted in a court order of final approval of
a class action settlement. Id., Order of Mar. 25, 2021, 2021 WL
1146038. In the Bureau's experience and expertise, payday lenders
may also be incentivized to use provisions like this, given the
potential their payment practices have to cause bank fees. See
generally CFPB v. ACE Cash Express, Case No. 22cv1494 (N.D. Tex.),
Complaint filed July 12, 2022, ]] 79-84 (citing unfair practice for
payment practices likely to result in bank fees).
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Short-term small-dollar lender allegedly frequently
enforced a forum selection clause to file debt collection lawsuits in a
State that was not where consumers resided or entered into the loan
agreement, leading to default judgments and their enforcement in
garnishment actions against consumers.\170\
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\170\ CFPB v. Freedom Stores, Inc., et al. (E.D. Va. Case no.
2:14cv643) (Complaint filed Dec. 18, 2014), ]] 50-59, 62-81
(alleging unfair and abusive acts and practices based on lender's
filing ``over 3,500 [collection] lawsuits in Norfolk, Virginia,
against consumers who lived in distant venues and who were not
physically present in Norfolk, Virginia, when they executed the
underlying financing contract; almost all of the lawsuits resulted
in a default judgment.''), https://files.consumerfinance.gov/f/201412_cfpb_complaint_freedom-stores_va-nc.pdf. The Bureau entered
into a 2015 settlement barring this company from filing distant-
forum actions and providing relief for affected consumers. See
https://files.consumerfinance.gov/f/201512_cfpb_stipulated-final-judgment-and-order-freedom-stores_va-nc.pdf.
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Short-term small-dollar lender's standard terms set an
unenforceable 30-day deadline for filing suit, attempting to shorten
four-year period set by State law.\171\
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\171\ Gandee v. LDL Freedom Enterprises, Inc., 293 P.3d 1197,
1201 (Wa. 2013).
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[[Page 6921]]
Short-term small dollar lender allegedly used term or
condition attempting to limit or waive consumers' right to cancel
preauthorized electronic funds transfers used to repay loan, despite
anti-waiver provision in EFTA section 914.\172\
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\172\ 15 U.S.C. 1693l. See, e.g., Cobb v. Monarch Finance Corp.,
913 F. Supp. 1164, 1179 (N.D. Ill. 1995) (rejecting motion to
dismiss claim that nonbank lender violated EFTA anti-waiver
provisions by using contract term purporting to waive right under
EFTA to stop payment of preauthorized electronic funds transfers);
Baldukas v. B&R Check Holders, Inc., 2012 WL 7681733 at *5 (D. Colo.
Oct. 2, 2012) (similar holding), adopted by 2013 WL 950847 (D. Colo.
Mar. 8, 2013). See also Jordan v. Freedom Nat'l, 2016 WL 5363752 (D.
Ariz. Sept. 26, 2016) (granting class certification for EFTA anti-
waiver claims involving payment authorizations requiring consumers
to agree that the payee ``will not be responsible for claims
relating to the debit or credit of my account'').
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The Bureau also previously studied and reported on the prevalence
of one type of contract term that limits enforcement of consumer rights
in these markets--arbitration agreements. For more than a decade now,
under U.S. Supreme Court precedent, the Federal Arbitration Act has
preempted State law prohibitions on enforcement of arbitration
agreements due to their containing a ``no class'' provision.\173\ As a
result, some supervised institutions have used arbitration agreements
to block collective legal action by consumers. When that occurs, there
is a risk that consumers may not receive relief for breach of consumer
legal protections unless they pursue actions individually. And if the
threat of individual action is lower, arbitration agreements also may
reduce deterrence and in turn compliance with these consumer legal
protections. This risk may be present across supervised markets.\174\
For example, in its 2015 Arbitration Study, the Bureau noted that
nearly 84% of storefront payday loan agreements representing nearly 99%
of storefronts sampled had arbitration clauses in their agreements in
2013 and 2014, with almost all of these agreements also limiting
availability of class proceedings.\175\ Similarly, over 85% of private
student loan contracts sampled by the Bureau included arbitration
clauses in 2014, with all of these limiting availability of class
proceedings.\176\ The 2015 Arbitration Study also found that, while
consumers sometimes can obtain relief in class actions concerning these
products,\177\ arbitration agreements also can be used to block those
efforts.\178\ Although the Bureau had issued a 2017 regulation to
prohibit limitations on class actions in arbitration agreements for
many types of consumer financial products and services,\179\ Congress
overturned that rule later that year.\180\ As a result, in the Bureau's
experience and expertise, arbitration agreements remain a common term
or condition in contracts for supervised consumer financial products or
services. Arbitration agreements also may specify the location for an
arbitration hearing \181\ and may include provisions setting deadlines
for filing of claims, raising a question of whether those deadlines are
shorter than the time frame specified in State statutes.\182\ Tracking
on an ongoing basis when these agreements are used, by whom, and
whether they are held to be enforceable, is important to the Bureau for
the assessment of potential risks to consumers from such limitations on
their ability to actually pursue and/or participate in legal action.
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\173\ Arbitration Study at 4 (citing AT&T Mobility LLC v.
Concepcion, 131 S. Ct. 1740 (2011)).
\174\ As noted in part II.B.2 above, Federal law (TILA)
restricts the use of arbitration agreements in the mortgage market.
But as discussed at the outset of this part II.C.2, the Bureau
routinely finds acts and practices inconsistent with the TILA
prohibitions and restrictions.
\175\ 2015 Arbitration Study sec. 2.3.4 & sec. 2.5.5 (describing
prevalence of class action-limiting terms).
\176\ Id. sec. 2.3.5 & sec. 2.5.5 (describing prevalence of
class action-limiting terms).
\177\ Id. sec. 8 Table 1 (number of Federal class action
settlements, by market, identified from cases filed from 2010 to
2012) & Table 8 (gross monetary relief to class members, by market).
\178\ Id. sec. 6.7.1 (motions to compel arbitration of putative
class litigation filed in Federal court and selected State courts
from 2010 through 2012 in payday loan, private student loan, and
automobile finance markets).
\179\ 82 FR 33210 (July 19, 2017).
\180\ 82 FR 55500 (Nov. 22, 2017) (discussing adoption of joint
resolution of Congress disapproving the 2017 rule, signed by the
President).
\181\ Arbitration Study sec. 2 at 56.
\182\ Id. sec. 2.5.7 (noting three storefront payday loan
agreements specified time limits for consumer claims).
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Consumer Reporting Market \183\
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\183\ The Bureau supervises the consumer reporting market
pursuant to its rule defining larger participants in that market.
See 12 U.S.C. 5514(a)(1)(B) & 5514(a)(2); 12 CFR 1090.104.
---------------------------------------------------------------------------
In the credit monitoring market, contract waivers and other
provisions may undermine the adequacy of the legal protections afforded
to consumers under the Fair Credit Reporting Act (FCRA). The Bureau's
Arbitration Study found that FCRA claims were the third most common
type of Federal statutory claim in Federal class action settlements
reviewed by the Bureau from selected cases filed from 2010 through
2012.\184\ Moreover, class settlements of Federal class actions related
to consumer reporting filed between 2010 and 2012 provided over $750
million in relief to consumers.\185\ More recently, as discussed below,
case law indicates that consumer reporting agencies may use arbitration
agreements to block potential availability of this type of relief in
this market.
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\184\ Arbitration Study sec. 8.3.1 Figure 1.
\185\ Id. sec. 8.3.3 Table 8.
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For example, the Bureau has learned that some credit monitoring
products that some consumer reporting agencies market by representing
that they help consumers detect and fix inaccuracies in their consumer
reports may undermine FCRA protections. For example, in one case, after
consumers engaged the service, the consumer reporting agency used the
terms of that service against the consumer to block a putative class
action lawsuit. The consumer reporting agency used an arbitration
agreement in the credit monitoring contract to block consumers' legal
action seeking to remedy alleged failure to reasonably investigate
inaccurate information on consumer reports in violations of the
FCRA.\186\ This outcome illustrates how consumer reporting agencies
could use arbitration agreements to limit collective legal action
seeking to remedy pre-existing inaccuracies in a consumer's credit
report. This outcome also may indicate a broader trend: through its
market monitoring activity, the Bureau also has seen several examples
of national consumer reporting agencies imposing arbitration agreements
when consumers use their online interface to obtain copies of their
credit report or their credit score, to file a dispute, or to place a
security freeze. The Bureau has a need, through its nonbank supervision
program and market monitoring more broadly, to assess the potential
magnitude of these risks across the consumer reporting market.
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\186\ See, e.g., Coulter v. Experian Info. Sols., Inc., Case No.
20-cv-1814 (E.D. Pa.) (Order Feb. 25, 2021), 2021 WL 735726.
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Consumer Debt Collection Market \187\
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\187\ The Bureau supervises the consumer debt collection market
pursuant to its rule defining larger participants in that market.
See 12 U.S.C. 5514(a)(1)(B) & 5514(a)(2); 12 CFR 1090.105.
---------------------------------------------------------------------------
Waivers and other limitations often found in the terms and
conditions of a form contract can put consumers at risk during the debt
collection process. For example, although debt collectors typically do
not enter into arbitration agreements directly with consumers,
nevertheless, they may attempt to use these and other limitations in
the terms and conditions of the underlying consumer contract
establishing the debt
[[Page 6922]]
to block class actions.\188\ When used in this manner, any valid claims
that would have been asserted only on a class basis are suppressed.
Such potential for claim suppression may pose risks to consumers.
Indeed, the collective action mechanism can generate relief in this
market, as the Bureau's Arbitration Study found that Fair Debt
Collection Practices Act (FDCPA) claims were by far the most common
type of claim in Federal class action settlements the Bureau analyzed
from cases filed between 2010 and 2012.\189\ And these settlements
provided over $95 million in monetary relief to consumers.\190\
---------------------------------------------------------------------------
\188\ Arbitration Study sec. 6 at n.94 (describing examples).
\189\ Id. sec. 8.3.1 Figure 1.
\190\ Id. sec. 8.3.3 Table 3.
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In addition, as discussed above, when setting up recurring payments
or payment plans on loans, creditors or their collectors may use
contract terms that attempt to limit or waive consumers' rights to
cancel these payments, including in circumstances that violate the
anti-waiver provision in EFTA section 914.\191\
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\191\ 15 U.S.C. 1693l. See, e.g., Cobb v. Monarch Finance Corp.,
913 F. Supp. 1164, 1179 (N.D. Ill. 1995) (rejecting motion to
dismiss claim that nonbank lender violated EFTA anti-waiver
provisions by using contract term purporting to waive right under
EFTA to stop payment of preauthorized electronic funds transfers);
Baldukas, 2012 WL 7681733 at *5 (D. Colo. Oct. 2, 2012) (similar
holding), adopted by 2013 WL 950847 (D. Colo. Mar. 8, 2013). See
also Jordan v. Freedom Nat'l, 2016 WL 5363752 (D. Ariz. Sept. 26,
2016) (granting class certification for EFTA anti-waiver claims
involving payment authorizations requiring consumers to agree that
the payee ``will not be responsible for claims relating to the debit
or credit of my account'').
---------------------------------------------------------------------------
Debt collectors also may seek to rely on other covered terms and
conditions used by creditors. For example, debt collectors may seek to
rely on contract terms in creditor contracts that seek to waive the
right of consumers to revoke consent to receive autodialed calls under
the Telephone Consumer Protection Act and its implementing
regulations.\192\ In the Bureau's experience and expertise, including
based on findings in recent examination activity, waivers of that
consumer right to revoke consent--an applicable legal protection
administered by the Federal Communications Commission (FCC)--may make
it challenging for consumers to exercise applicable legal protections
under other statutes the Bureau administers to stop unwanted or even
harassing or unlawful debt collection calls. The FCC has determined
that consumers' right to revoke this consent cannot be waived.\193\ But
some courts have not embraced that position.\194\ Creditor contract
terms that waive any such right to revoke consent to so-called
robocalls pose potential risk to consumers in debt collection markets.
Similarly, to the extent that debt collectors contract directly with
consumers, debt collectors also might attempt to directly deploy
contract terms that seek to waive or otherwise limit consumer rights
under the FDCPA and its implementing regulations \195\ to stop
collections communications or to specify inconvenient times, places, or
media for collections communications.\196\
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\192\ Under the TCPA, according to the FCC, such consent when
given to a creditor in connection with an existing debt may also
extend to the debt collector. Implementing the Telephone Consumer
Protection Act of 1991, Request of ACA Int'l for Clarification and
Declaratory Ruling, 23 FCC Rcd 559, 563-65 (Feb. 1, 2008).
\193\ In re Rules & Regulations Implementing the Tel. Consumer
Prot. Act of 1991, 30 FCC. Rcd. 7961, 7994-7999 (2015); ACA
International v. FCC, No. 15-1211 (D.C. Cir. 2018). See also
Ginwright v. Exeter Finance Corp., 280 F.Supp.3d 674, 683-84 (D. Md.
2017) (holding that a standard contractual term in an automobile
finance agreement prohibiting the consumer from revoking consent to
be called would violate FCC ruling that a consumer has a right of
revocation); Jara v. GC Servs. LP, 2018 WL 2276635 at *5 (C.D. Cal.
May 17, 2018) (same, in private legal action by consumer against a
debt collector).
\194\ Reyes v. Lincoln Automotive Fin. Svs., 16-2104-cv, 2017 WL
2675363 (2d Cir. June 22, 2017); Medley v. Dish Network, LLC, No.
18-13841 (11th Cir. 2020). See also Harris v. Navient Sols., LLC,
2018 WL 3748155 (D. Conn. Aug. 7, 2018) (applying Reyes to private
legal action by consumer against student loan servicer).
\195\ See Bureau's Regulation F at 12 CFR part 1006.
\196\ Cf. Clark v. Capital Credit & Collection Services, Inc.,
460 F.3d 1162, 1170 (9th Cir. 2006) (applying heightened standard of
voluntariness but finding that consumer's initiation of contact with
a debt collector constituted a limited waiver of the consumer's
cease communications request under the FDCPA).
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As also discussed above, under FTC rules, in consumer credit and
collection markets, consumers have important rights to limit the types
of assets that can be seized or garnished to enforce a court order to
pay a debt. As noted above, terms and conditions may directly flout
those rules and the rules may not be comprehensive enough to prevent
contract terms that waive or undermine these rights. For example, the
Bureau recently found that a very large depository institution sought
to limit its liability to consumers for failing to follow these
laws.\197\ Garnishor creditors or their debt collectors may seek to
utilize similar contract terms and conditions.
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\197\ In re Bank of America, N.A., Admin. Proc. 2022-CFPB-0002
(Consent Order filed May 4, 2022), ] 49 et seq. (citing deposit
agreement provision stating that bank has ``no liability to'' the
consumer if it follows the provisions of the contract), https://files.consumerfinance.gov/f/documents/cfpb_bank-of-america_consent-order_2022-05.pdf.
---------------------------------------------------------------------------
Further, the Bureau notes that the FDCPA prohibits debt collectors
from bringing legal actions in certain inconvenient venues, generally
requiring that debt collectors only file suit where the consumer
resides or entered into the contract, or in the case of real property,
where the real property is located.\198\ Forum selection clauses in
terms or conditions may suggest otherwise. For example, similar to the
case involving a short-term small-dollar lender described above, a debt
collector could seek to use such a clause as a basis for filing actions
in venues not permitted under the FDCPA.
---------------------------------------------------------------------------
\198\ 15 U.S.C. 1692i(a).
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Finally, some larger participant debt collectors the Bureau
supervises also collect medical debt. Collection of amounts subject to
waiver, arbitration agreements, or both can pose risks to consumers in
the medical debt context. For example, the Department of Health and
Human Services (HHS) recently finalized rules implementing the No
Surprises Act. Under these implementing regulations, when an insured
consumer seeks non-emergency treatment at a hospital, the hospital may
use a contract that includes a waiver of the consumer's new Federal law
protections against surprise bills. The regulations require that these
waivers must meet certain standards, including that they are ``provided
voluntarily, meaning the individual is able to consent freely, without
undue influence, fraud, or duress . . . .'' \199\ HHS estimated that
hospitals may deploy these contract waivers nearly 2.5 million times
each year.\200\ Debt collectors may attempt to collect amounts
hospitals charge on the basis of such waivers. Depending on the
circumstances of the waiver, this may raise risks to consumers
including under applicable legal protections such as the FDCPA and the
FCRA.\201\ If a consumer contests such an amount in a legal action, a
debt collector could seek to enforce the underlying waiver to block
such a claim. If a consumer asserts the waiver is invalid, that may
raise questions of whether the Holder Rule, described above, applies to
ensure the consumer may assert that defense. Or
[[Page 6923]]
the debt collector could seek to enforce an arbitration agreement the
hospital may enter into with the consumer. In addition, in a different
medical debt context, debt collectors could seek to enforce arbitration
agreements in long-term care facility admission contracts. If a debt
collector uses an arbitration agreement in that context, its use may
raise a question about whether the consumer was given a choice to
accept the arbitration agreement as is required by HHS regulations and
whether the arbitration agreement complies with other requirements in
the HHS regulations.\202\
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\199\ 45 CFR 149.420(c)(2)(i).
\200\ HHS Supporting Statement--Part A, Requirements Related to
Surprise Billing: Qualifying Payment Amount, Notice, and Consent,
Disclosure on Patient Protections Against Balance Billing, and State
Law Opt-in (CMS-10780/OMB control number: 0938-1401) at 16.
\201\ See CFPB Bulletin 2022-01, ``Medical Debt Collection and
Consumer Reporting Requirements in Connection with the No Surprises
Act,'' 87 FR 3025 (Jan. 20, 2022).
\202\ See 42 CFR 483.70(n)(2).
---------------------------------------------------------------------------
Student Loan Servicing Market \203\
---------------------------------------------------------------------------
\203\ The Bureau supervises the student loan servicing market
pursuant to its rule defining larger participants in that market.
See 12 U.S.C. 5514(a)(1)(B) & 5514(a)(2); 12 CFR 1090.106.
---------------------------------------------------------------------------
As in the consumer debt collection market discussed above, student
loan servicers may attempt to rely on waivers or other covered terms
and conditions in creditor contract clauses to defend against legal
actions by consumers. Examples of waivers that may pose risks to
consumers include terms and conditions attempting to waive
dischargeability of loans prior to the filing of a bankruptcy petition.
In addition, depending on the facts and circumstances and applicable
law, student loan servicers may use creditor contracts to compel
arbitration of claims consumers file in court.\204\ As noted above,
while class actions can provide relief to student loan borrowers,
arbitration agreements in private student loan contracts can be used to
block that relief. Further, as with creditors and their debt collectors
discussed above, loan servicers also could attempt to use terms and
conditions for payment authorizations that attempt to limit or waive
consumers' rights to cancel these payments--including in circumstances
that may violate the anti-waiver provision in EFTA section 914.
---------------------------------------------------------------------------
\204\ See, e.g., Howard v. Navient Solutions, LLC, 2018 WL
5112634 at *4 (W.D. Wa. 2018) (granting student loan servicer's
motion to compel arbitration of consumer's claims based on
arbitration provision in original promissory note).
---------------------------------------------------------------------------
Remittance Market \205\
---------------------------------------------------------------------------
\205\ The Bureau supervises the remittance market (International
Money Transfer Market) pursuant to its rule defining larger
participants in that market. See 12 U.S.C. 5514(a)(1)(B) &
5514(a)(2); 12 CFR 1090.107.
---------------------------------------------------------------------------
Remittance transfer service agreements may contain rights waivers
that are prohibited by statute. The Bureau recently resolved an
enforcement action for violations of EFTA's anti-waiver provision by a
remittance provider.\206\ In addition, the Bureau recently reported
that examiners found multiple instances of such violations in
remittance transfer service agreements with consumers in direct
violation of the law. Specifically, examiners found terms and
conditions that expressly limited consumer rights under EFTA section
916 to bring legal action against the institution and to recover costs
and attorney's fees.\207\
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\206\ In re Choice Money Transfer, Inc., Admin. Proc. 2022-CFPB-
0009 (Oct. 4, 2022), ]] 79-83 (consent order citing a waiver of
liability that was inconsistent than rights conferred by regulations
implementing EFTA).
\207\ See Supervisory Highlights (Spring 2022) at sec. 2.8.2.
---------------------------------------------------------------------------
In addition, with respect to arbitration agreements and waivers of
collective legal action, the Bureau's Arbitration Study noted an
example of $5.5 million in monetary relief in a Federal class action
settlement in the remittances market.\208\
---------------------------------------------------------------------------
\208\ Arbitration Study sec. 8 at 25.
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3. Making Information Collected in the Registry Publicly Available
Would Serve the Public Interest
The public transparency provisions in proposed Sec. 1092.303,
described in the section-by-section analysis in part V below, also
accomplish core elements of the Bureau's mission.
Congress anticipated that the insights the Bureau would gain from
mandatory market monitoring should at times become available to a wider
audience than just Bureau employees. Not only did Congress mandate that
the Bureau ``publish not fewer than 1 report of significant findings of
its monitoring . . . in each calendar year,'' but it also instructed
that the Bureau may make non-confidential information available to the
public ``as is in the public interest.'' \209\ Congress gave the Bureau
discretion to determine the format of publication, authorizing the
Bureau to make the information available ``through aggregated reports
or other appropriate formats designed to protect confidential
information in accordance with [specified protections in this
section].'' \210\ These instructions regarding public release of market
monitoring information align with one of the Bureau's ``primary
functions'' mentioned above--to ``publish[ ] information relevant to
the functioning of markets for consumer financial products and services
to identify risks to consumers and the proper functioning of such
markets.'' \211\ CFPA section 1022(c)(7)(B) similarly contemplates that
publishing registry information for this purpose can be beneficial to
consumers, authorizing the Bureau to ``publicly disclose registration
information to facilitate the ability of consumers to identify covered
persons that are registered with the Bureau.'' \212\
---------------------------------------------------------------------------
\209\ 12 U.S.C. 5512(c)(3).
\210\ 12 U.S.C. 5512(c)(3)(B).
\211\ 12 U.S.C. 5511(c)(3).
\212\ 12 U.S.C. 5512(c)(7)(B).
---------------------------------------------------------------------------
The Bureau believes that publication of registration information is
in the public interest for a variety of reasons as discussed below and
in the section-by-section analysis of proposed Sec. 1092.303.
Other regulators would be able to quickly access the centralized,
publicly-accessible database, facilitating their efficient
prioritization of oversight of supervised nonbanks that, in their
judgment, use particularly risky covered terms and conditions. These
regulators could associate the data the Bureau publishes with other
information they have about supervised nonbanks, providing a better
picture of their practices. This oversight would be particularly
valuable when the covered terms and conditions limit private
enforcement or exercise of rights. Some regulators also may identify
published covered terms and conditions explicitly prohibited by laws
they enforce or supervise, including some of the laws discussed in part
II.B above and similar laws. This information may spur action by those
regulators to enjoin or otherwise stop further use of those covered
terms and conditions. However, as discussed in part VII.E below, the
registry already would disincentivize use of expressly prohibited
covered terms and conditions. Thus, it is uncertain how prevalent use
of expressly prohibited covered terms and conditions would be in the
registry.
More broadly, use of form contracts and covered terms and
conditions have long been topics of public debate in consumer finance
markets and beyond, informing adoption of the legal protections
applicable to consumer financial products and services offered in
markets supervised by the Bureau discussed in part II.B and the broader
public policy they reflect. The registry would provide reliable,
comprehensive, and periodically updated data about this matter of
significant public import. For example, regulators, legislatures,
courts, the legal profession, researchers, universities, and other non-
governmental organizations, the press, and the general public would be
able to use data from the registry to monitor trends and to identify
high-risk areas affecting consumers in markets for consumer financial
products and services. Indeed, as described above,
[[Page 6924]]
some statutory consumer legal protections either specifically
contemplate waivers or are silent on the topic. A registry of waivers
could highlight legal protections that are at risk of being undermined.
Currently, there appears to be no similar database of covered terms
and conditions available to the public with widespread coverage of one
or more markets for consumer financial products and services. The
public appears to have access to only limited data, such as form
contracts used by certain private student lenders registered in the few
States that collect and publish the entire form contract, form
contracts for first-lien mortgages on site-bult homes insured,
guaranteed, or eligible for purchase in Federal mortgage programs, and
to some degree, form contracts marketed by form providers for
automobile finance transactions. As a result, a comprehensive,
periodically-updated database focused on the use of covered terms and
conditions would substantially inform that debate and more fully ground
it in data.\213\
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\213\ The Bureau's recent proposal to register orders also, in
conjunction with data gathered under this proposal, can help the
public to understand when contract terms and conditions limiting
private action are associated with conduct that leads to public
orders. See Nonbank Registration--Orders Proposal.
---------------------------------------------------------------------------
Other benefits exist as well. For example, other regulators,
researchers, consumer advocacy organizations, the press, and others
could review this information and, where it indicates a concern,
potentially educate consumers about identifying and managing these
risks. Those activities could complement the Bureau's consumer
education functions. Based on information gleaned from trends in the
information collected, researchers, non-governmental organizations, and
other regulators could provide timely and well-informed consumer
education materials. And companies that do not include covered terms or
conditions in their contracts may consider using their absence from
being required to register and other information in the registry from
competitors to market their consumer financial products or services as
potentially less risky to consumers.
Similarly, publication of registration information would facilitate
the ability of consumers to identify supervised nonbank covered persons
that are registered with the Bureau. CFPA section 1022(c)(7)(B)
contemplates that publishing registry information for this purpose can
be beneficial to consumers.\214\ Publishing registration information
identifying the supervised nonbanks that use covered terms and
conditions could help consumers when disputes or problems arise. When a
consumer has a dispute with a supervised registrant giving rise to a
potential legal claim, the consumer or their representative could
quickly check the Bureau's website to see if the supervised registrant
was identified as using covered terms or conditions for that type of
consumer financial product or service.\215\ Reviewing information in a
published registry would not be a substitute for reviewing the covered
form contract. But the registry can be a resource that may be easier
for consumers to perform an initial check quickly, before obtaining and
reviewing their entire contract. It also may identify additional
covered terms or conditions that may affect to the consumer's account
or transaction.
---------------------------------------------------------------------------
\214\ 12 U.S.C. 5512(c)(7)(B).
\215\ This information could indicate whether the consumer's
covered terms and conditions were typical of those offered to other
consumers. But the consumer's form contract itself (which a
consumer's representative may already have) typically would be used
with many consumers by its very nature. And arbitration agreements
generally do not allow class actions, as discussed elsewhere in this
part II. Thus, for these and other reasons discussed in part VII.E,
a significant increase in class action litigation as a result of the
proposal is unlikely. Indeed, a chief purpose of the proposal is to
increase public oversight of covered terms and conditions precisely
because of the limitations covered terms and conditions impose on
private enforcement.
---------------------------------------------------------------------------
All of the above groups and the rest of the general public also
would have access to identifying information collected on the nonbank
itself, affording a better understanding of which specific nonbanks are
subject to supervision and examination by the Bureau.
Finally, publication would formally align the proposed nonbank
registration system with the Federal government's emphasis on making
government data available to and usable by the public, by default, to
the greatest extent possible.\216\
---------------------------------------------------------------------------
\216\ See, e.g., Open, Public, Electronic and Necessary
Government Data Act, in title II of Public Law 115-435 (Jan. 14,
2019); Office of Management & Budget, M-19-18, ``Federal Data
Strategy--A Framework for Consistency'' (June 4, 2019), https://www.whitehouse.gov/wp-content/uploads/2019/06/M-19-18.pdf (last
visited Dec. 7, 2022).
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D. Other Alternatives Considered
As explained in part II.C and in the section-by-section analysis in
part V, the Bureau has considered a number of alternatives to the scope
of the rule and the coverage of particular provisions. In addition to
those alternatives, the Bureau has considered several other
alternatives.
The Bureau considered proposing that supervised nonbanks submit
their covered form contracts, instead of providing information about
them. That alternative might reduce burdens on some registrants, who
would not have to review their contracts in order to provide
standardized data. However, that type of registry would result in a
much greater volume of information collected and published. As
discussed in this part II above, the Bureau is concerned that terms and
conditions waiving or limiting enforcement of consumer legal
protections may not receive adequate attention by consumers or the
public. Publication of additional information unrelated to those types
of terms could reduce the attention to those type of terms in the
registry. At the same time, the Bureau also lacks the resources to
engage in an annual review of the full text of all of the standard
contracts of every nonbank subject to its supervisory authority. In
particular, the Bureau lacks the resources to extract from such
standard contracts the standardized data on the clauses of concern
described in the proposal. Therefore, collecting this data from the
supervised registrants themselves would establish a registration system
that is more effective.
The Bureau also has considered alternative means of collecting
information relating to use of covered terms and conditions, including
requesting the information on an ad hoc basis from supervised entities,
whether during examinations or through an order pursuant to CFPA
section 1022(c)(4)(B)(ii). However, these alternatives generally would
be infeasible for accomplishing the goals of the proposed rule. As
discussed in the impacts analysis in part VII, there are thousands of
nonbanks subject to the Bureau's supervisory authority. By contrast,
the Bureau's supervision program historically has been designed to
conduct slightly more than 100 on-site examinations per year, and less
than 1,000 overall exam events per year.\217\ In addition, as discussed
in this part II above, existing systems do not generate a comprehensive
list of persons the Bureau may supervise.\218\ In addition,
[[Page 6925]]
an important purpose of the proposal is to facilitate an assessment of
the adequacy of applicable legal protections for consumers whose
contracts contain covered terms and conditions. These legal protections
are not ad hoc or time-limited. Furthermore, the Bureau's need to
consider their adequacy as part of its monitoring and supervisory work
is similarly ongoing, and so is best served by a system that collects
information on a recurring basis. In addition, these alternatives would
not be as effective at informing the Bureau's ongoing prioritization of
its supervisory resources for examining nonbank covered persons.
Nonbank covered persons' use of covered terms and conditions may change
over time, as business structures, product offerings, and markets
evolve. In the Bureau's experience and expertise, supervised
registrants frequently make changes in terms and conditions in their
form contracts, including to alter or add covered terms or conditions.
Doing a one-time collection or performing point-in-time collections
would be less useful to the Bureau's continuous prioritization. And for
the same reasons, it would be less useful to the public as well.
---------------------------------------------------------------------------
\217\ See CFPB Annual Performance Plan and Report FY 2022 at
Table 2.2.1.1 (on-site exams) & Table 2.2.1.2 (all supervisory
events with significant activity), https://files.consumerfinance.gov/f/documents/cfpb_performance-plan-and-report_fy22.pdf.
\218\ For markets where the Bureau has information about many of
the participants, the Bureau also has considered the alternative of
issuing orders on a recurring basis, which might approximate an
annual collection. However, a general plan for such orders, even if
recurring, would not establish a rule that creates predictability,
reliability, and certainty that a rule provides. For example, the
proposed rule would require nonbanks to collect the relevant
information. Absent that requirement in regulation, supervised
nonbanks could find responding to an order more burdensome.
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Further, the Bureau has considered the alternative of not
specifying in the rule whether information collected would be publicly
released. After all, the Bureau has authority to publicly release
information under CFPA section 1022(c)(3) without first promulgating a
rulemaking. In addition, the information collection under proposed
Sec. 1092.302 would enable the Bureau to monitor for risks to
consumers and to prioritize its resources based on risk indicators,
even without publication of the information as described in proposed
Sec. 1092.303. Thus, the information collection requirements in
proposed Sec. 1092.302 can operate independently of the publication
requirements in proposed Sec. 1092.303.
However, the Bureau is proposing to specify expectations about
public release in the rule. Without specifying these expectations, the
rule itself would lack transparency, and submitters of information, and
the public (consumers, competitors, and researchers, among others)
would be less certain about how the Bureau will use and disclose the
information. In addition, by including in the proposed regulation its
plans to disclose the data, the Bureau will gain the benefit of public
comment on those plans in the rulemaking process, including comment on
the degree to which the submitters of collected information may keep
that information confidential (a topic on which the Bureau requests
comment in the section-by-section analysis of proposed Sec. 1092.303
below). In any event, the Bureau requests comment on whether there is
an important reason for nondisclosure of the information collected when
disclosure otherwise would be permitted by law.
Finally, this proposal reflects a priority on establishing a system
by rule for the collection of information on the use of covered terms
and conditions from supervised nonbanks as a subset of covered persons.
One of the reasons for prioritizing coverage of supervised nonbanks is
the need to identify them, as discussed in this part II.C.2 above. As
discussed in the impacts analysis in part VII of the proposal, the
Bureau estimates that there are thousands of nonbanks subject to its
supervisory authority under CFPA section 1024(a). In addition, there is
no comprehensive registry of identifying information for nonbanks
subject to the Bureau's supervisory authority across supervised
markets. Further, given resource constraints, the Bureau does not
regularly examine each of the thousands of nonbanks subject to its
supervisory authority under CFPA section 1024. Rather, under CFPA
section 1024(b)(2), the Bureau must implement a risk-based program for
supervision of these nonbanks. By contrast, Federal prudential
regulators track and already publicize information about the identity
and size of depository institutions.\219\ These include depository
institutions subject to the Bureau's supervisory authorities under CFPA
sections 1025 and 1026. The Bureau also publicly identifies the fewer
than 200 large depository institutions subject to its supervisory
authority under CFPA section 1025, and it has procedures for regularly
supervising them.\220\ In light of all these considerations, the Bureau
is prioritizing this proposal to establish a registration system for
identifying those nonbanks that use covered terms or conditions and
monitoring and assessing the associated risks to consumers as discussed
in this part II above.\221\ This proposal does not affect how the
Bureau can apply its functions for monitoring and assessing risks posed
by covered terms and conditions used by depository institutions and
credit unions subject to its authority under CFPA sections 1022, 1025,
and 1026.
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\219\ See, e.g., FDIC Bank Find Suite, https://banks.data.fdic.gov/bankfind-suite/bankfind; Federal Financial
Institutions Examinations Council National Information Center,
https://www.ffiec.gov/NPW; OCC Financial Institutions Lists, https://www.occ.treas.gov/topics/charters-and-licensing/financial-institution-lists/index-financial-institution-lists.html; Credit
Union Locator, https://mapping.ncua.gov/.
\220\ See CFPB, List of Depository Institutions and Depository
Affiliates under CFPB Supervision, https://www.consumerfinance.gov/compliance/supervision-examinations/institutions/; CFPB Supervision
and Examination Manual, Overview at 5 (describing Bureau's approach
to setting regular examination schedules for large depository
institutions), https://files.consumerfinance.gov/f/documents/cfpb_supervision-and-examination-manual_2022-09.pdf.
\221\ In prioritizing this proposal, the Bureau also has
considered other factors, including the following: The Bureau's
existing regulations already require depository institutions to
submit to the Bureau information about their agreements in certain
markets, such as credit cards and prepaid accounts. The Bureau makes
these agreements publicly available at https://www.consumerfinance.gov/credit-cards/agreements/ and https://www.consumerfinance.gov/data-research/prepaid-accounts/. In
addition, CFPA sections 1022 and 1024 do not expressly authorize the
Bureau to establish a registration system for depository
institutions, which are excluded from the Bureau's registration
authority under section 1022(c)(7)(A) and excluded from the scope of
section 1024(b)(7). There is no parallel registration provision in
the Bureau's authorities over depository institutions generally.
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III. Outreach
The Bureau received feedback from external stakeholders in
developing this proposal. The following is a brief summary of that
effort.
A. State Agencies and Tribal Governments
As required by CFPA sections 1022(c)(7) and 1024(b)(7),\222\ the
Bureau consulted with State agencies and Tribal governments, including
agencies involved in supervision of nonbanks and agencies charged with
law enforcement, in crafting the proposed registration requirements and
system.\223\ In developing this proposal, the Bureau considered the
input it received from State agencies and Tribal governments. This
input included concerns State agencies expressed regarding possible
duplication between any registration system the Bureau might build and
existing registration systems. This input also included concerns Tribal
governments expressed regarding maintaining Tribal sovereignty.
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\222\ 12 U.S.C. 5512(c)(7)(C); 12 U.S.C. 5514(b)(7)(D).
\223\ During the rulemaking process for issuing rules under the
Federal consumer financial laws, Bureau policy is to consult with
appropriate Tribal governments. See https://files.consumerfinance.gov/f/201304_cfpb_consultations.pdf.
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B. Federal Regulators
Before proposing a rule under the Federal consumer financial laws,
including CFPA sections 1022(c) and 1024(b), the Bureau must consult
with
[[Page 6926]]
appropriate prudential regulators or other Federal agencies regarding
consistency with prudential, market, or systemic objectives
administered by such agencies.\224\ In developing this proposal, the
Bureau consulted with prudential regulators and other Federal agencies
and considered the input it received.
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\224\ 12 U.S.C. 5512(b)(2)(B).
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IV. Legal Authority
The Bureau is issuing this proposal pursuant to its authority under
the CFPA.\225\
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\225\ Consumer Financial Protection Act of 2010, title X of the
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-
Frank Act), Public Law, 111-203, 124 Stat. 376 (2010).
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A. CFPA Sections 1022(b) and (c)
CFPA section 1022(b)(1) authorizes the Bureau to prescribe rules
``as may be necessary or appropriate to enable the Bureau to administer
and carry out the purposes and objectives of the Federal consumer
financial laws, and to prevent evasions thereof.'' \226\ Among other
statutes, the CFPA--i.e., title X of the Dodd-Frank Wall Street Reform
and Consumer Protection Act (Dodd-Frank Act)--is a Federal consumer
financial law.\227\ Accordingly, in issuing the proposed rule, the
Bureau would be exercising its authority under CFPA section 1022(b) to
prescribe rules that carry out the purposes and objectives of the CFPA
and prevent evasions thereof. CFPA section 1022(b)(2) prescribes
certain standards for rulemaking that the Bureau must follow in
exercising its authority under section 1022(b)(1).\228\ For a
discussion of the Bureau's standards for rulemaking under CFPA section
1022(b)(2), see part VII below.
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\226\ 12 U.S.C. 5512(b)(1).
\227\ 12 U.S.C. 5481(14) (defining ``Federal consumer financial
law'' to include the provisions of title X of the Dodd-Frank Act).
\228\ 12 U.S.C. 5512(b)(2).
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CFPA sections 1022(c)(1)-(4) authorize the CFPB to prescribe rules
to collect information from covered persons for purposes of monitoring
for risks to consumers in the offering or provision of consumer
financial products or services. More specifically, CFPA section
1022(c)(1) requires the Bureau to support its rulemaking and other
functions by monitoring for risks to consumers in the offering or
provision of consumer financial products or services, including
developments in the markets for such products or services.\229\ CFPA
section 1022(c)(2) authorizes the Bureau authorizes the Bureau to
allocate resources to perform monitoring required by section 1022(c)(1)
by considering ``likely risks and costs to consumers associated with
buying or using a type of consumer financial product or service,''
``understanding by consumers of the risks of a type of consumer
financial product or service,'' ``the legal protections applicable to
the offering or provision of a consumer financial product or service,
including the extent to which the law is likely to adequately protect
consumers,'' ``rates of growth in the offering or provision of a
consumer financial product or service,'' ``the extent, if any, to which
the risks of a consumer financial product or service may
disproportionately affect traditionally underserved consumers,'' and
``the types, number, and other pertinent characteristics of covered
persons that offer or provide the consumer financial product or
service.'' \230\ CFPA section 1022(c)(4)(A) authorizes the Bureau to
conduct monitoring required by section 1022(c)(1) by ``gather[ing]
information from time to time regarding the organization, business
conduct, markets, and activities of covered persons and service
providers.\231\ The Bureau is authorized to gather this information by,
among other things, requiring covered persons participating in markets
for consumer financial products and services to file annual or special
reports, or answers in writing to specific questions, that furnish
information ``as necessary for the Bureau to fulfill the monitoring . .
. responsibilities imposed by Congress.'' \232\ The Bureau may require
such reports to be filed ``in such form and within such reasonable
period of time as the Bureau may prescribe by rule or order. . . .''
\233\
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\229\ 12 U.S.C. 5512(c)(1).
\230\ 12 U.S.C. 5512(c)(2)(A)-(F).
\231\ 12 U.S.C. 5512(c)(4)(A).
\232\ 12 U.S.C. 5512(c)(4)(B)(ii) (``In order to gather
information described in subparagraph (A), the Bureau may . . .
require covered persons and service providers participating in
consumer financial services markets to file with the Bureau, under
oath or otherwise, in such form and within such reasonable period of
time as the Bureau may prescribe by rule or order, annual or special
reports, or answers in writing to specific questions, furnishing
information described in paragraph (4), as necessary for the Bureau
to fulfill the monitoring, assessment, and reporting
responsibilities imposed by Congress.'').
\233\ Id.
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CFPA section 1022(c)(7)(A) further authorizes the Bureau to
``prescribe rules regarding registration requirements applicable to a
covered person, other than an insured depository institution, insured
credit union, or related person.'' \234\ Section 1022(c)(7)(B) provides
that, ``[s]ubject to rules prescribed by the Bureau, the Bureau may
publicly disclose registration information to facilitate the ability of
consumers to identify covered persons that are registered with the
Bureau.'' \235\ The Bureau interprets section 1022(c)(7)(B) as
authorizing it to publish registration information required by Bureau
rule under section 1022(c)(7)(A) so that consumers may identify the
nonbank covered persons on which the Bureau has imposed registration
requirements.
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\234\ 12 U.S.C. 5512(c)(7)(A).
\235\ 12 U.S.C. 5512(c)(7)(B).
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Finally, section 1022(c)(3) authorizes the Bureau to publicly
release information obtained pursuant to CFPA section 1022(c), subject
to limitations specified therein.\236\ Specifically, section 1022(c)(3)
states that the Bureau ``may make public such information obtained by
the Bureau under [section 1022] as is in the public interest, through
aggregated reports or other appropriate formats designed to protect
confidential information in accordance with [specified protections in
section 1022].'' \237\ Information submitted to the Bureau's registry
is protected by, among other things, section 1022(c)(8), which states
that ``[I]n . . . publicly releasing information held by the Bureau, or
requiring covered persons to publicly report information, the Bureau
shall take steps to ensure that proprietary, personal, or confidential
consumer information that is protected from public disclosure under
[the Freedom of Information Act, 5 U.S.C. 552(b)] or [the Privacy Act
of 1974, 5 U.S.C. 552a], or any other provision of law, is not made
public under [the CFPA].'' \238\
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\236\ 12 U.S.C. 5512(c)(3) & 5512(c)(7)(B).
\237\ 12 U.S.C. 5512(c)(3)(B).
\238\ 12 U.S.C. 5512(c)(8).
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B. CFPA Section 1024(b)
As explained above, section 1024(b) of the CFPA authorizes the
Bureau to exercise supervisory authority over certain nonbank covered
persons.\239\ Section 1024(b)(1) requires the Bureau to periodically
require reports and conduct examinations of persons subject to its
supervisory authority to assess compliance with Federal consumer
[[Page 6927]]
financial law, obtain information about the activities and compliance
systems or procedures of persons subject to its supervisory authority,
and detect and assess risks to consumers and to markets for consumer
financial products and services.\240\ Section 1024(b)(2) requires that
the Bureau establish a risk-based nonbank supervision program. In
particular, section 1024(b)(2) requires that the Bureau exercise its
supervisory authority over nonbank covered persons based on its
assessment of risks posed to consumers in the relevant product markets
and geographic markets, and taking into consideration, as applicable:
``(A) the asset size of the covered person; (B) the volume of
transactions involving consumer financial products or services in which
the covered person engages; (C) the risks to consumers created by the
provision of such consumer financial products or services; (D) the
extent to which such institutions are subject to oversight by State
authorities for consumer protection; and (E) any other factors that the
Bureau determines to be relevant to a class of covered persons.'' \241\
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\239\ The nonbank covered persons over which the Bureau has
supervisory authority are listed in CFPA section 1024(a)(1). They
include covered persons that: offer or provide origination,
brokerage, or servicing of loans secured by real estate for use by
consumers primarily for personal, family, or household purposes, or
loan modification or foreclosure relief services in connection with
such loans; are larger participants of a market for consumer
financial products or services, as defined by Bureau rule; the
Bureau has reasonable cause to determine, by order, that the covered
person is engaging, or has engaged, in conduct that poses risks to
consumers with regard to the offering or provision of consumer
financial products or services; offer or provide private education
loans; or offer or provide payday loans. 12 U.S.C. 5514(a)(1).
\240\ 12 U.S.C. 5514(b)(1), provides: ``The Bureau shall require
reports and conduct examinations on a periodic basis of persons
described in subsection (a)(1) for purposes of--(A) assessing
compliance with the requirements of Federal consumer financial law;
(B) obtaining information about the activities and compliance
systems or procedures of such person; and (C) detecting and
assessing risks to consumers and to markets for consumer financial
products and services.''
\241\ 12 U.S.C. 5514(b)(2).
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CFPA section 1024(b)(7) in turn identifies three independent
sources of Bureau rulemaking authority. First, section 1024(b)(7)(A)
requires the Bureau to prescribe rules to facilitate the supervision of
nonbank covered persons subject to the Bureau's supervisory authority
and assessment and detection of risks to consumers.\242\ Second,
section 1024(b)(7)(B) authorizes the Bureau to require nonbank covered
persons subject to its supervisory authority to ``generate, provide, or
retain records for the purposes of facilitating supervision of such
persons and assessing and detecting risks to consumers.'' \243\ This
section authorizes the Bureau to require nonbank covered persons
subject to its supervisory authority to create reports regarding their
activities for submission to the Bureau. ``Records'' is a broad term
encompassing any ``[i]nformation that is inscribed on a tangible medium
or that, having been stored in an electronic or other medium, is
retrievable in perceivable form,'' or any ``documentary account of past
events.'' \244\ Section 1024(b)(7)(B) thus authorizes the Bureau to
require nonbank covered persons subject to its supervisory authority to
``generate''--i.e., create \245\--reports and then ``provide'' them to
the Bureau.\246\
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\242\ 12 U.S.C. 5514(b)(7)(A) (``The Bureau shall prescribe
rules to facilitate supervision of persons described in subsection
(a)(1) and assessment and detection of risks to consumers.'').
\243\ 12 U.S.C. 5514(b)(7)(B) (``The Bureau may require a person
described in subsection (a)(1), to generate, provide, or retain
records for the purposes of facilitating supervision of such persons
and assessing and detecting risks to consumers.'').
\244\ Record, Black's Law Dictionary (11th ed. 2019); accord,
e.g., Andrews v. Sirius XM Radio Inc., 932 F.3d 1253, 1259 (9th Cir.
2019) (citing Black's Law Dictionary's and Webster's Third New
International Dictionary's definitions of ``record'').
\245\ See Generate, Merriam-Webster Online Dictionary, https://www.merriam-webster.com/dictionary/generate (defining ``generate''
as ``to bring into existence'').
\246\ The Bureau's authority under section 1024(b)(7)(B) to
require generation of records complements its authority under
section 1024(b)(1) to ``require reports . . . on a periodic basis''
from nonbank covered persons subject to its supervisory authority.
12 U.S.C. 5514(b)(1).
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The third source of authority, CFPA section 1024(b)(7)(C),
authorizes the Bureau to prescribe rules regarding nonbank covered
persons subject to its supervisory authority ``to ensure that such
persons are legitimate entities and are able to perform their
obligations to consumers.'' \247\ Under this section, the Bureau may
prescribe substantive rules to ensure that supervised entities are
willing and able to comply with their legal, financial, and other
obligations to consumers, including those imposed by Federal consumer
financial law. The term ``obligations'' encompasses ``anything that a
person is bound to do or forbear from doing,'' including duties
``imposed by law, contract, [or] promise.'' \248\ As discussed in the
Bureau's recent proposal to establish a nonbank registration for
certain orders, the Bureau construes the phrase ``legitimate entities''
as encompassing an inquiry into whether an entity takes seriously its
duty to ``[c]omply[ ] with the law.'' \249\
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\247\ 12 U.S.C. 5514(b)(7)(C) (``The Bureau may prescribe rules
regarding a person described in subsection (a)(1), to ensure that
such persons are legitimate entities and are able to perform their
obligations to consumers. Such requirements may include background
checks for principals, officers, directors, or key personnel and
bonding or other appropriate financial requirements.'').
\248\ Obligation, Black's Law Dictionary (11th ed. 2019).
\249\ Legitimate, Black's Law Dictionary (11th ed. 2019)
(defining ``legitimate'' as ``[c]omplying with the law; lawful'');
see also Legitimate, Webster's Second New International Dictionary
(1934) (defining ``legitimate'' as ``[a]ccordant with law or with
established legal forms and requirements; lawful''); Legitimate,
Merriam-Webster Online Dictionary, https://www.merriam-webster.com/dictionary/legitimate (defining ``legitimate'' as ``accordant with
law or with established legal forms and requirements''). See also
Nonbank Registration--Orders Proposal at 21.
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While each of the three subparagraphs of section 1024(b)(7)
discussed above operates as independent sources of rulemaking
authority, the subparagraphs also overlap in several respects, such
that a particular rule may be (and, in the case of this proposal, is)
authorized by more than one of the subparagraphs. For example, rules
requiring the generation, provision, or retention of records generally
will be authorized under both subparagraphs 1024(b)(7)(A) and (B). That
is so because subparagraph 1024(b)(7)(B) makes clear that the Bureau's
authority under subparagraph 1024(b)(7)(A) to prescribe rules to
facilitate supervision and assessment and detection of risks to
consumers extends to requiring covered persons subject to the Bureau's
supervisory authority ``to generate, provide or retain records for the
purposes of facilitating supervision of such persons and assessing and
detecting risks to consumers.'' \250\
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\250\ 12 U.S.C. 5514(b)(7)(B); see also, e.g., Barton v. Barr,
140 S. Ct. 1442, 1453 (2020) (``redundancies . . . in statutory
drafting'' may reflect ``a congressional effort to be doubly
sure''); Atlantic Richfield Co. v. Christian, 140 S. Ct. 1335, 1350
n.5 (2020) (concluding that ``Congress employed a belt and
suspenders approach'' in statute); Marx v. Gen. Revenue Corp., 568
U.S. 371, 383-85 (2013) (statutory language is ``not . . .
superfluous if Congress included it to remove doubt'' about an
issue).
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V. Section-by-Section Analysis
Part 1092
Subpart A--General
Proposed subpart A is identical to proposed subpart A in the
Bureau's separate proposal relating to the registration of certain
orders.\251\ The Bureau is proposing a common, identical subpart to be
shared between the two rulemakings due to the commonality of provisions
regarding authority and purpose, submission and use of registration
information, and severability. However, the Bureau would consider
separate or independent subparts if warranted, based on public comments
received in each rulemaking. The Bureau seeks comment on both
approaches, i.e., common or separate subparts for the two rules,
specifically including comments on whether subpart A should remain
separate from subpart C.
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\251\ Nonbank Registration--Orders Proposal. That proposal also
would establish specific registration requirements in subpart B of
part 1092.
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Section 1092.100 Authority and Purpose
100(a) Authority
Proposed Sec. 1092.100(a) would set forth the legal authority for
proposed 12
[[Page 6928]]
CFR part 1092, including all subparts. Proposed Sec. 1092.100 would
refer to CFPA sections 1022(b) and (c) and 1024(b),\252\ which are
discussed in sections II.C and IV of the proposal above.
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\252\ 12 U.S.C. 5512(b), (c); 12 U.S.C. 5514(b).
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100(b) Purpose
Proposed Sec. 1092.100(b) would explain that the purpose of this
part is to prescribe rules regarding nonbank registration requirements,
to prescribe rules concerning the collection of information from
registered entities, and to provide for public release of that
information as appropriate.
Section 1092.101 General Definitions
Proposed Sec. 1092.101 would define terms that are used elsewhere
in proposed part 1092 of the rules. Proposed Sec. 1092.101(a) would
define the terms ``affiliate,'' ``consumer,'' ``consumer financial
product or service,'' ``covered person,'' ``Federal consumer financial
law,'' ``insured credit union,'' ``person,'' ``related person,''
``service provider,'' and ``State'' as having the meanings set forth in
the CFPA, 12 U.S.C. 5481. Some of these terms would be used only in
subpart B if the Bureau adopts its separate proposal relating to the
registration of certain orders.\253\
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\253\ Nonbank Registration--Orders Proposal.
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Proposed Sec. 1092.101(b) would define the term ``Bureau'' as a
reference to the Consumer Financial Protection Bureau.
Proposed Sec. 1092.102(c) would clarify that the terms
``include,'' ``includes,'' and ``including'' throughout part 1092 would
denote non-exhaustive examples covered by the relevant provision.\254\
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\254\ See, e.g., Christopher v. SmithKline Beecham Corp., 567
U.S. 142, 162 (2012) (use of ``includes'' indicates that ``the
examples enumerated in the text are intended to be illustrative, not
exhaustive'').
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Proposed Sec. 1092.101(d) would define the term ``nonbank
registration system'' to mean the Bureau's electronic registration
system identified and maintained by the Bureau for the purposes of part
1092. Proposed Sec. 1092.101(e) would define the term ``nonbank
registration system implementation date'' to mean, for a given
requirement or subpart of part 1092, the date(s) determined by the
Bureau to commence the operations of the nonbank registration system in
connection with that requirement or subpart. The Bureau currently
anticipates that the nonbank registration system implementation date
with respect to proposed subpart C would occur sometime after the
effective date of the proposed rule and no earlier than January 2024.
The actual nonbank registration system implementation date would
depend, in significant part, upon the Bureau's ability to develop and
launch the required technical systems that will support the submission
and review of applicable filings. For subpart C, the Bureau also would
establish an annual registration date as defined in proposed Sec.
1092.301(f). As discussed in the section-by-section analysis of
proposed Sec. 1092.301(f), the annual registration date will occur
after the system implementation date for subpart C.
In connection with setting both the nonbank registration system
implementation date and the annual registration date, the Bureau seeks
comment on how much time entities would need to comply with the
requirements of part 1092 and to register with the nonbank registration
system including under subpart C. The Bureau would set these dates
after considering feedback provided by commenters regarding the time
registrants would need to implement the requirements of this part
including its subpart C. In particular, the Bureau would provide
advance public notice regarding the nonbank registration system
implementation date with respect to subpart C and the annual
registration date to enable entities subject to subpart C to prepare
and submit timely filings to the nonbank registration system.
Section 1092.102 Submission and Use of Registration Information
102(a) Filing Instructions
Proposed Sec. 1092.102(a) would provide that the Bureau shall
specify the form and manner for electronic filings and submissions to
the nonbank registration system that are required or made voluntarily
under part 1092. The Bureau would issue specific guidance for filings
and submissions. The Bureau anticipates that its filing instructions
may, among other things, specify information that filers must submit to
verify that they have authority to act on behalf of the entities for
which they are purporting to register. The Bureau proposes to accept
electronic filings and submissions to the nonbank registration system
only and does not propose to accept paper filings or submissions.
Proposed Sec. 1092.102(a) also would state that the Bureau may
provide for extensions of deadlines or time periods prescribed by the
proposed rule for persons affected by declared disasters or other
emergency situations. Such situations could include natural disasters
such as hurricanes, fires, or pandemics, and also could include other
emergency situations or undue hardships including technical problems
involving the nonbank registration system. For example, the Bureau
could defer deadlines during a presidentially-declared emergency or
major disaster under the Robert T. Stafford Disaster Relief and
Emergency Assistance Act (42 U.S.C. 5121 et seq.) or a presidentially-
declared pandemic-related national emergency under the National
Emergencies Act (50 U.S.C. 1601 et seq.). The Bureau would issue
guidance regarding such situations. The Bureau seeks comment on the
types of situations that may arise in this context, and about
appropriate mechanisms for addressing them.
102(b) Coordination or Combination of Systems
Proposed Sec. 1092.102(b) would provide that in administering the
nonbank registration system, the Bureau may rely on information a
person previously submitted to the nonbank registration system under
part 1092. This proposed section would clarify, for example, that the
registration process for proposed subpart C may take account of
information previously submitted, such as in a prior annual
registration under subpart C or, if applicable, a registration of
certain orders and related information under subpart B.
Proposed Sec. 1092.102(b) also would provide that in administering
the nonbank registration system, the Bureau may coordinate or combine
systems with State agencies as described in CFPA sections 1022(c)(7)(C)
and 1024(b)(7)(D). Those statutory provisions provide that the Bureau
shall consult with State agencies regarding requirements or systems
(including coordinated or combined systems for registration), where
appropriate. This proposed section would clarify that the Bureau may
develop or rely on such systems as part of maintaining the nonbank
registration system and may also rely on previously submitted
information. The Bureau seeks comment on the types of coordinated or
combined systems that would be appropriate and the types of information
that could be obtained from or provided to State agencies. For example,
as discussed in part II.C above, some States have begun implementing
public registries for private student loan agreements. The Bureau
requests comment on whether the proposed nonbank registration system
should identify whether a covered form contract also appears in such
State registries, and whether and how the Bureau's nonbank registration
should utilize information already collected by State registries in the
[[Page 6929]]
process of registering covered terms and conditions in covered form
contacts.
102(c) Bureau Use of Registration Information
Proposed Sec. 1092.102(c) would provide that the Bureau may use
the information submitted to the nonbank registration system under this
part to support its objectives and functions, including in determining
when to exercise its authority under CFPA section 1024 to conduct
examinations and when to exercise its enforcement powers under subtitle
E of the CFPA.
The Bureau proposes to establish the nonbank registration system
under its registration and market-monitoring rulemaking authorities
under CFPA section 1022(b)(1), (c)(1)-(4) and (c)(7), and under its
supervisory rulemaking authorities under CFPA section 1024(b)(7)(A),
(B), and (C). As discussed in greater detail in part II.C above, the
Bureau would be able to use the information submitted under the nonbank
registration system to monitor for risks to consumers in the offering
or provision of consumer financial products or services, and to support
all of its functions as appropriate, including its supervisory,
rulemaking, enforcement, and other functions. Among other things, the
Bureau may rely on the information submitted under this part as it
considers whether to initiate supervisory activity at a particular
entity, in determining the frequency and nature of its supervisory
activity with respect to particular entities or markets, in
prioritizing and scoping its supervisory, examination, and enforcement
activities, and otherwise in assessing and detecting risks to
consumers. In particular, the Bureau may consider this information in
developing its risk-based supervision program and in assessing the
risks posed to consumers in relevant product markets and geographic
markets and the factors described in 12 U.S.C. 5514(b)(2) with respect
to particular covered persons, and for enforcement purposes.\255\
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\255\ See, e.g., 12 U.S.C. 5514(b)(2)(C), (D), and (E)
(providing that in prioritizing examinations the Bureau shall take
into account ``the risks to consumers created by the provision of
such consumer financial products or services,'' ``the extent to
which such institutions are subject to oversight by State
authorities for consumer protection,'' and ``any other factors that
the Bureau determines to be relevant to a class of covered
persons''). Depending upon the circumstances, the Bureau may
consider registration under this part to be a risk factor under
these provisions for those covered persons subject to the proposed
rule. See also, e.g., 12 U.S.C. 5565(c)(3)(D) and (E) (providing
that in determining the amount of civil money penalties the Bureau
shall take into account ``the history of previous violations'' and
``such other matters as justice shall require'').
In exercising its authorities under any of these provisions, the
Bureau may take into account any risks that it identifies in
connection with a covered person's registration with the nonbank
registration system and any information submitted under the proposed
rule.
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Proposed Sec. 1092.102(c) also would provide that part 1092, and
registration under that part, would not alter any applicable process
whereby a person may dispute that it qualifies as a person subject to
Bureau authority. For example, 12 CFR 1090.103 establishes a Bureau
administrative process for assessing a person's status as a larger
participant under CFPA section 1024(a)(1)(B) and (2) and 12 CFR part
1090. As specified in 12 CFR 1090.103(a), if a person receives a
written communication from the Bureau initiating a supervisory activity
pursuant to CFPA section 1024, such person may respond by asserting
that the person does not meet the definition of a larger participant of
a market covered by 12 CFR part 1090 within 45 days of the date of the
communication. Section 1090.103 of part 1090 establishes a process for
review and determination by a Bureau official regarding the person's
larger participant status. Section 1090.103(c) of part 1090 provides
that, in reaching that determination, the Bureau official shall review
the person's affidavit and related information, as well as any other
information the official deems relevant.
Under proposed Sec. 1092.102(c), a person may submit such an
assertion regarding the person's status as a larger participant under
12 CFR 1090.103 notwithstanding any registration or information
submitted to the nonbank registration system under part 1092, including
any submission of identifying information. Submission of such
assertions regarding larger participant status to the Bureau under 12
CFR 1090.103, including the Bureau's processes regarding the treatment
of such assertions and the effect of any determinations regarding the
person's supervised status, would be governed by the provisions of 12
CFR part 1090. The Bureau may use the information provided to the
nonbank registration system in connection with making any determination
regarding a person's supervised status under 12 CFR 1090.103, along
with the affidavit submitted by the person and other information as
provided in that section. However, the submission of information to the
nonbank registration system would not prevent a person from also
submitting other information under 12 CFR 1090.103.
Section 1092.103 Severability
Proposed Sec. 1092.103 would provide that the provisions of the
proposed rule are separate and severable from one another, and that if
any provision is stayed or determined to be invalid, the remaining
provisions shall continue in effect. This is a standard severability
clause of the kind that is included in many regulations to clearly
express agency intent about the course that is preferred if such events
were to occur. The Bureau has carefully considered the requirements of
the proposed rule, both individually and in their totality, including
their potential costs and benefits to covered persons and consumers. In
the event a court were to stay or invalidate one or more provisions of
this rule as finalized, the Bureau would want the remaining portions of
the rule as finalized to remain in full force and legal effect.
Subpart B--Reserved
Subpart B of part 1092 would be reserved for rules relating to the
registration of orders. Those rules are the subject of a separate
proposal.\256\
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\256\ Nonbank Registration--Orders Proposal.
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Subpart C--Use of Form Contracts To Impose Certain Terms and Conditions
That Seek To Waive or Limit Consumer Legal Protections
The Bureau proposes that subpart C of part 1092 specify
requirements for supervised nonbanks to register in the nonbank
registration system their identifying information and information about
certain terms and conditions in form contracts they use that seek to
waive consumer legal protections or limit private enforcement or
exercise of consumer rights, defined in proposed Sec. 1092.301(c) as
covered terms or conditions. The Bureau requests comment on each of the
provisions of proposed subpart C, including whether they should be
modified and whether proposed subpart C should include additional
provisions, and if so, what the modifications or additions should be
and why.
Section 1092.300 Scope
Proposed Sec. 1092.300 would describe the scope of subpart C of
part 1092 in two parts. First, subpart C would require supervised
nonbanks to collect and submit information to the Bureau's nonbank
registration system regarding their use of form contracts to impose
certain terms and conditions that seek to waive or limit consumer legal
rights and other applicable legal protections. Second, subpart C would
provide for the Bureau to make this information
[[Page 6930]]
publicly available when permitted by law.
Section 1092.301 Definitions
Proposed Sec. 1092.301 would define key terms used in subpart C.
301(a) Administrative Information
Proposed Sec. 1092.301(a) would define the term administrative
information, for purposes of subpart C, to include contact information
and other information submitted or collected in the nonbank
registration system to facilitate administration of the nonbank
registration system including nonregistration notices submitted to the
nonbank registration system under proposed Sec. 1092.302(d). Some of
the information submitted or collected in the nonbank registration
system would be for purely administrative purposes. For example,
proposed Sec. 1092.302(a) would require a supervised registrant to
submit contact information for a person to whom the Bureau could direct
its questions about registration. In addition, notices by persons that
they believe in good faith that they are not required to register
certain information due to not being covered by subpart C also
generally would be administrative in nature. As discussed in the
section-by-section analysis in proposed Sec. 1092.302(d) and in the
impacts analysis in part VII, these notices would help the Bureau to
understand who is not registering and why, and facilitate guidance the
Bureau may provide.
Under proposed Sec. 1092.303, the Bureau would publish information
collected pursuant to subpart C, subject to certain exceptions in
proposed Sec. 1092.303(b), including an exception for administrative
information. Administrative information is separate from identifying
information, defined in proposed Sec. 1092.301(e), and is separate
from information regarding the use of covered terms and conditions by
supervised registrants, collected under proposed Sec. 1092.302(a).
Information collected for a purely administrative purpose should not be
made publicly available. The identifying information collected under
proposed Sec. 1092.302(a) already would facilitate the ability of
consumers to identify covered persons for purposes of the Bureau's
authority in CFPA section 1022(c)(7)(B) to publicly disclose
registration information discussed in part II.C.3 above.\257\ Including
administrative information with other information the Bureau publishes
pursuant to proposed Sec. 1092.303 also is unlikely to serve the
public interest for purposes of the Bureau's authority to publish
information under CFPA section 1022(c)(3) discussed in part II.C.3
above.\258\ The publication of administrative information may not in
all instances be especially useful to external users of the system.
Administrative information is likely to include information such as
time and date stamps, contact information, and administrative
questions. The Bureau may need such information to work with personnel
at nonbanks and in order to administer the nonbank registration system.
Even in the case of nonregistration notices, they would not be required
to include information about the use of covered terms or conditions
collected under proposed Sec. 1092.302(a). Publishing such information
would not be in the public interest because it is unclear what use the
public would have for such information and likely would be
counterproductive to the goals of ensuring compliance with the
proposal.
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\257\ 12 U.S.C. 5512(c)(7)(B).
\258\ 12 U.S.C. 5512(c)(3).
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Proposed Sec. 1092.301(a) would define the term administrative
information to clarify the scope of that exception to publication in
proposed Sec. 1092.303(b). The Bureau seeks comment on the proposed
definition of administrative information in proposed Sec. 1092.301(a)
and on the Bureau's proposal not to publish administrative information
as reflected in proposed Sec. 1092.303(b).
301(b) Covered Form Contract
The proposal would require supervised registrants to provide
information to the nonbank registration system relating to covered form
contracts they use in offering or providing consumer financial products
or services as relevant to proposed Sec. 1092.301(g). Proposed Sec.
1092.301(b) would define a covered form contract as any written
agreement between a covered person and a consumer that has two
features: (1) It was drafted prior to the transaction for use in
multiple transactions between a business and different consumers; and
(2) It contains a covered term or condition as defined in proposed
Sec. 1092.301(c).
The Bureau proposes to use the term covered form contract as a
reference to the overall written agreement that contains a covered term
or condition. By using this term, the proposal would be more precise as
to the information the agency would collect, and, as applicable,
distinguish the contract provision at issue from the contract itself.
Under proposed Sec. 1092.301(b), the Bureau would limit the
information collection to information about covered terms or conditions
contained in written agreements, including paper and electronic
versions.\259\ The Bureau interprets the term ``written agreement'' as
including electronic form contracts such as website terms of use that
govern the offering or provision of consumer financial products or
services. A given transaction therefore may be subject to multiple
covered form contracts, such as website terms of use for online
applications, a transaction agreement for approved applicants, and an
arbitration agreement that may be provided separately. The Bureau also
interprets the term ``written agreement'' for purposes of proposed
Sec. 1092.301(b) as potentially including agreements reached orally
that are recorded or otherwise documented in writing. For example, as
Bureau guidance has clarified, phone recordings evidencing assent to a
standard-form preauthorized payment authorization may be considered a
written authorization.\260\ However, such a written agreement would not
necessarily constitute a covered form contract. As described in
proposed Sec. 1092.301(b)(1), discussed below, a covered form contract
also must have been drafted prior to the transaction for use in
multiple transactions.\261\
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\259\ The Bureau does not propose to collect information about
oral agreements that have no written component. For such oral
agreements, it is unclear these are used to seek to waive or limit
enforcement of applicable legal protections; it also may be
burdensome for the supervised registrant to generate responsive
information concerning oral agreements for purposes of the proposed
rule.
\260\ See CFPB Compliance Bulletin 2015-06 (Nov. 23, 2015),
https://files.consumerfinance.gov/f/201511_cfpb_compliance-bulletin-2015-06-requirements-for-consumer-authorizations-for-preauthorized-electronic-fund-transfers.pdf.
\261\ In addition, as described in proposed Sec.
1092.301(h)(6), registration would not be required by persons who,
in the previous calendar year, entered into covered form contracts
containing any covered term or condition fewer than 1,000 times and
did not obtain a court or arbitrator decision on the enforceability
of a covered term or condition.
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Proposed Sec. 1092.301(b) is not itself limited to agreements
between the supervised registrant and the consumer. Rather, proposed
Sec. 1092.301(b), if the conditions in proposed Sec. 1092.301(b)(1)
and (2) are also present, could reach any written agreement between a
consumer and a covered person as that term is defined in the CFPA, and
without regard to whether the covered person is excluded from
authorities under CFPA sections 1027 or 1029. While those covered
persons are not covered by the rule or in some cases subject to the
authority of the Bureau, the agreements they enter into potentially
could be subject to the rule when used by a
[[Page 6931]]
supervised registrant. For example, if an agreement meeting the
definition of covered form contract also contained covered terms and
conditions under proposed Sec. 1092.301(c) (which must relate to a
consumer financial product or service described in proposed Sec.
1092.301(g)), and those covered terms or conditions are also used by a
supervised registrant, as discussed in the section-by-section analysis
of proposed Sec. 1092.301(i), then the supervised registrant would be
required to comply with proposed Sec. 1092.302.
As discussed in part II, risks to consumers posed by certain
contractual terms and conditions may be magnified through the use of
adhesion contracting, or ``take-it-or-leave-it'' non-negotiable
contracting processes. And many covered form contracts will be entered
into in this way. The Bureau also recognizes that the definition of
covered form contract in proposed Sec. 1092.301(b) would cover
contracts even if they include terms and conditions that may be, in
some sense, negotiated. For example, even if a consumer and a lender
bargain over the price of credit, the resulting loan agreement
typically still would be a covered form contract. Even if the lender
offers the consumer an opportunity to opt out of a covered term or
condition as defined in proposed Sec. 1092.301(c), the resulting
contract typically still would be a covered form contract. As discussed
in the section-by-section analysis of proposed Sec. 1092.301(b)(1),
the Bureau is concerned about potential risks to consumers from the use
of covered terms and conditions that the company drafts, even if they
are in contracts that appear to include some aspects of consumer
choice. Such terms, conditions, and choices are defined in advance by
the company, not the consumer. And, depending on the facts and
circumstances, these choices may be constrained; for example, some
negative options may not present meaningful choices.\262\ The Bureau
therefore is not proposing to expressly limit the definition of a
covered form contract to contracts that do not reflect any negotiation.
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\262\ FTC Enforcement Policy Statement Regarding Negative Option
Marketing, 85 FR 60822, 60823 (Nov. 4, 2021) (discussing how
negative option marketing and contracting are ``widespread in the
marketplace'' and that FTC and States ``regularly bring cases
challenging a variety of harmful negative option practices'').
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However, proposed Sec. 1092.301(b)(1) would limit the covered
terms or conditions about which the proposal would collect information
to those that are drafted prior to the transaction for use in multiple
transactions between a business and different consumers. This component
of the proposed definition of covered form contract borrows from the
definition of a ``standard contract term'' from the Restatement.\263\
As the Restatement explains, this definition ``focuses on the pre-
drafting factor, which captures a key feature of consumer contracts:
their multi-transaction application. Pre-drafting also implies that
there is no negotiation between the business and the consumer over the
language of those terms.'' Under this approach, even optional terms are
standard contract terms if drafted in advance by the business ``because
the method for specifying their content is set up by the business and
has a multi-transaction application.'' \264\ This limitation on the
proposed definition of a covered form contract would provide clarity
and thus reduce potential burden. Contracts which are truly non-
standard--where the business and the consumer can unilaterally modify
any pre-drafted content of the proposed agreement--would not be covered
form contracts as defined by the proposal. For example, based on the
clarification in proposed Sec. 1092.301(b)(1), supervised registrants
would not be required to collect or submit information about unique
contracts that consumers specifically drafted or attempted to draft.
Nor would the proposal cover handwritten modifications by individual
consumers to covered terms and conditions, because these would not be
contained in the covered form contract drafted for use in multiple
transactions. As a result, the information collection requirement under
proposed Sec. 1092.302(a) would not require supervised registrants to
track or report on such ad hoc, nonstandard variances.
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\263\ Restatement sec. 1(5).
\264\ Id. sec. 1 cmt. 4.
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In addition, based on this component of the definition in proposed
Sec. 1092.301(b)(1), proposed Sec. 1092.302(a) would collect only
information on standard terms that businesses draft to use in multiple
transactions with more than one consumer. Thus, if a business drafted a
contract prior to a transaction for use by a single consumer to engage
in multiple transactions, such as a contract to establish an open-end
credit line for a single consumer that is not the same contract used
for other consumers, under proposed Sec. 1092.301(b)(2), that contract
would not be a covered form contract if the business did not draft the
contract for use in transactions with other consumers as well.
Further, settlement agreements resolving specific legal actions
typically would not be covered by proposed Sec. 1092.301(b) for
several reasons. First, many settlement agreements are drafted for the
particular claims involved and may be unique to that case; these types
of settlement agreements would not be drafted for use in multiple
settlements with different consumer parties within the meaning of
proposed Sec. 1092.301(b)(1). In addition, for class action
settlements, members of a class generally are not ``parties'' to the
settlement agreement.\265\ The Bureau is not proposing to include these
types of settlement agreements in the registration requirements in
subpart C because they typically differ, in process and substance, from
the covered form contracts used to offer the products or services in
the first place. For example, in formal proceedings, consumers may be
represented by counsel or others. Indeed, under Federal Rule of Civil
Procedure 23 and State analogues, the terms of a consumer class action
settlement must be negotiated at arms-length between the defendant and
attorneys representing the interests of consumers. Courts review the
settlement process and terms for compliance with these and other
requirements.\266\ Under the Class Action Fairness Act, appropriate
Federal and State regulators also receive information about class
action settlements proposed in Federal court, including in cases
removed from State court due to a higher amount in controversy.\267\
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\265\ See, e.g., Fed. R. Civ. P. 23 (generally distinguishing
between parties and class members).
\266\ See, e.g., Fed. R. Civ. P. 23(e)(2) (requiring that the
court consider, inter alia, that the proposal was ``negotiated at
arm's length'' and that ``the class representatives and class
counsel have adequately represented the class''). Almost all States
have adopted class action procedures analogous to Federal Rule 23.
See Marcy Hogan Greer, ``A Practitioner's Guide to Class Actions,''
at 142 (A.B.A. 2010).
\267\ 28 U.S.C. 1715 (providing for notification of proposed
class action settlements to appropriate Federal and State
officials), codified by Class Action Fairness Act (CAFA), Public Law
109-2, 119 Stat. 4 (2005).
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The Bureau requests comment on the definition of covered form
contract in proposed Sec. 1092.301(b), including on whether the
proposal should instead define covered form contracts with reference to
their negotiability, similar to the definition of that ``form
contract'' in the Consumer Review Fairness Act: ``a contract with
standardized terms . . . imposed on an individual without a meaningful
opportunity for such individual to negotiate the standardized terms.''
\268\ However, as discussed above, the Bureau is proposing to cover
form contracts that may present some element of choice, for which the
[[Page 6932]]
Restatement definition may be a better model.
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\268\ 15 U.S.C. 45b(a)(3).
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301(c) Covered Term or Condition
As discussed in the section-by-section analysis of proposed Sec.
1092.301(b) above, for a contract to be a covered form contract, it
must, among other things, contain a covered term or condition. Proposed
Sec. 1092.301(c) would define a covered term or condition as a clause,
term, or condition that expressly purports to establish a covered
limitation on consumer legal protections, as that term is defined in
proposed Sec. 1092.301(d), applicable to a consumer financial product
or service described in proposed Sec. 1092.301(g). In particular, the
definition would apply to those consumer financial products or services
offered or provided by covered persons specified in CFPA section
1024(a), including those supervised under larger participant rules
adopted under that authority.
If a term or condition expressly seeks to establish a covered
limitation on consumer legal protections, it would be covered
irrespective of its legal validity or enforceability. For example, an
arbitration agreement in a loan agreement with a servicemember that
violates the MLA would still be a covered term or condition. At the
same time, the proposed definition would only cover those terms and
conditions that expressly attempt to establish the covered limitation.
If a term or condition does not expressly attempt to establish the
covered limitation, it would not be covered, even if it may contradict
or violate an applicable legal protection. For example, an interest
rate in a loan agreement with a servicemember that violates the MLA
interest rate cap would not necessarily be a covered term or condition,
unless it expressly seeks to impose a covered limitation on consumer
legal protections. As discussed in the section-by-section analysis of
proposed Sec. 1092.301(d)(7), the Bureau understands that these
definitions generally would exclude the collection of terms or
conditions that may constitute implied waivers. For the reasons
discussed there, however, at this time the Bureau proposes to limit the
information collection to express waivers.
In addition, in the context of automobile finance agreements, to
the extent that a limitation on protections in the sale also purports
to establish a covered limitation on legal protections the consumer may
have, including recourse, against a finance company purchasing the
associated retail installment contract, then that limitation also may
qualify as a covered term or condition under proposed Sec.
1092.301(c).
301(d) Covered Limitation on Consumer Legal Protections
As discussed in part II above, the Bureau is concerned with
potential risks posed by terms or conditions that seek to waive
consumer legal protections or limit the ability of consumers to enforce
or exercise rights. The Bureau is proposing to collect information
about supervised registrants' use of these terms and conditions. In
particular, proposed Sec. 1092.301(d) would define eight specific
types of terms and conditions, each described below, about which the
nonbank registration system would collect the information described in
proposed Sec. 1092.302(a). In general, these terms and conditions
expressly seek to waive applicable legal protections or place express
limitations on their exercise or enforcement. These terms and
conditions may extinguish or seek to extinguish certain applicable
legal protections including obligations of supervised nonbanks under
Federal consumer financial law. These limitations also may affect when,
where, or how a consumer may file or participate in a legal action, or
whether a consumer may file a legal action at all. These limitations
also may affect the ability of the consumers to assert their rights and
protections through filing reviews and complaints. As a result, the
Bureau is concerned that these types of terms and conditions may pose
potential risks to consumers as described in more detail in part II of
the proposal above.
There may be overlap in definitions of the types of covered terms
and conditions. As a result, some terms and conditions may fall into
more than one category. The proposal and information collections
pursuant to proposed Sec. 1092.302(a) would account for that
possibility. The Bureau requests comment on the proposal's inclusion of
each term or condition described in each paragraph in proposed Sec.
1092.301(d), including on the relationship or overlap between each of
these proposed terms and conditions.
The Bureau also seeks comment on whether certain definitions of
covered terms or conditions should be narrowed to apply only when the
legal protection limited is a Federal consumer financial law. As
proposed, the definitions in proposed Sec. 1092.301(d), as
incorporated into the definition of a covered term or condition in
proposed Sec. 1092.301(c), would apply to any limitation on a consumer
legal protection applicable to a consumer financial product or service
described in proposed Sec. 1092.301(g). This approach may be more
administrable for supervised registrants, avoiding the need for them to
make determinations about which types of applicable legal protections
are affected by specific terms and conditions. Some terms and
conditions, such as arbitration agreements, limits on time, forum, or
venue for legal actions, and liability limits may apply generally, and
not be tied to a specific applicable legal protection. Other terms and
conditions may explicitly affect legal protections other than Federal
consumer financial law, but also could raise risks to consumers under
Federal consumer financial law. For example, using unenforceable or
prohibited terms or conditions (even if only unenforceable or
prohibited by a law other than Federal consumer financial law) may risk
deceiving consumers, as discussed in part II above. By collecting
information about waivers and limitations on all legal protections
applicable to the consumer financial products and services described in
proposed Sec. 1092.301(g), the definitions in proposed Sec.
1092.301(d) would provide an integrated understanding of the regulation
of a given consumer financial product or service, consistent with the
monitoring purposes of informing different Bureau functions as
discussed in part II.C.1 above.
Proposed Sec. 1092.301(d)(1) would define a covered limitation on
consumer legal protections to include precluding the consumer from
bringing a legal action after a certain period of time. Deadlines for
consumers to file legal actions to enforce legal protections generally
are set by statute, such as in many cases State laws specifying
statutes of limitation. There is a risk that terms or conditions may
seek to set deadlines that are earlier than the default deadline set by
statutory law. As discussed in part II above, in some cases a contract
may set a deadline so early that it is unenforceable. But whether or
not the contractual deadline is enforceable, this type of term or
condition may pose potential risks to consumer. For example, if the
consumer would have had more time under the statute of limitations law
to enforce the applicable legal protection, then the term or condition
would be taking away that additional time during which the consumer
could have enforced the applicable legal protection. That loss of time
to enforce rights may pose potential risks to consumers, raising the
need for greater public oversight to protect those rights. Proposed
Sec. 1092.301(d)(1) is not limited, however,
[[Page 6933]]
to terms and conditions that clearly set deadlines earlier than
applicable law. It may be burdensome for supervised registrants to
evaluate all potentially applicable statutes of limitation and assess
whether the deadline set by the contract is earlier than the most
likely applicable statute of limitation. For example, such an analysis
may involve review of multiple statutes of limitation potentially under
the laws of multiple States. Therefore, the Bureau is proposing a
definition that would be broader and likely simpler for supervised
registrants to implement. If a contract specifies a deadline, it would
be a covered limitation for purposes of subpart C, regardless of what
the underlying limitation would have been absent the contractual
deadline. The Bureau requests comment on this approach and whether
proposed Sec. 1092.301(d)(1) should be more limited, and if so, how
and why, and whether proposed Sec. 1092.301(d)(1) should be expanded,
and if so, how and way. For example, the Bureau requests comment on
whether the final rule should limit proposed Sec. 1092.301(d)(1) to
only terms and conditions that set deadlines that are shorter than
applicable law, or deadline that often may be unreasonable and
therefore unenforceable (such as six months or less--the time period
identified in the Restatement as discussed part II.B.5 above).
In addition, the Bureau requests comment on whether proposed Sec.
1092.301(d)(1) should be expanded to cover standard terms and
conditions that also may have an effect on when a consumer can file a
legal action, such as terms and conditions that impose pre-filing
requirements not otherwise specified in the law before a consumer can
file a legal action. Terms and conditions that impose pre-filing
requirements may have the effect of shortening the overall time period
during which the consumer may be eligible for file a legal action
because they purport to make the consumer ineligible to file a legal
action until after certain steps are completed. Pre-filing requirements
in some arbitration agreements also have spurred some consumers to
claim they are so onerous as to be unconscionable.\269\ In addition,
the MLA expressly prohibits ``onerous legal notice provisions'' in
consumer credit contracts subject to the MLA.\270\ For these reasons,
the Bureau requests comment on the degree of risk that pre-filing
requirements may pose, including to the ability of consumers to meet
other deadlines for filing legal action, whether set by a State statute
of limitations or a covered term or condition in a contract.
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\269\ See, e.g., Bielski v. Coinbase, Inc., 2022 WL 1062049 at
*3 (N.D. Cal. Apr. 8, 2022) (describing virtual currency exchange
operator's form contract terms and conditions that seek to require
the consumer to follow specific procedures for engaging in the
company's informal and formal complaint processes before proceeding
to arbitration or small claims court), cert granted Coinbase, Inc.
v. Bielski, 2022 WL 17544994 (U.S. Dec. 9, 2022); Suski v. Marden-
Kane, Inc., 2022 WL 103451 at *1 (N.D. Cal. Jan. 11, 2022) (same).
\270\ 10 U.S.C. 987(e), implemented at 32 CFR 232.8(c).
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Proposed Sec. 1092.301(d)(2) would define a covered limitation on
consumer legal protections to include specifying a forum or venue where
a consumer must bring a legal action in court. The Bureau understands
that State and Federal laws often already specify standards for
determining where a consumer may file a legal action in court, and that
it therefore is not legally necessary for a contract to make that
determination. Thus, to the extent a supervised registrant seeks to set
a requirement of this nature in a covered form contract, there is a
risk that requirement may limit the otherwise available legal options
of the consumer. Because proposed Sec. 1092.301(d)(8) would separately
identify the existence of arbitration agreements, proposed Sec.
1092.301(d)(2) would not apply to arbitration agreements. Arbitration
agreements also identify the forum to act as administrator of the
arbitration, as well as in some cases a particular venue or place for
the arbitration to be conducted, if not online. As discussed in the
section-by-section analysis of proposed Sec. 1092.302(a), the Bureau
requests comment on whether the nonbank registration system should also
collect forum or venue requirements for arbitration agreements pursuant
to proposed Sec. 1092.301(d)(2).
Proposed Sec. 1092.301(d)(3) would define a covered limitation on
consumer legal protections to include limiting the ability of the
consumer to file a legal action seeking relief for other consumers or
to participate in or seek to participate in a legal action filed by
others. The Bureau is concerned that, in circumstances where consumers
likely would not seek legal relief individually, but may claim relief
in collective actions, potential risks may arise when they are
prohibited by contract from doing so. For example, there is a risk that
small-dollar harms affecting larger numbers of consumers may go
unremedied; and public regulators such as the Bureau may wish to
prioritize their oversight role to transactions when this risk is
present. For example, the Bureau could use information indicating that
private class action relief is cutoff, in conjunction with other
information used to assess risk, to decide whether to prioritize
examination of a given supervised nonbank in response to certain
consumer complaints. This type of information also could inform the
Bureau's use of its other functions discussed in part II.C above.
Accordingly, proposed Sec. 1092.301(d)(3) would include limits on
(including waivers of) the consumer's ability to participate in a legal
action where one or more parties seek or obtain class treatment
pursuant to Federal Rule of Civil Procedure 23, any analogous State
process, or rules providing for class arbitration. Proposed Sec.
1092.301(d)(3) also would cover limitations on (including waivers of)
the consumer's ability to participate in legal actions through
procedures such as representative actions, joinder, intervention, or
consolidation. A standard term or condition specifying such limits
would be covered by proposed Sec. 1092.301(d)(3) even if it appears in
an arbitration agreement described in proposed Sec. 1092.301(d)(8).
This approach will avoid supervised registrants having to determine
whether these types of limitations are part of an arbitration
agreement. This approach also will ensure that the Bureau obtains
information about these types of limitations on the same basis
regardless of whether they appear in arbitration agreements, while
still taking into account the existence of an arbitration agreement.
On the other hand, the Bureau understands that any arbitration
agreement--even absent such a limitation--may be construed as limiting
class actions. For example, the U.S. Supreme Court recently held that
arbitration agreements generally do not authorize class arbitration
unless by affirmative consent of the parties.\271\ Therefore,
arbitration agreements that do not evince affirmative consent of the
parties to class arbitration also, by their very nature, may limit the
ability of consumers to participate in class actions filed in court. In
its experience and expertise, the Bureau has found that it is
exceedingly rare, if ever the case, that a supervised registrant has
included a provision in an arbitration agreement expressly authorizing
class arbitration. Thus, under current law, arbitration agreements
reported under proposed Sec. 1092.301(d)(8) discussed below often, if
not always, would not permit class actions, even when the supervised
registrant does not report the use of an express class waiver under
proposed
[[Page 6934]]
Sec. 1092.301(d)(3). As a result, the Bureau is not proposing to
separately collect information on the degree to which arbitration
agreements contain such an authorization. The Bureau requests comment
on whether there is data indicating that a significant number of
supervised registrants use arbitration agreements that do authorize
class arbitration, and if so, whether the proposed Sec. 1092.302(a)
should be broadened to require supervised registrants to review their
arbitration agreements and report whether they contain a class
arbitration authorization.
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\271\ See generally Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407,
1410 (2019) (acknowledging that class arbitration can occur on the
consent of the parties).
---------------------------------------------------------------------------
Proposed Sec. 1092.301(d)(4) would define a covered limitation on
consumer legal protections to include limiting liability to the
consumer in a legal action including by capping the amount of recovery
or the type of remedy. Just as applicable law generally defines
statutes of limitation and standards for where a consumer may file a
legal action, applicable legal protections generally define the scope
of a firm's liability to the consumer including what remedies are
available to the consumer in a civil action in court. The Bureau is
concerned about risks to consumers from terms and conditions that take
away potentially-available relief. Risks may arise when consumers are
unable to exercise otherwise available rights to seek consequential
damages, statutory damages, punitive damages, or other forms of relief
such as declaratory or injunctive relief, as well as to recover
attorneys' fees when the law so permits. The Bureau also believes
proposed Sec. 1092.301(d)(4) would cover liquidated damages clauses
which set a specific amount, or maximum amount, recoverable to a
certain type of injury. While liquidated damages clauses may be based
on estimates made in advance of relief available in the future, they
nonetheless can serve as a limit on actual relief available. To the
extent that these types of limitations described in proposed Sec.
1092.301(d)(4) appear within an arbitration agreement described in
proposed Sec. 1092.301(d)(8), these types of limitations would be
separately reportable from the existence of an arbitration agreement as
a different type of covered term or condition under proposed Sec.
1092.302(a). This will avoid supervised registrants having to determine
whether these types of limitations are part of an arbitration
agreement, and will ensure that the Bureau obtains information about
these types of limitations on liability on the same basis regardless of
whether they appear in arbitration agreements.
Proposed Sec. 1092.301(d)(4) would cover liability limits
including when they are permitted by law. For example, the Bureau is
aware that some covered form contracts include a standard term or
condition that states that ``[t]o the extent permitted by law'' the
seller has ``no responsibility'' for remedies such as consequential
damages or lost profits of the consumer. This would be a limit on
liability to the consumer within the meaning of proposed Sec.
1092.301(d)(4).\272\
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\272\ However, as explained above, coverage of a limitation
imposed by a term or condition under proposed Sec. 1092.301(d)
alone does not determine whether that triggers a reporting
obligation under the proposal. To be a reportable as a covered term
or condition, the term or condition must affect legal protections
applicable to consumer financial products and services as relevant
to proposed Sec. 1092.301(g), and the clause must be used as
defined in proposed Sec. 1092.301(i) by a supervised registrant as
defined in proposed Sec. 1092.301(h). Through these integrated
definitions, proposed subpart C would ensure that the information
reported has a meaningful nexus to the offering or provision of
consumer financial products and services when subject to the scope
of the Bureau's supervisory authority.
---------------------------------------------------------------------------
However, the Bureau does not anticipate that proposed Sec.
1092.301(d)(4) generally would cover terms and conditions that allow
the prevailing party to recover attorney's fees. These provisions do
not limit the liability of the provider to the consumer, but rather
expand that liability in certain circumstances, while also potentially
establishing an obligation on the consumer to pay the attorney's fees
of the provider in other circumstances. In any event, the Bureau's 2015
Arbitration Study found that terms and conditions requiring consumers
to pay the legal fees of the company if it prevails were rare,
generally used in less than 1% of the agreements sampled.\273\ The
Bureau requests comment on the prevalence of these provisions, the
degree to which they alter the underlying legal protections (such as
laws governing the recovery of attorney's fees), and the degree to
which they pose a risk of limiting consumer enforcement despite their
authorizing the consumer to recover legal fees if the consumer
prevails.
---------------------------------------------------------------------------
\273\ Arbitration Study sec. 2 Table 14.
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Proposed Sec. 1092.301(d)(5) would define a covered limitation on
consumer legal protections to include waiving a cause of action by the
consumer, including by stating that a person is not responsible to the
consumer for a harm or violation of law or that a consumer is
exclusively responsible for the injury. If a legal protection
applicable to the offering or providing of a consumer financial product
or service would hold a supervised registrant accountable for a
particular injury, there risks to consumers can arise when a term or
condition takes away that form of accountability. For example, as
discussed in part II.C. above, some lenders have included terms or
conditions in form contracts that seek to disclaim responsibility for
bank fees caused by their payment processing practices. Proposed Sec.
1092.301(d)(5) therefore would cover waivers of causes of action for
violation of legal protections. Operating in conjunction with the
definition of a covered term or condition in proposed Sec.
1092.301(c), proposed Sec. 1092.301(d)(5) would make these waivers
reportable under proposed Sec. 1092.302(a) if the waived legal
protection applies to the offering or provision of a consumer financial
product or service described in proposed Sec. 1092.301(g).\274\
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\274\ See proposed Sec. 1092.301(c) (limiting the definition of
covered term or condition to those that impose a limitation on a
legal protection applicable to the offering or provision of a
consumer financial product or service).
---------------------------------------------------------------------------
Proposed Sec. 1092.301(d)(6) would define a covered limitation on
consumer legal protections to include limiting the ability of the
consumer to engage in certain types of communications about the
consumer financial products or services offered by the supervised
registrant. Proposed Sec. 1092.301(d)(6) would cover limitations on
any written, oral, or pictorial review, assessment, complaint, or other
similar analysis or statement. Non-disparagement clauses (also referred
to as so-called gag clauses) generally would fall into this category,
whether they limit reviews or assessments posted online for the public
to see, complaints filed with government regulators, or otherwise. The
term ``limitation'' is broad and would encompass provisions that
outright prohibit these types of analysis and statements by consumers,
as well as provisions that impose a penalty for making such analysis or
statements or that require consumers to grant the business exclusive
intellectual property rights in the content of their analysis or
statements.\275\
---------------------------------------------------------------------------
\275\ See generally 15 U.S.C. 45b(b)(1) (Consumer Review
Fairness Act listing these three types of invalid contractual
limitations that impede consumer reviews).
---------------------------------------------------------------------------
As discussed above in part II.C.2, some consumer complaints may be
an indicator of violations or risks of violation of applicable legal
protections. And the Consumer Review Fairness Act separately protects a
consumer's right to complain, generally prohibiting the use of non-
disparagement terms and conditions in form contracts for the sale of
goods and services. As a result, these terms or conditions may limit
consumer protections, such as those afforded under the Consumer Review
Fairness
[[Page 6935]]
Act or related laws,\276\ limit recourse consumers may have through
complaints concerning violations of applicable legal protections, or
both.
---------------------------------------------------------------------------
\276\ See also CFPB Bulletin 2022-05.
---------------------------------------------------------------------------
And whether or not a statute expressly prohibits a contract from
including a term or condition of this type, the term or condition
generally may have the effect of restricting the flow of information
about potential concerns with the consumer financial product or
service--whether through public online review fora, or through consumer
complaints filed with regulators. Collecting consumer complaints is a
primary function of the Bureau under CFPA section 1021(c)(2). The
Bureau relies on consumer complaints for, among other purposes, its
risk-based supervision program.\277\ Other reviews consumers post may
qualify as field market intelligence, which the Bureau may consider in
its risk-based supervision program.\278\ And both consumer complaints
to the Bureau and publicly posted consumer reviews are information the
Bureau may consider in its role in monitoring the markets for risks to
consumers. These contract terms carry the potential to discourage
consumers from providing this information, which could understate or
obscure the risk profile of a supervised registrant. It is therefore
important for the Bureau's supervisory prioritization and examination
work and for its market monitoring to be able to assess when this may
be happening.
---------------------------------------------------------------------------
\277\ See generally CFPB Examination Manual at 11 (describing
prioritization process).
\278\ Id.
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Notably, the statutory prohibition against non-disparagement
clauses in the Consumer Review Fairness Act includes certain
exceptions, generally allowing contractual provisions that prohibit
disclosure or submission of, or reserve the right to remove trade
secrets or commercial or financial information obtained from a person
and considered privileged or confidential, certain personnel and
medical files, certain information compiled for law enforcement
purposes, content containing computer viruses and other potentially
damaging code, and content that is clearly false or misleading, is
unrelated to the goods or services offered, contains personal
information or likeness of another person, or is libelous, harassing,
abusive, obscene, vulgar, sexually explicit, or is inappropriate with
respect to race, gender, sexuality, ethnicity, or other intrinsic
characteristic.\279\ The Bureau requests comment on whether proposed
Sec. 1092.301(d)(6) should be narrowed to explicitly include these
types of exceptions or whether the nonbank registration system should
allow supervised registrants to identify when limitations in a term or
condition covered by proposed Sec. 1092.301(d)(6) are only those that
would qualify for an exception from the Consumer Review Fairness Act.
The Bureau preliminarily believes that a more detailed criteria for
proposed Sec. 1092.301(d)(6) that includes these exceptions could be
more burdensome for supervised registrants to apply. Under proposed
Sec. 1092.302(a)(3)(iv)(F), the proposal would collect the text of the
term containing the limitation. To the extent the limitation fell
within the statutory exclusions described above, the Bureau may be able
to identify that when assessing the risk posed by the term.
---------------------------------------------------------------------------
\279\ 15 U.S.C. 45b(b)(2)-(3).
---------------------------------------------------------------------------
Proposed Sec. 1092.301(d)(7) would define a covered limitation on
consumer legal protections to include 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. This sort of catch-all
provision would capture other terms or conditions not already covered
by proposed Sec. 1092.301(d)(1) through (6) that expressly waive or
expressly attempt to waive an identified legal protection of the
consumer.
There are different ways a term or condition could waive or attempt
to waive a ``consumer legal protection'' for purposes of proposed Sec.
1092.301(d)(7). A term or condition may waive or attempt to waive an
identified legal right the consumer might exercise, or a legal
obligation the supervised registrant owes to the consumer. This could
include, for example, a waiver of a right to a jury trial, or a waiver
of a substantive legal protection such as a right to receive a
disclosure.
Proposed Sec. 1092.301(d)(7) would explicitly cover express
waivers that extinguish, or in which a consumer relinquishes, rights or
other applicable legal protection.\280\ In addition, proposed Sec.
1092.301(d)(7) would cover a consumer's express agreement not to assert
rights or other applicable legal protections.\281\ For example, as
discussed in part II.C.2 above, in 2020 the Bureau resolved an
enforcement action over a provision in an automobile loan extension
agreement affecting at least tens of thousands of consumers. The loan
extension agreement included a term and condition that required the
consumer to ``agree that [the consumer] will not file for bankruptcy
protection within 120 days[.]'' \282\ This term did not use the word
``waive'' or ``waiver'' in its text. However, the express language of
this term or condition, at least for the 120-day period, purported to
extinguish the identified protection (bankruptcy protection), which is
a legal protection. As the Bureau concluded, the agreements ``created
the net impression consumers could not file for bankruptcy.'' \283\ On
that basis, the Bureau indicated that the term may be reasonably
understood to be a ``waiver of an individual's right to file for
bankruptcy [that] is void as against public policy.'' \284\ Thus
proposed Sec. 1092.301(d)(7) expressly applies to this type of waiver,
just as a number of anti-waiver statutes discussed in part II.B
expressly apply to agreements not to assert rights or protections.
---------------------------------------------------------------------------
\280\ See, e.g., Waiver, Black's Law Dictionary (11th ed. 2019)
(common definition of ``waiver'' including ``relinquishment'' of a
legal right or advantage).
\281\ See, e.g., id. (common definition of ``waiver'' also
including ``abandonment'' of a legal right or advantage).
\282\ In re Nissan Motor Acceptance Corporation, Admin. Proc.
2020-BCFP-0017 (Consent order filed Oct. 13, 2020), ] 47.
\283\ Id. ] 49.
\284\ Id. ] 50.
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Proposed Sec. 1092.301(d)(7) refers to waivers of ``other''
consumer legal protections to simplify the regulation and reduce burden
by distinguishing the coverage of proposed Sec. 1092.301(d)(7) from
the other subparagraphs of proposed Sec. 1092.301(d). As a result, if
a term or condition already is covered by an earlier category under
proposed Sec. 1092.301(d)(1) through (6), then it would not be
necessary for supervised registrants to determine whether the term or
condition also would be covered by the catch-all.
In addition, an arbitration agreement would not be per se covered
by proposed Sec. 1092.301(d)(7). But if an arbitration agreement
specifies waivers, those waivers may fall separately under proposed
Sec. 1092.301(d)(1) through (6), as applicable, or otherwise under
proposed Sec. 1092.301(d)(7). For example, if an arbitration agreement
classified under proposed Sec. 1092.301(d)(8) discussed below also
expressly refers to a waiver of a right to a jury trial, the jury trial
waiver would be separately reportable under proposed Sec.
1092.301(d)(7).
Proposed Sec. 1092.301(d)(7) would act as a sort of catch-all, but
it would not extend to implied waivers, which might arise from a term
or condition that violates a consumer legal protection but
[[Page 6936]]
does not expressly purport to accomplish a waiver of that legal
protection. As discussed in the section-by-section analysis of proposed
Sec. 1092.301(c) above, the Bureau is not seeking in this proposal to
require supervised registrants to evaluate the legality of all terms
and conditions for potential implied waivers. The Bureau requests
comment on that approach. For example, the Bureau requests comment on
whether proposed Sec. 1092.301(d) should be expanded to cover clauses
purporting to obtain the agreement of the consumer to a limitation or
restriction that is inconsistent with the applicable legal protections.
As discussed in part II above, for example, the Bureau has identified
instances of agreements containing terms or conditions that purport to
block the ability of consumers to take specified action. These terms or
conditions do not necessarily clarify that action may amount to an
exercise of certain potentially applicable consumer rights--such as a
right, under certain appellate and agency precedents, to revoke consent
to receive debt collection calls. The degree to which proposed Sec.
102.301(d)(7) would cover those terms or conditions will depend in part
on whether they identify a consumer legal protection that is being
waived, relinquished, or the consumer is agreeing not to assert.
For some other agreements, for other reasons, it is unlikely they
would contain express waivers. For example, agreements to receive
electronic disclosures and other electronic communications commonly are
used in the marketplace. In particular, when consumer disclosures
required by statute, regulation, or other rule must be in writing, the
consumer may consent to receive electronic disclosures pursuant to the
process specified in the Electronic Signatures in Global and National
Commerce (E-Sign) Act.\285\ The E-Sign Act states that it does not
``limit, alter, or otherwise affect any'' requirement of law ``other
than a requirement that contracts or other records be written, signed,
or in nonelectronic form.'' \286\ Because the E-Sign Act expressly
affects existing legal requirements, the Bureau does not understand an
agreement that forgoes receipt of a disclosure in nonelectronic form,
when the agreement complies with the E-Sign Act, would constitute an
express waiver of a written disclosure right for purposes of proposed
Sec. 1092.301(d)(7). Rather, the E-Sign Act clarifies that a compliant
consent agreement ``satisfies the requirement that such information be
in writing[.]'' \287\ The Bureau requests comment on whether it should
expand the scope of proposed Sec. 1092.301(d)(7) or otherwise clarify
that subpart C may cover E-Sign Act consent to receive electronic
disclosures and communications, and if so, for what types of
agreements, why, and how.
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\285\ 15 U.S.C. 7001 et seq.
\286\ 15 U.S.C. 7001(b)(1).
\287\ 15 U.S.C. 7001(c)(1).
---------------------------------------------------------------------------
And in situations involving legitimate uncertainty over the
coverage of a particular term or condition under subpart C, supervised
nonbanks could file a notice of non-registration as described in
proposed Sec. 1092.302(d). Still, terms and conditions that may be
characterized as purported implied waivers also can pose risk to
consumers, including a risk of deceiving consumers about their
underlying legal rights. Notwithstanding that risk, the Bureau has not
proposed that subpart C would cover these types of terms and
conditions. The Bureau's preliminary assessment is that the burden of
identifying these types of terms and conditions may be relatively
higher, depending not just on identifying a limitation or restriction
in the term or condition, but on its relationship to all potentially
applicable legal protections that are not expressly identified in the
text of the term or condition. There also may be more uncertainty about
when a contract condition is inconsistent with an applicable legal
protection. To the extent that a commenter nonetheless believes these
types of terms and conditions should be covered, the Bureau requests
comment on how to clearly define these terms and conditions in a manner
that could be implemented to allow supervised registrants to detect the
clauses without significant burden.
The Bureau also requests comment on whether proposed Sec.
1092.301(d)(7) is sufficiently clear to identify which terms and
conditions are covered by it, and whether additional clarifications
would be useful, and if so, what clarifications.
Finally, proposed Sec. 1092.301(d)(8) would cover arbitration
agreements, defined as a term or condition requiring that a consumer
bring any type of legal action in arbitration. Because these agreements
require consumers to assert certain privately-actionable legal claims
only in arbitration, they by definition limit how consumers can bring
legal action by removing the option of asserting those claims in court.
The Bureau considered, but is not proposing, covering other types
of terms and conditions that may, to one degree or another, affect the
ability of consumers to enforce or exercise applicable legal
protections. For example, the Bureau notes that the proposal would not
identify a choice of law provision as itself a covered limitation on
applicable consumer legal protections. These clauses also can alter the
rights of consumers, particularly when providers choose laws less
favorable to the consumer that bear little relation to the transaction.
Nevertheless, the Bureau believes that requiring registration of all
uses of choice of law provisions would lack utility, as these clauses
are nearly universal, and the Bureau understands that they may present
lower risk in some circumstances, such as when they are used to provide
clarity and certainty without limiting consumer rights or ability to
vindicate rights.
The Bureau proposes that if a provider uses any one or more of the
covered terms and conditions, then the proposed rule would require the
supervised registrant to submit data on choice of law provisions
governing the covered term(s) or condition(s) as discussed in the
section-by-section analysis of proposed Sec. 1092.302(a). Under this
approach, if a provider does not use any of the covered terms or
conditions defined in proposed Sec. 1092.301(d), but does use a choice
of law provision, then it would not be required to register or submit
information collected under proposed Sec. 1092.302(a).
The Bureau believes that this approach strikes the right balance to
help it monitor for risks to consumers and inform the Bureau's risk-
based supervision program because there is a need to identify and
understand the use of choice of law clauses in contexts that already
pose risks to consumers. Conditioning the reporting of a choice of law
clause on the existence of other terms and conditions defined in
proposed Sec. 1092.301(d) is appropriate because a provider using a
choice of law provision that poses significant risks to consumers is
likely to also use one or more of the other covered terms or conditions
addressed by the proposed rule. While the other clauses may be very
common, one purpose of the proposed rule is to understand and track how
common; by contrast, the Bureau is already confident that choice of law
clauses are ubiquitous if not universal. The Bureau seeks comment on
this approach, and whether it should instead require registration of
choice of law provisions, even when a provider does not use any of the
covered terms or conditions defined in proposed Sec. 1092.301(d).
[[Page 6937]]
The Bureau requests comment on its proposed definition in Sec.
1092.301(d), including on whether modifications or additions to the
definition are necessary to accomplish the objectives of the proposal.
301(e) Identifying Information
Proposed Sec. 1092.301(e) would define the term identifying
information. This term describes the scope of identifying information a
supervised registrant would be required to submit pursuant to proposed
Sec. 1092.302(a). Proposed section Sec. 1092.301(e) would limit this
information to information that is already available to the supervised
registrant, and which uniquely identifies the supervised registrant. As
described in proposed Sec. 1092.301(e), this information would
include, to the extent already available to the supervised registrant,
the supervised registrant's legal name(s), State of incorporation or
organization, headquarters and principal place of business addresses,
and unique identifiers issued by a government agency or standards
organization. Examples of addresses that entities may be required to
provide under proposed Sec. 1092.302(a) include addresses used for
conducting business with consumers, including both physical addresses
and electronic addresses such as internet website addresses. Examples
of the identifiers issued by a government agency or standards
organization that entities may be required to provide under proposed
Sec. 1092.302(a) include the Nationwide Multistate Licensing System
and Registry identifier (NMLSR ID), the HMDA Reporter's Identification
Number (HMDA RID), the Legal Entity Identifier (LEI) issued by a
utility endorsed by the LEI Regulatory Oversight Committee or endorsed
or otherwise governed by the Global LEI Foundation (GLEIF, or any
successor of the GEIF), and a Federal Tax Identification number.\288\
---------------------------------------------------------------------------
\288\ The Bureau's HMDA Regulation C specifies the collection of
a LEI or GLEIF for reporters subject to that rule. See 12 CFR
1003.4(a)(1)(i)(A).
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This information will help the Bureau identify supervised
registrants with specificity, including ensuring that the Bureau can
relate their submissions to other registries and databases where
applicable, such as the NMLS, and HMDA submissions. Furthermore, upon
publication, this information will facilitate the ability of consumers
to identify covered persons that are registered with the Bureau, as
discussed in part II.C.3 above.
The proposal would not require the entity to obtain an identifier.
Thus, for example, if the nonbank registration system were to ask about
a particular type of identifier and that type of identifier had not
been assigned to the supervised registrant, then the Bureau expects
that the supervised registrant would be able to indicate the identifier
is not applicable.
The Bureau seeks comment on these proposed types of identifying
information, and other types of identifying information that the
nonbank registration system might collect and publish.
301(f) Annual Registration Date
Proposed Sec. 1092.301(f) would define the annual registration
date as the day during the calendar year by which a supervised
registrant must complete its annual registration required by proposed
Sec. 1092.302(a). As explained in proposed Sec. 1092.301(f), annual
registration dates would not occur until after the nonbank registration
system implementation date defined pursuant to proposed Sec.
1092.101(e). When the Bureau issues filing instructions as described in
proposed Sec. 1092.102(a), the Bureau would set the precise timing for
the annual registration date and any extensions to that date during
emergencies. Proposed Sec. 1092.301(f) also would provide that the
Bureau will specify the annual registration date under proposed subpart
C including the process for filing for an automatic extension of the
annual registration date for up to 30 days. The Bureau's filing
instructions under proposed Sec. 1092.102(a) would clarify the process
for obtaining such an extension. The Bureau seeks comment on the
process, length, and frequency for automatic extensions under this
proposed provision.
301(g) Supervised Nonbank
The proposal generally would apply to nonbank covered persons that
are subject to supervision by the Bureau under its statutory
authorities in CFPA section 1024(a). Proposed Sec. 1092.301(g) would
define the term supervised nonbank by reference to the relevant
provisions of the CFPA that establish the Bureau's supervisory
authority over nonbank covered persons in CFPA section 1024(a). For
clarity, proposed Sec. 1092.301(g) would reiterate, as provided in the
CFPA, that persons are not supervised nonbanks with respect to
activities that are excluded from the supervisory authority of the
Bureau under one or more of the provisions of CFPA section 1027 or
section 1029.
301(h) Supervised Registrant
Proposed Sec. 1092.301(h) would define the term supervised
registrant as those supervised nonbanks that are subject to proposed
subpart C. The term would cover supervised nonbanks, as defined in
proposed Sec. 1092.301(g), that are subject to the Bureau's
supervisory authority under CFPA section 1024(a) and are not
specifically excluded from coverage of this proposal by one or more of
the exclusions in the paragraphs in proposed Sec. 1092.301(h). Under
the proposed definition of ``supervised registrant,'' the Bureau need
not have previously exercised its authority to require reports from, or
conduct examinations of, a particular supervised nonbank for that
entity to qualify as a supervised registrant. A supervised nonbank
would qualify as a supervised registrant if the Bureau could require
reports from, or conduct examinations of, that entity because it is a
covered person described in CFPA section 1024(a)(1). Such an entity
would be ``subject to supervision and examination'' within the meaning
of the proposal even if the Bureau has never previously exercised its
authority to require reports or conduct examinations with respect to
that entity.
Proposed Sec. 1092.301(h)(1) and (2) would clarify that certain
governments, as described in these subparagraphs, would not be covered
by the proposal. Proposed Sec. 1092.301(h)(1) would clarify that an
agency of the Federal government, as defined in 28 U.S.C. 2671, would
not be covered by the proposal. The Bureau has other avenues of
collaborating with Federal agencies and, out of considerations of
comity, does not seek to subject other Federal agencies to an
information collection requirement in this proposal.
For parity, comity, and other reasons described below, proposed
Sec. 1092.301(h)(2) also would exclude certain other types of
governmental bodies. Specifically, proposed Sec. 1092.301(h)(2) would
exclude a State as defined in CFPA section 1002(27), which includes a
federally-recognized Indian Tribe.\289\ The Bureau also collaborates
with State and Tribal regulators and does not seek to subject their
governments to an information requirement in this proposal.
Governmental bodies described in proposed Sec. 1092.301(h)(2)
generally are
[[Page 6938]]
immune from private suit already.\290\ Therefore, the Bureau does not
have the same concerns about the risk that terms and conditions in form
contracts would limit availability of suit, given that the law itself
already limits such suits against these persons.
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\289\ In this proposal, when the Bureau uses the term ``Tribe,''
it is referring to any federally-recognized Indian Tribe, as defined
by the Secretary of the Interior under section 104(a) of the
Federally Recognized Indian Tribe List Act of 1998, 25 U.S.C.
5131(a).
\290\ In proposed Sec. 1092.301(h)(2), the Bureau specifically
identifies a ``Tribe'' as an entity included in the exemption.
Because sovereign immunity only applies to the sovereign, the Bureau
believes that an entity that is eligible for the sovereign immunity
conferred upon a Tribe would be considered the ``Tribe'' for
purposes of proposed Sec. 1092.301(h)(2).
---------------------------------------------------------------------------
There may be some uncertainty about when a particular supervised
nonbank is a State (including for purposes of the CFPA, a Tribe) and
thus enjoys the sovereign immunity from private suit typically
conferred upon a State (including a Tribe). Such an entity could
register under the proposal, since, as clarified in proposed Sec.
1092.102(c), registration is without prejudice to the ability of the
entity to dispute that it is subject to the Bureau's authority over it.
Or, if the entity has a good faith basis to believe it is a State
(including a Tribe), such as by virtue of enjoying its sovereign
immunities, it could voluntarily file with the nonbank registration
system a notice of nonregistration as described in proposed Sec.
1092.302(d). At the same time, courts have found that immunities are
not available to some providers of consumer financial products or
services subject to the Bureau's supervisory authority, notwithstanding
their claims to have a nexus with a State or a Tribe.\291\ In those
circumstances, the entities could face private enforcement, and covered
terms or conditions purporting to limit private enforcement would pose
the types of risks to consumers as described in this proposal.\292\
Therefore, the Bureau is not proposing an exemption for all State or
Tribe-affiliated businesses, regardless of whether they are part of the
State (including a Tribe). The Bureau requests comment on this
approach.
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\291\ See, e.g., Great Plains Lending, LLC v. Department of
Banking, 259 A.3d 1128, 1134 (Conn. 2021) (holding that Great Plains
Lending, LLC, had established sovereign immunity, but that there was
insufficient evidence to conclude that another lender formerly known
as American Web Loan, Inc., had sovereign immunity, and remanding on
that issue); Solomon v. American Web Loan, 375 F.Supp.3d 638, 660
(E.D. Va. 2021) (holding that American Web Loan did not share
tribe's sovereign immunity).
\292\ Solomon v. American Web Loan, Inc., Case No. 17cv0145
(E.D. Va.) (Final Approval Order for Class Action Settlement July 9,
2021), https://www.awlsettlement.com/ (last visited Dec. 6, 2022).
---------------------------------------------------------------------------
The Bureau also requests comment on whether the exemption in
proposed Sec. 1092.301(h)(2) should be limited in some way. For
example, although State and Tribal governments generally have sovereign
immunity from private suit, that immunity may be waived by the
government itself or in some cases by law, such as a clear statement in
a Federal statute.\293\ The Bureau requests information on how common
it is for waivers of sovereign immunity to occur in the provision of
supervised consumer financial products or services, and whether the
exemption in Sec. 1092.301(h)(2) should not apply when the sovereign
immunity has been waived.
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\293\ See, e.g., Michigan v. Bay Mills Indian Cmty., 572 U.S.
782, 790 (2014) (citing C&L Enters, Inc. v. Citizen Band Potawatomi
Tribe of Okla., 532 U.S. 411 (2001)).
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In addition, for clarity and administrability, proposed Sec.
1092.301(h)(2) would not subject State and Tribal governments to a
partial registration requirement. However, the Bureau requests comment
on whether the Bureau should finalize a different approach, under which
a State or a Tribe should be required to register covered terms or
conditions that are not expressly framed as limitations on private
suit. Such terms could include, for example, outright waivers of legal
protections that do not establish a private right of action in the
first place or non-disparagement clauses impeding exercise of rights.
Even when entities are not subject to private suit in the first place,
these terms or conditions may pose risks to consumers.
The Bureau also requests comment on whether the exclusions in
proposed Sec. 1092.301(h) should be broadened to include other
governments, and if so, which ones and why. The Bureau understands the
local governments do not enjoy the same degree of sovereign immunity as
States and Tribes.
Proposed Sec. 1092.301(h)(3) would clarify that the proposal would
not cover nonbank persons who are subject to the Bureau's supervisory
authority solely in either of two capacities. First, proposed Sec.
1092.301(h)(3)(i) would clarify that the proposal would not cover
nonbank persons who are subject to the Bureau's supervisory authority
solely under CFPA section 1024(e), section 1025(d), or section 1026(e),
which describe the Bureau's supervisory authority over service
providers to supervised persons. The Bureau is prioritizing in this
proposal the registration of nonbank covered persons subject to its
supervisory authority under CFPA section 1024(a). The Bureau believes
that it can achieve the anticipated benefits described above without
extending its coverage to entities solely supervised as service
providers subject to supervision under CFPA section 1024. Registering
entities solely supervised as service providers may introduce
complexity and would add burden and broaden the scope of the nonbank
registration system in a manner the Bureau is not prepared to do at
this initial stage of nonbank registration rulemaking. In any event, if
a person is a service provider to a supervised person and also is
itself supervised under CFPA section 1024(a), then the proposal already
would cover that person. For example, the proposal would apply to a
larger participant in the consumer debt collection market including
when the debt collector is acting as a service provider to a payday
lender or a credit card issuer.
Second, proposed Sec. 1092.301(h)(3)(ii) would clarify that the
proposal would not cover an entity that is subject to the Bureau's
supervisory authority solely in its capacity as an entity supervised
for a period of two years or less pursuant to an order issued by the
Bureau pursuant to 12 U.S.C. 5514(a)(1)(C). For example, proposed Sec.
1092.301(h)(3)(ii) would exclude a person supervised by the Bureau
solely based on a consent agreement by which an entity may voluntarily
consent to the Bureau's supervisory authority as described in 12 CFR
part 1091. The Bureau already will have identified such an entity,
likely will have plans to examine it under that order based on its
determination that the entity's conduct poses risks to consumers, and
the Bureau may obtain information about its covered terms and
conditions through the normal examination process. At the same time,
given the limited duration of such an order, if the proposed rule were
to apply to it, it may only be subject to registration for one annual
registration date. For these reasons, the registration information for
such an entity may be less useful to the Bureau's risk-based non-bank
supervision program. Collection of that information also would generate
only a discrete amount of information about a single entity, typically
in a market not otherwise generally supervised and subject to the
proposal. For these reasons, the Bureau is not proposing to cover these
entities under this proposed rule. However, the Bureau requests comment
on this approach, including whether the final rule should not include
this exemption, should include an exemption for all such orders even
when they result in supervisory authority for a longer period of time,
or should include a provision that would allow such an order itself to
subject the entity to the rule, whether in whole or in part (for
example,
[[Page 6939]]
registration but not publication), which determinations would be made
in the orders themselves on an order-by-order basis. For example, under
that alternative, if an order that established supervisory authority
for a two-year period were renewed for another two-year period, then if
the original order did not subject the entity to the rule, the renewal
order could do so.
Proposed Sec. 1092.301(h)(4) would exclude natural persons from
the requirements of proposed subpart C. Many supervised nonbanks are
not natural persons. However, some natural persons may fall within the
scope of the provisions of CFPA section 1024(a), including those that
broker mortgages. For example, a natural person may act in the capacity
as sole proprietor of a sole proprietorship that is not incorporated as
a distinct legal entity. Such a natural person could qualify as being
subject to the Bureau's supervisory authority, which applies to
supervised covered persons, a term defined in CFPA section 1002(6) by
reference to ``any person'' which, under CFPA section 1002(19) includes
an ``individual.'' The Bureau does not believe, however, that
individual natural persons typically would be likely to enter into a
significant number of covered form contracts with consumers. Such
persons might qualify for the exclusion from subpart C under proposed
Sec. 1092.301(h)(5) for persons with receipts of less than $1 million,
or for the exclusion under proposed Sec. 1092.301(h)(6) for persons
with de minimis levels of use of covered terms and conditions. Yet
there still may be burden involved in analyzing the regulation and
assessing eligibility for these exclusions. The Bureau requests comment
on this exclusion, including any data on whether natural persons enter
into large numbers of covered form contracts containing covered terms
or conditions and have receipts of over $1 million from offering or
providing these consumer financial products or services.
Proposed Sec. 1092.301(h)(5) would exclude supervised nonbanks
with less than $1 million in annual receipts resulting from offering or
providing all consumer financial products and services as relevant
under proposed Sec. 1092.301(g). For purposes of this exclusion,
proposed Sec. 1092.301(h)(5)(i) would clarify that the term ``annual
receipts'' has the same meaning as that term has in 12 CFR 1090.104(a),
including the provisions of that definition at 12 CFR 1090.104(a)(i)
regarding receipts, 12 CFR 1090.104(a)(ii) regarding period of
measurement, and 12 CFR 1090.104(a)(iii) regarding annual receipts of
affiliated companies.
In addition, for purposes of this exclusion, proposed Sec.
1092.301(h)(5)(ii) would clarify that receipts that count toward
determining larger participant status under a larger participant rule
would count toward this exclusion, even if the person ultimately did
not qualify as a larger participant. This clarification would address
the example of a person offering or providing both consumer mortgages,
private student loans, or payday loans, on the one hand, and consumer
financial products or services identified in a larger participant rule,
on the other hand. In that example, even if the person did not meet the
threshold for larger participant status under the larger participant
rule, the receipts from offering or providing the consumer financial
product or service covered by the larger participant rule still would
count as receipts for purposes of the exclusion in this proposal.
Under this proposed definition, the exclusion would be based on the
receipts resulting from offering or providing all consumer financial
products and services as relevant under proposed Sec. 1092.301(g),
including such receipts from affiliated companies as defined in the
Bureau's regulations at 12 CFR 1090.101. The receipts test in proposed
Sec. 1092.301(h)(5) does not refer to when the underlying consumer
contract that generated the receipt was entered into, or whether the
underlying consumer contract that generated the receipt was a covered
form contract or included a covered term or condition. Therefore, if a
supervised nonbank earned receipts in the previous calendar year from a
consumer financial product or service as relevant under proposed Sec.
1092.301(g) originally offered or provided in prior years, those
receipts still would count toward the threshold. In addition, if a
supervised nonbank earned receipts in the previous calendar year from
consumer financial products or services as relevant under proposed
Sec. 1092.301(g) that were not subject to covered terms and conditions
in covered form contracts, those receipts still would count toward the
threshold.
The Bureau is proposing the exemption in proposed Sec.
1092.301(h)(5) for two reasons. First, consumer financial product and
service providers with significantly lower levels of receipts generally
may pose lower risks because they engage with fewer consumers, obtain
less money from those consumers, or both. Second, the information
collection burdens on entities with receipts of $1 million or less, on
a relative basis, generally would be higher than such burdens on larger
entities.\294\
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\294\ See 12 U.S.C. 5514(b)(2)(A), (B) (requiring the Bureau to
take into consideration ``the asset size of the covered person'' and
``the volume of transactions involving consumer financial products
or services in which the covered person engages''). Furthermore,
while the Bureau does not believe that it needs to rely on its
authority under 12 U.S.C. 5512(b)(3) to exempt classes of covered
persons from rules in proposing this small-entity exclusion. The
Bureau believes that the exclusion would be warranted as an exercise
of its section 1022(b)(3) exemption authority, to the extent that
provision was applicable. See 12 U.S.C. 5512(b)(3). As under 12
U.S.C. 5514(b)(2), an entity-size-based exclusion accords with 12
U.S.C. 5512(b)(3)(B)(i) and (ii), which instruct the Bureau to
consider ``the total assets of the class of covered persons'' and
``the volume of transactions . . . in which the class of covered
persons engage'' in issuing exemptions. 12 U.S.C. 5512(b)(3)(B)(i)-
(ii). In addition, given the relatively limited scope of the harm to
consumers that entities with annual receipts not exceeding $1
million would generally be able to cause, the Bureau does not
believe that the factor articulated in 12 U.S.C. 5512(b)(3)(B)(iii)
(``existing provisions of law which are applicable to the consumer
financial product or service and the extent to which such provisions
provide consumers with adequate protection'') warrants not proposing
the proposed small-entity exclusion.
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The Bureau requests comment on this approach, including whether the
exemption in proposed Sec. 1092.301(h)(5) should apply on a fiscal-
year basis, as an alternative to the proposed calendar-year basis or as
an additional basis for exemption, and why or why not. The calendar-
year measurement generally would align with the period used to define
reporting obligations under proposed Sec. 1092.302(a). However, the
Bureau notes that receipts calculations for larger participant
determinations in the debt collection and consumer reporting markets
are on a fiscal-year basis, as provided for in part 1090. The Bureau
also requests comment on whether the proposed exemption should be
automatically adjusted for inflation, such as every five years or at
some other interval.
Proposed Sec. 1092.301(h)(6) would exclude supervised nonbanks
that, together with their affiliates, engaged in no more than a de
minimis level of use of covered terms or conditions in the previous
calendar year. In general, risks to consumers from covered terms and
conditions may be greater for covered terms and conditions used more
frequently, such as in more transactions or with more consumers.
Relatedly, as discussed in the section-by-section analysis of the
definition of a covered form contract in proposed Sec. 1092.301(b)(1),
the proposal would focus on risks related to terms and conditions in
form contracts used repeatedly in multiple transactions. The Bureau
also recognizes the burdens of the information collection discussed in
more detail in parts VII, VIII, and IX. By
[[Page 6940]]
not proposing to collect information about supervised nonbanks'
relatively infrequent use of covered terms and conditions, the proposal
seeks to balance that burden in light of the potentially lower risks
from infrequent use. For these reasons, proposed Sec. 1092.301(h)(6)
would exclude from the definition of supervised registrant those
supervised nonbanks engaged in no more than a de minimis level of use
of covered terms or conditions.
Under proposed Sec. 1092.301(h)(6), if a supervised registrant
meets two conditions, its use of covered terms and conditions would
qualify as de minimis. First, the supervised registrant must not have
entered into covered form contracts containing any covered term or
condition 1,000 or more times during the previous calendar year.
Proposed Sec. 1092.301(i)(1) describes the ways in which a supervised
registrant would enter into a covered form contract for purposes of
subpart C. This test would count the number of times the supervised
registrant entered into covered form contracts in the previous calendar
year, for consumer financial products and services as relevant under
proposed Sec. 1092.301(g).\295\ Entering into covered form contracts
for a consumer financial product or service subject to a larger
participant rule would count toward this threshold even if the person
did not qualify as a larger participant. In addition, regardless of how
many covered terms and conditions are contained in the covered form
contract, each time the supervised registrant enters into the covered
form contract would count only once toward the 1,000-use cutoff for
this component of the proposed de minimis threshold. As a result, if a
supervised registrant entered into only one covered form contract, that
covered form contract contained multiple covered terms or conditions,
and the supervised registrant entered into the contract 999 or fewer
times, it would satisfy this component. As noted in the section-by-
section analysis of proposed Sec. 1092.301(c), some transactions may
be governed by multiple covered form contracts. For that reason, the
Bureau seeks comment on whether this component of the proposed
exclusion should be revised to be based on the number of times the
supervised registrant entered into all form contracts for the same
consumer financial product or services. The Bureau also requests
comment on whether to adopt a different threshold for what is a de
minimis number of times for a supervised registrant to enter into a
covered term or condition.
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\295\ This would include activity subject to an order under CFPA
section 1024(a)(1)(C) that is not excluded by proposed Sec.
1092.301(h)(3)(ii), because that activity falls within the
definition of covered term or condition in proposed Sec.
1092.301(c). Proposed Sec. 1092.301(c) covers the described terms
or conditions when they apply to a consumer financial product or
service ``described in'' proposed Sec. 1092.301(g). When a
supervised registrant's consumer financial product or service is
specified in an order issued under CFPA section 1024(a)(1)(C), then
for the supervised registrant, that consumer product or service
would be one that is ``described in'' proposed Sec. 1092.301(g) for
purposes of the definition in proposed Sec. 1092.301(c).
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Second, the supervised registrant must not have received, as a
party to a legal action, court or arbitrator decision(s) ruling on the
enforceability of a covered term or condition in the previous calendar
year. Such decisions could include orders or opinions terminating,
dismissing, staying, deferring, suspending, restricting, limiting
liability for a claim filed by the consumer pursuant to a covered term
or condition in a covered form contract. As discussed in the section-
by-section analysis of proposed Sec. 1092.301(i)(2) below,
administrative tribunals are less likely to be charged with ruling on
the enforceability of a contract term; for that reason, proposed Sec.
1092.301(h)(6)(ii) would not cover administrative decisions.
The Bureau requests comment on whether a de minimis use exclusion
is appropriate, and if not, why not. The Bureau also requests comment
on its proposed levels of use to define de minimis use. For the
component of the threshold related to decisions in legal actions, the
Bureau requests comment on whether the final rule should adopt a higher
threshold, or a different threshold for individual and putative or
certified class actions, and if so, what the threshold(s) should be and
why. The Bureau is not proposing a different threshold for these
different types of cases. Even decisions in individual legal actions
may have precedential, authoritative, or persuasive impact beyond the
individual case, whether for other courts, arbitrators, or the public.
For that reason, such decisions may have impact beyond those consumers
who are party to an individual legal action or potential members of a
class action.
Proposed Sec. 1092.301(h)(7) would exclude supervised nonbanks
whose use of covered terms or conditions in covered form contracts in
the previous calendar year was limited to entering into contracts for
residential mortgages in a form made publicly available on the internet
required for insurance or guarantee by a Federal agency or purchase by
the Federal National Mortgage Association, the Federal Home Loan
Mortgage Corporation (or its successors), or the Government National
Mortgage Association. This exclusion would not apply if the supervised
nonbank used covered terms or conditions for consumer financial
products or services as relevant to proposed Sec. 1092.301(g) that
were different from or in addition to any covered terms and conditions
that appeared in these published form contracts. In addition, this
exclusion would not apply if the person obtained a court or arbitrator
decision in the previous calendar year regarding the enforceability of
a covered term or condition in a covered form contract as described in
proposed Sec. 1092.301(i)(2).
The Bureau is proposing this exclusion because, as discussed in the
impacts analysis in part VII, these standard federally-adopted
contracts are publicly-available on the internet websites of Federal
agencies or enterprises overseen by Federal agencies and are in general
use throughout the market for first-lien mortgages on site-built homes
that are insured, guaranteed, or purchased by these Federal agencies or
enterprises supervised by Federal agencies. Covered terms and
conditions may appear in these covered form contracts. However, the
Bureau and the general public already have access to these contracts on
the websites of these Federal agencies or the enterprises they oversee.
The Bureau already can use that information as part of its market
monitoring and risk assessments. It therefore does not propose to
require registration from supervised nonbanks whose sole use of covered
terms or conditions consists of entering into those contracts. The
exemption in proposed Sec. 1092.301(h)(7) would not apply, however, if
the supervised nonbank obtained a court or arbitrator decision
enforcing a covered term in such a covered form contract. The Bureau
and the public do not have general knowledge of all such decisions, and
the value in collecting information about them from a risk monitoring
and assessment perspective therefore is similar to the value of
registering decisions related to covered terms and conditions in other
covered form contracts. In addition, if the supervised nonbank uses
covered terms and conditions contained in covered form contracts, other
than the contracts described in proposed Sec. 1092.301(h)(7), then the
entity would not be eligible for this exemption. For entities not
eligible for an exemption in proposed Sec. 1092.301(h), the Bureau is
not proposing a blanket exclusion for the
[[Page 6941]]
contracts described in proposed Sec. 1092.301(h)(7) because the
incremental burden from registering an additional contract (compared to
the burden of registering overall) should not be significant,
particularly as the nonbank registration system can streamline how it
collects information about supervised registrants' use of these type of
standard form contracts that have widespread market usage.
Finally, proposed Sec. 1092.301(h)(8) would clarify that the
proposal would not cover a person who is a covered person solely by
virtue of being a related person as defined in CFPA section
1002(25).\296\ Under CFPA section 1002(25), certain persons are
``deemed to mean a covered person for all purposes of any provision of
Federal consumer financial law[.]'' \297\ However, CFPA section
1022(c)(7)(A) excludes related persons from the type of covered persons
covered by Bureau rules regarding registration issued under CFPA
section 1022(c)(7) authority. As discussed in part II.C and part IV
above, the Bureau is proposing this rule in part under separate
authorities under CFPA sections 1022 and 1024. However, for clarity,
the Bureau is not proposing to cover persons who are not subject to its
CFPA section 1022(c)(7)(A) authority. Therefore, it is proposing to
exclude related persons in this rule, to the extent that they are not
covered persons for any other reason than being deemed covered persons
pursuant to CFPA section 1002(25). Similar to the operation of the
exclusion for related persons in the Bureau's recent proposal for
registration of certain nonbank orders,\298\ this exclusion generally
would not apply to a supervised nonbank who offers or provides consumer
financial products or services described in CFPA section 1024(a)(1) (as
recited in proposed Sec. 1092.301(g)), even if it also happens to be a
related person for other reasons.
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\296\ 12 U.S.C. 5481(25).
\297\ 12 U.S.C. 5481(25)(B).
\298\ See Nonbank Registration--Orders Proposal, proposed Sec.
1092.201(d)(1).
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301(i) Use of a Covered Term or Condition
The proposal would collect information about supervised
registrants' use of covered terms and conditions in covered form
contracts. Supervised registrants may use terms and conditions in
different ways. Supervised registrants may typically use covered terms
and conditions by placing them in contracts between the consumer and
the supervised registrant. In other circumstances, supervised
registrants may seek to enforce covered terms and conditions in a
covered form contract that they did not enter into as a party. For
example, as discussed in part II, under some legal precedents, a larger
participant debt collector or student loan servicer may seek to enforce
a covered term or condition in a loan agreement between the consumer
and the creditor.
The enforcement of covered terms and conditions may signal risk to
consumers that is different than the risks presented by placing the
covered terms or conditions in the covered form contract. Namely, the
degree to which a covered term or condition dissuades or chills private
enforcement of an applicable legal protection depends on whether there
are in fact instances of non-compliance with the applicable legal
protection that could lead to private enforcement. If a consumer files
a legal action, then that may indicate that a consumer is claiming
there are such instances. If a court or arbitrator then enforces the
covered term or condition, then that decision on its face restricts the
ability of the consumer to enforce an applicable legal protection when
they have determined they would do so. In addition, as discussed in the
section-by-section analysis of proposed Sec. 1092.301(d)(6) above, a
non-disparagement clause covered by proposed Sec. 1092.301(d)(6) may
similarly chill public comment or complaint about a supervised
registrant's practices, which in turn may make potential violations or
risks of violations of applicable legal protections more difficult to
uncover. Accordingly, proposed Sec. 1092.301(i) would define the term
``use'' in this context to include both entering into a contract that
contains the covered terms or conditions and obtaining decisions about
the enforceability of covered terms and conditions.
First, as described in proposed Sec. 1092.301(i)(1), a supervised
registrant would use a covered term or condition for purposes of
subpart C if it ``enters into'' a covered form contract containing the
covered term or condition. Proposed Sec. 1092.301(i)(1) would list the
covered examples of this type of use. The examples in proposed Sec.
1092.301(i)(1) include providing a new consumer financial product or
service, acquiring or purchasing a consumer financial product or
service, or adding a covered term or condition to a consumer financial
product or service, as described in more detail in proposed Sec.
1092.301(i)(1).\299\
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\299\ This proposed definition and related examples would not
reach terms or conditions affecting all goods and services. The
definition of covered term and condition in proposed Sec.
1092.301(c) reaches only limitations applicable to those consumer
financial products and services subject to the Bureau's supervisory
authority listed in proposed Sec. 1092.301(g).
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Proposed Sec. 1092.301(i)(1)(iii) would clarify that one way a
supervised nonbank would enter into a covered form contract is to
acquire a consumer financial product or service that is subject to a
covered form contract. That would be the case even if the seller is not
subject to the Bureau's supervisory authority. For example, a larger
participant automobile finance lender would enter into a covered form
contract for purposes of proposed Sec. 1092.301(i)(1)(iii) when it
acquires a covered retail installment sales form contract from an
automobile dealer excluded from supervisory authority of the Bureau
under CFPA section 1029(a).
In addition, proposed Sec. 1092.301(i)(1)(v) would clarify that
another way a supervised registrant may enter into a covered form
contract is to add a covered form contract to a pre-existing consumer
financial product or service. For example, a loan servicer or debt
collector may engage in servicing or collection of a debt originated
under a consumer contract that the servicer or debt collector had not
entered into at the time of origination of the loan. But as part of its
servicing or debt collection activities, the servicer or debt collector
may enter into an agreement with the consumer such as for a payment
plan, a payment authorization, a debt modification or settlement, or
some other type of agreement. If the agreement is a covered form
contract, then the servicer or debt collector has entered into that
covered form contract for purposes of proposed Sec. 1092.301(i)(1).
Second, as described in proposed Sec. 1092.301(i)(2), subpart C
would cover an additional type of use of covered terms or conditions--
obtaining decisions by a court or arbitrator on the enforceability of a
covered term or condition. This type of ``use'' could affect a
supervised registrant's obligations under the proposal in two ways.
First, this type of use would affect a supervised registrant's
eligibility for the de minimis exclusion from subpart C, as discussed
in the section-by-section analysis of proposed Sec. 1092.301(h)(6)
above. In addition, when the supervised registrant is not eligible for
the de minimis exclusion, the Bureau would collect certain limited
information about this type of use as described in proposed Sec.
1092.302(a)(4).
Proposed Sec. 1092.301(i)(2) would define the type of event that
would be
[[Page 6942]]
the subject of information collection under proposed Sec.
1092.302(a)(4). The Bureau seeks to define an event or events that
would be a meaningful indicator of potentially significant risk to a
consumer who has asserted a claim in a legal action (or in the case of
non-disparagement clauses, faces a claim against them), while also
defining an event or events that supervised registrants could ascertain
without incurring significant burdens. Court or arbitrator decisions to
enforce or not enforce a covered term or condition would be both a
notable event in the supervised registrant's administration of covered
terms or conditions, and a relatively definitive indicator of risk
posed by those terms or conditions. The section-by-section analysis of
proposed Sec. 1092.302(a)(4) below explains the value of this
information from a risk monitoring and assessment perspective.
Many decisions covered by proposed Sec. 1092.301(i)(2) are not
readily available to the public, such as through electronic legal
research. Decisions in individual arbitrations generally are
confidential, and decisions in lawsuits filed in court are not always
searchable. Some court decisions may be publicly available such that
the Bureau and the public could conduct legal research to determine
when covered terms and conditions were enforced. However, the
supervised registrant is in the best position to know and to readily
access decisions in the legal actions brought against or by them.
The Bureau is not proposing to define ``use'' more broadly. For
example, proposed Sec. 1092.301(i)(2) would not cover steps taken by
the supervised registrant to enforce covered terms or conditions, such
as through filing a pleading that a court or arbitrator either has not
decided or has rejected. Based on the narrower definition in proposed
Sec. 1092.301(i)(2), which would cover only decisions on such
requests, proposed Sec. 1092.302(a)(4) would pose a lower information
collection burden than if it were collecting information about the
broader range of attempts at enforcement (such as motions practice)
regardless of whether the motion resulted in a decision. Supervised
registrants would not need to review all pleadings in a legal action to
identify responsive information. Instead, supervised registrants would
need to be aware of the decisions of the court or arbitrator.
In addition, proposed Sec. 1092.301(i)(2) would not cover
administrative decisions. While courts and arbitrators may generally
apply State common law of contracts to rule on enforceability of terms,
administrative agencies may be less likely to serve that general role
of applying State common law of contracts to rule on enforceability of
covered terms and conditions. The Bureau seeks comment on this
approach, including on the likelihood that administrative decisions may
have a bearing on the enforceability of covered terms and conditions.
Section 1092.302 Registration and Submission of Information Regarding
Use of Covered Terms and Conditions
302(a) Requirements To Register and Annually Submit Information to the
Nonbank Registration System
Proposed Sec. 1092.302(a) would establish requirements for
supervised registrants to annually register in the nonbank registration
system and provide information about their use of covered terms and
conditions in covered form contracts. Proposed Sec. 1092.302(a) would
require that, each calendar year by the annual registration dates,
supervised registrants must identify themselves or update their
identifying information and administrative information in the nonbank
registration system. Proposed Sec. 1092.302(a)(1) and (2) would
require the supervised registrant to specify the supervised products as
relevant to proposed Sec. 1092.301(g) for which the supervised
registrant used covered terms or conditions in the previous calendar
year and the States or other jurisdictions where it offered those
products or services. Proposed Sec. 1092.302(a)(3) and (4), would
further require that supervised registrants provide information to the
nonbank registration system about their use of those covered terms and
conditions by providing standardized data.
The Bureau requests comment on the general requirements of proposed
Sec. 1092.302(a), including the requirement to register and update
registration information annually. The Bureau requests comment on
whether registration and registration updates should be required or
permitted more or less often, and if so, why and in what circumstances.
For example, the Bureau requests comment on whether, and if so, why and
when supervised registrants should be required or allowed to update the
registry upon a change in their identifying information, such as a
result of a merger or acquisition, or a change in their use of a
previously-registered covered term or condition or a change in use of a
form contract containing covered terms or conditions. To the extent
such updates are permitted or required, the Bureau also requests
comment on how and when the updates should be published pursuant to
proposed section Sec. 1092.303 below.
The Bureau also requests comment on whether the nonbank
registration system should include pre-completed selections for
standard form contracts that have widespread market usage. For example,
as discussed in the section-by-section analysis of proposed Sec.
1092.301(h)(7), some mortgage lenders using certain form contracts for
federally-related mortgages may be required to register in
circumstances where exclusions in proposed Sec. 1092.301(h) do not
apply. Because the form contracts are widely accessible on Federal
agency and government-sponsored enterprise websites, the Bureau may be
able to pre-populate answers to the questions posed by the nonbank
registration system for these contracts. That would reduce the
incremental burden of registering any covered terms or conditions in
these contracts. The Bureau requests comment on what other covered form
contracts may be in such widespread usages that would be amenable to
similar burden-reducing information collection methods. The Bureau
requests commenters provide examples of these covered form contracts.
In addition, the Bureau requests comment on the benefits and
burdens involved in identifying the States or other jurisdictions where
the supervised registrant offered the consumer financial products or
services identified pursuant to proposed Sec. 1092.302(a)(1). In
addition, the Bureau requests comment on whether the final rule should
clarify what qualifies as a State where the consumer financial product
or service is offered. The Bureau does not believe significant
uncertainty on this issue is likely. If, for example, an online lender
in one State offers loans to consumers in the State where it is located
as well as to consumers in other States, for purposes of subpart C, the
lender presumably would be offering or providing loans in all of these
States where the loans would be available.
Proposed Sec. 1092.302(a)(3) would collect additional types of
data more specifically related to each of the covered terms and
conditions contained in covered form contracts entered into by the
supervised registrant. Proposed Sec. 1092.302(a)(3) would require the
supervised registrant to identify which consumer financial products and
services identified pursuant to proposed Sec. 1092.302(a)(1) are
affected by each covered term or condition, and in which States listed
pursuant to proposed Sec. 1092.302(a)(2). Proposed Sec.
1092.302(a)(3) also would require the supervised registrant to provide
six
[[Page 6943]]
additional types of data on its use of the covered term or condition.
First, proposed Sec. 1092.302(a)(3)(i) would collect brand name
and trade names the supervised registrant used to provide the
supervised consumer financial product or service. Second, proposed
Sec. 1092.302(a)(3)(ii) would collect the legal names of any persons,
other than a consumer and the supervised registrant, that typically
entered into the applicable covered form contract such as other named
parties. The information described in proposed Sec. 1092.302(a)(3)(i)
and (ii) would help the Bureau to more clearly identify the products
and services and other covered persons to which the information
collected relates.
Absent the data collected by proposed Sec. 1092.302(a)(3)(i), the
remaining data collected under proposed Sec. 1092.302(a) may be
associated only with corporate entity names that may be difficult to
match to other information related to a brand name or trade name. Thus,
the data collected by proposed Sec. 1092.302(a)(3)(i) would facilitate
use of the data for the Bureau's market monitoring and supervisory
purposes as described in part II.C.
Absent the data collected by proposed Sec. 1092.302(a)(3)(ii), the
Bureau may have greater difficulty identifying when the remaining data
collected under proposed Sec. 1092.302(a) is partially duplicative of
information provided by other supervised registrants. For example, if a
nonbank lender covered by subpart C registers terms and conditions in a
covered form contract to which an unaffiliated loan broker or loan
servicer covered by subpart C is also a party, then without the
information collected by proposed Sec. 1092.302(a)(3)(ii), the Bureau
may be unable to identify that the terms and conditions registered
relate to the same agreement.
Furthermore, the Bureau anticipates that publication of this
information under proposed Sec. 1092.303 would similarly help other
regulators and the public to more clearly identify the products and
services to which the information collected relates.
Third, proposed Sec. 1092.302(a)(3)(iii) would collect information
on each category of covered limitation on consumer legal protections
that is included in the covered form contract. Because each of the
types of covered limitations listed in proposed Sec. 1092.301(d) may
pose different risks, it would be useful to collect information about
which types of covered terms or conditions the supervised registrant
used. This information also would identify situations where a
supervised registrant is using multiple types of covered terms or
conditions for a given consumer financial product or service, which may
shed light on distinct risks or magnify risks.
Fourth, for each type of covered limitation on consumer legal
protections described in proposed Sec. 1092.301(d)(1) through (7)
contained in the covered form contract, proposed Sec.
1092.302(a)(3)(iv) would collect certain information about the
limitation. For limitations described in proposed Sec. 1092.301(d)(1)
(precluding the consumer from bringing a legal action after a certain
period of time), proposed Sec. 1092.301(d)(2) (specifying a forum or
venue where a consumer must bring a legal action in court), and
proposed Sec. 1092.301(d)(3) (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), supervised registrants
may be able to provide specific information about the limitations'
content in a more standardized form, without incurring significant
burdens. By collecting the standardized information described below,
the Bureau also would be able to monitor and assess risks posed by
these limitations and compare limitations across consumer financial
products and services in a more efficient manner. Because the risks
posed by these terms or conditions vary not just by their type or
combination, but also by their content, collecting information about
their content would facilitate closer monitoring and more careful risk
assessment.
Accordingly, for limitations described in proposed Sec.
1092.301(d)(1) (precluding the consumer from bringing a legal action
after a certain period of time), proposed Sec. 1092.302(a)(3)(iv)(A)
would collect the specified time period, within ranges specified by the
Bureau, for the consumer to bring a legal action. For limitations
described in proposed Sec. 1092.301(d)(2) (specifying a forum or venue
where a consumer must bring a legal action in court), proposed Sec.
1092.302(a)(3)(iv)(B) would collect the name and, as applicable, place,
of the forum or venue for the consumer to bring a legal action. For
limitations described in proposed Sec. 1092.301(d)(3) (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),
proposed Sec. 1092.302(a)(3)(iv)(C) would collect information about
what type of legal action the consumer is prohibited from filing and,
as applicable, what type of participation the consumer is prohibited
from engaging in vis-[agrave]-vis legal action filed by others. This
could include specifying, for example, whether the consumer is
prohibited from engaging or participating in joinder, intervention,
representative action, a class action, or some combination of these or
others.
For limitations described in proposed Sec. 1092.301(d)(4)
(limiting liability to the consumer in a legal action, including by
capping the amount of recovery or type of remedy), proposed Sec.
1092.301(d)(5) (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), proposed Sec. 1092.301(d)(6) (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), and proposed Sec.
1092.301(d)(7) (waiving 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), an efficient, low-burden way to collect relevant information to
monitor and assess the risk posed by the term or condition would be for
the supervised registrant to submit the text of the relevant contract
term or condition. For contracts stored electronically, the supervised
registrant could type or electronically paste the text quickly into the
nonbank registration system. For contracts not stored electronically,
the supervised registrant could type the text in their nonbank
registration system submission or potentially submit an image that
contains or can be converted to readable text. For these types of
covered limitations on consumer legal protections, collection of the
covered term or condition itself would pose a lower burden on
supervised registrants than requiring the supervised registrant to
describe or otherwise characterize the limitation. The latter approach
could call upon the supervised registrant to make burdensome legal
judgments about the scope of what may be a complex legal provision, for
example. By contrast, the Bureau would be better able to monitor and
assess risks posed by these limitations when it can review their text.
Proposed Sec. 1092.302(a)(3)(iv) would not propose to collect
information about the contents of an arbitration agreement covered by
proposed Sec. 1092.301(d)(8). There is substantial information
available about the generalized risks posed by arbitration agreements,
including those discussed in part II and the section-by-section
analysis of proposed Sec. 1092.301(d)(8) above. These risks include
that class actions are not
[[Page 6944]]
available and decisions in individual arbitration generally are not
public. These risks remain in particular after the Bureau's 2017
rulemaking to address them was voided by a joint resolution of Congress
signed by the President.\300\ The Bureau therefore believes at this
time that it would be unnecessary to impose additional information
collection burdens because the baseline risks posed by arbitration
agreements described above (as distinct from any other covered terms or
conditions that they may contain) are unlikely to vary. And to the
extent an arbitration agreement contains one of the limitations
described in proposed Sec. 1092.301(d)(1)-(7), supervised registrants
already would provide information about that limitation separately.
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\300\ See 82 FR 55500 (Nov. 22, 2017) (discussing Congressional
Review Act revocation of Bureau's 2017 Arbitration Agreements rule),
https://www.federalregister.gov/documents/2017/11/22/2017-25324/arbitration-agreements.
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The Bureau requests comment on this approach. For example, the
Bureau notes that some arbitration agreements may allow consumers to
obtain judicial review of the validity of the arbitration agreement
itself, while others may contain a delegation provision requiring that
only the arbitrator may decide the validity of the arbitration
agreement. In addition, some arbitration agreements could specify
unusual administrators. The Bureau requests comment on whether it
should collect information about whether reported arbitration
agreements contain such delegation clauses, and about the identity of
the arbitration administrator, including information about the
potential value and burdens of such information collection.
Fifth, proposed Sec. 1092.302(a)(3)(v) would collect information
about the State or other jurisdiction identified in any choice of law
provisions in the covered form contract, as applicable. The applicable
law specified in the covered form contract may be important contextual
information for assessing the risk posed by the covered form contract
and the covered terms or conditions in the covered form contract. For
example, as discussed in part II above, some laws prohibit or void
certain contract terms, while others do not. By collecting information
about the chosen law, the Bureau can assess whether a contract term or
condition may be prohibited by that law, or if the supervised
registrant may have selected a law that has the effect of avoiding a
prohibition or limitation on the term or condition that exists under a
different law.
Sixth, proposed Sec. 1092.302(a)(3)(vi) would collect information
necessary for the Bureau identify and obtain form contracts provided by
form providers to supervised registrants. Proposed Sec.
1092.302(a)(3)(vi) would collect the name of the form contract provider
and other information necessary to identify the form contract, such as
the complete copyrighted name including any form number and date of the
contract. The information collected pursuant to proposed Sec.
1092.302(a)(3)(vi) would help the Bureau to identify and obtain these
agreements. The Bureau could use these agreements to simplify
registration of terms and conditions contained in those contracts. As
discussed above, the Bureau may be able to prepopulate the nonbank
registration system with information about certain form contracts used
by multiple market participants. To the extent the Bureau is able to
obtain a specific form contract and prepopulate the nonbank
registration system with information about that contract, and the
supervised registrant uses that contract without modification, the
Bureau requests comment on whether the final rule should permit
supervised registrants to simply identify their use of that contract
pursuant to proposed Sec. 1092.302(a)(3)(vi), as an alternative to
providing the specific information about that contract required by
proposed Sec. 1092.302(a)(3)(iii)-(v).
In addition, by identifying those terms and conditions that are
contained in form provider contracts, the Bureau could more efficiently
identify supervised registrants that use potentially unique or outlier
terms and conditions. Accordingly, the information collected pursuant
to proposed Sec. 1092.302(a)(3)(vi) also would facilitate the Bureau's
monitoring of risks to consumers and assessment of risks for
prioritization of its risk-based supervision program.
Finally, the Bureau requests comment on whether it should publish
the name of the form provider and the citation to the specific form
contract, pursuant to proposed Sec. 1092.303.
Proposed Sec. 1092.302(a)(4) would obtain information about the
degree to which supervised registrants obtained court or arbitration
rulings during the previous year regarding the enforceability of
covered terms or conditions. In particular, pursuant to proposed Sec.
1092.302(a)(4), the nonbank registration system would ask basic
questions, such as binary questions about whether courts or arbitrators
issued decisions ruling on the enforceability of a covered term in
legal actions by consumers, as defined in proposed Sec.
1092.301(i)(2). The information collected would further assist the
Bureau in monitoring and assessing risks, by informing judgments about
whether the terms or conditions are lawful and hence enforceable.
If a supervised registrant received one or more such decisions,
proposed Sec. 1092.302(a)(4) also would require the supervised
registrant to identify which type of covered term or condition was at
issue in the decision, and whether the ruling enforced or declined to
enforce the covered term or condition. This information would clarify
the type of risk posed by the decision. In the case of a ruling
declining to enforce the covered term or condition, this could indicate
that the term was unenforceable in that case, posing a risk that
consumers may have been misled to believe otherwise. By contrast, a
ruling enforcing a covered term or condition could be a concrete
indication that claims a consumer affirmatively asserted in court or
arbitration were being limited by a term or condition found to be
lawful in that case.
In many cases, information about decisions collected under proposed
Sec. 1092.302(a)(4) would relate to claims filed by the consumer as
described in proposed Sec. 1092.301(i)(2). However, proposed Sec.
1092.302(a)(4) also would apply to certain actions the supervised
registrant brought against the consumer. In particular, if a supervised
registrant used a non-disparagement term or condition described in
proposed Sec. 1092.302(d)(6) to obtain a decision on its
enforceability from a court or arbitrator, then that decision also
would be subject to proposed Sec. 1092.302(a)(4).
The Bureau requests comment on how the legal departments or legal
function of supervised registrants track the legal actions filed
against or by supervised registrants and the decisions courts or
arbitrators issue in those legal actions. The Bureau considered
proposing to require supervised registrants to quantify the number of
times they attempted to enforce covered terms or conditions. However,
the Bureau is concerned that to identify such a number, legal staff at
supervised registrants may need to review the pleadings in all legal
actions filed against or by them in a calendar year. Proposed Sec.
1092.302(a)(4) therefore takes a more limited approach to avoid this
higher burden on supervised registrants.
The Bureau requests comment on whether proposed Sec.
1092.302(a)(4) also should require the supervised registrant to
identify the citation for or court issuing each decision ruling on the
enforceability of a covered term or condition. For example, this could
help
[[Page 6945]]
the Bureau to locate the relevant decisions as well as to identify
multiple decisions in the same case, such as different decisions on
appeal over time. The Bureau also requests comment on whether similar
information should be collected related to arbitration decisions and,
in the case of any confidential arbitration decisions, whether such
information should be excluded from information the Bureau would
publish under proposed Sec. 1092.303. Finally, the Bureau requests
comment on whether proposed Sec. 1092.302(a)(4) should be expanded to
require or allow supervised registrants to report when decisions are
pending appeal or the like.
The Bureau also requests comment on whether proposed Sec.
1092.302(a)(4) should be expanded to require a supervised registrant to
identify any orders registered under rules for subpart B that the
Bureau is separately proposing \301\ when the order refers to the use
of a covered term or condition in a covered form contract as a basis
for a finding of a violation of law covered by subpart B. For example,
if an order is not issued by a court or arbitrator, then it would not
already be covered by the information collection in proposed Sec.
1092.302(a)(4). Thus, the Bureau seeks comment on whether proposed
Sec. 1092.302(a)(4) should be expanded to cover agency orders, and if
so, whether exclusions in proposed Sec. 1092.301(h) should be
similarly adjusted to account for agency orders.
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\301\ See Nonbank Registration--Orders Proposal.
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Finally, the Bureau requests comment on whether proposed Sec.
1092.302(a) more broadly should identify additional or different
categories of information to be collected by the nonbank registration
system, including but not limited to the text of the standard covered
terms or conditions used by the supervised registrant beyond those
described in proposed Sec. 1092.301(c)(4) through (7), the text of the
covered form contract in which covered terms or conditions appear, or
both. Such additional or different categories also could relate to the
contracting process, such as whether the supervised registrant uses an
electronic contracting process pursuant to the E-Sign Act requirements,
including those discussed in the section-by-section analysis of
proposed Sec. 1092.301(d)(7) above.
302(b) Supervised Registrant's Collection and Reporting of Information;
Scope of Initial Registration; Corrections to Registration Information
Proposed Sec. 1092.302(b) would set forth certain standards
related to the information supervised registrants must collect and
report pursuant to this subpart.
Proposed Sec. 1092.302(b)(1) would clarify that for the period
while a supervised registrant qualifies as a supervised registrant, it
must collect the information necessary to comply with the reporting
requirements in proposed Sec. 1092.302(a). For periods when persons
are not supervised registrants, the rule would not place requirements
on those persons. For example, a debt collector that is not a larger
participant would not be required to collect information about its use
of covered form contracts. If that debt collector later becomes a
larger participant in the market for consumer debt collection and also
is not eligible for an exclusion from the definition of supervised
registrant in proposed Sec. 1092.301(h), then the debt collector would
be subject to proposed Sec. 1092.302(b)(1) at the time it becomes a
supervised registrant. Similarly, under proposed Sec. 1092.302(b)(1),
upon exit from the Bureau's supervisory authority, a person would no
longer be required to collect the information covered by proposed
subpart C. The Bureau requests comment on proposed Sec. 1092.302(b)(1)
including on whether it should include a similar requirement to retain
records used to submit registration information under subpart C, and if
so, for how long.\302\
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\302\ See 12 U.S.C. 5514(b)(7)(A)-(C) (provisions, discussed in
part IV above, authorizing the Bureau to prescribe rules to
facilitate supervision and assessing and detecting risks to
consumers, as well as to ensure that supervised nonbanks ``are
legitimate entities and are able to perform their obligations to
consumers). See also 12 U.S.C. 5512(b)(1) (provision, discussed in
part IV above, authorizing Bureau to prescribe rules as necessary or
appropriate to enable the Bureau to administer and carry out the
purposes and objectives of the Federal consumer financial laws and
to prevent evasions thereof). See, e.g., Nonbank Registration--
Orders Proposal (proposed Sec. 1092.203(e) (relying on these
authorities to propose a record retention requirement in connection
with registration of certain orders in Bureau's nonbank registration
system); CFPB Final Rule, Debt Collection Practices (Regulation F),
85 FR 76734, 76859 (Nov. 30, 2020) (relying on these authorities to
impose a record retention requirement in connection with debt
collection rule).
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Proposed Sec. 1092.302(b)(2) would clarify that supervised
registrants do not need to collect or report information related to
periods that predate when they become subject to subpart C, as
determined by the effective date of the rule.\303\ Proposed Sec.
1092.302(b)(2) would provide examples. For example, proposed Sec.
1092.302(b)(i) would clarify that, for registrations providing
information about activities in the calendar year that includes the
effective date, supervised registrants would satisfy the requirements
of proposed Sec. 1092.302(a) by submitting information that relates to
the portion of that calendar year after the effective date. Therefore,
the Bureau anticipates that, in the first year when it accepts
registrations (assuming that is in the calendar year after the
effective date), the information provided may relate to only a portion
of the previous calendar year. This approach would afford supervised
registrants advance time to prepare to collect the information they
will need to report. In addition, to the extent that supervised
registrants do not want to report certain contract terms or conditions,
they would have the option of updating their contracts before the
effective date of the subpart. For example, if a supervised registrant
had a covered form contract that included a waiver of rights that is
prohibited by an anti-waiver provision of a statute, the supervised
registrant could fix that non-compliant contract provision before it
becomes subject to mandatory reporting under proposed subpart C. As
discussed in the analysis of impacts of the proposal in part VII, some
supervised registrants would have an incentive to make such corrections
before the effective date.
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\303\ The nonbank registration system implementation date
defined in proposed Sec. 1092.101(e) is a separate date that serves
a different function. The nonbank registration system implementation
date would define when the filing process begins, and not
necessarily the time period to which those filings relate.
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Proposed Sec. 1092.302(b)(2)(ii) would provide another example,
where a nonbank became a larger participant in the middle of the
calendar year before the annual registration date. This could happen,
for example, for participants in debt collection or consumer reporting
markets where the larger participant test is based on receipts during
the fiscal year, if the supervised registrant's fiscal year is not the
calendar year. In that case, as described in proposed Sec.
1092.302(b)(2)(ii), its submission of data required by proposed Sec.
1092.302(a) would only need to cover the period between the date it
became a larger participant under the applicable test in part 1090 and
the end of the calendar year.
Proposed Sec. 1092.302(b)(3) would provide that supervised
registrants that are affiliates of one another will make their
submissions either jointly or in combination, as set forth in filing
instructions the Bureau issues under proposed Sec. 1092.102(a). As
noted in proposed Sec. 1092.101(a), the term ``affiliate'' has the
meaning in CFPA section 1002(1): ``any person that controls, is
controlled by, or is under common control with another
[[Page 6946]]
person.'' \304\ Proposed Sec. 1092.302(b)(3) would further clarify
that for subpart C, the term ``control,'' for purposes of determining
who is an affiliate, would have the meaning set forth in part 1090 of
the Bureau's regulations.\305\ The Bureau believes those definitions
may facilitate compliance by establishing a standard for what
constitutes ``control''--one that has been in place for several years
in the Bureau's larger participant rules.
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\304\ 12 U.S.C. 5481(1).
\305\ See 12 CFR 1090.101 (paragraph (2) of the definition of
``affiliated company'' defining three types of control).
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The Bureau anticipates the possibility of joint or combined
submissions because that may be the most efficient manner to register
supervised registrants that have affiliates. It is necessary for the
Bureau's monitoring and supervision risk assessment to understand the
scope of an enterprise involved in supervised markets. That information
affects, among other things, the entity or entities the Bureau may
choose to examine. Rather than requiring each affiliate to make a
separate registration, proposed Sec. 1092.302(b)(3) envisions
registering a group of affiliated entities at once or at least in
combination. The alternative could be more burdensome. Not only would
each affiliate have to register separately, but each affiliate would
have to submit duplicative information--namely, the identity all its
affiliates.
Proposed Sec. 1092.302(b)(4) would clarify that a supervised
registrant must correct an information submission within 30 days of
when it becomes aware of or has reason to believe that the submitted
information was and remains inaccurate. Proposed Sec. 1092.302(b)(4)
would clarify that the process for making corrections will be described
in the filing instructions the Bureau issues pursuant to proposed Sec.
1092.102(a). Proposed Sec. 1092.302(b)(4) also would clarify that the
Bureau may direct a supervised registrant to correct errors or other
non-compliant submissions to the nonbank registration system. Under
proposed Sec. 1092.302(b)(4), the Bureau could direct corrections at
any time and in its sole discretion.
With respect to the potential for errors in submissions to the
nonbank registration system, the Bureau also requests comment on
whether subpart C should provide that a supervised registrant would not
violate the requirements of proposed subpart C as a result of an error
in collecting or reporting information, if the error was unintentional
and occurred despite the maintenance of procedures reasonably adapted
to avoid such an error. For example, there is a bona fide error
provision in another information reporting system the Bureau
administers under Regulation C.\306\ The Bureau also proposed a similar
provision in its small business lending data reporting proposal.\307\
The Bureau is not proposing a similar exception here because, unlike
data collected under Regulation C and the Bureau's small business
lending data reporting proposal, the data collected under Sec.
1092.302 of this proposal generally would not be as complex, extensive,
or statistical, and thus less prone to error. In addition, even in the
absence of such a provision, supervised registrants may still have
sufficient incentives to establish compliance systems both to avoid
violations and to mitigate risks associated with any inadvertent
violations that do occur.\308\ However, the Bureau requests comment on
whether this type of provision would provide incentives for supervised
registrants to establish procedures to comply with the requirements of
proposed subpart C, and/or would reduce burden on supervised
registrants by reducing the risk of penalties in the event of
inadvertent errors. The Bureau also requests comment on what types of
bona fide errors, if any, might be likely to occur often.
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\306\ 12 CFR 1003.6(b).
\307\ 86 FR 56356, 56503-04 (Oct. 8, 2021) (section-by-section
analysis of proposed 12 CFR 1002.112(b)).
\308\ See, e.g., CFPB Bulletin 2020-01, Responsible Conduct:
Self-Assessing, Self-Reporting, Remediating, and Cooperating (Mar.
6, 2020) (identifying self-assessment factors that Bureau considers
when determining how to resolve violations of law via supervisory
and enforcement tools).
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302(c) Notification by a Previously-Supervised Registrant That It Is No
Longer Covered by This Subpart
Under proposed Sec. 1092.302(c), the nonbank registration system
would accept notification from previously-registered supervised
registrants that they are no longer covered by proposed subpart C. The
notifications would be voluntary since the Bureau is not seeking,
through proposed subpart C, to impose information reporting
requirements on entities who are no longer supervised by the Bureau.
Some supervised nonbanks may exit supervised markets, ceasing to be
supervised nonbanks. If a person is no longer a supervised nonbank,
then under the proposed rule it would not be required to register or
update its registration when it is not a supervised nonbank. For
example, an entity that is not a supervised registrant as of the annual
registration date would not be required to report information
concerning the previous calendar year, even if it was a supervised
registrant for some or all of that time period. However, some
supervised nonbanks that registered previously may wish to update the
nonbank registration system so that it is clear that they are no longer
offering the consumer financial product or service that led them to
register or that they are no longer a larger participant in the
relevant market. Proposed Sec. 1092.302(c) would provide a means of
doing so. Such notices also would facilitate the Bureau's
administration of the nonbank registration system by clarifying the
reasons why an entity is no longer registering under proposed subpart
C. Absent the notification described in proposed Sec. 1092.302(c),
there may be uncertainty over whether a previously-registered
supervised registrant failed to comply with the annual update
requirements in proposed Sec. 1092.302(a).
The Bureau seeks comment on whether to require the notice described
in proposed Sec. 1092.302(c), and if so, why, in what circumstances.
302(d) Notification by Certain Persons of Non-Registration Under This
Subpart
Under proposed Sec. 1092.302(d), the nonbank registration system
would accept voluntary notifications of non-registration from persons
who have a good-faith basis to believe that they are not a supervised
registrant, or that certain contracts or terms or conditions are not
covered by subpart C. Notices filed under proposed Sec. 1092.302(d)
also would be defined as administrative information under proposed
Sec. 1092.301(a) and therefore not subject to publication under
proposed Sec. 1092.303(b). Proposed Sec. 1092.302(d) would clarify
that the person would be required to comply with the registration
requirements of proposed Sec. 1092.302 promptly if the person becomes
aware of facts or circumstances that would not permit it to continue
representing that it has a good faith basis to believe that it is not a
supervised registrant or that the contract or terms or conditions in
question are covered by this subpart.
The Bureau is proposing Sec. 1092.302(d) for several reasons.
First, while determining whether a company qualifies as a ``supervised
registrant'' should be straightforward in most cases, some persons may
be uncertain about whether they are a supervised registrant. Similarly,
when supervised registrants offer multiple products or services with
multiple contracts, it should be straightforward in most cases to
[[Page 6947]]
determine which products or services are for consumer financial product
or service as relevant under Sec. 1092.301(g). However, some
supervised registrants may be uncertain about whether some of their
products or services are consumer financial products or services
described in proposed Sec. 1092.301(g). Finally, it should be
straightforward in most cases to determine which terms or conditions
are covered terms or conditions as defined in proposed Sec.
1092.301(c), including whether they impose limitations described in
proposed Sec. 1092.301(d). However, some supervised registrants may be
uncertain about whether some of their terms or conditions are covered
terms or conditions.
Even when persons in these circumstances have a good faith basis to
believe they are not a supervised registrant, or that certain products
and services they offer or provide are not consumer financial products
or services described in proposed Sec. 1092.301(g), or that certain
terms or conditions in their form contracts are not required to be
registered, the Bureau considered whether to propose that they annually
register if they did not want to incur the risk of violating the
requirements of subpart C. But that approach could impose burden on
persons who ultimately are not supervised registrants or who ultimately
are not using covered terms or conditions contained in covered form
contracts. The Bureau therefore proposes an alternative option for
these persons. Rather than facing the burden of registration, such an
entity could elect to file a notice under proposed Sec. 1092.302(d).
When a person makes a non-frivolous filing under proposed Sec.
1092.302(d) stating that it has a good faith basis to believe that it
is not a supervised registrant or that it uses a contract or terms or
conditions that are not covered by subpart C, the Bureau would not
bring an enforcement action against that person based on the person's
failure to comply with proposed Sec. 1092.302 unless the Bureau has
first notified the person that the Bureau believes the person does in
fact qualify as a supervised registrant or that its contract or terms
or conditions are covered by subpart C and has subsequently provided
the person with a reasonable opportunity to comply with proposed Sec.
1092.302.
Notices filed under proposed Sec. 1092.302(d) also may reduce
uncertainty by the Bureau about why certain entities are not
registering or are not registering certain terms or conditions under
subpart C. These notices also may provide the Bureau with information
about how market participants are interpreting the scope of subpart C,
about the potential need for the Bureau to instruct certain
unregistered entities to register or to instruct certain registered
entities to register additional terms or conditions, and about the
potential need for guidance or rulemaking clarifying the scope of
subpart C.
The Bureau requests comment on proposed Sec. 1092.302(d) including
on whether the final rule for the nonbank registration system should
specify information that a filer must provide to describe its good
faith basis to believe subpart C does not apply. For example, the
Bureau requests comment on whether the filer should provide information
that supports its determination, such as any court decisions or an
affidavit, as well as any information that may contradict its position,
such as a court decision holding that the entity is not outside the
scope of subpart C.
The Bureau has considered an alternative to proposed Sec.
1092.302(d) under which entities that do not file such a notice with
the Bureau still could avoid penalties for non-compliance with proposed
Sec. 1092.302 if in fact they could establish a good faith belief that
they did not qualify as supervised registrants subject to proposed
Sec. 1092.302. Under this alternative, entities would maintain such
good faith belief so long as the Bureau had not made clear that
proposed Sec. 1092.302 would apply to them. The Bureau seeks comment
on whether it should finalize this alternative instead. It also seeks
comment on whether, if it finalized this alternative, entities would
require additional guidance on the circumstances pursuant to which an
entity could no longer legitimately assert a good faith belief that
proposed Sec. 1092.302 would not apply to its conduct. While the
Bureau anticipates that such circumstances would certainly include
entity-specific notice from the Bureau that proposed Sec. 1092.302
applies, the Bureau does not believe such notice should be required to
terminate a good faith defense to registration. Among other
circumstances, the Bureau anticipates that at least formal Bureau
interpretations of (for example) subpart C or the provisions of CFPA
section 1024(a)(1) would generally suffice to terminate such
belief.\309\
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\309\ 12 U.S.C. 5514(a)(1).
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The Bureau also seeks comment on whether it should decline to
finalize proposed Sec. 1092.302(d) and on whether it should not adopt
the potential alternative to that provision.
Section 1092.303 Publication of Information Regarding Supervised
Registrants' Use of Covered Terms and Conditions
303(a) Publication of Information Collected Under This Subpart
In proposed Sec. 1092.303(a), the Bureau proposes to publish and
maintain a publicly-available source of identifying information about
supervised registrants and information about covered terms and
conditions that supervised registrants use. This could occur, for
example, on the Bureau's publicly-available internet website. Under
proposed Sec. 1092.303(a), the Bureau would make this information
available to the public on a periodic basis within a timeframe it
determines in its discretion.
The Bureau has preliminarily determined that publication of
supervised registrants' identifying information would facilitate the
ability of consumers to identify covered persons that are registered
with the Bureau.\310\
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\310\ 12 U.S.C. 5512(c)(7)(B).
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In addition, the Bureau preliminarily believes that publication of
additional information about supervised registrants and their use of
covered terms and conditions would be in the public interest.\311\
Proposed Sec. 1092.303(a) would formally align the proposed nonbank
registration system with the Federal government's emphasis on making
government data available to and usable by the public, by default, to
the greatest extent possible.\312\ It also would provide supervised
registrants, other regulators, and the general public with clarity as
to the public availability of data collected under proposed subpart C.
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\311\ 12 U.S.C. 5512(c)(3)(B).
\312\ See, e.g., Open, Public, Electronic and Necessary
Government Data Act, in title II of Public Law 115-435 (Jan. 14,
2019); Office of Management & Budget, M-19-18, Federal Data
Strategy--A Framework for Consistency (June 4, 2019), https://www.whitehouse.gov/wp-content/uploads/2019/06/M-19-18.pdf (last
visited Dec. 7, 2022).
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Further, the Bureau has preliminarily determined that making the
data collected publicly available would further the rationale of the
proposal--namely, enhancing oversight of and awareness of supervised
registrants' use of covered terms and conditions in covered form
contracts, as discussed in part II.C.3 above. Regulators at all levels
of government (not just the Bureau) could use the information the
Bureau makes publicly available to set priorities. Researchers could
analyze the
[[Page 6948]]
information the Bureau makes publicly available to gain valuable
insight into the issues addressed in the nonbank registration system.
For example, they could produce reports that may inform consumers and
the public more broadly of potential risks posed by covered terms and
conditions, or otherwise use the public data to promote private
innovation. The public registry could broadly inform public debate
about use of contracts of adhesion in consumer finance markets and
beyond and help ground that debate in data. The public registry also
could enable education of consumers about which consumer financial
products and services contain covered terms or conditions that the
consumers may or may not want. The Bureau requests comment on how
industry may use the published information, such as by better
understanding the terms or conditions used by other firms.
Finally, publication may help to promote government accountability
by making public certain information that the Bureau can use to
prioritize its resources. Publication also would help the public to
understand the impact of the Bureau's nonbank registry initiative more
broadly.
The Bureau seeks comment on potential costs and benefits of making
data from the nonbank registry system publicly available on a periodic
basis. In particular, the Bureau seeks comment on whether it should not
finalize the provisions in proposed Sec. 1092.303, whether it should
not publicize some of the information collected pursuant to proposed
Sec. 1092.302 (beyond administrative information or information not
permitted to be disclosed by law), or whether there may be approaches
to publishing the information that would mitigate confusion about the
registry. CFPA section 1022(c)(7) recognizes that it may be in the
public interest for consumers to know who is registered with the
Bureau. However, there may be some uncertainty over the degree to which
consumers would use the publicized information and, when they do, over
how consumers could interpret such information. For example, consumers
might view a supervised nonbank's registration in the Bureau's nonbank
registration system as an indicator that their covered terms and
conditions pose a substantial risk. (On that note, the Bureau requests
comment about whether to not publish information on certain terms or
conditions to the extent the risk they may pose to consumers is
negligible or de minimis, and if so, which covered terms may meet that
standard in which circumstances and how the Bureau would assess whether
the risk is at such a level.) Or consumers may misunderstand
registration to mean that registered entities are ``legitimate,'' that
registration itself serves as an endorsement by the Bureau, or that all
registered entities are regularly examined by the Bureau. While
registration might indicate that the entity is complying with subpart
C, it would not in and of itself establish the entity's legitimacy or
serve as a Bureau endorsement in any way. And, as discussed in part
II.C.2, there are many more nonbanks subject to the Bureau's
supervisory authority than are regularly examined by the Bureau--a fact
that consumers may not appreciate. Moreover, proposed subpart C would
not constitute a licensing system or an authorization by the Bureau for
the supervised registrant to engage in offering of supervised consumer
financial products or services. For these reasons, the Bureau continues
to evaluate the possibility that publishing information collected under
proposed subpart C has the potential to create confusion, which, to the
extent it occurs, is unlikely to serve the public interest. If the
Bureau finalizes proposed Sec. 1092.303, it would consider options for
publishing the information in a manner that mitigates this risk.
303(b) Scope of Information Released Publicly by the Bureau
Proposed Sec. 1092.303(b) would require the Bureau to publish
information collected by proposed subpart C by default.
However, proposed Sec. 1092.303(b) would clarify that, consistent
with CFPA section 1022(c)(8), the Bureau would not publish information
protected from public disclosure under Exemption 4 of the Freedom of
Information Act (FOIA), 5 U.S.C. 552(b)(4). CFPA section 1022(c)(8)
states that ``[i]n . . . publicly releasing information held by the
Bureau, or requiring covered persons to publicly report information,
the Bureau shall take steps to ensure that proprietary, personal, or
confidential consumer information that is protected from public
disclosure under [the FOIA, 5 U.S.C. 552(b)] or [the Privacy Act of
1974, 5 U.S.C. 552a], or any other provision of law, is not made public
under [the CFPA].'' While much of the information submitted to the
nonbank registry under proposed subpart C would not be legally
protected from public disclosure, some of the information may be
confidential commercial information subject to Exemption 4 of the
FOIA.\313\
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\313\ Information subject to publication under proposed Sec.
1092.303 appears unlikely to be subject to legal protections from
public disclosure, other than perhaps the information protected by
FOIA Exemption 4. The Bureau requests comment on whether additional
legal protections may apply to information the Bureau proposes to be
included in the public registry.
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Exemption 4 protects from disclosure ``trade secrets and commercial
or financial information obtained from a person and [that is]
privileged or confidential.'' \314\ Courts construe data to be
``commercial information'' where the submitter has a ``commercial
interest'' in them.\315\ The Bureau therefore believes that information
submitted to the nonbank registry system that describes supervised
registrants' ongoing business operations is likely to qualify as
``commercial information.'' Furthermore, courts have interpreted
information to be ``confidential'' under Exemption 4 if it is
customarily and actually kept private by the submitter.\316\ Some of
the information submitted to the nonbank registry may meet this
standard and therefore be protected by Exemption 4.
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\314\ 5 U.S.C. 552(b)(4).
\315\ See Pub. Citizen Health Research Group v. FDA, 704 F.2d
1280, 1290 (D.C. Cir. 1983).
\316\ See Food Marketing Institute v. Argus Leader Media, 139 S.
Ct. 2356, 2363 (2019).
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The Bureau requests comment on whether institutions customarily and
actually keep private information collected under proposed Sec.
1092.302, including any information collected under proposed Sec.
1092.302(a) such as information about arbitrator decisions described by
proposed Sec. 1092.302(a)(4), and information about certain affiliate
relationships that may be collected pursuant to proposed Sec.
1092.302(b)(3). Where applicable, the Bureau asks that such comments
address each category of information listed in proposed Sec. 1092.302
with specificity, including descriptions of practices related to how
each category is (or is not) maintained and/or protected from
disclosure.
If the Bureau determines that information submitted to the nonbank
registry may be protected from disclosure by FOIA Exemption 4, the
Bureau instead would publish the data in an aggregated format that does
not directly or indirectly identify the source of the information.\317\
The Bureau believes that publication of this data is in the public
interest, for the same reasons as described above, even if the
[[Page 6949]]
data is published in aggregated form to protect confidentiality.
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\317\ See 12 CFR 1070.41(c) (``The CFPB may, in its discretion,
disclose materials that it derives from or creates using
confidential information to the extent that such materials do not
identify, either directly or indirectly, any particular person to
whom the confidential information pertains.'').
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Because the Bureau is relying in part on its supervisory authority
in CFPA section 1024 to require submission of information to the
nonbank registration system, information collected under the proposed
rule could be construed to be ``confidential supervisory information''
as defined in the Bureau's confidentiality rules at 12 CFR 1070.2(i).
The public release of information required by proposed Sec.
1092.303(b) would be authorized by the Bureau's confidentiality rules
at 12 CFR 1070.45(a)(7). That provision permits the Bureau to disclose
confidential information ``[a]s required under any other applicable
law.'' The Bureau does not believe that the information proposed to be
published under Sec. 1092.303(b) would raise the concerns generally
addressed by the Bureau's general restrictions on disclosure of
confidential supervisory information. For example, after accounting for
any confidential business information protected by FOIA Exemption 4 and
excluding administrative information as defined in proposed Sec.
1092.301(a), disclosure of the remaining information would not reveal
institutions' proprietary or privileged information; would not impede
the confidential supervisory process; and would not present risks to
the financial system writ large. The Bureau's alternative for
information subject to FOIA Exemption 4--to publish it in a format that
does not directly or indirectly identify the source of the
information--is consistent with how the Bureau treats confidential
information generally, including confidential supervisory
information.\318\
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\318\ See id.
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Proposed Sec. 1092.303(b) also would clarify that the Bureau would
not publish administrative information, as defined in proposed Sec.
1092.301(a). The proposal defines that term to include contact
information and other information submitted or collected in the nonbank
registration system to facilitate administration of the nonbank
registration system, including nonregistration statements filed under
proposed Sec. 1092.302(d). The purposes for this information are
limited--for example, so the Bureau can contact the supervised
registrant with questions about the registration. As also discussed in
the section-by-section analysis of proposed Sec. 1092.301(a), the
proposal would not publicize this information because the Bureau does
not believe publication would be of use to the general public.
Therefore, the Bureau preliminarily concludes that release of
administrative information would not be in the public interest. The
Bureau seeks comment on its proposal not to publish administrative
information, including whether the release of administrative
information would be in the public interest.
Finally, proposed Sec. 1092.303(b) would clarify that the Bureau
retains discretion not to publish information that has been corrected
or is subject to correction, as well as information that is not
required to be submitted under subpart C or is otherwise not in
compliance with part 1092. For example, the Bureau does not believe it
would be in the public interest to publish or continue to publish
previously published inaccurate information for which it has received
or issued a correction notice as described in proposed Sec.
1092.302(b)(4). In addition, persons could submit unauthorized or
inadvertent filings, or filings regarding terms and conditions that
would not require registration under the proposal, or other inaccurate
or inappropriate filings. The Bureau believes it would require
flexibility not to publish such information to maintain the accuracy
and integrity of the nonbank registration system and the data that
would be published by the Bureau.
VI. Proposed Effective Date of Final Rule
The Administrative Procedure Act generally requires that rules be
published not less than 30 days before their effective date.\319\ The
Bureau proposes that, once issued, the final rule for this proposal
would be effective 30 days after it is published in the Federal
Register. However, as described in the proposal, registration would be
required by an annual registration date that comes at a later time,
after the nonbank registration system implementation date, which is
likely to be no earlier than January 2024. The Bureau seeks comment on
the proposed effective date including whether it should be at a
different time, and if so, when and why.
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\319\ 5 U.S.C. 553(d).
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VII. Dodd-Frank Act Section 1022(b)(2) Analysis
A. Overview
In developing the proposed rule, the Bureau has considered the
potential benefits, costs, and impacts of the proposed rule as required
by section 1022(b)(2) of the Consumer Financial Protection Act
(CFPA).\320\ The Bureau requests comment on the preliminary analysis
presented below as well as submissions of additional data and analysis
that could help refine the Bureau's analysis of the benefits, costs,
and impacts. In developing the proposed rule, the Bureau has consulted,
or offered to consult with, the appropriate prudential regulators and
other Federal agencies, including regarding consistency with any
prudential, market, or systemic objectives administered by such
agencies as required by CFPA section 1022(b)(2)(B). The Bureau also has
consulted with State agencies and Tribal governments \321\ as required
by CFPA sections 1022(c)(7)(C) and 1024(b)(7)(D).
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\320\ Specifically, CFPA section 1022(b)(2)(A) calls for the
Bureau to consider the potential benefits and costs of a regulation
to consumers and covered persons, including the potential reduction
of access by consumers to consumer financial products or services;
the impact on depository institutions and credit unions with $10
billion or less in total assets as described in CFPA section 1026;
and the impact on consumers in rural areas.
\321\ CFPA section 1002(27) defines ``State'' to include ``any
federally recognized Indian Tribe, as defined by the Secretary of
the Interior under section 104(a) of the Federally Recognized Indian
Tribe List Act of 1994 (25 U.S.C. 479a-1(a)).''
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The Bureau is proposing this rule to establish a registration
system for supervised nonbanks that use form contracts to impose
covered terms and conditions. The purposes of this nonbank registration
system would be to support monitoring of risks to consumers in the
offering or provision of consumer financial products and services, to
facilitate supervision of nonbanks and assess and detect risks to
consumers as authorized by CFPA section 1024(b), and to publicly
release the information collected in the public interest, as authorized
by CFPA section 1022(c). The registration system for nonbanks that use
certain standard terms and conditions in consumer contracts would
increase transparency and oversight in areas where certain standard
terms and conditions limit private enforcement and increase
transparency for the public when consumers are waiving rights.
The policy embodied in the proposed rule can be broken into three
parts.
First, under the proposed rule, subject to certain exclusions,
supervised nonbanks that use covered terms and conditions would be
required to register annually using a nonbank registration system
established by the Bureau. As part of the registration process, these
supervised registrants would be required to submit three separate types
of information: identifying information, administrative information,
and information related to their use of covered contract terms and
conditions.
Second, the Bureau would use information acquired through the
[[Page 6950]]
nonbank registration system to facilitate the Bureau's monitoring
functions and supervisory processes.
Third, the Bureau would publish each of the types of nonbank
registration information, except for administrative information, on its
website and potentially in other forms, to the maximum extent permitted
by applicable law.
We analyze these three parts separately below.
B. Data Limitations and the Quantification of Benefits, Costs, and
Impacts
The discussion below relies on information that the Bureau has
obtained from other regulatory agencies and publicly available sources,
as well as Bureau expertise. These sources form the basis for the
Bureau's consideration of the likely impacts of the proposed rule. The
Bureau provides its best estimates of the potential benefits and costs
to consumers and covered persons of this proposal, given available
data. However, as discussed further below, the data with which to
quantify the potential costs, benefits, and impacts of the proposed
rule generally are limited.
In light of these data limitations, the analysis below generally
provides a qualitative discussion of the benefits, costs, and impacts
of the proposed rule. General economic principles and the Bureau's
expertise in markets for consumer financial products and services,
together with the limited data that are available, provide insight into
these benefits, costs, and impacts. The Bureau requests additional data
or studies that could help quantify the benefits and costs to consumers
and covered persons of the proposed rule.
C. Baseline for Analysis
In evaluating the potential benefits, costs, and impacts of the
proposed rule, the Bureau takes as a baseline the current legal
framework regarding the use of covered terms and conditions. Under the
baseline legal framework, supervised nonbanks are subject to certain
prohibitions and restrictions on the use of covered terms and
conditions, including explicit statutory and regulatory restrictions,
as well as a prohibition on UDAAPs, as discussed in part II above.
Supervised nonbanks also are not obliged to annually register with the
Bureau. Nor are they required by rule to provide information to the
Bureau concerning their use of covered terms and conditions.\322\ Much
of the information that would be acquired by the Bureau as a result of
the proposed rule is not in the Bureau's possession or available from
any other source. As a result, it is not used currently by the Bureau
to monitor, assess, or address the risks to consumers presented by
covered terms and conditions. Furthermore, much of this information is
not currently published by the Bureau and therefore is not available to
other regulators or the general public.\323\
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\322\ Some nonbanks may be required to provide sample contracts
as a part of examination by the Bureau. The Bureau's examination
procedures generally describe how contracts are sampled. For
individual exams, information requests vary and may not include all
contracts covered by this rule. Furthermore, in contrast to the
proposed rule, any information on contracts obtained through
examinations is confidential and generally is not made publicly
available in non-aggregated form.
\323\ Part II.C above discusses examples of Bureau supervisory
or enforcement matters that identified risks from the use of covered
terms and conditions at certain supervised nonbanks. These are made
public through Supervisory Highlights or the public enforcement
actions the Bureau brings.
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A few nonbanks currently are required to report their entire
contract, including any covered terms and conditions, under State laws
which govern one supervised market--private student loan origination--
in a few states.\324\ In addition, in the mortgage lending market, most
residential mortgages for site-built homes are either eligible for
purchase by government-sponsored enterprises or for insurance by
Federal agencies \325\ that generally require the use of standard-form
promissory notes that are published on websites for a commercial
audience.\326\ For these firms, the costs, benefits, and impacts of the
proposed rule will generally be smaller than described below.
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\324\ There are general requirements in Colorado, Maine, and
Louisiana for private student lenders to provide model loan
agreements that regulators make or will make publicly-accessible. In
addition, Illinois has adopted legislation to collect these
agreements.
\325\ CFPB 2021 Mortgage Market Trends Report at Table 1
(reporting fewer than 10% of total 2021 originations for 1-4 family
residential mortgages were not conventional conforming or FHA/VA/
FSA/RHS-insured), https://files.consumerfinance.gov/f/documents/cfpb_data-point-mortgage-market-activity-trends_report_2022-09.pdf.
\326\ See, e.g., Fannie Mae Selling Guide B8-3-01, Notes for
Conventional Mortgages (09/02/2020) & Fannie Mae Legal Documents
(July 2021), https://singlefamily.fanniemae.com/fannie-mae-legal-documents (last visited Dec. 7, 2022).; HUD Single Family Mortgage
Promissory Notes, https://www.hud.gov/program_offices/housing/sfh/model_documents (last visited Dec. 7, 2022).
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D. Coverage of the Proposed Rule
This proposed rule would affect nonbank covered persons subject to
the supervisory authority of the Bureau under 12 U.S.C. 5514(a), and
not excluded from the supervisory authority of the Bureau pursuant to
12 U.S.C. 5517 or 12 U.S.C. 5519 (defined in proposed Sec. 1092.301(g)
as supervised nonbanks). Supervised nonbanks that may be covered by the
rule may offer or provide several types of consumer financial products
and services. Subject to the foregoing statutory exclusions, supervised
nonbanks include any nonbank covered person that:
(1) Offers or provides a residential mortgage-related product or
service as described in 12 U.S.C. 5514(a)(1)(A);
(2) Offers or provides any private educational consumer loan as
described in 12 U.S.C. 5514(a)(1)(D);
(3) Offers or provides any consumer payday loan as described in 12
U.S.C. 5514(a)(1)(E);
(4) Is a larger participant in any market as defined by rule in
part 1090 pursuant to 12 U.S.C. 5514(a)(1)(B); \327\ or
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\327\ Under current Bureau regulations, larger participant
markets include: consumer reporting, consumer debt collection,
student loan servicing, international money transfers, and
automobile financing.
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(5) Is subject to an order issued by the Bureau pursuant to 12
U.S.C. 5514(a)(1)(C).
The Bureau seeks comment on any other entities that may be affected
by the proposed rule.
All Bureau-supervised nonbanks in the markets described above that
use covered terms and conditions potentially would be affected by the
proposed rule, except for persons excluded by proposed Sec.
1092.301(h). Among other exclusions, proposed Sec. 1092.301(h) would
exclude natural persons, persons (together with affiliates) with less
than $1 million in annual receipts from the offering or provisions of
the consumer financial products or services described above, persons
(together with affiliates) using covered terms in no more than a de
minimis manner, and persons whose sole use of covered terms and
conditions is in publicly-available residential mortgage contracts
required for insurance, guarantee, or purchase by Federal agencies or
Federal government-
[[Page 6951]]
sponsored enterprises.\328\ Many of the costs, benefits, and impacts of
the proposed rule will not be applicable to entities that both do not
enter into contracts containing covered terms or conditions, and do not
enforce these terms or conditions appearing in contracts of
others.\329\
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\328\ The proposed de minimis exemption has two components:
entering into covered form contracts containing covered terms and
conditions less than 1,000 times in the previous calendar year and
not obtaining a court or arbitrator decision on the enforceability
of covered of terms and conditions (whether enforcing or rejecting
enforcement). Proposed Sec. 301(h) also includes exemptions for a
Federal agency, a State (including a Tribe), persons supervised
solely as service providers under Bureau supervisory authorities,
and persons to the extent they meet the definition of ``related
person'' in 12 U.S.C. 5481(25).
\329\ In general, supervised nonbanks not using covered terms or
conditions will need to understand the rule and verify that they are
exempt. This will generally be a one-time cost, as nonbanks are able
to verify that future contracts do not include covered terms or
conditions in the normal course of business.
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The Bureau seeks comment on any other entities that may be affected
by the proposed rule.
Under existing law, there is no system or central registry that
comprehensively identifies nonbanks that are subject to the Bureau's
supervisory authority. Furthermore, as discussed above, supervised
nonbanks currently are not required to register with the Bureau
regarding their use of covered terms or conditions. Without
comprehensive information on the number of supervised nonbanks,
including the number of supervised nonbanks using covered terms or
conditions in covered form contracts, the Bureau cannot precisely
estimate the number of entities that will be affected by the proposed
rule. Moreover, the Bureau cannot precisely estimate the number of
consumers or accounts that will be affected by the proposed rule.
BILLING CODE 4810-A-P
[[Page 6952]]
[GRAPHIC] [TIFF OMITTED] TP01FE23.002
BILLING CODE 4810-AM-C
[[Page 6953]]
Table 1 presents the best estimate available to the Bureau of the
number of affected entities under the proposed rule.\330\ The estimate
is based on the most recent Economic Census data.\331\ Table 1 presents
entity counts for the 6-digit North American Industry Classification
System (NAICS) codes that generally include the markets supervised by
the Bureau, including counts for entities with more than $1 million in
revenue reported in the 2017 Economic Census. The markets defined by
NAICS codes are broader than the markets supervised by the Bureau.\332\
Moreover, Table 1 counts an unknown number of entities active in
markets over which the Bureau exercises larger participant supervisory
authority, but which are not supervised because they are not larger
participants under existing Bureau rules in part 1090, generally
because they fall below a size threshold. Although some supervised
nonbanks may fall outside the NAICS codes listed in Table 1, the Bureau
believes their number to be small. In particular, the Bureau believes
that the number of these supervised nonbanks is smaller than the number
of entities counted in Table 1 that are not subject to the Bureau's
supervisory authority. As such, the Bureau considers the estimates in
Table 1 to be an upper bound on the number of currently-supervised
nonbanks potentially covered by the proposed rule.\333\ The Bureau
seeks comment on NAICS codes not included in Table 1 that include a
significant number of entities affected by the proposed rule.
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\330\ The number of entities in the ``total'' row in Table 1 is
less than the sum of the rows above it because some NAICS codes
appear in multiple markets, for example, ``Other Activities Related
to Credit Intermediation'' appears three times.
\331\ These entity counts include only firms operating for the
entire year, for which there are reliable estimates of annual
receipts. See U.S. Census Bureau, ECN Core Statistics Economic
Census: Establishment and Firm Size Statistics for the U.S.,
Selected Sectors: Sales, Value of Shipments, or Revenue Size of
Firms for the U.S. (2017), https://data.census.gov/table?d=ECN+Core+Statistics+Economic+Census:+Establishment+and+Firm+Size+Statistics+for+the+U.S.&tid=ECNSIZE2017.EC1700SIZEREVFIRM.
\332\ The full definitions of each of the 2017 NAICS codes in
Table 1 can be identified at https://www.census.gov/naics/.
\333\ That is, any undercounting of impacted entities outside
the NAICS codes listed in Table 1 is likely to be more than offset
by an overcounting due to the broader delineation of markets defined
by NAICS codes relative to the larger participant markets.
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In addition, the penultimate row of Table 1 presents an estimate of
the number of nonbanks that would be subject to the Bureau's
supervisory authority pursuant to orders the Bureau may issue in the
future.\334\
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\334\ Currently, the Bureau estimates that very few entities are
subject to supervision solely due to a pre-existing consent order.
However, the Bureau has recently announced plans to use this
authority and anticipates that the number of entities in this
category will increase. Given that orders generally remain in force
for two to five years, and the proposal includes an exemption for
such orders with a duration of two years or less, it is unlikely
that more than 25 entities would be covered in any given year. See
Consumer Financial Protection Bureau, CFPB Invokes Dormant Authority
to Examine Nonbank Companies Posing Risks to Consumers (Apr. 25,
2022), https://www.consumerfinance.gov/about-us/newsroom/cfpb-invokes-dormant-authority-to-examine-nonbank-companies-posing-risks-to-consumers/.
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As noted above, Table 1 likely over-estimates the number of current
larger participants subject to the Bureau's supervisory authority. In
any event, any nonbank covered persons not currently subject to the
Bureau's supervisory authority that become subject to its authority
pursuant to a future larger participant rule generally would incur the
same costs the Bureau describes and estimates below on a per-entity
basis. Similarly, the benefits described below generally would increase
as more entities become subject to the registration requirement and
provide information about the covered terms and conditions in their
specific form contracts.
Given that some supervised nonbanks may not use covered terms and
conditions, Table 1 is likely to overestimate the number of entities
subject to the registration requirements of the proposed rule. The
Bureau does not have sufficient data to precisely estimate the number
of supervised nonbanks that use covered terms and conditions, which is
one problem the proposed rule seeks to remedy. However, based on
available information, the Bureau believes that the use of covered
terms and conditions is widespread, although prevalence of specific
terms may vary widely by market.\335\ The Bureau seeks any additional
input or data on this issue.
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\335\ There has been some variance in the use of arbitration
agreements across markets. See Consumer Financial Protection Bureau,
Arbitration Study (Mar. 2015), https://files.consumerfinance.gov/f/201503_cfpb_arbitration-study-report-to-congress-2015.pdf.
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Some nonbanks that the Bureau has not previously examined may not
know if they are subject to the Bureau's supervisory jurisdiction. The
Bureau anticipates that nonbanks facing legitimate uncertainty about
their status as supervised nonbanks under the proposed rule will choose
to notify the Bureau on a confidential basis that they are not
registering, due to the low burden of providing that basic information
and the specific option to do so described in proposed Sec.
1092.302(d). Unfortunately, no information exists on the number of
unsupervised nonbanks facing legitimate uncertainty over whether they
are subject to Bureau supervision. However, such nonbanks still are
most likely to be in the Economic Census industries defined by the
NAICS codes listed in Table 1, and therefore accounted for in the
analysis. The Bureau seeks comment or data on the extent and impact of
potential uncertainty regarding a nonbank's status (such as whether it
is a larger participant) and registration requirements, and on
alternatives which might reduce the impact of this uncertainty.
E. Potential Benefits and Costs to Consumers and Covered Persons
This section describes the benefits and costs to consumers and
covered persons that the Bureau expects to occur if the proposed rule
is adopted. Each of the three components of the rule, described above,
is analyzed in detail separately.
The Bureau anticipates that the primary benefit of the proposed
rule is increased compliance by those entities using covered terms and
conditions to avoid complying with underlying law including Federal
consumer financial laws regulating the supervised registrant's business
practices (apart from the use of covered terms and conditions,
discussed separately below). The proposed rule would incentivize firms
to comply through at least two mechanisms. First, the proposed registry
would enable the Bureau to better target its limited monitoring,
supervision, and enforcement resources to entities posing a risk of
violation of Federal consumer financial law. Upon publication of the
information collected in the registry, other public regulators,
including those who have a shared role in enforcing Federal consumer
financial law, also could use the information to calibrate the
prioritization of their resources. Consumers would benefit from
increased compliance as a result of this public scrutiny in
circumstances where consumers' ability to protect themselves through
private enforcement is impeded.
Second, a public registry of covered terms and conditions contained
in covered form contracts will increase compliance by helping public
regulators to detect terms or conditions prohibited by law. As
discussed in part II.B above, some provisions of law expressly prohibit
certain covered terms and conditions, expressly render certain
[[Page 6954]]
covered terms and conditions void and unenforceable, or both. As also
illustrated by some of the examples discussed in part II.C above, other
provisions of law, such as the CFPA's prohibition against UDAAPs, also
may prohibit or limit the use of certain covered terms and conditions.
Although such illegal terms generally are unenforceable, they still
sometimes may be used. The Bureau does not possess data on the
frequency of use of such terms, but as discussed in part II above,
these terms and conditions are in fact used today. And when used in
prohibited circumstances such as those generally described in part II
above, these terms and conditions likely still have a chilling effect
on consumers' ability to enforce or exercise their rights or otherwise
protect their interests. As discussed in more detail below including in
part VII.E.2, the Bureau believes that supervised nonbanks currently
using prohibited covered terms and conditions often would remove them
from their contracts, thus benefitting consumers.
The primary costs of the proposed rule would affect supervised
nonbanks that use covered terms or conditions. These entities would
incur the cost of time spent by employees to read and understand the
requirements of the proposed rule, and then gather and submit the
required registration information. This would include locating and
identifying information sought by the proposed rule about the
supervised nonbanks' use of covered terms and conditions in covered
form contracts regarding the offering or provision of consumer
financial products or services in markets the Bureau supervises. This
information would include standardized data regarding certain covered
terms and conditions (i.e., limitations on time, place, forum, or venue
for filing legal action, on filing actions seeking relief for other
consumers, on participation in legal action filed by others, and
arbitration agreements) and the text of other covered terms and
conditions (liability limits, waivers of causes of action, non-
disparagement clauses, and other waivers). This information also would
include a limited amount of additional information about each form
contract--the States in which the contract is used, the legal names of
any persons other than a consumer and the supervised registrant that
typically entered into the covered form contract, and any governing law
specified in the contract. If the terms or conditions are contained in
a form contract from a form provider, the name of the provider and
citation to the contract also would be collected. Finally, the
supervised nonbank would need to locate any court and arbitrator
decisions on enforcement of these terms and conditions and report about
the frequency and results of these decisions. As discussed below,
covered supervised nonbanks may also bear some indirect costs related
to increased incentives to comply with laws specifically governing the
use of covered terms and conditions.
If finalized as proposed, the rule would affect supervised nonbanks
as long as it is in effect. However, the costs, benefits, and impacts
of any rule are difficult to predict far into the future. Therefore,
the analysis below of the benefits, costs, and impacts of the proposed
rule is most likely to be accurate for the first several years
following implementation of the proposed rule.
1. Registration and Submission of Information Regarding Covered Terms
and Conditions Contained in Covered Form Contracts
This section VII.E.1 discusses the costs and benefits to consumers
and covered persons of the first part of the rule outlined in part
VII.A above: registration and submission of information regarding
covered terms and conditions contained in covered form contracts.
Costs
To precisely quantify the costs to covered persons, the Bureau
would need representative data on the operational costs that supervised
nonbanks incur to locate, identify, gather, and submit registration
information regarding their use of covered terms and conditions in
covered form contracts. Given that no such registry currently exists,
the Bureau does not believe that data on this specific type of
reporting cost are likely to be available from any source. The Bureau
has made reasonable effort to gather data on reporting costs,
generally, and the discussion below uses this information to quantify
certain likely costs of the proposed rule. The Bureau believes that the
following discussion of the costs of registration and submission of
information regarding covered terms or conditions in covered form
contracts accounts for most elements of cost, given the extent of
available data. However, these calculations may not fully quantify the
costs to covered persons, especially given the potential for wide
variation in use of covered terms or conditions in covered form
contracts by supervised nonbanks across a diverse set of industries.
The Bureau requests comment on any additional impacts as well as
information that would inform its cost estimates.
In general, the costs would fall into four subcategories: the cost
of understanding the proposed rule, the cost of identifying covered
terms and conditions in covered form contracts that the nonbanks enter
into, the cost of identifying and reporting on the nature of court and
arbitrator decisions on the enforceability of covered terms and
conditions, and the cost of entering all the related information, as
well as the nonbank's identifying information and administrative
information,\336\ into the registration system. If a supervised nonbank
does not directly enter into agreements with consumers and did not
obtain arbitrator or court decisions on the enforceability of a covered
term or condition--which may be the case for some servicers or debt
collectors--then its costs in the second and subsequent categories
would be limited to the time needed to confirm that fact.
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\336\ The cost of entering required administrative information,
such as contact information, would be minimal and generally is
accounted for below as part of the cost of entering related
identifying information.
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The first step to register as required by the proposed rule is to
read the filing instructions and understand the requirements of the
proposed rule as reflected in the filing instructions. The Bureau
anticipates issuing guidance in the filing instructions to assist with
this step, and that supervised nonbanks will generally not read the
final rule in its entirety. Based on the Bureau's experience, this will
generally take roughly 60 minutes for a typical firm. Some firms may
have higher costs. For example, as part of the time to understand the
registration requirements, some nonbanks may take time to analyze
whether they are supervised by the Bureau or otherwise exempt from the
proposed rule. Some of these nonbanks may be permitted to notify the
Bureau that they believe in good faith they are not supervised or
eligible for an exclusion from the definition of supervised registrant.
These nonbanks, to the extent they may use covered terms or conditions,
may consult an in-house attorney on whether they have a good faith
basis to file a notice of non-registration.\337\ The Bureau requests
comment on which types of consumer financial products and services over
which there would be such uncertainty as to coverage by the proposed
rule, as well as the costs of
[[Page 6955]]
determining whether to file such a notice and of filing the notice.
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\337\ And if they file such a notice, the cost of that would be
less than the cost of full registration in steps 4 and 5 of Table 2
discussed below.
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The second step requires supervised registrants to identify certain
information regarding covered terms and conditions in each of their
covered form contracts for the offering or provision of consumer
financial products or services in Bureau-supervised markets. These
covered terms and conditions appear in contracts in standardized
language, and therefore often can be identified relatively quickly by
skimming or searching, without reading the contract in its entirety.
Based on comments it receives on the proposal or other feedback, the
Bureau also may issue guidance documents to assist with this step. The
time involved in identifying required information is likely to depend
on how firms maintain information regarding their use of consumer
contracts, and the Bureau therefore expects the burden to decline as
firms gain experience with the registration process and adapt their
record-keeping practices to more efficiently track the information
required by the proposed rule. The Bureau also is proposing to collect
information on firms' use of covered terms and conditions in contracts
purchased from third-party providers. Although the Bureau believes the
burden of identifying and submitting information on covered terms and
conditions already would be small, if the Bureau allowed simplified
reporting of common purchased contracts,\338\ some firms may choose to
minimize their burden by purchasing their contracts instead of writing
them in house. In addition, in the years following the first year of
registration, supervised registrants will need to identify only
information needed to update their existing registration--i.e., any new
covered form contracts that contain covered terms or conditions, any
new or amended covered terms or conditions in previously-registered
covered form contracts, or removals or modifications of previously-
registered covered terms or conditions. The time needed to do that will
be shorter than in the first year of registration. Therefore, the
Bureau assesses that, on average, this step will take less than 45
minutes per contract each year for supervised registrants using ten or
fewer contracts, and less than 30 minutes per contract each year for
supervised registrants using more than ten contracts. Some firms may
use uncommon covered terms and conditions that cannot be readily
identified or determined to be covered for purposes of registration.
For such firms, this step may take additional time, including in
circumstances where the firm ultimately decides it has a good faith
basis to determine the term or condition is not covered and thus may
instead file a voluntary notice of non-registration of that term or
condition under proposed Sec. 1092.302(d). The Bureau requests comment
on the types and specific examples of covered terms and conditions that
might be difficult to detect or determine coverage and on steps the
Bureau could take to reduce this burden.
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\338\ As discussed in the section-by-section analysis of
proposed Sec. 1092.302(a)(3)(vi), the Bureau requests comment on
this option.
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The third step requires supervised registrants to identify whether
courts or arbitrators have issued decisions on the enforceability of
covered terms or conditions, such as by ruling on requests to enforce
these covered terms and conditions. If, during the previous calendar
year, supervised registrants know they did not receive a court decision
of this type, such as a decision dismissing, staying, or capping
liability for a claim filed by the consumer on the basis of a covered
term or condition, or ruling on a request to enforce a non-
disparagement clause, they can answer no. If supervised registrants are
aware of any covered court or arbitrator decisions, then they can
answer yes. The Bureau believes that most supervised registrants retain
records of legal action and can readily ascertain whether or not they
had any covered court or arbitrator decisions. Furthermore, the Bureau
believes that the majority of registrants will not have any covered
court or arbitration decisions and will be able to complete this step
in under 20 minutes. Registrants with covered decisions will be
required to compile those decisions and identify the presence or
absence of language related to covered terms or conditions contained in
covered form contracts. For decisions that would be covered, supervised
registrants must note what product or service and term or condition was
at issue in the decision, and how the court or arbitrator ruled (i.e.,
to enforce the term or condition or not). The Bureau assesses that this
is likely to take less than 120 minutes. Therefore, the Bureau assesses
that, on average, supervised registrants will require less than 70
minutes to find and consult the relevant records to complete this
step.\339\ Large entities may have more complex legal activities and
may be more likely to have qualifying court or arbitrator decisions and
the Bureau therefore assesses that this step will take 140 minutes for
firms with 250 or more separate contracts.
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\339\ Under the conservative assumption that at least 50% of
registrants do not have covered court or arbitration decisions in a
given calendar year, we compute this as: 0.5*20 + 0.5*120 = 70
minutes, or twice that amount for large, complex firms.
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Finally, supervised registrants must submit the information they
have gathered to the online registration system. There would be a one-
time cost of creating an account to register in the nonbank
registration system, which would involve, among other steps, verifying
the identity of the individual performing the registration for the
supervised registrant as well as their authority to act on behalf of
the supervised registrant for purposes of the nonbank registration. For
supervised registrants already registered with the Bureau, for example
through the Consumer Response Company Portal, the time involved should
be minimal. For entities that have not already been verified, this
process may take significantly more time. The burden of verification
will depend on the exact policies and procedures laid out in the filing
instructions and cannot be precisely estimated at this time. However,
the Bureau expects that, on average, this step will take under five
hours of employee time to complete. Registrants may occasionally need
to reverify, for example due to reorganization or employee turnover.
The Bureau expects that, on average, registrants will not need to go
through the verification process more than once every five years.
Therefore, the amortized annual burden of verification is likely to be
less than 60 minutes on average.
Each year during periodic registrations, there would be a cost for
providing or updating basic identifying information for the supervised
registrant, including information about any affiliate relationships
with other supervised registrants, and for providing or updating
information regarding the covered terms and conditions. Submitting this
information is likely to take less than 60 minutes for most firms, and
up to 90 minutes for large, complex firms. In addition, the Bureau
estimates that once the relevant information on each covered form
contract is gathered, inputting this information into the registration
system is likely to take less than roughly 20 minutes per contract.
These estimates include time supervised registrants likely would spend
to verify that the registration is complete and accurate. Proposed
Sec. 1092.302(b)(4) would require correction of incorrect registration
information, but it is uncertain how often errors would occur. The
Bureau requests comment on that
[[Page 6956]]
issue, and also seeks comment and data on how a possible bona fide
error provision discussed in the section-by-section analysis of
proposed Sec. 1092.302(b)(4) may affect the procedures established to
ensure the accuracy of information submitted, and the related expected
costs.
The Bureau requests comment, data, or other information that would
help inform its estimates of the time required to complete the tasks
described above.
The Bureau assesses the average hourly base wage rate for each
reporting requirement at $43.60 per hour. This is the mean hourly wage
for employees in four major occupational groups assessed to be most
likely responsible for the registration process: Management ($59.31/
hr); Legal Occupations ($54.38/hr); Business and Financial Operations
($39.82/hr); and Office and Administrative Support ($20.88/hr).\340\
The average hourly wage of $43.60 is multiplied by the private industry
benefits factor of 1.42 to get a fully loaded wage rate of $61.90/
hr.\341\ The Bureau includes these four occupational groups in order to
account for the mix of specialized employees that may assist in the
registration process. The Bureau assesses that the registration process
will generally be completed by office and administrative support
employees that are generally responsible for the registrant's paperwork
and other administrative tasks. Employees specialized in business and
financial operations or in legal occupations are likely to provide
information and assistance with the registration process. Senior
officers and other managers are likely to review the registration
information before it is submitted and may provide additional
information. The Bureau requests any information that would inform its
estimate of the average hourly compensation of employees required to
register under the proposed rule.
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\340\ See U.S. Bureau of Labor Statistics, National Occupational
Employment and Wage Estimates United States (May 2021), https://www.bls.gov/oes/current/oes_nat.htm.
\341\ As of March 2022, the ratio between total compensation and
wages for private industry workers is 1.42. See U.S. Bureau of Labor
Statistics, Employer Costs for Employee Compensation: Private
industry dataset, (March 2022), https://www.bls.gov/web/ecec/ecec-private-dataset.xlsx.
[GRAPHIC] [TIFF OMITTED] TP01FE23.003
The direct registration cost for a given supervised nonbank will
depend on its complexity in general and, most importantly, on the
number of different covered form contracts it uses. Table 2 presents
the estimated direct registration cost for supervised nonbanks at three
different levels of complexity, based on the assumptions described
above. For supervised nonbanks covered by exclusions to the rule in
proposed Sec. 1092.301(h), they would only need to complete step 1 in
Table 2 to ascertain that fact. For other supervised nonbanks that
complete steps 2 and 3 without identifying covered terms and conditions
in covered form contracts they enter into or decisions on enforcement
of covered terms, they would not need to complete steps 4 or 5.
The total direct cost of registration depends on how many
supervised nonbanks fall into each of the three representative
categories of contract complexity. For illustrative purposes, Table 3
reports estimates of how many of the estimated number of supervised
nonbanks reported in Table 1 may fall into each category, based on
their total revenue as reported in the Economic Census. The Bureau
believes that revenue is a reasonable and transparent indicator of the
number of contracts used by supervised nonbanks, and therefore
appropriate for estimating the average time burden and cost of
registration. However, some supervised nonbanks with relatively low
revenue may use many covered form contracts, or vice versa. The Bureau
requests any information that could inform its estimates of the
distribution of registration costs across supervised nonbanks.
The Bureau has considered the possibility that covered nonbanks
pass on some or all of the costs described above to consumers. As
described below, the nature of these costs makes it unlikely that
consumers will bear a
[[Page 6957]]
significant portion of the direct costs of registration under the
proposed rule. According to standard theory of the firm, profit-
maximizing firms will fully absorb any one-time costs or fixed costs,
unless these costs are sufficiently large that it is no longer
profitable to offer a given product or service. Firms may pass on,
fully or in part, an increase in their variable cost to consumers
through higher prices.\342\ Therefore, consumers could experience
modestly higher prices if registration costs depend on the number of
times a given contract is used. However, because the registration costs
very likely do not depend on the number of times a given covered form
contract is used, the Bureau considers these costs to be fixed costs at
the product or service level. Therefore, the Bureau believes that the
provisions of the proposed rule requiring registration and submission
of information regarding covered terms and conditions will not lead to
increased prices for consumers.
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\342\ Fixed costs are defined as costs required to provide a
product or service and which do not depend on the number of
consumers or accounts, or on the size or volume of transactions.
Variable costs are defined as costs which change as the quantity of
the good or service provided by the firm changes.
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The Bureau also has considered the degree to which the proposed
rule may induce supervised nonbanks to discontinue certain products or
services due to the cost of registering and submitting information
regarding covered terms and conditions contained in covered form
contracts. That outcome is not the rationale or stated goal of the
rule, but the Bureau is considering the extent of its likelihood here.
Given the small fixed costs associated with these provisions, as
described above, a firm or product line would need to be on the
threshold of unprofitability for the proposed rule to induce exit. The
Bureau believes there are very few, if any, firms with over $1 million
in revenues for which the proposed rule would be a decisive factor in
their exit decision. Therefore, the proposed rule is unlikely to lead
to a significant reduction in the offering of specific products and
services. However, the Bureau does not have adequate information with
which to quantify the identity or number of products or services that
could or might be discontinued as a result of this proposed rule, and
therefore cannot quantify the resulting impact, if any, on consumers.
If it is cheaper to remove a given covered term or condition than
to maintain it, then profit maximization implies that the firm will
remove that covered term or condition from its contracts. As a result,
under the proposed rule, if the cost of registering a given covered
term or condition minus the benefits of maintaining it in a covered
form contract for a particular product or service exceeds a firm's
costs of removing the term from supervised nonbanks' contracts, profit
maximization implies that the firm will remove that term from its
contracts.\343\ To the extent that any covered terms or conditions
removed by supervised registrants were disadvantageous to consumers,
consumers will benefit and some supervised registrants may be impacted.
To quantify these impacts, the Bureau would need information regarding
the costs and benefits to supervised nonbanks of including covered
terms and conditions in their contracts. In its 2017 arbitration
agreement rule, which did not take effect, the Bureau found that many
firms often view the benefits of arbitration agreements to
significantly exceed their costs.\344\ Similar data on the costs and
benefits to firms from other covered terms and conditions is not
available. The costs of removing covered terms and conditions are
discussed in part VII.E.2 below and should be considered an upper bound
on the costs described here, because supervised nonbanks always have
the option to register contracts instead of removing covered terms and
conditions.
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\343\ That is, if (cost of registration)--(benefits of contract
term) > (cost of removing term).
\344\ 82 FR at 33397.
[GRAPHIC] [TIFF OMITTED] TP01FE23.004
Benefits
---------------------------------------------------------------------------
\345\ The Economic Census provides firms counts for revenue
ranges. Here, firms with $1-10MM in revenue are assumed to be
``simple,'' with 10 different contracts on average. Firms with over
$100MM in revenue are assumed to be ``complex'' with 250 different
contracts on average. In addition to the Economic Census data, the
Bureau assumes that the estimated 25 nonbanks subject to supervision
due to orders are large and therefore complex. For details burden
and cost estimates, see Table 2.
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When separated out from the monitoring and supervisory uses
(analyzed separately in part VII.E.2 below) and the publication
provision (analyzed separately in part VII.E.3 below), the registration
and information submission provision alone is unlikely to provide any
benefits for affected firms.
For consumer financial services and products offered by supervised
nonbanks, the main benefit derived from registration under the proposed
rule is the Bureau's enhanced monitoring and supervision based on the
information collection regarding covered terms and conditions contained
in covered form contracts. This consumer protection activity by the
Bureau via this proposed rule and its beneficial effects for consumers
are described in detail in the following part VII.E.2.
2. Use of Information for Bureau's Market Monitoring and Supervision
Processes
The Bureau can use the information collected under the proposal for
[[Page 6958]]
monitoring and supervisory processes. The publication component, while
a monitoring process, is discussed separately in part VII.E.3 below.
Costs
The costs to covered persons of the Bureau's use of information
collected under the proposal through its monitoring and supervisory
processes may differ depending on the degree to which any covered terms
and conditions that supervised nonbanks use are prohibited by law,
including Federal consumer financial law (whether enumerated consumer
laws and implementing regulations discussed in part II.B or the
prohibition against UDAAPs such as in the examples discussed in part
II.C). Most of these costs can be grouped into two categories, each of
which relates to changes in the probability of supervision by the
Bureau. First, as discussed below, some firms may face incentives to
modify the covered terms and conditions in their covered form contracts
in response to the proposed rule. Firms choosing to modify their
covered terms and conditions in their covered form contracts face a
direct paperwork cost of modifying their form contracts, as well as
potential impacts from changes to their form contracts. For example, to
the extent supervised nonbanks use prohibited covered terms and
conditions, there may be specific impacts from these firms'
discontinuing use of prohibited covered terms and conditions in covered
form contracts they enter into with consumers in the future. Second,
some nonbanks may experience costs from an increased likelihood of
examination by the Bureau due to the Bureau's use of the information
collected under the proposed rule. As discussed below, this increase
likely would be at least partially offset by forgone examinations of
other supervised nonbanks.
With respect to the first category of cost--of removing prohibited
covered terms and conditions, in addition to the prohibition against
UDAAPs, Federal, State, and Tribal laws include a number of express
prohibitions of the use of a number of covered terms and
conditions.\346\ Despite these express prohibitions and the prohibition
against UDAAPs, the Bureau and other regulators have identified
violations of some of these prohibitions linked to contract terms and
conditions purporting to waive consumer protections and limit their
exercise or enforcement by consumers. Although these types of
prohibited contract terms and conditions generally are unenforceable,
the fact that some supervised nonbanks include them in their contracts
strongly suggests that these entities obtain some economic benefit from
them. For example, such terms may deter consumers from pursuing
remedies by deceiving them into believing that they no longer have the
right purported to be waived or limited.
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\346\ For examples, see the discussion in parts II.A and II.C of
the preamble.
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Under the proposed rule, supervised nonbanks would be required to
register covered terms and conditions, including any covered terms or
conditions that are expressly prohibited or whose use may constitute
UDAAPs. The Bureau believes that supervised nonbanks currently using
prohibited covered terms or conditions in their form contracts
generally would choose to remove them (from the form contracts for
future use) prior to registration. Under the proposal (see proposed
Sec. 1092.302(b)(2)(i)), if a supervised registrant removes a covered
term or condition before the effective date of the final rule, a
supervised registrant would not be required to register that term or
condition. This impact may impose two types of costs on supervised
nonbanks. First, supervised nonbanks will lose any benefits they were
obtaining from the use of prohibited covered terms or conditions.
Second, supervised nonbanks may incur administrative costs to identify
and remove any prohibited covered terms or conditions from their form
contracts slated for future use. Supervised nonbanks may accomplish the
removal directly to form contracts they draft and periodically update,
or through implementing updated form contracts they purchase from form
providers who periodically update their form contracts based on changes
in law.\347\ The Bureau does not have any systematic data with which to
estimate the prevalence of prohibited covered terms and conditions, and
therefore cannot fully quantify either of these costs. At baseline,
these terms and conditions already are prohibited, whether explicitly
or under UDAAP. Thus, firms already have an incentive not to use them.
Regardless of their prevalence, prohibited covered terms and conditions
generally are unenforceable, and only of value to the firms using them
to the extent they mislead consumers into believing otherwise and thus
chill consumers' enforcement or exercise of rights. Therefore, the
Bureau believes the impact of no longer using prohibited covered terms
and conditions on supervised nonbanks is likely to be small.
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\347\ As noted in the discussion of benefits of this second
component of impact, the Bureau believes that existing widely-used
form provider contracts, in general, are unlikely to contain
expressly prohibited covered terms or conditions.
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Covered terms and conditions that are not expressly prohibited by
law, or that are not per se prohibited (such as where the presence of a
UDAAP may depend on facts and circumstances beyond the text of the term
or condition), also may be indicators of risk to consumers and use of
these covered terms and conditions also may inform the Bureau's
supervision priorities. The Bureau therefore also considers the impact
of nonbanks' incentives to modify the covered terms or conditions
contained in their covered form contracts in response to changes in the
probability of examination by the Bureau. The impact of changes to
Bureau supervision, and examination prioritization in particular, is
discussed below. As discussed below, given Bureau resource constraints
and the high number of supervised nonbanks, the baseline likelihood of
examination in a given year is low for the average supervised nonbank.
Examination priorities depend on many factors other than use of covered
terms and conditions and it is unlikely that a supervised nonbank could
significantly decrease their likelihood of examination, in absolute
terms, by modifying their covered terms or conditions in their covered
form contracts.\348\ For most supervised nonbanks, the cost of the
examination process is primarily the employee time necessary to respond
to the Bureau's information requests and is unlikely to exceed roughly
$35,000.\349\ Therefore, the incentive for a typical supervised nonbank
to modify their contracts in order to manipulate their probability of
examination is relatively weak.
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\348\ The Bureau does not currently have access to the
information that would be collected by the proposed rule, and
therefore has not developed policies or procedures for incorporating
this information into its examination priorities. To the extent that
the relationship between use of covered terms and conditions and the
Bureau's examination priorities is not public, supervised nonbanks'
incentives to influence the Bureau's priorities by modifying their
contracts will be further weakened.
\349\ See, e.g., CFPB, Final Rule Defining Larger Participants
of the Automobile Financing Market and Definition Certain Automobile
Leasing Activity as a Financial Product or Service, 80 FR 37496,
37520 (June 30, 2015) (estimating cost of examination for larger
participant automobile finance company would be $27,611, or $33,834
when adjusted for inflation using the 2022Q3 GDP Implicit Price
Deflator).
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Some subset of supervised nonbanks engaged in activities that, if
supervised, likely would lead to enforcement may have stronger
incentives to modify their
[[Page 6959]]
contracts. These incentives may be particularly high if such supervised
nonbanks are unknown to the Bureau at baseline, as they may face a
relatively larger increase in the probability of examination upon
registration. In theory, such firms could choose to avoid this
increase, and the prospect of increased public oversight generally, by
removing all covered terms and conditions from their contracts.
However, it is uncertain whether these firms would act on the
incentive, for example, by removing their arbitration agreements. Such
a move essentially would trade an increased risk of public oversight
for an increased risk of private enforcement including class actions.
And firms engaged in activities likely to lead to enforcement may be
equally concerned about creating new exposure to class actions. The
Bureau requests comment on supervised nonbanks' incentives to modify
the covered terms or conditions in their covered form contracts in
response to the proposed rule including, where relevant, specific
examples of covered terms and conditions that firms may modify and a
description of what modifications may occur and why.
For the unknown share of supervised nonbanks that may choose to
review and modify the covered terms or conditions contained in their
covered form contracts for future use, the Bureau assesses the cost to
be less than 5 hours per contract. This process would involve a mix of
managerial, legal, business, and administrative employees, with an
average fully loaded hourly wage of $61.90, calculated as described
above. Therefore, the cost for supervised nonbanks using expressly
prohibited covered terms and conditions could range from $3,095 for a
firm using 10 contracts containing such terms to $77,375 for a firm
using 250 contracts. The Bureau believes this would be a one-time cost
because, after the effective date of the final rule, supervised
nonbanks may simply choose to refrain from including expressly
prohibited covered terms and conditions in their new contracts.
Amortized over the first five years of the rule, the cost of changing a
form contract would range from approximately $620.00 to $15,500
annually. To quantify the total impact, the Bureau would need
information on how many supervised nonbanks would have a strong
incentive to modify their form contracts, generally because they
contain prohibited covered terms and conditions.\350\ The Bureau also
would need to know how many supervised nonbanks draft their own form
contracts, as opposed to purchasing them from third parties. Form
contract providers appear less likely to use prohibited terms and
conditions, and, if that is so, would be less likely to have an
incentive to modify their contracts as a result of the proposed rule.
Furthermore, the form contract providers would bear the cost of these
modifications. To the extent that these costs are passed through to
supervised nonbanks as higher prices, the impact on any individual
business that is a customer of the form contract provider is likely to
be negligible. The Bureau seeks comment or data on the use of form
contracts purchased from third parties. In particular, the Bureau seeks
information on the prevalence of third-party form contracts in
different markets and for supervised nonbanks of different sizes.
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\350\ As discussed above, some supervised nonbanks also may have
an incentive to modify or remove covered terms and conditions that
are not expressly prohibited. For example, a supervised nonbank may
believe that modifying or removing a specific term or condition
would lead to decreased likelihood of Bureau supervision.
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With respect to the second category of cost--the direct costs of
monitoring and examination by the Bureau that may specifically result
from the proposed rule, pursuant to its authorities under CFPA section
1022, as discussed in part II.C.1 above, the Bureau may consider both
risks and costs to consumers, and consumer understanding of risks, as
factors in allocating its monitoring resources. A major purpose of the
proposed rule is to use the nonbank registration system to facilitate
the Bureau's monitoring and supervisory processes. The information
collected under the proposed rule will have at least two distinct
effects on supervised nonbanks' costs related to Bureau supervision and
enforcement. First, the Bureau would use the registration information
to prioritize markets or entities where applicable legal protections
are often waived, or where private enforcement or exercise of consumer
rights is weakened, by the use of covered terms and conditions. Second,
the registry of supervised nonbanks independently would improve the
Bureau's ability to determine which nonbanks are subject to its
supervisory authority. To the extent a nonbank would not have been
examined but for the adoption of the proposed rule, the costs of an
examination of that nonbank could be similar to the costs estimated in
the Bureau's larger participant rules, adjusted for inflation.\351\
However, most supervised nonbanks would not go from no likelihood of
examination to definitely being examined as a result of the proposed
rule. Rather, for a given supervised nonbank, the examination cost
resulting from the proposed rule generally would be the cost of an
examination multiplied by the marginal change in probability of an
examination. The Bureau cannot quantify the change in likelihood of
such an examination without the information collected by the proposed
rule and the opportunity to develop and test methods for incorporating
this information into Bureau decision making. However, the Bureau
conducts a limited number of supervisory actions per year. A modest
increase in the number of actions due to increased efficiency will not
noticeably change the probability that any given entity is supervised.
Individual supervised nonbanks may experience larger changes in the
probability of supervisory action due to improvements in how the Bureau
prioritizes supervision. Therefore, the cost of any exam conducted due
to the rule generally would be offset by other, lower-priority exam
work not conducted. That is, to the extent that the costs of
supervisory action are similar across entities, the proposed rule would
reallocate the costs of being examined across supervised nonbanks but
is unlikely to increase significantly the overall costs to all
supervised nonbanks of being examined.
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\351\ See, e.g., CFPB, Final Rule Defining Larger Participants
of the Automobile Financing Market and Definition Certain Automobile
Leasing Activity as a Financial Product or Service, 80 FR 37496,
37520 (June 30, 2015) (estimating cost of examination for larger
participant automobile finance company would be $27,611).
---------------------------------------------------------------------------
The Bureau has considered the possibility that supervised nonbanks
would pass through some of the costs described above to consumers,
generally by raising prices. Although the Bureau lacks sufficient data
to quantify the extent to which consumers may ultimately bear some of
the impacts on firms discussed above, economic theory and available
evidence suggest that the impact on consumers is likely to be small. As
discussed in part VII.E.1. above, firms generally are only able to pass
increased costs through to consumers if those costs vary depending on
the number of units sold. Although the incentive to modify a contract
may depend on the number of times it is used, many of the costs
described above are paid for each covered form contract, regardless of
the number of times the covered form contract is used, and therefore
are unlikely to be passed through to consumers. Because firm size is
taken into account in the Bureau's examination prioritization, costs
[[Page 6960]]
associated with the probability of supervision arguably are variable
costs that could be passed through to consumers. However, as discussed
above, the proposed rule does not increase the total resources
available to the Bureau for supervision and will generally reallocate
the costs of examination across supervised nonbanks. Because firms pass
through decreases as well as increases in marginal cost to consumers,
this implies that prices for consumers are unlikely to increase on net.
Consumers' ability to substitute towards firms offering lower prices
will further mitigate any increase in consumer prices related to the
costs described in this section.
Benefits
The Bureau does not have data on the prevalence of covered waivers
and other covered terms and conditions that are expressly prohibited by
Federal, State, and Tribal laws, or on the prevalence of covered terms
and conditions that may constitute UDAAPs. As against that baseline,
which the Bureau lacks data to quantify, the Bureau believes that the
proposed rule will significantly reduce the use of prohibited covered
terms and conditions. Even when they are generally unenforceable,
covered terms and conditions still harm consumers by chilling private
action because many consumers are unaware that such covered terms and
conditions are prohibited. For example, when a consumer complains about
a particular practice or harm, a firm using a prohibited covered waiver
may incorrectly claim that the consumer waived their rights and thus
has no rights to enforce. In light of what the covered waiver states
and the likelihood of the firm standing behind it if a consumer
complains, a reasonable consumer may believe that they have waived
their rights, and not pursue further action.
As discussed above, the Bureau believes that the obligation to
register covered terms and conditions will significantly reduce the use
of prohibited covered terms and conditions. Although the Bureau has
documented examples of the use of prohibited covered waivers and other
covered terms and conditions, the Bureau is unaware of any systematic
data that would enable it to estimate the prevalence of prohibited
covered terms or conditions or their harm to consumers. Therefore, the
Bureau cannot quantify the benefit from incentivizing firms to remove
prohibited covered terms and conditions from their contracts. The
Bureau requests any additional information that would improve its
understanding of this benefit.
Some firms may be using prohibited covered terms or conditions
unintentionally, for example because they have purchased a contract
from a vendor. Because such firms did not choose to include expressly
prohibited covered terms or conditions in their contracts, the legal
risks associated with using them may exceed the benefits. Such firms
may therefore benefit from the proposed rule, as any advantages lost by
removing prohibited covered terms and conditions (which the form
provider may do, or the supervised registrant may do by modifying the
form contract or using a different contract) are outweighed by the
benefit of reduced legal risk. The Bureau does not have systematic data
on the unintentional use of prohibited covered terms and conditions, or
on the expected benefits or costs of using prohibited covered terms and
conditions. Therefore, the Bureau cannot quantify this benefit. Because
form providers typically review developments in the law and update
their form contracts accordingly, and market the form contracts as
legally tested and updated, the likelihood of a prohibited covered term
or condition in a form contract furnished by a form contract provider
may be relatively low.
Covered terms and conditions that are not prohibited also may
deprive consumers of legal rights or other legal protections or
undermine those legal rights or other legal protections by placing
limits on how consumers enforce them (e.g., by limiting the timing,
venue, forum, or recovery for legal actions, or ability to file
complaints) or complain about matters related to potential
noncompliance with them.\352\ By extinguishing or diminishing the
adequacy of applicable consumer legal protections, these covered terms
and conditions weaken firms' incentives to comply with applicable legal
protections including Federal consumer financial law. Therefore, the
Bureau believes that markets or firms where these covered terms and
conditions are more prevalent likely are relatively riskier for
consumers. The proposed rule will allow the Bureau to target its
monitoring, supervision, enforcement, and other resources to riskier
markets and firms. The possibility of such increased supervision as
well as its reality will increase firms' incentives to comply with
applicable legal protections including Federal consumer financial law
and reduce harm to consumers.
---------------------------------------------------------------------------
\352\ There may be relatively few situations where contractual
limitations on complaints are not prohibited by law. See CFPB
Bulletin 2022-05 (describing likelihood that contractual limits on
complaints will constitute UDAAPs).
---------------------------------------------------------------------------
Because their use is not generally prohibited in supervised markets
outside of certain mortgage agreements and lending to servicemembers as
discussed in part II above, arbitration agreements may be a common
example of covered terms or conditions generally not prohibited by law.
As discussed in the Bureau's section 1022(b) analysis of the provisions
of its 2017 final rule (which did not take effect) that would have
prohibited use of arbitration agreements from blocking class actions,
arbitration agreements (which often may be enforceable under the
Federal Arbitration Act) pose a risk of reducing deterrence for
violation of, and thereby increasing noncompliance with, Federal
consumer financial law and other applicable legal protections.\353\
---------------------------------------------------------------------------
\353\ 82 FR at 33410.
---------------------------------------------------------------------------
Apart from data about the prevalence of arbitration agreements
discussed in part II.C.2 above, the Bureau does not have systematic
data on the use of covered terms and conditions that are not expressly
prohibited by law, the relationship between these covered terms and
conditions and risky or potentially illegal activity, the resulting
harm to consumers, or the extent to which risky or potentially illegal
activity would be deterred by changes to Bureau prioritization.
Therefore, the Bureau is unable to quantify this benefit.
In addition to enhancing the Bureau's process for prioritizing
supervision of individual entities, the information collected by the
proposed rule will improve the Bureau's general understanding of the
role of covered terms and conditions in supervised markets and their
effects on consumers. The proposed rule would give the Bureau high-
quality information on the use of covered terms and conditions in
several significant markets in which the Bureau monitors for risks to
consumers. The proposed registry would improve the Bureau's monitoring
for potential risks to consumers arising from the use of specific
covered terms and conditions, their use at specific types of firms, and
broader patterns in the use of covered terms and conditions. Such
monitoring, in turn, would help inform the Bureau's other functions,
including not only its supervisory function, but also its consumer
education, market research, and enforcement functions. Through exercise
of those functions, the Bureau may identify and publicize linkages from
the use of particular
[[Page 6961]]
covered terms and conditions, or patterns of use of covered terms and
conditions, and specific benefits or harms to consumers (whether
through the use of covered terms and conditions that are prohibited by
applicable legal protections, or through the undermining of applicable
legal protections by the use of covered terms and conditions
generally). Those activities likely would improve the functioning of
the broader market for consumer financial products and services.
Because market participants typically benefit from well-functioning
markets, the proposed rule is likely to have positive effects on both
consumers and supervised nonbanks. The Bureau does not have data to
quantify these benefits.
Because the proposed rule would not require entities to register if
they do not use covered terms and conditions, and the proposal would
not require entities to submit information about their revenues or
volume of activity in the supervised markets, the Bureau would need
additional data on non-users to precisely estimate the prevalence of
covered terms and conditions overall or within a given market. However,
the proposed rule still would provide a valuable source of information
on questions of interest to the Bureau and the general public. For
example, in part due to lack of comprehensive data, the Bureau does not
have good estimates of how consumers value covered terms and
conditions. Similarly, precisely how market concentration and
competition between firms impacts use of covered terms and conditions
offered to consumers is generally poorly understood. The proposed rule
will provide evidence that will shed light on these and other
questions, which may inform or precipitate future Bureau publications
or policy initiatives. For example, as the Bureau learns more about the
effects of certain covered terms and conditions, it may issue guidance
to improve consumers' understanding of their rights and ability to make
informed decisions about the contracts they enter into or about their
rights under contracts they already entered into. Firms using covered
terms and conditions in covered form contracts also may benefit from a
better understanding of how these terms and conditions are used and how
they are perceived by consumers. Without the data to be collected by
the proposed registry, the Bureau cannot anticipate, or quantify, these
benefits.
Firms that are complying with the law (by both not using covered
terms and conditions that are prohibited, and by adhering to underlying
applicable legal protections despite any use of covered terms and
conditions), are often at a competitive disadvantage relative to firms
that do not comply with the law. As discussed above, the information
collected by the proposed rule is likely to improve the Bureau's
ability to target supervisory action towards those firms that may be
using covered terms and conditions in a manner that facilitates
violating Federal consumer financial law. To the extent that this
improvement induces more firms to comply with Federal consumer
financial law, firms which were previously compliant will benefit. As
noted above, the Bureau does not have systematic data on the use of all
covered terms and conditions, the number of firms currently not
complying with consumer protection law, or the harm to compliant firms
from their competitors' noncompliance. The Bureau is therefore unable
to quantify this benefit to firms. Improved targeting of the Bureau's
monitoring and supervision processes also may benefit firms that do not
use covered terms and conditions or use them in a manner that does not
facilitate violation of Federal consumer financial law, as they would
be, on the margin, less likely to bear the costs of supervision or
enforcement actions, as discussed above. Without the data proposed to
be collected by the registry or the opportunity to develop, test, and
implement procedures for using this data to inform Bureau
prioritization, the Bureau is unable to quantify this benefit.
3. Publication of Registration Information Pursuant the Bureau's Market
Monitoring Authority Costs
The publication requirement in proposed Sec. 1092.303 would allow
information about covered terms and conditions that are already
available to existing customers of supervised registrants to be
centralized on the Bureau's public website. This could make the
information more accessible than it might otherwise be. However, in the
section 1022(b) analysis impacts of the Bureau's recent proposal to
register certain public orders against covered persons, the Bureau
observed that publication of certain public orders in a centralized
fashion would be unlikely to change the behavior of most
consumers.\354\ Similarly, as explained at the end of this part VII.E.3
below, the publication of information that would be required by this
proposal is likely to have a minimal impact on consumer behavior, so
the impact of this proposed provision on most affected entities likely
would not be significant.
---------------------------------------------------------------------------
\354\ Nonbank Registration--Orders Proposal, at 169 (citing
research on impacts of consumer disclosures).
---------------------------------------------------------------------------
For the reasons discussed in part VII.E.2 above, firms are likely
to remove covered terms or conditions that are prohibited by law,
before being required to register them under the proposed rule. Some
firms' use of covered terms and conditions that are not prohibited by
law still may be so controversial among consumers or the general public
that their publication on the Bureau's public website could impose a
significant impact on these firms. However, even under the baseline
with no rule, covered terms and conditions generally are available and
can become the subject of scrutiny by public regulators and the public
at large. Publication may increase the incentive at the margin to
remove covered terms and conditions, to the extent the Bureau, through
its supervisory work, would not have found a given covered term or
condition to violate or risk violating Federal consumer financial law.
With respect to the covered terms and conditions that are
registered (which likely would be largely terms and conditions that are
not prohibited), even if controversial, their publication is unlikely
to result in a significant increase in private class actions. As
discussed in part II, these remaining covered terms and conditions
reflect risks to consumers due to their potential to undermine
applicable legal protections magnified by their creation through form
contracts often entered into with limited consumer understanding. It is
possible some of these remaining terms and conditions may, in
conjunction with other facts or circumstances, also violate the
prohibition against UDAAP or other protections enforced by other
regulators or privately. However, with respect to the potential for
significant increased private enforcement, through class actions in
particular, that appears unlikely. Consumers' ability to participate in
class actions is limited by several of the covered terms and
conditions, and especially in light of the prevalence of arbitration
agreements discussed in part II above. As a result, in the context of
current law governing the covered terms and conditions, the Bureau's
publication of information collected by the proposal is unlikely to
result in a significant increase in class action litigation across
markets supervised by the Bureau.
The Bureau requests comments and information that would inform the
Bureau's estimates of the impacts of publication on covered entities.
[[Page 6962]]
Although the Bureau is not proposing the registry to signal an
endorsement of supervised registrants or their safety, some consumers
may interpret registration as a signal of legitimacy or safety.\355\
Unregistered firms may experience costs if consumers interpret their
absence from the registry as a signal that they are relatively more
likely to be illegitimate or risky.\356\ There is also some potential
for harm to consumers who do not understand the information conveyed by
registration and, for example, pay less attention to other indicators
of a firm's business practices. The Bureau is in a position to minimize
these costs by designing a public-facing registration system that can
educate those consumers who might access it on the significance of the
published information.
---------------------------------------------------------------------------
\355\ All else equal, use of covered terms and conditions in
covered form contracts is an indicator that a firm is potentially
risky, rather than safe. It is also only one among many indicators
of risk to consumers, and should not be relied on exclusively to
determine a firm's riskiness to consumers.
\356\ For example, enough firms purport to be supervised by the
Securities and Exchange Commission (SEC) that the SEC maintains a
public list of unregistered entities known as the PAUSE program.
---------------------------------------------------------------------------
On the other hand, consumers might interpret published information
on a supervised registrant's use of covered terms and conditions in
covered form contracts as a signal that their products or services are
risky. As discussed below, consumers are unlikely to directly-access
the registry, but its information could be used to heighten public
awareness. This signal potentially generated by publication in the
registry generally is unlikely to impose costs such as by altering the
ability of firms to attract or retain customers, except potentially in
limited circumstances. In general, the use of many types of covered
terms and conditions is widespread and that the presence of many well-
known firms on the registry would not negatively affect their ability
to attract or retain customers. In addition, the registry may identify
certain other covered terms and conditions that are not prohibited but
which are outliers and are unusually risky. Depending on the
competitive environment that firms face, they may choose to adjust
their use of such terms and conditions, weighing the cost associated
with a risk of losing trust with their customers or potential customers
against the value they believe those terms and conditions to provide.
Finally, as discussed above, to the extent that supervised nonbanks are
using prohibited covered terms and conditions, they are likely to
remove those before registration. However, if a supervised registrant
does continue to use prohibited covered terms and conditions, then, as
discussed above, Bureau supervisory or enforcement action already may
become more likely; otherwise, to the extent the term is prohibited by
State or Tribal law, then the publication of this type of registration
information under the proposed rule could increase the visibility of
that practice; the resulting increased public scrutiny of such a
prohibited practice might reduce that firm's ability to attract or
retain customers.
In a baseline with no rule, consumers have the opportunity to
review the terms and conditions of contracts for products or services
they are considering at point of sale, but may rarely do so, as
discussed in part II above. The publication of information collected
under the proposal on the Bureau website would offer consumers an
alternative, centralized way to access this information and facilitate
comparisons across competing firms. While the Bureau does not have
sufficient data to quantify this impact, a large body of research has
shown that consumers often pay little attention even to important
product attributes.\357\ For that reason, the Bureau does not
anticipate making the centralized registry directly accessible to
consumers would have significant impact on supervised registrants.
Unlike core financial deal terms like price or payment terms, covered
terms and conditions often are distant in time and probability, and
often may directly affect only a minority of consumers of a given
product or service. In addition, consumers may not appreciate how
covered terms and conditions may weaken compliance incentives
generally, which can have broader impacts on product and service
delivery overall. Therefore, covered terms and conditions are unlikely
to be decisive factors in consumers' choices at the point of sale.
Because consumers already have access to the contract at point of sale,
the public registry centralizing this information on the Bureau's
website would have limited additional impact. Well-designed information
disclosures can be effective at directing consumer attention; for
example, one study found that providing payday loan borrowers with
information about the costs of payday loans reduced payday loan
borrowing.\358\ However, effective information disclosures are
typically more direct (e.g., disclosing the costs of payday loans to
payday loan borrowers) and more timely (e.g., disclosed to payday loan
borrowers at the time they are obtaining a payday loan) than the
information that would be published under the proposed rule. Therefore,
the Bureau believes that the proposed publication of registration
information is likely to have a minimal impact on consumer behavior,
and so the associated impact on supervised nonbanks also will be
minimal.
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\357\ For one review of this research, see Benjamin Handel and
Joshua Schwartzstein, Frictions or Mental Gaps: What's Behind the
Information We (Don't) Use and When Do We Care?, Journal of Economic
Perspectives (2018), vol. 32(1), at 155-178.
\358\ See Marianne Bertrand and Adair Morse, Information
Disclosure, Cognitive Biases, and Payday Borrowing, The Journal of
Finance (2011), vol. 66(6), at 1865-1893.
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The Bureau has considered the possibility that supervised nonbanks
would pass through some of the costs described above to consumers,
generally by raising prices. As discussed in the previous sections,
firms' ability to shift the burden on increased costs to consumers
depends on the nature of those costs, especially whether they vary
depending on the number of customers or units sold. Some of the effects
described above could potentially make it more or less difficult for
some registrants to attract new customers. In the long-run, customer
acquisition costs are arguably a component of variable cost, and
potentially could lead to higher prices. However, for the reasons
discussed above, the impact of the proposed publication of registration
information is likely to have a minimal impact on consumer behavior, so
even if these costs were fully passed through the impact on consumers
would be minimal.
Benefits
Under the proposed rule, the registration information (except for
administrative information) would be published on the Bureau's public
website to the extent permitted by applicable laws. This would benefit
the public by facilitating the use of registration information by other
public regulators. Recognizing the value of contract registration, some
individual States have established registration systems for one
market.\359\ The proposed registration system would provide nationwide,
standardized information on covered terms and conditions in covered
form contracts across a broader set of supervised markets. Other
Federal agencies and public regulators in States without
[[Page 6963]]
preexisting contract registration systems would be able to use the
Bureau's registry to inform and improve their supervision and
enforcement activities. Public regulators in States with preexisting
contract registration systems would benefit from the additional context
provided by national data, as well as data focused specifically on the
use of covered terms and conditions.
---------------------------------------------------------------------------
\359\ For example, Colorado, Louisiana, Maine, and Illinois
require private student lenders to register their standard terms and
conditions.
---------------------------------------------------------------------------
The benefits of making the Bureau registry available to other
public regulators are analogous to the benefits of the Bureau's own use
of the registry discussed above. The two primary benefits are
incentivizing firms to ensure that their contracts do not use
prohibited covered terms or conditions and facilitating risk-based
monitoring, supervision, and enforcement of applicable law. Many of the
laws prohibiting waivers discussed in parts II.B and II.C are enforced
by other Federal and State agencies. Because the Bureau cannot enforce
many of these laws, the proposed rule would not incentivize firms to
remove covered terms and conditions prohibited by those laws unless
they were used in circumstances that constituted a UDAAP or
registration information were shared with the other agencies
responsible for enforcement. For the reasons discussed above,
quantifying these benefits is not possible without data on the
prevalence of prohibited clauses and the harm they do to consumers.
To the extent that consumers are more willing to trust firms
subject to Bureau supervision, the public registry identifying nonbanks
in part on the basis that they are subject to the Bureau's supervisory
authority may provide a benefit to firms that may partially offset
costs associated with publication of their risky covered terms and
conditions. The Bureau does not have sufficient data, for example, on
how Bureau supervision affects consumers' attitudes towards firms or
consumers' choices, for it to quantify this benefit. Some supervised
nonbanks covered by the proposed rule already would have a license at
the State level. Many State licensing regimes also provide an online
search function, and firms may advertise their license number either
because it is required or because it is beneficial. In addition, firms
would need to take care to avoid deceptive practices and other
problematic statements in conveying the significance of their
registration to consumers.\360\ For these reasons, any benefits from
publicizing their registration with the Bureau are likely to be
incremental at best.
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\360\ Cf. Consumer Financial Protection Circular 2022-02,
``Deceptive representations involving the name or logo of deposit
insurance'' (May 17, 2022) (discussing risks of deception in falsely
characterizing the status of deposit products as insured by a
Federal regulator); CFPB Order to Terminate Sandbox Approval Order,
In re Payactiv, Inc. (June 30, 2022) (rescinding regulatory approval
under TILA due to statements by regulated entity ``wrongly
suggesting the CFPB had endorsed [the entity] or its products'').
---------------------------------------------------------------------------
One alternative to publication is the establishment of confidential
data-sharing agreements with individual public regulators. This would
permit use of the Bureau registry by other regulators without making it
available to the public or to other firms, including potential
competitors. However, the process of establishing memoranda of
understanding with other regulators at the Federal, State, Tribal, and
local levels specifically covering the proposed registry would require
public resources and impose costs for public regulators, and therefore
may lead to incomplete sharing of information and significant
reductions in the benefit to consumers. Furthermore, as described
above, the Bureau believes that publication of registration information
will not impose significant costs on firms that would justify these
reductions.
Furthermore, publication of registration information is likely to
provide benefits to the public beyond improved compliance with
applicable law and strengthened public enforcement of consumers'
rights. For example, academics, journalists, and consumer advocacy
groups may use registry information to produce articles or reports
which increase consumers' understanding of their rights. The Bureau
does not have sufficient information to quantify the value of
additional consumer education resulting from the publication of
registration information.
In addition, the Bureau is proposing to collect information on
firms' use of covered form contracts containing covered terms and
conditions purchased from third-party providers. If this type of
information is published by the Bureau, firms using these contracts may
benefit if consumers and public regulators perceive them as following
an industry standard. Publication of this type of information may also
have an impact on the contract provider industry by providing
additional information on the market for contracts. This may improve
contract providers' understanding of the market for contracts,
including new market opportunities. The Bureau seeks comment on the
potential impacts of collecting and publishing information on covered
terms and conditions in covered form contracts sold by third-party form
contract providers.
F. Potential Specific Impacts of the Proposed Rule
1. Insured Depository Institutions and Credit Unions With $10 Billion
or Less in Total Assets, as Described in Section 1026
There will be no direct effect on insured depository institutions
or credit unions with $10 billion or less in total assets, as the rule
applies only to supervised nonbanks. There may be certain indirect
impacts, as described below.
Some smaller depository institutions may partner with nonbanks to
offer loans, such as payday loans, in supervised markets. Proposed
Sec. 1092.302(a)(2)(iii)(B) would require supervised payday lenders to
identify the legal names of parties to their covered agreements. The
Bureau requests data on how often payday lenders' agreements identify
smaller depository institutions as parties in the payday lenders'
agreements with consumers. If the payday lender's agreement identifies
the smaller depository institution as a party, then that information
would be reported under the proposal to the Bureau and potentially the
public under the publication provisions of the proposal. It is
uncertain whether such reporting and publication would have even an
indirect effect on the smaller depository institution, however.
An additional indirect impact on some insured depository
institutions or insured credit unions with $10 billion or less in total
assets may be possible in two separate contexts. First, to the extent
that they are affiliated with a supervised registrant, a cost to the
affiliate--such as the cost of registration and submission of
information--may be an indirect cost to the insured depository
institution or insured credit union. Second, to the extent they compete
with a supervised registrant, a cost to the competitor--such as the
cost of registration and submission of information--may be an indirect
benefit to them because they do not incur that cost under the proposal.
But as noted above, even for supervised registrants, the Bureau does
not anticipate that the cost of the proposed rule will be significant
in most cases. Therefore, the Bureau anticipates that these types of
indirect impacts on any such insured depository institutions or insured
credit unions with $10 billion or less in total assets would be even
less significant.
[[Page 6964]]
2. Impact of the Proposed Provisions on Consumer Access to Credit
The proposed rule could potentially reduce consumer access to
credit if costs associated with the proposed rule were passed through
to consumers as higher prices or led covered persons to discontinue
certain products or services. As discussed above, the available data,
combined with economic theory, suggests that such effects will be
negligible. Moreover, bank and nonbank entities that would not be
directly affected by the proposed rule could provide financial products
and services to consumers who would otherwise obtain these financial
products and services from affected nonbank covered persons. Therefore,
the Bureau believes that the proposed rule will not have a significant
negative impact on consumer access to credit.
By improving the Bureau's ability to conduct its consumer
education, regulation, market monitoring, and supervision activities,
the proposed rule would likely improve the functioning on the broader
market for consumer financial products and services. Therefore, the
proposed rule may have positive effects on consumer access to consumer
financial products and services provided in conformity with applicable
legal obligations designed to protect consumers.
3. Impact of the Proposed Provisions on Consumers in Rural Areas
Broadly, the Bureau believes that the analysis above of the impact
of the proposed rule on consumers in general provides an accurate
analysis of the impact of the proposed rule on consumers in rural
areas. If consumers in rural areas are relatively less reliant on
affected nonbanks, the impact of the rule on consumers in rural areas
would be smaller than the impact on those in non-rural areas. Because
the Bureau lacks high-quality data on the rural market share of
supervised nonbanks that would be affected by the proposed rule, the
Bureau cannot judge with certainty the relative impact of the rule on
rural areas. However, for certain large and well-studied industries,
including mortgage and auto lending, the Bureau has evidence of the
lesser rural impact.\361\ Based on this evidence, the Bureau believes
that the impact of the proposed rule would likely be relatively smaller
in rural areas.
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\361\ For evidence on the mortgage market, see Julapa Jagtiana,
Lauren Lambie-Hanson, and Timothy Lambie-Hanson, Fintech Lending and
Mortgage Credit Access, The Journal of FinTech (2021), vol. 1(1).
For evidence on the auto loan market, see Donghoon Lee, Michael Lee,
and Reed Orchinik, Market Structure and the Availability of Credit:
Evidence from Auto Credit, MIT Sloan Research Paper https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3966710.
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VIII. Regulatory Flexibility Act Analysis
A. Overview
The Regulatory Flexibility Act of 1980 (RFA), as amended by the
Small Business Regulatory Enforcement Fairness Act of 1996, the Dodd-
Frank Act Wall Street Reform and Consumer Protection Act of 2010, as
well as the Small Business Jobs Act of 2010, requires each agency to
consider the potential impact of its regulations on small entities,
including small businesses, small governmental units, and small not-
for-profit organizations.\362\ The RFA defines a ``small business'' as
a business that meets the size standard developed by the Small Business
Administration pursuant to the Small Business Act.\363\ Potentially
affected small entities include those in the markets described in Table
1 above.
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\362\ 5 U.S.C. 601-12. The Bureau is not aware of any small
governmental units or not-for-profit organizations to which the
proposal would apply. Proposed Sec. 1092.301(h) would exclude
governmental units, unless, in the case of a State, Tribe, or arm of
a State or Tribe, the U.S. Congress has abrogated their immunities.
\363\ 5 U.S.C. 601(3) (the Bureau may establish an alternative
definition after consultation with the Small Business Administration
and an opportunity for public comment).
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The Regulatory Flexibility Act (RFA) generally requires an agency
to conduct an initial regulatory flexibility analysis (IRFA) and a
final regulatory flexibility analysis of any rule subject to notice-
and-comment rulemaking requirements, unless the agency certifies that
the rule will not have a significant economic impact on a substantial
number of small entities. The Bureau also is subject to certain
additional procedures under the RFA involving the convening of a panel
to consult with small business representatives prior to proposing a
rule for which an IRFA is required.
For the reasons discussed below, the Bureau has determined, and the
undersigned has certified, that this proposed rule, if adopted, would
not have a significant economic impact on a substantial number of small
entities, and that an IRFA is, therefore, not required.
B. Impacts of the Proposed Rule on Small Entities
As discussed in the 1022(b)(4) analysis above, the costs to
supervised nonbanks associated with registration under the proposed
rule are small. The direct cost to supervised nonbanks is the employee
time spent by to gather and submit registration information. Required
information includes identifying and administrative information, as
well as information regarding the covered terms and conditions in
registrants' covered form contracts. This information should be readily
accessible to all entities affected and providing it through the
nonbank registration system should be straightforward. While the Bureau
cannot precisely quantify this cost, it believes this will generally
take on average 15 to 25 hours of employee time per small entity
annually, as reflected in Table 2 above, based on the Bureau's estimate
that small entities generally have a consumer contracting system of
simple or intermediate complexity.\364\ Firms would not need to
purchase new hardware or software and would not need to employ or train
specialized personnel to comply with the proposed rule.
---------------------------------------------------------------------------
\364\ See the 1022(b)(4) analysis above for a detailed
description of this burden. Table 2 reports the estimated burden for
each task involved in the proposed registration, for firms at
varying levels of complexity.
---------------------------------------------------------------------------
The Bureau believes that indirect costs, primarily related to
increased incentives for compliance with applicable consumer protection
law including Federal consumer financial law, are also likely to be
small. For example, some supervised nonbanks may choose to conduct a
compliance audit of their covered terms and conditions in their covered
form contracts, to ensure there are no waivers or other covered terms
or conditions subject to the various express legal prohibitions
mentioned in part II.B above and there are no covered terms or
conditions that constitute UDAAPs under Bureau decisions and guidance
such as those discussed in part II.C above. As discussed in the
1022(b)(4) analysis, this often would involve review of only relatively
easily-identified terms and conditions and would not require an audit
of the whole contract. Small entities in some supervised markets, such
as mortgage and automobile finance, typically purchase their contracts
from vendors, who may bear the cost of conducting such audits. These
are fixed costs and therefore unlikely to be passed on to small
entities. Regardless of the method of ascertaining information
contained in contracts and to determine compliance with the law and
this proposed regulation, the business cost to review contracts and
remove prohibited terms would be a one-time cost and is unlikely to be
significant when amortized over
[[Page 6965]]
five years and, in any event, is an existing requirement under existing
consumer protection law, separate and apart from the requirements that
would be imposed by this proposed rule. Moreover, to the extent that
the Bureau prioritizes supervision of entities which pose risks to a
larger number of consumers, these indirect costs are likely to be even
smaller for small entities.
The 1022(b)(4) analysis above finds that, even for complex entities
using many different contracts, it is unlikely that the direct costs of
registration under the proposed rule exceed approximately $13,250
annually. Because entities with under $1 million in receipts are exempt
from registration, the impact of the rule would be less than 1.3% of
receipts for all affected registrants, and therefore not significant.
The Bureau believes that this estimate is likely to overstate the cost
to most small entities. The estimated direct costs of registration for
a supervised registrant using 10-25 different contracts range from more
than $900 to less than $1,600 annually, or 0.09-0.16% of annual
receipts. The Bureau believes that this lower estimate is most likely
to be appropriate for small entities.
For some small entities, the impact may be larger than average and
in extreme cases may rise to the level of a significant economic
impact. However, the Bureau believes that such cases would be rare, and
that the number of small entities experiencing a significant economic
impact under the proposed rule would not be substantial.
IX. Paperwork Reduction Act
Under the Paperwork Reduction Act of 1995 (PRA), 44 U.S.C. 3501 et
seq., Federal agencies generally are required to seek approval from the
Office of Management and Budget (OMB) for information collection
requirements prior to implementation. Under the PRA, the Bureau may
neither conduct nor sponsor, and, notwithstanding any other provision
of law, a person is not required to respond to, an information
collection unless the information collection displays a valid control
number assigned by OMB.
The information collection requirements in this proposed rule would
be mandatory. Certain information collected under this proposed rule
would not be made available to the public, in accordance with
applicable law.
The collections of information contained in this proposed rule, and
identified as such, have been submitted to OMB for review under section
3507(d) of the PRA. A complete description of the information
collection requirements (including the burden estimate methods) is
provided in the information collection request (ICR) that the Bureau is
submitting to OMB under the requirements of the PRA. Please send your
comments to the Office of Information and Regulatory Affairs, OMB,
Attention: Desk Officer for the Bureau of Consumer Financial
Protection. Send these comments by email to [email protected]
or by fax to 202-395-6974. If you wish to share your comments with the
Bureau, please send a copy of these comments as described in the
Addresses section above. The ICR submitted to OMB requesting approval
under the PRA for the information collection requirements contained
herein is available at www.regulations.gov as well as on OMB's public-
facing docket at www.reginfo.gov.
Title of Collection: Registry of Supervised Nonbanks that Use Form
Contracts to Impose Terms and Conditions that Seek to Waive or Limit
Consumer Legal Protections.
OMB Control Number: 3170-00XX.
Type of Review: Request for approval of a new information
collection.
Affected Public: Private sector.
Estimated Number of Respondents: 7,345.
Estimated Total Annual Burden Hours: approximately 15-210 depending
on complexity of entity's contracting with consumers.
Comments are invited on: (a) Whether the collection of information
is necessary for the proper performance of the functions of the Bureau,
including whether the information will have practical utility; (b) the
accuracy of the Bureau's estimate of the burden of the collection of
information, including the validity of the methods and the assumptions
used; (c) ways to enhance the quality, utility, and clarity of the
information to be collected; and (d) ways to minimize the burden of the
collection of information on respondents, including through the use of
automated collection techniques or other forms of information
technology. Comments submitted in response to this proposal will be
summarized and/or included in the request for OMB approval. All
comments will become a matter of public record.
If applicable, the notice of final rule will display the control
number assigned by OMB to any information collection requirements
proposed herein and adopted in the final rule.
List of Subjects in 12 CFR Part 1092
Administrative practice and procedure, Consumer protection, Credit,
Intergovernmental relations, Law enforcement, Nonbank registration,
Registration, Reporting and recordkeeping requirements, Trade
practices.
Authority and Issuance
0
For the reasons set forth above, the Bureau proposes to add part 1092
to chapter X in title 12 of the Code of Federal Regulations, to read as
follows:
PART 1092--NONBANK REGISTRATION
Subpart A--General
Sec.
1092.100 Authority and purpose.
1092.101 General definitions.
1092.102 Submission and use of registration information.
1092.103 Severability.
Subpart B--[Reserved]
Subpart C--Use of Form Contracts To Impose Terms and Conditions That
Seek To Waive or Limit Consumer Legal Protections.
1092.300 Scope.
1092.301 Definitions.
1092.302 Registration and submission of information regarding
supervised registrants' use of covered terms and conditions.
1092.303 Publication of information regarding supervised
registrants' use of covered terms and conditions.
Authority: 12 U.S.C. 5512(b) and (c); 12 U.S.C. 5514(b).
Subpart A--General
Sec. 1092.100 Authority and purpose.
(a) Authority. The regulation in this part is issued by the Bureau
pursuant to section 1022(b) and (c) and section 1024(b) of the Consumer
Financial Protection Act of 2010 (CFPA), codified at 12 U.S.C. 5512(b)
and (c), and 12 U.S.C. 5514(b).
(b) Purpose. The purpose of this part is to prescribe rules
governing the registration of nonbanks, and the collection and
submission of registration information by such persons, and for public
release of the collected information as appropriate.
(1) Subpart A contains general provisions and definitions used in
this part.
(2) Subpart B is reserved.
(3) Subpart C sets forth requirements regarding the registration of
supervised nonbanks and collection of information regarding their use
of form contracts to impose certain terms and conditions that seek to
waive or limit consumer rights or other applicable legal protections.
[[Page 6966]]
Sec. 1092.101 General definitions.
For the purposes of this part, unless the context indicates
otherwise, the following definitions apply:
(a) Affiliate, consumer, consumer financial product or service,
covered person, Federal consumer financial law, insured credit union,
person, related person, service provider, and State have the same
meanings as in CFPA section 1002, codified at 12 U.S.C. 5481.
(b) Bureau means the Consumer Financial Protection Bureau.
(c) Include, includes, and including mean that the items named may
not encompass all possible items that are covered, whether like or
unlike the items named.
(d) Nonbank registration system means the Bureau's electronic
registration system identified and maintained by the Bureau for the
purposes of this part.
(e) Nonbank registration system implementation date means, for a
given requirement or subpart of this part, the date(s) determined by
the Bureau to commence the operations of the nonbank registration
system in connection with that requirement or subpart.
Sec. 1092.102 Submission and use of registration information.
(a) Filing instructions. The Bureau shall specify the form and
manner for electronic filings and submissions to the nonbank
registration system that are required or made voluntarily under this
part. The Bureau also may provide for extensions of deadlines or time
periods prescribed by this part for persons affected by declared
disasters or other emergency situations.
(b) Coordination or combination of systems. In administering the
nonbank registration system, the Bureau may rely on information a
person previously submitted to the nonbank registration system under
this part and may coordinate or combine systems in consultation with
State agencies as described in 12 U.S.C. 5512(c)(7)(C) and 12 U.S.C.
5514(b)(7)(D).
(c) Bureau use of registration information. The Bureau may use the
information submitted to the nonbank registration system under this
part to support its objectives and functions, including in determining
when to exercise its authority under 12 U.S.C. 5514 to conduct
examinations and when to exercise its enforcement powers under subtitle
E of the CFPA. However, this part does not alter any applicable process
whereby a person may dispute that it qualifies as a person subject to
Bureau authority.
Sec. 1092.103 Severability.
The provisions of this part are separate and severable from one
another. If any provision is stayed or determined to be invalid, the
remaining provisions shall continue in effect.
Subpart B--[Reserved]
Subpart C--Use of Form Contracts To Impose Terms and Conditions
That Seek To Waive or Limit Consumer Legal Protections
Sec. 1092.300 Scope.
This subpart requires supervised nonbanks to collect and submit
information to the Bureau's nonbank registration system regarding their
use of form contracts to impose certain terms and conditions that seek
to waive or limit consumer legal rights and other applicable legal
protections. This subpart also describes the information the Bureau
will make publicly available, when permitted by law.
Sec. 1092.301 Definitions.
For the purposes of this subpart, unless the context indicates
otherwise, the following definitions apply:
(a) Administrative information means contact and other information
regarding persons subject to this subpart and other information
submitted or collected to facilitate the administration of the nonbank
registration system including submissions made pursuant to Sec.
1092.302(d).
(b) Covered form contract means any written agreement between a
covered person and a consumer that:
(1) Was drafted prior to the transaction for use in multiple
transactions between a business and different consumers; and
(2) Contains a covered term or condition.
(c) Covered term or condition means 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 described in paragraph (g) of
this section.
(d) Covered limitation on consumer legal protections means any
covered term or condition in a covered form contract:
(1) Precluding the consumer from bringing a legal action after a
certain period of time;
(2) Specifying a forum or venue where a consumer must bring a legal
action in court;
(3) 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;
(4) Limiting liability to the consumer in a legal action including
by capping the amount of recovery or type of remedy;
(5) 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;
(6) 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;
(7) 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
(8) Requiring that a consumer bring any type of legal action in
arbitration.
(e) Identifying information means existing information available to
the supervised registrant that uniquely identifies the supervised
registrant, which includes legal name(s), State of incorporation or
organization, headquarters and principal place of business addresses,
and unique identifiers issued by a government agency or standards
organization.
(f) Annual registration date means, starting after the nonbank
registration system implementation date, the day during the calendar
year by which a supervised registrant must complete its annual
registration required by Sec. 1092.302(a). The annual registration
date will be set by filing instructions issued by the Bureau, as
described in Sec. 1092.102(a), in which the Bureau may specify the
process for filing for an automatic extension of the annual
registration date for up to 30 days.
(g) Supervised nonbank means a nonbank covered person that is
subject to supervision and examination by the Bureau pursuant to 12
U.S.C. 5514(a), except to the extent that such person engages in
conduct or functions that are excluded from the supervisory authority
of the Bureau pursuant to 12 U.S.C. 5517 or 12 U.S.C. 5519. Subject to
the foregoing statutory exclusions, this term includes any nonbank
covered person that:
(1) Offers or provides a residential mortgage-related product or
service as described in 12 U.S.C. 5514(a)(1)(A);
(2) Offers or provides any private educational consumer loan as
described in 12 U.S.C. 5514(a)(1)(D);
[[Page 6967]]
(3) Offers or provides any consumer payday loan as described in 12
U.S.C. 5514(a)(1)(E);
(4) Is a larger participant in any market as defined by rule in
part 1090 pursuant to 12 U.S.C. 5514(a)(1)(B); or
(5) Is subject to an order issued by the Bureau pursuant to 12
U.S.C. 5514(a)(1)(C).
(h) Supervised registrant means, for purposes of this subpart, any
supervised nonbank that is subject to supervision and examination by
the Bureau pursuant to 12 U.S.C. 5514(a), except for the following:
(1) A Federal agency as defined in 28 U.S.C. 2671;
(2) A State as defined in 12 U.S.C. 5481 including a federally
recognized Indian Tribe;
(3) A person that is subject to Bureau supervision and examination
solely in the following capacity:
(i) As a service provider under 12 U.S.C. 5514(e), 12 U.S.C.
5515(d), or 12 U.S.C. 5516(e); or
(ii) As an entity that is subject to the Bureau's supervisory
authority for a period of no more than two years pursuant to an order
issued by the Bureau pursuant to 12 U.S.C. 5514(a)(1)(C), such as an
order issued based on a consent agreement by which an entity may
consent to the Bureau's supervisory authority as described in 12 CFR
part 1091;
(4) A natural person;
(5) A person with less than $1 million in annual receipts resulting
from offering or providing all consumer financial products and services
as relevant to paragraphs (g)(1) through (5) of this section. For
purposes of this exclusion:
(i) The term ``annual receipts'' has the same meaning as that term
has in 12 CFR 1090.104(a), including 12 CFR 1090.104(a)(i)-(iii); and
(ii) A person's receipts from offering or providing a consumer
financial product or service subject to a larger participant rule
described in paragraph (g)(4) of this section count as receipts for
purposes of the exclusion in this paragraph (h)(5) regardless of
whether the person qualifies as a larger participant;
(6) A person that has not, together with its affiliates, engaged in
more than de minimis use of covered terms and conditions by either:
(i) Entering into covered form contracts containing any covered
term or condition as described in paragraph (i)(1) of this section
1,000 or more times during the previous calendar year; or
(ii) Obtaining, as a party to a legal action, a court or arbitrator
decision in the previous calendar year on the enforceability of a
covered term or condition in a covered form contract as described in
paragraph (i)(2) of this section;
(7) A person that used of 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 the Federal National Mortgage Association, the Federal
Home Loan Mortgage Corporation (or its successors), or the Government
National Mortgage Association. This exclusion does not apply if the
person obtained a court or arbitrator decision in the previous calendar
year on the enforceability of a covered term or condition in a covered
form contract as described in paragraph (i)(2) of this section; or
(8) A person who is a covered person solely due to being a related
person as defined in 12 U.S.C. 5481(25).
(i) Use of a covered term or condition means entering into a
covered form contract containing a covered term or condition as
described in paragraph (i)(1) of this section or obtaining a court or
arbitrator decision ruling on the enforceability of a covered term or
condition in a covered form contract as described in paragraph (i)(2)
of this section.
(1) Entering into a covered form contract containing a covered term
or condition. A supervised nonbank enters into a covered form contract
containing a covered term or condition when it takes any of the
following actions:
(i) Provides to a consumer a new consumer financial product or
service that is governed by a covered form contract that contains a
covered term or condition;
(ii) Provides to a consumer a new consumer financial product or
service that is subject to a pre-existing covered form contract that
contains a covered term or condition, and the provider is a party to
that covered form contract;
(iii) Acquires or purchases a consumer financial product or service
that is subject to a covered form contract that contains a covered term
or condition, even if the seller is not subject to supervision under 12
U.S.C. 5514(a)(1) and regardless of whether the seller is subject to
the authorities of the Bureau more broadly;
(iv) Adds a covered term or condition to a covered form contract
governing an existing consumer financial product or service provided to
a consumer; or
(v) Adds a covered form contract containing a covered term or
condition to a consumer financial product or service.
(2) Obtaining court or arbitrator decisions on enforceability of a
covered term or condition in a covered form contract. A supervised
registrant engages in use of a covered term or condition when, as a
party to a legal action, it obtains an order, opinion, or any other
type of decision from a court or arbitrator ruling on the
enforceability of a covered term or condition.
Sec. 1092.302 Registration and submission of information regarding
supervised registrants' use of covered terms and conditions.
(a) Annual registration of supervised registrants regarding their
use of covered terms or conditions. By the annual registration date in
each calendar year, a supervised registrant must submit or update in
the Bureau's nonbank registration system its identifying information
and administrative information, as well as the following information
regarding its use of covered terms or conditions in the previous
calendar year:
(1) The applicable consumer financial products or services listed
in Sec. 1092.301(g) for which the supervised registrant used covered
term(s) or condition(s);
(2) Each State or other jurisdiction where the supervised
registrant offered or provided the consumer financial products or
services listed in paragraph (a)(1) of this section;
(3) For each covered form contract the supervised registrant
entered into containing a covered term or condition, which consumer
financial products and services identified pursuant to paragraph (a)(1)
of this section are affected by the covered term or condition and in
which States identified pursuant to paragraph (a)(2) of this section,
as well as following information:
(i) All brand names and trade names the supervised registrant used
to offer or provide the consumer financial product or service;
(ii) The legal names of any persons other than a consumer and the
supervised registrant that typically entered into the applicable
covered form contract;
(iii) Each type of covered limitation on consumer legal protection
listed in Sec. 1092.301(d) contained in the covered form contract for
the consumer financial product or service;
(iv) For each type of covered limitation on consumer legal
protections described in Sec. 1092.301(d)(1) through (7), relevant
information about the limitation including:
[[Page 6968]]
(A) For any limitation on when a consumer may bring a legal action
described in Sec. 1092.301(d)(1), the specified time period, within
ranges specified by the Bureau, for the consumer to bring a legal
action;
(B) For any limitation on where a consumer may bring a legal action
in court described in Sec. 1092.301(d)(2), the name and, as
applicable, place, of the forum or venue for the consumer to bring a
legal action;
(C) For any limitation on the consumer's filing a legal action
seeking relief for other consumers or seeking to participate in a legal
action filed by others described in Sec. 1092.301(d)(3), the type of
legal action and, as applicable, participation to which the limitation
applies;
(D) For any limitation on liability to the consumer described in
Sec. 1092.301(d)(4), the text of the covered term or condition
imposing the limitation on liability;
(E) For any waiver of a cause of action by the consumer as
described in Sec. 1092.301(d)(5), the text of the covered term or
condition imposing the waiver;
(F) For any limitation on a consumer review, assessment, complaint,
or other similar analysis or statement, as described in Sec.
1092.301(d)(6), the text of the covered term or condition imposing the
limitation; and
(G) For any other waiver of an identified consumer legal protection
as described in Sec. 1092.301(d)(7), the text of the covered term or
condition imposing the waiver;
(v) The State or other jurisdiction identified in any choice of law
provisions in the covered form contract, as applicable; and
(vi) If a covered term or condition reported under this paragraph
(a)(3) is contained in a standard form contract provided by a third
party for use by multiple market participants, the name of the form
contract provider and other information, such as the complete
copyrighted name including any form number and date of the contract, as
necessary for the Bureau to identify the precise version of the
standard form contract;
(4) Whether the supervised registrant, as a party to a legal
action, obtained one or more court or arbitrator decisions regarding
enforceability of a covered term or condition in any covered form
contract as described in Sec. 1092.301(i)(2) and, if so, the following
information related to these decisions:
(i) The consumer financial products or services listed in Sec.
1092.301(g) to which the decision(s) relate;
(ii) The type(s) of covered term(s) or condition(s) listed in Sec.
1092.301(d) at issue in the decision(s); and
(iii) Whether the decision(s) enforced or declined to enforce the
covered term(s) or condition(s) at issue.
(b) Supervised registrant's collection and reporting of
information; scope of initial registration; corrections to registration
information.
(1) General rule. During the period for which a person qualifies as
a supervised registrant, it must collect information necessary to
comply with the reporting requirements in paragraph (a)(2) of this
section.
(2) Scope of information submitted on the first annual registration
date after a supervised registrant becomes subject to this subpart. As
illustrated by the following examples, supervised registrants are not
required to collect or report information prior to becoming subject to
this subpart:
(i) When a supervised registrant must submit information in the
calendar year after the effective date of subpart C of this part, the
requirements of paragraph (a)(2) of this section shall be satisfied by
submission of information that covers the portion of the previous
calendar year beginning with the effective date.
(ii) If a supervised registrant qualifies as a larger participant
under a Bureau rule in part 1090 as of the annual registration date,
but the entity was not a larger participant for the entire previous
calendar year, then the requirements of paragraph (a)(2) of this
section shall be satisfied by submission of information that covers the
portion of the previous calendar year during which the entity was a
larger participant.
(3) Registration process for affiliated persons. Supervised
registrants that are affiliates will make their submissions either
jointly or in combination, as set forth in filing instructions the
Bureau issues pursuant to Sec. 1092.102(a). For purposes of this
subpart, the definition of ``control'' for purposes of who is an
affiliate shall have the meaning set forth in paragraph (2) of the
definition of ``affiliated company'' in 12 CFR 1090.101.
(4) Correction of submissions to the nonbank registration system.
If any information submitted to the nonbank registration system was
inaccurate when submitted and remains inaccurate, the supervised
registrant shall file a corrected report in the form and manner
specified by the Bureau within 30 calendar days after the date on which
such supervised registrant becomes aware or has reason to know of the
inaccuracy. In addition, the Bureau may at any time and in its sole
discretion direct a supervised registrant to correct errors or other
non-compliant submissions to the nonbank registration system.
(c) Notification by a previously-supervised registrant that it is
no longer covered by this subpart. Any nonbank person that has
registered pursuant to paragraph (a) of this section should notify the
Bureau if it determines that it is no longer a supervised nonbank.
(d) Notification by certain persons of non-registration under this
subpart. A person may submit a notice to the nonbank registration
system stating that it is not registering pursuant to this section
because it has a good faith basis to believe that it is not a
supervised registrant, or that it is not registering terms or
conditions contained in a contract it used because it has a good faith
basis to believe that the contract is not a covered form contract or
that the terms or conditions are not covered terms or conditions. Such
person shall promptly comply with this section upon becoming aware of
facts or circumstances that would not permit it to continue
representing that it has a good faith basis to believe that it is not a
supervised registrant or that the contract or terms or conditions in
question are covered by this subpart.
Sec. 1092.303 Publication of information regarding supervised
registrants' use of covered terms and conditions.
(a) Publication of information collected under this subpart. The
Bureau shall publish and maintain a publicly-available source of
information about supervised registrants and the covered terms and
conditions that supervised registrants use. The Bureau will make this
information publicly available on a periodic basis within a timeframe
it determines in its discretion.
[[Page 6969]]
(b) Scope of information released publicly by the Bureau. The
Bureau shall publish information collected pursuant to this subpart,
except for administrative information as defined in Sec. 1092.301(a)
and categories of information that are protected from public disclosure
under 5 U.S.C. 552(b)(4). The Bureau may choose not to publish
information that has been corrected or must be corrected pursuant to
Sec. 1092.302(b)(4), or information that is not required to be
submitted under this subpart or is otherwise not in compliance with
this part. Nothing in this paragraph prohibits publication by the
Bureau of aggregated reports that do not identify, either directly or
indirectly, the submitter of the information.
Rohit Chopra,
Director, Consumer Financial Protection Bureau.
[FR Doc. 2023-00704 Filed 1-31-23; 8:45 am]
BILLING CODE 4810-AM-P