[Federal Register Volume 89, Number 120 (Friday, June 21, 2024)]
[Rules and Regulations]
[Pages 51955-51957]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-13581]



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 Rules and Regulations
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  Federal Register / Vol. 89, No. 120 / Friday, June 21, 2024 / Rules 
and Regulations  

[[Page 51955]]



CONSUMER FINANCIAL PROTECTION BUREAU

12 CFR Chapter X


Consumer Financial Protection Circular 2024-03: Unlawful and 
Unenforceable Contract Terms and Conditions

AGENCY: Consumer Financial Protection Bureau.

ACTION: Consumer financial protection circular.

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SUMMARY: The Consumer Financial Protection Bureau (CFPB) has issued 
Consumer Financial Protection Circular 2024-03, titled, ``Unlawful and 
Unenforceable Contract Terms and Conditions.'' In this circular, the 
CFPB responds to the question, ``Can persons that include unlawful or 
unenforceable terms and conditions in contracts for consumer financial 
products and services violate the prohibition on deceptive acts or 
practices in the Consumer Financial Protection Act (CFPA)?''

DATES: The CFPB released this circular on its website on June 4, 2024.

ADDRESSES: Enforcers, and the broader public, can provide feedback and 
comments to [email protected].

FOR FURTHER INFORMATION CONTACT: George Karithanom, Regulatory 
Implementation & Guidance Program Analyst, Office of Regulations, at 
202-435-7700 or at: https://reginquiries.consumerfinance.gov/. If you 
require this document in an alternative electronic format, please 
contact [email protected].

SUPPLEMENTARY INFORMATION: 

Question Presented

    Can persons that include unlawful or unenforceable terms and 
conditions in contracts for consumer financial products and services 
violate the prohibition on deceptive acts or practices in the Consumer 
Financial Protection Act (CFPA)?

Response

    Yes. ``Covered persons'' and ``service providers'' must comply with 
the prohibition on deceptive acts or practices in the CFPA.\1\ The 
inclusion of certain terms in contracts for consumer financial products 
or services may violate the prohibition when applicable Federal or 
State law renders such contractual terms, including those that purport 
to waive consumer rights, unlawful or unenforceable.
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    \1\ 12 U.S.C. 5481(6), (26), 5531, 5536. For simplicity, the 
remainder of this Circular refers to covered persons and service 
providers as ``covered persons.''
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Background on Unlawful and Unenforceable Contract Terms

    Many Federal laws--including statutes enforced by the CFPB--render 
unlawful or unenforceable various contract terms in certain contexts. 
For example, as highlighted in a recent CFPB compliance bulletin,\2\ 
the Consumer Review Fairness Act of 2016 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, and 
invalidates these types of contract terms and conditions.\3\ As another 
example, Regulation Z, which implements the Truth in Lending Act 
(TILA), prohibits the inclusion in a residential mortgage loan or open-
ended consumer credit plan secured by the principal dwelling of terms 
requiring arbitration or any other nonjudicial procedure as the method 
for resolving any controversy or settling claims arising out of the 
transaction.\4\ The Electronic Fund Transfer Act (EFTA) prohibits 
contract terms that contain a ``waiver of any right conferred'' by EFTA 
and prohibits waivers of any ``cause of action'' under EFTA.\5\ And the 
Military Lending Act and its implementing regulations generally 
prohibit terms in certain 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 . . . .'' \6\
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    \2\ CFPB, Bulletin 2022-05: Unfair and Deceptive Acts or 
Practices That Impede Consumer Reviews (Mar. 22, 2022), https://files.consumerfinance.gov/f/documents/cfpb_bulletin-2022-05_unfair-deceptive-acts-practices-impede-consumer-reviews.pdf.
    \3\ 15 U.S.C. 45b.
    \4\ 12 CFR 1026.36(h)(1), implementing 15 U.S.C. 1639c(e)(1).
    \5\ 15 U.S.C. 1693l; see also, e.g., Choice Money Transfer, Inc. 
d/b/a Small World Money Transfer, ]] 79-83, File No. 2022-CFPB-0009 
(Oct. 4, 2022) (consent order) (finding remittance transfer provider 
violated section 1693l by including waiver of consumer rights in 
disclosure consumers were required to sign); Chime, Inc. d/b/a 
Sendwave, ]] 26-29, File No. 2023-CFPB-0012 (Oct. 17, 2023) (consent 
order) (finding violation of section 1693l where remittance transfer 
provider required consumers to sign a remittance services agreement 
containing language limiting consumers' damages and claims for costs 
and attorney fees, contrary to the provisions for defendant 
liability contained in section 1693m(a)(3)).
    \6\ 32 CFR part 232.8(b), implementing 10 U.S.C. 987(e)(2).
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    In addition to express prohibitions like these, a recent Federal 
district court decision held that the Servicemembers Civil Relief Act 
(SCRA) renders unenforceable provisions in contracts with 
servicemembers that purport to waive their right to participate in 
class actions to enforce the SCRA.\7\ The Federal Trade Commission also 
administers laws that forbid certain contractual waivers.\8\ And 
certain State laws similarly prohibit or restrict the use of waivers in 
consumer contracts.\9\
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    \7\ Espin v. Citibank, N.A., No. 5:22-CV-383-BO-RN, 2023 WL 
6449909, at *3 (E.D.N.C. Sept. 29, 2023) (denying defendant's motion 
to compel arbitration and observing that the SCRA was ``amended to 
codify the unwaivable right of servicemembers to bring and 
participate in class actions, `notwithstanding any previous 
agreement to the contrary' '') (quoting 50 U.S.C. 4042(a)).
    \8\ See 16 CFR part 442(a)(2) (FTC's 1984 Credit Practices Rule, 
prohibiting 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). The FTC also has interpreted section 604(b)(2)(A) of the 
Fair Credit Reporting Act (FCRA) to prohibit the inclusion of a 
waiver of consumer rights in a disclosure form required under that 
section, observing that ``it is a general principle of law that 
benefits provided to citizens by federal statute generally may not 
be waived by private agreement unless Congress intended such a 
result.'' FTC, Division of Credit Practices, Staff Opinion Letter 
(June 12, 1998), 1998 WL 34323756, at *1 (citing Brooklyn Savings 
Bank v. O'Neill, 324 U.S. 697 (1945)). In addition, while not an 
express prohibition on waivers, the FTC's Preservation of Consumers' 
Claims and Defenses rule, commonly known as the ``Holder Rule'' and 
also enforced by the CFPB, 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, 
thereby emphasizing the importance of preserving consumer rights. 16 
CFR part 433.
    \9\ For instance, the California Consumer Privacy Act affords 
consumers certain rights to know how their information will be used, 
instructs businesses not to sell consumers' personal information, 
and deems ``void and unenforceable'' any contractual provision 
``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.'' See generally Cal. Civ. Code sec. 1798.100 et seq. 
described at https://oag.ca.gov/privacy/ccpa; Cal. Civ. Code sec. 
1798.192. Further, certain State laws, including those of 
California, Illinois, Kansas, and Tennessee, contain outright 
prohibitions of waivers of legal protections in general consumer 
protection laws. See Cal. Civ. Code. sec. 1751 (barring waivers of 
protections under California Consumers Legal Remedies Act); Ill. St. 
Ch. 815 sec. 505(10c), Waiver or modification (barring waiver or 
modification of protections under consumer fraud and deceptive 
practices statute); 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); Tenn. 
Stat. 47-18-113(a) (generally prohibiting waivers ``by contract, 
agreement, or otherwise'' of provisions of the Tennessee Consumer 
Protection Act of 1977).

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[[Page 51956]]

Analysis

    The CFPB is issuing this Circular to emphasize that covered persons 
who include unlawful or unenforceable terms in their consumer contracts 
may violate the CFPA's prohibition on deceptive acts or practices.\10\
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    \10\ Covered persons also should comply with other consumer 
protection laws enforceable by the CFPB that may apply to their 
conduct, including but not limited to EFTA, Regulation E; RESPA, 
Regulation X; and TILA, Regulation Z.
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    Covered persons may violate the CFPA's prohibition on deceptive 
acts or practices if they include terms, including waiver provisions, 
in their consumer contracts that are rendered unlawful or unenforceable 
by Federal or State law. Under the CFPA, a representation or omission 
is deceptive if it is likely to mislead a reasonable consumer and is 
material. A representation is ``material'' if it ``involves information 
that is important to consumers and, hence, likely to affect their 
choice of, or conduct regarding, a product.'' \11\ A contractual 
provision stating that a consumer agrees not to exercise a legal right 
is likely to affect a consumer's willingness to attempt to exercise 
that right in the event of a dispute. Moreover, certain categories of 
information, including express representations, are presumptively 
material.\12\
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    \11\ Novartis Corp. v. FTC, 223 F.3d 783, 786 (D.C. Cir. 2000) 
(quoting In re Cliffdale Assocs., Inc., 103 F.T.C. 110, 165 (1984)) 
(emphasis added).
    \12\ See, e.g., CFPB v. Chou Team Realty LLC, Case No. 8:20-cv-
00043-SB-ADS, 2021 WL 4077110, at *4 (C.D. Cal. Aug. 10, 2021) 
(citing FTC v. Pantron I Corp., 33 F.3d 1088, 1095-96 (9th Cir. 
1994)); FTC v. NCH, Inc., Civ.A. No. CV-S-94-138LDG, 1995 WL 623260, 
at *8 (D. Nev. May 25, 1995) (``express representations that are 
shown to be false are presumptively material'') (citing Cliffdale 
Assocs., 103 F.T.C. at 168, 182).
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    In the recent compliance bulletin noted above, the CFPB reminded 
covered persons that they could be liable under the CFPA if they 
deceive consumers using form contract restrictions on consumer reviews 
that are unenforceable.\13\ The CFPB explained that ``including an 
unenforceable material term in a consumer contract is deceptive, 
because it misleads consumers into believing the contract term is 
enforceable,'' and that ``disclaimers in a contract such as `subject to 
applicable law' do not cure the misrepresentation caused by the 
inclusion of an unenforceable contract term.'' \14\ Similarly, 
qualifying a provision that purports to waive a consumer right with 
``except where unenforceable'' is unlikely to cure the provision's 
misleading or material nature. Neither do disclaimers that are issued 
after the fact.\15\
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    \13\ CFPB, Bulletin 2022-05: Unfair and Deceptive Acts or 
Practices That Impede Consumer Reviews (Mar. 22, 2022), https://files.consumerfinance.gov/f/documents/cfpb_bulletin-2022-05_unfair-deceptive-acts-practices-impede-consumer-reviews.pdf (Bulletin 2022-
05).
    \14\ Id. at 4-5; cf. Ruth v. Triumph P'ships, 577 F.3d 790, 801-
02 (7th Cir. 2009) (``To threaten to take some action `to the extent 
permitted by law[ ]' . . . is to imply that, under some set of 
circumstances and to some extent, the law actually permits that 
action to be taken.'').
    \15\ Bulletin 2022-05 at 5 (citing FTC v. IAB Marketing Assocs., 
LP, 746 F.3d 1228, 1233 (11th Cir. 2014)).
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    CFPB supervisory examiners have identified several violations of 
the CFPA's prohibition on deception stemming from covered persons' use 
of unlawful or unenforceable contract terms and conditions.\16\ In 
addition, in several prior enforcement matters, the CFPB has found 
covered persons to have violated the CFPA by including in contracts for 
consumer financial products or services terms that are unlawful or 
unenforceable under Federal or State law, such as waivers that are 
prohibited by Federal or State law. For example, the CFPB found that a 
respondent bank engaged in a deceptive practice under the CFPA when it 
represented to consumers that because they signed a deposit agreement 
including broad language directing the bank not to contest legal 
process, consumers had waived their right to hold the bank liable for 
improperly responding to garnishment notices; in fact, regardless of 
the language in the account agreement, consumers had the right to 
challenge the garnishments.\17\ In another matter, the CFPB found that 
a respondent auto loan servicer violated the CFPA's deception 
prohibition when it used loan extension agreements or written 
confirmations that included language that created the net misimpression 
that consumers could not exercise bankruptcy protection rights, which 
was false.\18\ In fact, an agreement to waive an individual's right to 
file for bankruptcy is void as against public policy,\19\ rendering 
terms that purport to waive such right generally unenforceable. The 
CFPB found in a different matter that a respondent non-bank remittance 
transfer provider engaged in a deceptive act or practice in violation 
of the CFPA when it made misleading statements in disclosures 
purporting to limit consumers' error resolution rights, in violation of 
EFTA and the Remittance Rule.\20\ And, in a recent report, the CFPB 
highlighted that certain student tuition payment plan agreements and 
financial responsibility agreements ``include terms and conditions that 
purport to waive consumers' legal protections, limit how consumers 
enforce their rights, or misrepresent the rights or protections 
available to consumers under existing law.'' \21\ Some of these terms 
and conditions, such as purported waivers of the right to retain 
counsel and the right to seek discharge in bankruptcy proceedings, are 
likely unenforceable and thus similarly raise deception risk.
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    \16\ See Supervisory Highlights: Summer 2015, at 15, available 
at https://files.consumerfinance.gov/f/201506_cfpb_supervisory-highlights.pdf (deceptive waivers of borrowers' rights in mortgage 
loan agreements that were unenforceable under Regulation Z, 
implementing TILA); Supervisory Highlights: Fall 2015, at 17, 
available at https://files.consumerfinance.gov/f/201510_cfpb_supervisory-highlights.pdf (same); Supervisory 
Highlights: Summer 2017, 82 FR 48703, 48708 (Oct. 19, 2017) 
(deceptive waivers of borrowers' rights in loss mitigation 
agreements that were unenforceable under Regulation Z, implementing 
TILA); Supervisory Highlights, Issue 24, Summer 2021, 86 FR 36108, 
36117 (July 8, 2021) (deceptive waivers of rights in security deed 
riders that were unenforceable under Regulation X, implementing the 
Real Estate Settlement Procedures Act); Supervisory Highlights, 
Issue 28, Fall 2022, 87 FR 72449, 72455 (Nov. 25, 2022) (deceptive 
waiver of borrowers' rights in loan security agreements that was 
unenforceable under Regulation Z, implementing TILA).
    \17\ In re Bank of America, N.A. (2022-CFPB-0002), https://www.consumerfinance.gov/enforcement/actions/bank-of-america-na/.
    \18\ In re Nissan Motor Acceptance Corp. (2020-BCFP-0017), 
https://www.consumerfinance.gov/policy-compliance/enforcement/actions/nissan-motor-acceptance-corporation/.
    \19\ See 11 U.S.C. 524(a) (providing that a bankruptcy discharge 
under title 11 voids judgments and operates as an injunction against 
the commencement or continuation of an action ``whether or not 
discharge of such debt is waived'').
    \20\ In re Trans-Fast Remittance LLC, also d/b/a New York Bay 
Remittance (2020-BCFP-0010), https://www.consumerfinance.gov/policy-compliance/enforcement/actions/trans-fast-remittance-llc/.
    \21\ CFPB, Tuition Payment Plans in Higher Education (Sept. 
2023), at 29-30, available at https://files.consumerfinance.gov/f/documents/cfpb_tuition_payment_plan_report_2023-09.pdf.
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    As these examples demonstrate, the inclusion of unlawful or 
unenforceable terms and conditions in consumer contracts is likely to 
mislead a

[[Page 51957]]

reasonable consumer into believing that the terms are lawful and/or 
enforceable, when in fact they are not. Further, the representations 
made by the presence of such terms are often material, presumptively so 
when they are made expressly. In particular, consumers are unlikely to 
be aware of the existence of laws that render the terms or conditions 
at issue unlawful or unenforceable, so in the event of a dispute, they 
are likely to conclude they lawfully agreed to waive their legal rights 
or protections after reviewing the contract on their own or when 
covered persons point out the existence of these contractual terms and 
conditions. Deceptive acts and practices such as these pose risk to 
consumers, whose rights are undermined as a result, and distort markets 
to the disadvantage of covered persons who abide by the law by 
including only lawful terms and conditions in their consumer contracts.
    Thus, the inclusion of unlawful or unenforceable terms in consumer 
contracts, including unlawful or unenforceable waiver provisions, may 
violate the CFPA's prohibition on deceptive acts or practices.

About Consumer Financial Protection Circulars

    Consumer Financial Protection Circulars are issued to all parties 
with authority to enforce Federal consumer financial law. The CFPB is 
the principal Federal regulator responsible for administering Federal 
consumer financial law, see 12 U.S.C. 5511, including the Consumer 
Financial Protection Act's prohibition on unfair, deceptive, and 
abusive acts or practices, 12 U.S.C. 5536(a)(1)(B), and 18 other 
``enumerated consumer laws,'' 12 U.S.C. 5481(12). However, these laws 
are also enforced by State attorneys general and State regulators, 12 
U.S.C. 5552, and prudential regulators including the Federal Deposit 
Insurance Corporation, the Office of the Comptroller of the Currency, 
the Board of Governors of the Federal Reserve System, and the National 
Credit Union Administration. See, e.g., 12 U.S.C. 5516(d), 5581(c)(2) 
(exclusive enforcement authority for banks and credit unions with $10 
billion or less in assets). Some Federal consumer financial laws are 
also enforceable by other Federal agencies, including the Department of 
Justice and the Federal Trade Commission, the Farm Credit 
Administration, the Department of Transportation, and the Department of 
Agriculture. In addition, some of these laws provide for private 
enforcement.
    Consumer Financial Protection Circulars are intended to promote 
consistency in approach across the various enforcement agencies and 
parties, pursuant to the CFPB's statutory objective to ensure Federal 
consumer financial law is enforced consistently. 12 U.S.C. 5511(b)(4).
    Consumer Financial Protection Circulars are also intended to 
provide transparency to partner agencies regarding the CFPB's intended 
approach when cooperating in enforcement actions. See, e.g., 12 U.S.C. 
5552(b) (consultation with CFPB by State attorneys general and 
regulators); 12 U.S.C. 5562(a) (joint investigatory work between CFPB 
and other agencies).
    Consumer Financial Protection Circulars are general statements of 
policy under the Administrative Procedure Act. 5 U.S.C. 553(b). They 
provide background information about applicable law, articulate 
considerations relevant to the Bureau's exercise of its authorities, 
and, in the interest of maintaining consistency, advise other parties 
with authority to enforce Federal consumer financial law. They do not 
restrict the Bureau's exercise of its authorities, impose any legal 
requirements on external parties, or create or confer any rights on 
external parties that could be enforceable in any administrative or 
civil proceeding. The CFPB Director is instructing CFPB staff as 
described herein, and the CFPB will then make final decisions on 
individual matters based on an assessment of the factual record, 
applicable law, and factors relevant to prosecutorial discretion.

Rohit Chopra,
Director, Consumer Financial Protection Bureau.
[FR Doc. 2024-13581 Filed 6-20-24; 8:45 am]
BILLING CODE 4810-AM-P