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The US Consumer Financial Protection Bureau (CFPB) has issued a proposal to register non-banks whose contract terms attempt to curb consumers’ legal rights to sue the company, six years after former President Donald Trump blocked the agency’s first attempt to address the issue.
On Wednesday (January 11), the CFPB proposed a rule to establish a public registry of supervised non-banks’ terms and conditions that claim to waive or limit consumer rights and protections, such as bankruptcy rights, liability amounts or complaint rights.
These terms allow companies to hide consumer harm, limit consumers’ ability to post criticism about their product and undermine consumer financial protection law, the agency says.
For instance, consumer contracts may include language that waives a consumer’s right to file a lawsuit.
The CFPB is concerned that companies may insert provisions that remain unnoticed until the consumer faces a problem or receive widespread public criticism.
In a specific case in October, PayPal announced an update to its terms and conditions that would have given the firm the authority to impose a $2,500 fine on users that spread “misinformation”. After significant backlash from the public, the fintech quickly apologised and dropped the plan.
In most cases, consumers do not have a choice to negotiate these contract terms and they must accept them if they want to use a financial product.
CFPB director Rohit Chopra said the registry would help regulators and law enforcement more easily detect unfair contract terms and inform how the CFPB conducts its supervision of non-banks.
Patrick McHenry (R-NC), the new chair of the House Financial Services Committee, criticised the proposal calling it “unprecedented” in making public such detailed contract information.
According to the Republican chair, the proposed registry will facilitate “the naming and shaming of firms” and he promised that “the days of Congress giving Director Chopra a free pass for his reckless actions have come to an end”.
Nonetheless, Chopra pointed out that numerous jurisdictions around the world have regulations against one-sided contracts or specific contract terms.
For instance, many EU member states have laws identifying prohibited or presumptively unfair contract terms, and the UK and Japan have limits on the use of one-sided consumer contracts.
Arbitration clauses back to the spotlight
The CFPB first took steps to address consumer risks related to arbitration clauses back in 2016 when it sought an outright ban on terms that prevent consumers from filing class action lawsuits against banks and card companies.
The proposal was countered by fierce opposition from Republican members of Congress and bank lobby groups which eventually led to President Donald Trump repealing the rule.
Debates during that time went as far as some lawmakers asking Trump to fire Richard Cordray, the Obama-elected director of the CFPB. According to media reports, at that point, McHenry was among those defending Cordray to keep his position.
As required by the law, the new proposal is substantially different from the repealed rule.
First of all, it is targeted at a much smaller group of companies. Specifically, non-banks supervised by the CFPB, such as international money transmitters.
Secondly, it does not introduce a new ban on the language of contracts and instead creates a register that would aid the agency’s supervisory work.
The public has 60 days to submit feedback on the proposal to the agency.
In December 2022, the CFPB proposed a rule to establish a similar registry for non-bank financial institutions to detect repeat offenders.
The CFPB’s interventionary approach to consumer protection has been a prominent feature of Chopra’s leadership.
Despite some attempts to curtail its actions, including a recent appeal court decision that found its funding structure unconstitutional putting into question some of the agency’s recent actions, this approach is expected to continue in 2023.
