Contract Terms and Conditions Under CFPB Scrutiny
You may think that prohibited contract terms simply make those terms, or even worse, an entire contract, unenforceable. Well, think again. There may be additional legal consequences to using unlawful contract terms, and last year, this circular sought to answer this 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)?”
The CFPB’s answer to that question? An emphatic “Yes”! “Covered persons” and “service providers” must comply with the prohibition on deceptive acts or practices in the CFPA. For example, including contractual terms that Federal or State law has said are unlawful or unenforceable may violate the prohibition.
The circular gives some great examples of Federal laws that render unlawful or unenforceable contract terms in certain contexts. A couple of these examples are:
1. Regulation Z, which implements the Truth in Lending Act (TILA), prohibits the inclusion of arbitration terms in a residential mortgage loan or open-ended consumer credit plan secured by the principal dwelling or any other nonjudicial procedure as the method for resolving any controversy or settling claims arising out of the transaction;
2. 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; and
3. 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....”
The FTC Policy Statement on Deception says a representation, omission, act or practice is deceptive when:
1. It misleads or is likely to mislead the consumer;
2. The consumer’s interpretation of the representation, omission, act or practice is reasonable; and
3. The misleading representation, omission, act or practice is material.
A representation is “material” if it “involves information that is important to consumers and, hence, likely to affect their choices. 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 if a dispute arises. Additionally, certain categories of information, including express representations, are presumed to be material.
The circular provided this compliance bulletin as a highlight. The CFPB explains that disclaimers in a contract such as “subject to applicable law” do not solve for the misrepresentation caused by the inclusion of an unenforceable contract term. Similarly, the CFPB said that qualifying a provision that claims to waive a consumer right with “except where unenforceable” is unlikely to solve for the provision’s misleading or material nature. Neither do disclaimers that are issued after the fact.
The circular goes on to provide many additional examples that demonstrate the inclusion of unlawful or unenforceable terms and conditions in consumer contracts that would likely lead a reasonable consumer to believe the terms are lawful and/or enforceable when, in fact, they are not.
Please note that CFPB circulars do not carry the force and effect of law. Rather, CFPB circulars are intended to “promote consistency in approach across the various enforcement agencies and parties,” and therefore should serve as a warning to financial institutions that regulators may be keeping an eye on consumer contracts to for potentially deceptive provisions. Further, credit unions should note that contract law is generally governed by the states. As such, a state could use the circular as a starting point to enhance consumer protection or even pursue a claim of "deceptive" acts or practices.
If you have any questions concerning this topic, please contact the America’s Credit Unions Compliance team at compliance@americascreditunions.org.
