On June 4, 2024, the Consumer Financial Protection Bureau (CFPB) released Consumer Financial Protection Circular 2024-03 (Circular). The Circular discusses whether having unlawful and/or unenforceable terms and conditions in a contract for consumer financial products and services are a violation of the Consumer Financial Protection Act’s (CFPA) prohibition on deceptive acts or practices. The short answer: Yes, having unlawful/unenforceable terms and conditions can be a violation of the CFPA. For those of you that want a longer answer, let’s get to it.
Deceptive Acts or Practices
Under the Dodd-Frank Act, a provider of consumer financial products or services is prohibited from engaging in deceptive acts or practices. As noted in this CFPB guidance, an act or practice is deceptive when:
“(1) The representation, omission, act, or practice misleads or is likely to mislead the consumer;
(2) The consumer’s interpretation of the representation, omission, act, or practice is reasonable under the circumstances; and
(3) The misleading representation, omission, act, or practice is material.”
For more information on deceptive acts or practices, the CFPB guidance linked to above provides a more detailed discussion.
Unlawful and Unenforceable Terms and Conditions
When it comes to whether a term or condition is unlawful, we need to look at any relevant law governing the substance of an agreement. This is because many federal and state laws explicitly prohibit certain terms and conditions. For example, Section 1693I of the Electronic Funds Transfer Act (EFTA) states:
“No writing or other agreement between a consumer and any other person may contain any provision which constitutes a waiver of any right conferred or cause of action created by this subchapter. Nothing in this section prohibits, however, any writing or other agreement which grants to a consumer a more extensive right or remedy or greater protection than contained in this subchapter or a waiver given in settlement of a dispute or action.”
Under the above, the EFTA prohibits a contract from waiving any right conferred by the act. There are other examples, such as the Military Lending Act, which prohibits contracts from requiring that servicemembers “waive the covered borrower’s right to legal recourse under any otherwise applicable provision of State or Federal law . . ..”
Credit unions should also be careful, as laws do not have to be explicit. A recent federal district court case held that the Servicemembers Civil Relief Act makes contract provisions that waive a right to class action unenforceable. Credit unions may want to further read the Circular for a more detailed discussion on unlawful and unenforceable provisions.
For an example of government action over an unenforceable contract term, this consent order may be helpful. Starting on page 24, there is a discussion on an improper waiver of rights under the EFTA. While the violation is on a waiver of error resolution rights for remittance transfers, it is still applicable to general waivers.
Looking at Your Contracts
Based on this Circular, credit unions may want to take a good look at their contracts/agreements to see if there are any unlawful and/or unenforceable provisions. Credit unions should also remember to look at any relevant regulations, such as Regulation E, which implements the EFTA. This includes the commentary. While a regulation might provide a general right to a consumer, the commentary can often clarify the right or provide an exception to it.
For example, Regulation E, section 1005.9(b) requires periodic statements be sent “for each monthly cycle in which an electronic fund transfer has occurred; and shall send a periodic statement at least quarterly if no transfer has occurred.” However, the commentary also states that “A financial institution need not send statements to consumers whose accounts are inactive as defined by the institution.”
Based on section 1005.9 and its commentary, it appears that a provision waiving a consumer’s right to a periodic statement would be unenforceable. However, a provision that states that the consumer understands and agrees that they will not receive a periodic statement if the consumer’s account is inactive, might be enforceable. Ultimately, if the credit union is unsure of whether or not a provision is unenforceable or unlawful, the credit union should speak to an attorney.