Companies using illegal or unenforceable terms and conditions risk breaking the law
The Consumer Financial Protection Bureau (CFPB) today issued a circular warning against the use of unlawful or unenforceable terms and conditions in contracts for consumer financial products or services. Companies use this fine print tactic to try to trick consumers into believing they have given up certain legal rights or protections. When financial institutions take these types of actions, they risk violating the Consumer Financial Protection Act. Today’s warning is part of the CFPB’s broader efforts to ensure freedom and fairness in people’s interactions with financial institutions.
“Federal and state laws ban a host of coercive contract clauses that censor and restrict individual freedoms and rights,” said CFPB Director Rohit Chopra. “The CFPB will take action against companies and individuals that deceptively slip these terms into their fine print.”
Many consumer contracts include terms and conditions that claim to limit consumer rights and protections. This fine print may just be an attempt to confuse people about their rights. A common example is the general liability waiver, which purports to fully insulate companies from suits even though most states have laws that create hosts of exemptions to these waivers.
Similarly, several federal consumer financial protection laws offer protections that cannot be taken away from people, no matter what a contract says. For example, the Military Lending Act generally prohibits terms in certain consumer credit contracts that require servicemembers and their dependents to waive their right to legal recourse. Another example is mortgage rules, implementing the Truth in Lending Act, which prohibit fine print that forces homeowners into arbitration or other nonjudicial procedures to resolve problems with a mortgage transaction.
Today’s circular explains how and when fine print tricks and intimidation in contracts for consumer financial products and services may violate the Consumer Financial Protection Act’s prohibition on deceptive acts and practices. Companies may be liable even if the unenforceable terms are borrowed from form templates or widely available contracts.
The CFPB has taken action with respect to this unlawful conduct on many occasions over the past several years, including on deceptive behavior toward:
- Mortgage borrowers: CFPB examiners have repeatedly found examples of deceptive contract terms purporting to waive mortgage borrowers’ rights that cannot be waived.
- Bank accountholders: The CFPB found that a bank deceived consumers through contract terms that it claimed waived consumers’ right to hold the bank liable for improperly responding to garnishment orders when, in fact, this right could not be waived. The bank inserted these terms into deposit agreements with broad fine print language.
- Remittance transfer consumers: The CFPB found that a remittance transfer provider violated the Consumer Financial Protection Act’s deception prohibition when it included misleading statements in disclosures purporting to limit consumers’ error resolution rights, which would be unenforceable under the Electronic Fund Transfer Act and the Remittance Rule.
- Auto loan borrowers: The CFPB found an auto loan servicer deceptively included language in contracts that indicated that consumers could not exercise bankruptcy rights, when in fact, waivers of bankruptcy rights generally are void as a matter of public policy.
Today’s circular builds on previous initiatives and guidance provided by the CFPB that are intended to ensure freedom and fairness in people’s interactions with financial institutions. Last year, the CFPB proposed a rule to require certain supervised nonbank companies to register with the CFPB information about their use of contractual terms that claim to waive or limit consumer rights. The CFPB also has explained that banks and financial companies attempting to silence consumers from posting honest online reviews through contract terms undermine fair competition and may be breaking the law. The CFPB additionally has highlighted that certain tuition payment plans include terms and conditions that are likely unenforceable. And the CFPB recently filed an amicus brief with the Justice Department to help ensure that servicemembers can file lawsuits to enforce the Servicemembers Civil Relief Act notwithstanding unenforceable fine print in contracts.
Read the consumer financial protection circular, Unlawful and unenforceable contract terms and conditions.
Consumers can submit complaints about financial products or services by visiting the CFPB’s website or by calling (855) 411-CFPB (2372).
Employees who believe their company has violated federal consumer financial protection laws are encouraged to send information about what they know to whistleblower@cfpb.gov.