The Consumer Financial Protection Bureau (CFPB) issued a proposed rule under Regulation AA to address the use of restrictive and coercive clauses in consumer financial contracts. This proposal seeks to prohibit terms in contracts for consumer financial products or services that in the view of the current CFPB limit fundamental rights or shield companies from accountability. Comments are due by April 1, 2025. This ambitious rulemaking follows other recent federal efforts to regulate agreements, such as the Federal Trade Commission's Click-to-Cancel rule, which implemented various required provisions for agreements that involve a negative option or automatic renewal feature.
Who Is Covered?
The proposed rule applies broadly to "covered persons" as defined under the Consumer Financial Protection Act (CFPA). This includes any entity offering or providing consumer financial products or services, as well as affiliates acting as service providers to those entities. The rule captures a wide range of financial products and services, such as loans, credit cards, payment processing, and credit reporting. Notably, while the rule applies universally to covered persons, small businesses, small organizations, and small governmental jurisdictions are exempt from certain provisions, such as the ban on unilateral amendments and restraints on free expression.
However, specific exceptions apply to persons or activities beyond the CFPB's regulatory authority under the CFPA, such as certain insurance products or services regulated by states. Companies operating in these exempted areas should still evaluate overlapping state or federal regulations that might impose similar requirements.
Key Provisions of the Proposed Rule
1. Prohibition on Waivers of Legal Protections: The rule would ban terms that waive consumers' substantive rights or remedies granted by federal or state laws. While procedural clauses like arbitration agreements remain unaffected, companies would no longer be able to nullify legislated consumer protections through fine print.
2. Ban on Unilateral Amendments: Covered entities would be forbidden from reserving the right to unilaterally change material contract terms; this addresses a common concern where consumers are subjected to adverse changes without notice or consent.
3. Preservation of Free Expression: Contractual clauses restricting consumers' ability to leave reviews or engage in lawful speech—often enforced with fines or account closures—would be disallowed under the rule.
4. Re-Codification of the FTC's Credit Practices Rule: The CFPB proposes to codify long-standing prohibitions such as bans on confessions of judgment, wage assignments, and security interests in household goods. This change aligns the rules across all covered entities, ensuring consistency. The Credit Practices Rule is available here.
Implications for Businesses
If finalized, the rule would require changes to standard-form contracts used by financial service providers. Companies must carefully review their agreements to ensure compliance and avoid enforcement actions under the CFPB's unfair, deceptive, or abusive acts or practices (UDAAP) authority. The CFPB in June 2024 issued a Consumer Financial Protection Circular on deceptive practices relating to unenforceable contract terms ("2024 Contract Terms Circular"). According to the 2024 Contract Terms Circular, the inclusion of certain terms in contracts for consumer financial products or services may violate the UDAAP 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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