On June 4, 2024, the Consumer Financial Protection Bureau (CFPB) issued a Circular warning companies that the inclusion of "unlawful" or "unenforceable" terms in a form contract constitutes a deceptive act or practice in violation of the Consumer Financial Protection Act (CFPA). This comes more than a year after the CFPB proposed a rule that would require supervised nonbanks that utilize form contracts to annually register such contracts with the Bureau. Covered persons subject to the CFPB's oversight should take note of the CFPB's comments, which could turn the inclusion of an unenforceable contract clause under state law into a potential Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) violation under the CFPA.
Importance of Form Contracts for Businesses
Many businesses and financial services companies utilize form agreements for a variety of reasons, including consistency and cost-effectiveness. Sometimes, a form contract may include a broadly enforceable provision that is inconsistent with a particular state's law. In those situations, courts typically sever the unenforceable portion from the rest of the contract.1 That approach makes sense for a variety of reasons, including the fact that a court's interpretation over the enforceability of a contract provision can change over time.
Potential UDAAP Violation for Unenforceable Clauses
Now, however, the inclusion of an unenforceable contract clause (and, specifically, one that could be construed as a waiver of a right a consumer or borrower has) could constitute a CFPA violation. As the CFPB outlined in its Circular:
Covered persons may violate the CFPA's prohibition on deceptive acts or practices if they include terms, including waiver provisions, in their consumer contracts that are rendered unlawful or unenforceable by federal or state law. Under the CFPA, a representation or omission is deceptive if it is likely to mislead a reasonable consumer and is material. A representation is "material" if it "involves information that is important to consumers and, hence, likely to affect their choice of, or conduct regarding, a product." 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 in the event of a dispute. Moreover, certain categories of information, including express representations, are presumptively material.
Disclaimers May Not Prevent UDAAP Violations
According to the CFPB, it is also not sufficient to include standard disclaimers in contracts, such as "subject to applicable law" or "except where unenforceable," to avoid a potential UDAAP violation under the CFPA. Notably, these disclaimers are typically included in form contracts not necessarily to avoid liability with respect to an unenforceable clause but because the law can vary drastically in each state as to whether a contractual clause or provision is enforceable or unenforceable.
Examples of Unenforceable Terms Cited by CFPB
The CFPB provided examples from supervisory examinations and enforcement actions where the inclusion of unenforceable contract terms violated the CFPA. It highlighted mortgage loss mitigation agreements' waivers of borrower's Truth-in-Lending Act rights, waivers of a right to contest garnishment proceedings in a depositor agreement, and the waiver of a right to file for bankruptcy in an auto loan extension agreement.
Increased CFPB Activity Post-Supreme Court Decision
The Bureau's activities have noticeably increased since the Supreme Court's decision in Community Financial Services. Covered persons should take a fresh look at their form contracts to ensure they do not include terms or clauses that may create risk under the CFPB's new UDAAP interpretation.
Footnotes
1. See Restatement (Second) of Contracts § 184(1) (1981) ("If less than all of an agreement is unenforceable under [public policy, as stated in] § 178, a court may nevertheless enforce the rest of the agreement in favor of a party who did not engage in serious misconduct if the performance as to which the agreement is unenforceable is not an essential part of the agreed exchange.").
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