CFPB’s Proposed Rule Aims to Prohibit the Use of Certain Contractual Provisions in Consumer Financial Products or Services Agreements

Article

23 January 2025

5 min read

Rachel Rodman |

Pratin Vallabhaneni |

S. Burr Eckstut

White & Case Tech Newsflash

Background, Purpose, and Structure of the Proposed Rule

On January 13, 2025, the Consumer Financial Protection Bureau (CFPB) published a proposed rule, which aims "to prohibit certain contractual provisions in agreements for consumer financial products or services."¹ CFPB Director Rohit Chopra stated, "To access the American financial system, people should not be forced into forfeiting rights enshrined in law or our Constitution."²

The proposed rule's prohibitions are organized into two overarching parts. Subpart B applies the Federal Trade Commission's (FTC) longstanding Credit Practices Rule to "covered persons" as defined by Title X of the Dodd-Frank Act. Covered persons include businesses that offer or provide consumer financial products or services, such as banks and non-bank providers of consumer credit. Subpart C then outlines further restrictions on contracts between covered persons and consumers, including prohibitions on clauses that "limit fundamental freedoms, including waivers of substantive legal rights and fine print that suppresses speech."³

Summary of the Proposed Rule's Prohibitions

Subpart B of the proposed rule would codify certain longstanding prohibitions under the FTC's Credit Practices Rule for all covered persons under the Consumer Financial Protection Act of 2010 (CFPA).⁴ This is noteworthy because the Credit Practices Rule currently applies only to lenders within the jurisdiction of the FTC.⁵ The proposed rule would extend the Credit Practices Rule to banks and other financial services companies within the CFPB's jurisdiction, and would permit state attorneys general to enforce the rule, including against banks.⁶

The credit practices prohibited under Subpart B of the proposed rule include the following:

(1) Confessions of judgment, a legal device whereby the consumer, as part of a credit contract, consents in advance to the creditor obtaining a judgment without prior notice or hearing.⁷
(2) Waivers of exemption, whereby a customer waives rights provided by state law that exempt certain property of a debtor from being seized or sold to satisfy the debt.⁸
(3) Wage assignments, which are contractual transfers by a debtor to a creditor of the right to receive wages directly from the debtor's employer.⁹
(4) Nonpossessory security interests in household goods, which grant a creditor the right to seize personal items from a consumer.¹⁰
(5) Misrepresenting the nature or extent of cosigner liability or failing to inform a cosigner of their obligations prior to becoming obligated.¹¹
(6) Pyramiding late charges, which occurs when a creditor assesses multiple delinquency charges due to a single late payment because any subsequent payments are first applied to the outstanding late charge and only then to interest and principal.¹²

Subpart C of the proposed rule would prohibit what the CFPB considers contractual clauses that limit fundamental freedoms, which include the following:

(1) Clauses that require a customer to waive substantive consumer legal rights and protections or their remedies granted by Federal or State law and designed to benefit or protect consumers.¹³ One notable exception is that the proposed rule does not include (a) waivers of procedural rights, such as venue or arbitration waivers and class action waivers,¹⁴ or (b) situations where a law is expressly waivable.¹⁵
(2) Clauses that reserve "the covered person's right to unilaterally change, modify, revise or add" contract language.¹⁶ The CFPB proposed to ban these since they mainly benefit companies and consumers have no option to reject the change, thereby allowing covered persons to circumvent consumers' freedom to benefit from a contract.¹⁷
(3) Clauses that restrain a consumer's lawful free expression.¹⁸ This prohibition would apply to clauses that limit a consumer's right to make negative comments about a company (non-disparagement or "gag" clauses) or to freely express their political and religious views.¹⁹ Further, any contractual mechanism for enforcing those limits, including fees, threats of account closure ("de banking"), or terms that give rise to breach of contract claims are prohibited.²⁰ However, this would not prohibit clauses allowing a covered person to close a consumer account based on use of the account to commit fraud or illegal activity.²¹

Key Takeaways

Subpart B restrictions largely codify existing law and practice: The Credit Practices Rule has been in place since 1984. And, in 2014, federal banking regulators issued interagency guidance clarifying that banks could violate the law by including in consumer credit contracts any provisions prohibited by the Credit Practices Rule.²² Thus, the CFPB does not expect Subpart B of the proposed rule to "have a substantial material effect on the market as covered persons are already likely to be in compliance with these prohibitions."²³
What is new in the proposed rule: While many of the terms in Subpart C are already unenforceable in various circumstances, the CFPB emphasized that this proposed rule would create a "bright line of prohibition and heightened accountability" for financial services companies that still use them and authorize a new enforcement mechanism by state attorneys general.²⁴ In addition, Subpart C would establish net new obligations for companies offering consumer financial products or services, creating a need for legal review of a covered person's contracts for compliance with the proposed rule.
Uncertain future: The CFPB has requested comments by April 1, 2025. Of course, it will be up to the incoming administration's new CFPB director to decide whether to proceed with finalizing the proposed rule, make material changes, or scrap it altogether.

Avi Tessone (White & Case, Law Clerk, New York) contributed to the development of this publication.

_{White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities.}

_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}