The Consumer Financial Protection Bureau (CFPB) has issued “CFPB Circular 2024-03: Unlawful and Unenforceable Contract Terms and Conditions,” warning against the use of unlawful or unenforceable terms and conditions in contracts for consumer financial products or services.
According to CFPB Circular 2024-03, companies use fine print tactics 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 of 2010. Issuance of the Circular by the Bureau is part of the CFPB’s broader efforts to ensure freedom and fairness in consumer interaction 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.”
Enforcing consumer protections
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.
Several federal consumer financial protection laws offer protections that cannot be taken away from people, no matter what a contract says. For example, in mortgage rules, implementing the Truth-in-Lending Act (TILA) prohibits fine print that forces homeowners into arbitration or other nonjudicial procedures to resolve problems with a mortgage transaction.
CFPB Circular 2024-03 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.
In defense of the public interest
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 (EFTA) 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.
The CFPB recently launched an inquiry into junk fees that are increasing mortgage closing costs. In its “Request for Information Regarding Fees Imposed in Residential Mortgage Transactions,” the CFPB intends to investigate why closing costs are increasing, who is benefiting, and how costs for borrowers and lenders could be lowered. According to the CFPB, from 2021-2023, median total loan costs for home mortgages increased by more than 36%. These fees due at closing can strain household budgets and a family’s ability to afford a down payment, as well as limit the ability of lenders to offer competitive mortgages because they must absorb the higher costs, or pass them on to borrowers.
The American Bankers Association (ABA), Housing Policy Council (HPC), and Mortgage Bankers Association (MBA) jointly issued a statement in response to the CFPB’s RFI on closing costs:
“Given the significant home-price appreciation and swift inflation that consumers have encountered in recent years, a discussion about policies that address affordability burdens while maintaining healthy and competitive mortgage markets makes good sense.
“Mortgage lenders fully and transparently disclose costs to every borrower on forms developed and prescribed by Congress in the Dodd-Frank Act and implemented by the CFPB. Many of those disclosed costs, such as title, appraisal and credit reports are required by federal statutes, safety and soundness guidelines, and the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), and Fannie Mae and Freddie Mac as a condition of buying and insuring a mortgage. Moreover, the services these fees cover mitigate risk for taxpayers and borrowers alike.”
