`[Federal Register Volume 90, Number 8 (Tuesday, January 14, 2025)]
[Proposed Rules]
[Pages 3566-3596]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-00633]



[[Page 3565]]

Vol. 90

Tuesday,

No. 8

January 14, 2025

Part VIII





 Consumer Financial Protection Bureau





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12 CFR Part 1027





Prohibited Terms and Conditions in Agreements for Consumer Financial 
Products or Services (Regulation AA); Proposed Rule

  Federal Register / Vol. 90, No. 8 / Tuesday, January 14, 2025 / 
Proposed Rules  

[[Page 3566]]


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CONSUMER FINANCIAL PROTECTION BUREAU

12 CFR Part 1027

[Docket No. CFPB-2025-0002]
RIN 3170-AB23


Prohibited Terms and Conditions in Agreements for Consumer 
Financial Products or Services (Regulation AA)

AGENCY: Consumer Financial Protection Bureau.

ACTION: Proposed rule; request for comment.

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SUMMARY: The Consumer Financial Protection Bureau (CFPB) is proposing 
to prohibit certain contractual provisions in agreements for consumer 
financial products or services. The proposal would prohibit covered 
persons from including in their contracts any provisions purporting to 
waive substantive consumer legal rights and protections (or their 
remedies) granted by State or Federal law. The proposal would also 
prohibit contract terms that limit free expression, including with 
threats of account closure, fines, or breach of contract claims, as 
well as other contract terms. The proposal would also codify certain 
longstanding prohibitions under the Federal Trade Commission's (FTC) 
Credit Practices Rule.

DATES: Comments must be received on or before April 1, 2025.

ADDRESSES: You may submit comments, identified by Docket No. CFPB-2025-
0002 or RIN 3170-AB23, by any of the following methods:
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments. A brief summary of 
this document will be available at https://www.regulations.gov/docket/CFPB-2025-0002.
     Email: [email protected]. Include Docket No. CFPB-
2025-0002 or RIN 3170-AB23 in the subject line of the message.
     Mail/Hand Delivery/Courier: Comment Intake--Prohibited 
Terms and Conditions in Agreements for Consumer Financial Products or 
Services (Regulation AA), c/o Legal Division Docket Manager, Consumer 
Financial Protection Bureau, 1700 G Street NW, Washington, DC 20552.
    Instructions: The CFPB encourages the early submission of comments. 
All submissions should include the agency name and docket number or 
Regulatory Information Number (RIN) for this rulemaking. Commenters are 
encouraged to submit comments electronically. In general, all comments 
received will be posted without change to https://www.regulations.gov.
    All submissions, including attachments and other supporting 
materials, will become part of the public record and subject to public 
disclosure. Proprietary information or sensitive personal information, 
such as account numbers or Social Security numbers, or names of other 
individuals, should not be included. Submissions will not be edited to 
remove any identifying or contact information.

FOR FURTHER INFORMATION CONTACT: George Karithanom, Regulatory 
Implementation and Guidance Program Analyst, Office of Regulations, at 
202-435-7700. If you require this document in an alternative electronic 
format, please contact [email protected].

SUPPLEMENTARY INFORMATION:

I. Summary of the Proposed Rule

    Consumer finance companies often limit or restrict individual 
freedoms and rights by including coercive terms and conditions in 
contracts of adhesion. These types of contracts--which are ubiquitous 
in transactions for consumer financial products or services--are 
drafted by the companies or their lawyers and presented to consumers on 
a ``take it or leave it'' basis. Form contracts can create operational 
efficiencies for large businesses, but in recent years they have been 
used to constrain fundamental freedoms and rights that are recognized 
and protected under the U.S. Constitution and statutory and common law. 
While the Bill of Rights, with limited exceptions, only protects people 
from government actions, jurists have long recognized affirmative 
obligations regarding certain private actors,\1\ and scholars and 
jurists are increasingly recognizing that corporate intrusion into 
historically recognized individual rights poses a similar threat as 
government intrusion.\2\ Clauses buried in the fine print of these 
contracts can have dramatic consequences for consumers--for instance, 
by waiving statutory protections passed by elected officials in Federal 
or State government, by surrendering due process rights upon default, 
by undermining consumers' right to contract and giving companies the 
power to unilaterally amend material terms of the contract at any time, 
or by constraining consumers' ability to exercise free speech. These 
clauses usually provide little or no benefit to consumers, but they can 
be valuable to companies by insulating them from accountability or 
advancing managers' political interests.
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    \1\ See generally Ganesh Sitaraman, Deplatforming, 113 Yale L.J. 
497 (2023).
    \2\ See Tunku Varadarajan, The `Common Carrier' Solution to 
Social-Media Censorship, Wall St. J. (Jan. 15, 2021), https://www.wsj.com/articles/the-common-carrier-solution-to-social-media-censorship-11610732343 (interviewing Richard Epstein); Biden v. 
Knight First Amend. Inst., 141 S. Ct. 1220, 1222-24 (2021) (Thomas, 
J., concurring) (raising concerns about the ability of companies to 
constrain free speech and recognizing that doctrines involving 
common carriers or public accommodation may be an appropriate 
solution).
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    Federal and State legislatures and regulators have taken action 
against these kinds of one-sided terms in consumer contracts. For 
instance, the FTC issued in 1984 a rule commonly known as the ``Credit 
Practices Rule,'' which prohibited certain creditor remedies in 
consumer credit contracts.\3\ Congress has also enacted numerous 
statutes limiting companies' ability to use certain one-sided contract 
terms, such as through inclusion of anti-waiver provisions in several 
consumer financial laws \4\ and passage of the Consumer Review Fairness 
Act of 2016, which prohibits companies that use form contracts from 
restricting consumers' right to provide negative reviews.\5\ The CFPB 
has also recently issued guidance warning companies that they could 
violate the law by using unenforceable terms and conditions in their 
consumer contracts, including terms and conditions in violation of the 
Consumer Review Fairness Act.\6\
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    \3\ Credit Practices Rule, 49 FR 7740 (Mar. 1, 1984).
    \4\ See, e.g., 10 U.S.C. 987(e)(2) (expressly prohibiting 
waivers of right to recourse under any State or Federal law in 
contracts with covered servicemembers).
    \5\ Public Law 114-258, codified at 15 U.S.C. 45b.
    \6\ Consumer Fin. Prot. Bureau, CFPB Consumer Financial 
Protection Circular 2024-03, Unlawful and unenforceable contract 
terms and conditions, (June 4, 2024), https://www.consumerfinance.gov/compliance/circulars/consumer-financial-protection-circular-2024-03/.
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    While defenders of civil liberties rightly focus on the risk of 
government infringement on constitutional freedoms, the CFPB is also 
concerned about large consumer financial companies' use of contracts of 
adhesion to curtail those same rights, especially due process, the 
freedom to benefit from a contract, the rule of law as established by 
democratically elected officials, and free expression. The CFPB is also 
concerned that certain terms used in these contracts deny consumers the 
benefits of a free market--one that is ``fair, transparent, and 
competitive.'' \7\ Under the CFPA, the CFPB may issue rules applicable 
to providers of consumer financial products or services (known as 
``covered persons'' under the statute) to identify and prevent 
``unfair,

[[Page 3567]]

deceptive, or abusive acts or practices.'' \8\ The CFPB is relying on 
this authority in this proposed rule to protect consumers from harms 
that often arise from contracts of adhesion used to constrain 
fundamental rights and freedoms.
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    \7\ 12 U.S.C. 5511(a).
    \8\ 12 U.S.C. 5531(b).
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    First, the CFPB is proposing to codify the Credit Practices Rule as 
applied to covered persons subject to the CFPA. As noted above, the FTC 
first issued the Credit Practices Rule in 1984. Although that rule 
applied only to creditors within the FTC's jurisdiction, banking 
regulators subsequently issued their own credit practices rules 
applicable to banks, Federal credit unions, and savings 
associations.\9\ The rules issued by the banking regulators were 
repealed upon enactment of the CFPA (which transferred those agencies' 
consumer financial protection authorities to the CFPB). However, in 
2014 the Federal financial regulators--including the CFPB--issued joint 
interagency guidance clarifying that financial institutions could 
violate the law by including in consumer credit contracts any 
provisions prohibited by the Credit Practices Rule.\10\ Thus, in this 
proposed rule, the CFPB is codifying the Credit Practices Rule with 
regard to all covered persons, and the CFPB does not anticipate that 
this provision of the rule will have a substantial material effect on 
the market as covered persons are already likely to be in compliance 
with these prohibitions.
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    \9\ These regulations were previously codified at: 12 CFR 227.11 
through 227.16 (part of Regulation AA) (banks); 12 CFR 535.1 through 
535.5 (savings associations); 12 CFR 706.1 through 706.5 (Federal 
credit unions).
    \10\ Board of Governors of the Federal Reserve, et al. 
Interagency Guidance Regarding Unfair or Deceptive Credit Practices 
(Aug. 22, 2014), https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20140822a2.pdf. The guidance highlighted 
that the repeal of the banking regulators' credit practices rules 
``should not be construed as a determination by the Agencies that 
the credit practices described in [the] former regulations are 
permissible'' and that ``the Agencies may determine that statutory 
violations exist even in the absence of a specific regulation 
governing the conduct.'' Id. at 2.
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    Second, the CFPB is proposing to forbid covered persons from 
including in their consumer contracts any terms or conditions that 
purport to waive substantive legal rights and protections, that reserve 
to the covered person the right to unilaterally amend a material term 
of the contract, or that restrain a consumer's lawful free expression. 
The CFPB has preliminarily concluded that use of these clauses may 
constitute an unfair or deceptive act or practice.
    The CFPB requests comment on all aspects of the proposal.

II. Background for Proposed Rule

A. Contracts of Adhesion

    In today's consumer economy, contracts of adhesion are inescapable. 
In banking, retail, insurance, health care, travel, or virtually any 
other sector, they are ubiquitous in everyday transactions. A contract 
of adhesion is a standard-form contract for a product or service with a 
fixed set of terms or conditions. The contract--which is often lengthy, 
complex, and full of boilerplate language or fine print--will have been 
drafted by the company and is presented to the consumer on a ``take it 
or leave it'' basis. The consumer usually has little ability to read 
the contract and no opportunity to negotiate its terms.\11\ If the 
consumer wants the product or service offered by the company, they must 
accept the contract's terms in totality. The company will use the same 
standard-form contract for every consumer with respect to the product 
or service at issue and will typically enter into thousands (or even 
millions) of versions of the same contract with its consumers. 
Altogether, the elements of a contract of adhesion create a deep 
imbalance of power between the contracting parties. ``[O]n the one side 
there is the ordinary individual and on the other a monopoly or 
powerful organi[z]ation with desirable goods or services to supply. The 
choice between not making a contract or making it on the only terms 
available is no choice at all.'' \12\
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    \11\ Todd D. Rakoff, Contracts of Adhesion: An Essay in 
Reconstruction, 96 Harv. L. Rev. 1173, 1176-77 (1983) (defining a 
contract of adhesion).
    \12\ H.B. Sales, Standard Form Contracts, 16 Mod. L. Rev. 318 
(1953).
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    In the experience of the CFPB, contracts of adhesion are widely 
used in the market for consumer financial products and services. When 
consumers want to take out a mortgage, apply for a new credit card, 
open a checking account, subscribe to a digital payment app, or engage 
in any type of routine consumer financial transaction, they are almost 
always presented with a standard-form contract. The FTC noted four 
decades ago that consumer finance companies ``[u]niversally make use of 
standardized forms in extending credit to consumer[s]. These forms are 
prepared for creditors or obtained by them, and the completed contract 
is presented to the prospective borrower on a `take it or leave it 
basis.' '' \13\ More recently, the U.S. Supreme Court observed that 
``the times in which consumer contracts were anything other than 
adhesive are long past.'' \14\
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    \13\ 49 FR 7745.
    \14\ AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 346-47 
(2011).
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    Standard-form contracts have long been used in the consumer 
marketplace, and standardization does not necessarily undermine 
consumer welfare. Standard-form contracts can lower transaction costs 
by making transactions more uniform, efficient, and expedient. Indeed, 
given the size and transaction volume of the consumer economy, it would 
be impractical for consumer contracts to be drafted and negotiated on 
an individual basis. ``The costs of negotiating with each customer 
would surely outweigh the benefits that would result from individually 
tailored contracts.'' \15\
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    \15\ 49 FR 7746.
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    But many standard-form contracts are used in consumer transactions 
today to do more than just establish the terms for the basic structure 
of a business relationship. They are also used to give large 
corporations undue economic advantage and constrain the personal 
autonomy and freedom of individual consumers. Because companies (and 
their lawyers) draft standard-form contracts, they have broad 
discretion in what terms and conditions to include. Contracts of 
adhesion will, of course, contain the ``deal terms'' of the transaction 
between the consumer and the company, which consumers are typically 
aware of in contrast to fine print clauses. For example, in a consumer 
credit transaction, the contract would include the amount borrowed, the 
repayment amount, the interest rate, and the repayment schedule. But 
over time, companies have realized that they could also include other 
ancillary terms and conditions that limit consumer rights and 
protections and shield the company from legal liability. These types of 
clauses have little to do with administering the transaction between 
the company and consumer, and they are almost always one-sided. They 
benefit or insulate the company but provide little, if any, added value 
to the consumer.
    In particular, with the advent of online contracting, companies are 
more readily able to use standard-form contracts to protect their own 
economic interests.\16\ Today, many transactions occur electronically, 
and online contracting with features such as ``click-through'' 
contracts are the norm, making

[[Page 3568]]

it easy for consumers to provide their electronic assent to contracts 
of adhesion. The electronic medium has encouraged many companies to add 
even more fine-print terms into those contracts. ``Because it is now 
trivial to attach a complex, one-sided `contract' to virtually any 
consumer transaction, more and more companies do so.'' \17\ Electronic 
contracting also makes it more difficult for consumers to understand 
these contracts. The terms and conditions in electronic form contracts 
may not be visible on the page where the consumer is asked to indicate 
their agreement; consumers may be required to do additional clicking or 
downloading to view the terms and conditions. Some terms or conditions 
may be de-emphasized. In some cases, companies may also engage in risky 
digital design practices--termed ``dark patterns''--that obscure 
certain terms and conditions in adhesion contracts or the adhesion 
contract itself.\18\
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    \16\ Recent research suggests the problem of one-sided contracts 
is a growing phenomenon. See e.g., Tim R. Samples et al., TL;DR: The 
Law and Linguistics of Social Platform Terms-of-Use, 39 Berkeley 
Tech. L.J. 47, 105 (2024).
    \17\ Mark A. Lemley, The Benefit of the Bargain, 2023 Wis. L. 
Rev. 237, 256 (2023).
    \18\ See generally FTC Staff Report, Bringing Dark Patterns to 
Light, at 7 (Sept. 1, 2022).
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    Given the complexity of fine print terms in contracts of adhesion, 
it should come as no surprise that consumers do not really provide 
meaningful assent to these terms. As many academic studies have shown, 
the vast majority of consumers pay little or no attention to such terms 
when reviewing or signing a standard-form contract. In one prominent 
study, the authors examined the extent to which potential buyers of 
software read End User License Agreements (EULAs), which are contracts 
that govern the use of software products. The study tracked nearly 
50,000 consumers across 90 software companies, and found that 0.2 
percent of consumers access the EULA for at least one second.\19\ Two 
recent studies found that online contracts are often unreadable 
according to scientific readability standards and lack basic 
organizational features like a table of contents or useful headings to 
help consumers locate important information in the contract.\20\ To the 
extent consumers read a standard-form contract at all, they are likely 
to focus on salient terms such as price.\21\
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    \19\ Yannis Bakos et al., Does Anyone Read the Fine Print?, 
Testing a Law and Economics Approach to Standard Form Contracts, 43 
U. Chicago J. of Legal Studies 1, 3 (2014); see also, e.g., Carl 
Schneider & Omri Ben-Shahar, The Failure of Mandated Disclosure, 159 
U. Penn. L. Rev. 647, 671 (2011) (reciting research that ``suggests 
that almost no consumers read [contract] boilerplate, even when it 
is fully and conspicuously disclosed'').
    \20\ Uri Benoliel & Shmuel Becher, The Duty to Read the 
Unreadable, 60 B.C. L. Rev. 2255, 2277-78 (2019); Uri Benoliel & 
Shmuel Becher, Messy Contracts, 2024 U. of Ill. L. Rev. 893, 917-18 
(2024).
    \21\ See George L. Priest, A Theory of the Consumer Product 
Warranty, 90 Yale L.J. 1297, 1304-06 (1981).
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    Nor is it feasible for consumers to comparison-shop for fine print 
terms. As an initial matter, many providers in a market may use similar 
terms, making comparison-shopping a futile exercise.\22\ ``If 80 
percent of creditors include a certain clause in their contracts, for 
example, even the consumer who examines contracts from three different 
sellers has a less than even chance of finding a contract without the 
clause.'' \23\ And even if consumers were to try to compare such terms, 
they would often find it difficult to do so because companies draft 
them using complex language and terminology.\24\ Moreover, many fine-
print terms relate to consequences that would occur only if the 
consumer breaches the contract or a problem with the transaction 
otherwise surfaces. Consumers can find it difficult to predict or 
envision such scenarios ex ante, meaning that fine-print terms may not 
resonate with consumers when they initially enter into an agreement 
with a provider.\25\
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    \22\ See generally Marcel Kahan & Michael Klausner, 
Standardization and Innovation in Corporate Contracting (or ``The 
Economics of Boilerplate''), 83 Va. L. Rev. 713 (1997) (discussing 
network effects which promote use of inefficient boilerplate); see 
also Benoliel and Becher, The Duty to Read the Unreadable, supra 
note 20, at 2291-94.
    \23\ 49 FR 7746.
    \24\ Id. at 7746-47.
    \25\ Id. at 7747.
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    For decades, courts, regulators, and scholars have warned about the 
risks and dangers associated with contracts of adhesion. Perhaps the 
most famous such pronouncement is the D.C. Circuit's decision in 
Williams v. Walker-Thomas Furniture Co.\26\ In that case, the consumers 
had purchased items from a furniture store on a lease-to-own basis, and 
the agreement--which was a standard-form contract--provided that title 
to the items would remain with the store until monthly payments equaled 
the stated value of the items. When the consumers did not make all the 
payments, the store sued them to take repossession of the property. The 
consumers claimed the contract was unenforceable because it was 
unconscionable. Reversing the lower court, the D.C. Circuit explained 
that contracts of adhesion can be invalidated on grounds of 
unconscionability when they are ``unfair'':
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    \26\ 350 F.2d 445 (D.C. Cir. 1965).
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    Unconscionability has generally been recognized to include an 
absence of meaningful choice on the part of one of the parties 
together with contract terms which are unreasonably favorable to the 
other party . . . . In many cases the meaningfulness of the choice 
is negated by a gross inequality of bargaining power. The manner in 
which the contract was entered is also relevant to this 
consideration. Did each party to the contract, considering his 
obvious education or lack of it, have a reasonable opportunity to 
understand the terms of the contract, or were the important terms 
hidden in a maze of fine print and minimized by deceptive sales 
practices? Ordinarily, one who signs an agreement without full 
knowledge of its terms might be held to assume the risk that he has 
entered a one-sided bargain. But when a party of little bargaining 
power, and hence little real choice, signs a commercially 
unreasonable contract with little or no knowledge of its terms, it 
is hardly likely that his consent, or even an objective 
manifestation of his consent, was ever given to all the terms. In 
such a case the usual rule that the terms of the agreement are not 
to be questioned should be abandoned and the court should consider 
whether the terms of the contract are so unfair that enforcement 
should be withheld.\27\
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    \27\ Id. at 449-50.
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    Unfair boilerplate terms in contracts of adhesion were also the 
basis for the FTC's Credit Practices Rule. As discussed in additional 
detail below in section IV, the Credit Practices Rule prohibited 
lenders from using certain remedial provisions in consumer credit 
contracts, including confessions of judgment, waivers of exemption, 
wage assignments, and security interests in household goods. Based on 
an extensive evidentiary record, the FTC concluded that these clauses 
were unlawful because lenders' uses of such clauses were unfair acts or 
practices.
    This view is also encapsulated in the recently adopted Restatement 
of Consumer Contracts, which warns that ``consumer contracts present a 
fundamental challenge to the law of contracts, arising from the 
asymmetry in information, sophistication, and stakes between the 
parties to these contracts--the business and the consumers.'' \28\ On 
one side of the transaction ``stands a well-informed and counseled 
business party, entering numerous identical transactions, with the 
tools and sophistication to understand and draft detailed legal terms 
and design practices that serve its commercial goals,'' while on the 
other ``stand consumers who are informed only about some core aspects 
of the transaction, but rarely about the list of standard terms.'' \29\ 
The Restatement thus notes that ``[b]ecause consumers rarely read or 
review the non-core standard contract terms, . . . the doctrine of 
unconscionability is a primary tool against the inclusion of

[[Page 3569]]

intolerable terms in a consumer contract.'' \30\
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    \28\ Restatement of the Law, Consumer Contracts, Introduction 
(Am. L. Inst. 2024).
    \29\ Id.
    \30\ Id. section 6 cmt.1.
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B. The Proposed Rule

    There are many types of fine print terms and conditions in 
contracts of adhesion. The CFPB's proposal does not seek to prescribe 
all of these terms. Rather, the CFPB is proposing to re-codify the 
Credit Practices Rule under Regulation AA to reinforce the prohibition 
of certain contract clauses that, for example, impede on consumers' 
right to due process, and is adding to Regulation AA additional 
prohibited clauses that implicate other fundamental or constitutional 
rights. This includes:
     Clauses that waive provisions of law designed by 
democratically elected officials to benefit or protect consumers.
     Clauses that reserve a company's discretion to amend a 
material term of the contract unilaterally.
     Clauses that restrain a consumer's free expression by, for 
example, limiting a consumer's right to provide a negative review or 
even engage in certain disfavored political speech.
    While companies may view these clauses as a way to save money or 
limit liability, for consumers these clauses have significant impacts--
they implicate fundamental principles of personal freedom and 
democratic governance. For example, clauses limiting free expression 
restrict citizens' ability to exercise free speech that government 
agencies could not prohibit under the First Amendment. Clauses that 
permit lenders to take citizens' unsecured property without any due 
process or just compensation amounts to a private taking--were the 
company a Federal government actor, it would potentially violate the 
Due Process and Takings Clauses of the Fifth Amendment. Citizens' 
freedom to benefit from a contract is undermined when a counterparty 
can unilaterally change the core terms of a contract at any time 
without notice and consent. And the rule of law, as established by 
democratically elected State and Federal legislatures, is undermined if 
large companies can nullify those laws in consumer contracts.
    The CFPB has authority to issue rules to prevent unfair or 
deceptive acts or practices by providers of consumer financial products 
or services (known as ``covered persons'').\31\ Under that authority, 
the CFPB proposes to prohibit covered persons from including, using, 
enforcing, or otherwise relying on these types of clauses in a contract 
for a consumer financial product or service.
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    \31\ 12 U.S.C. 5531(b).
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    Lastly, one of the reasons for proposing this rule is to grant 
State law enforcement new authority to enforce the existing Credit 
Practices Rule and the additional prohibitions against national 
banks.\32\ State attorneys general cannot yet use the CFPA's 
substantial remedies, including Civil Money Penalties,\33\ to stop some 
of the largest banks in the country (which are national banks) from, 
for example, using confessions of judgment or debanking a consumer for 
inappropriate reasons. This rule, if finalized, would grant State 
attorneys general that authority pursuant to section 1042(a) of the 
CFPA.
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    \32\ State attorneys general and regulators usually have 
authority to enforce the prohibition against unfair, deceptive, or 
abusive acts or practices in the CFPA. 12 U.S.C. 5552(a). However, 
State officials may not bring a civil action against a national bank 
or Federal savings association for violations of the CFPA, unless it 
is under a regulation prescribed by the CFPB. 12 U.S.C. 
5552(a)(2)(A) and (B). Thus, while many of the practices in this 
rulemaking are already enforceable by the CFPB against national 
banks and other covered persons, State officials cannot bring an 
action under the CFPA to prevent these practices if used by national 
banks until the CFPB codifies the prohibitions by rule.
    \33\ 12 U.S.C. 5565(c) (creating penalty authority of up to 
$5,000 per violation per day, $25,000 per violation per day if the 
violations are ``recklessly'' committed, and $1,000,000 per 
violation per day if the violations are ``knowingly'' committed).
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III. Consultation With Other Agencies

    In developing this proposed rule, the CFPB has consulted with the 
Federal Trade Commission (FTC), as well as with the Board of Governors 
of the Federal Reserve System (Board), the Federal Deposit Insurance 
Corporation (FDIC), the National Credit Union Administration (NCUA), 
and the Office of the Comptroller of the Currency (OCC) on, among other 
things, consistency with any prudential, market, or systemic objectives 
administered by such agencies.

IV. Scope of Proposed Rule

    The proposed rule would generally apply to ``covered persons'' 
under the CFPA (subject to certain exceptions discussed below). A 
covered person is ``(A) any person that engages in offering or 
providing a consumer financial product or service; and (B) any 
affiliate of a person described in subparagraph (A) if such affiliate 
acts as a service provider to such person.'' \34\ The CFPA covers a 
broad array of financial products or services offered or provided to 
consumers, including (but not limited to) credit, real or personal 
property leases, real estate settlement services, deposits, payment 
processing, and credit reporting.\35\ Subject to certain exceptions 
discussed below, any person offering or providing such a consumer 
financial product or service--or an affiliate of such a person acting 
as a service provider to the person--would thus be covered by the 
proposed rule. Such a person would be subject to the prohibition on 
certain credit practices discussed in section V and the prohibition on 
certain other terms and conditions in contracts for consumer financial 
services discussed in section VI. Notably, the practices re-codified 
from the existing Credit Practices Rule in subpart B only apply with 
regard to credit transactions, while the additional terms in subpart C 
apply to all consumer financial products or services including deposit 
accounts, payments, and other services.
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    \34\ 12 U.S.C. 5481(6).
    \35\ See 12 U.S.C. 5481(15).
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    Section 1027.102 of the proposed rule would exempt two categories 
of covered persons from the rule:
    First, under Sec.  1027.102(a) the rule would not apply to ``any 
person to the extent that it is providing a product or service in 
circumstances excluded from the CFPB's rulemaking authority pursuant to 
12 U.S.C. 5517 or 5519.'' Under those sections, the CFPB may not 
exercise its CFPA rulemaking authority over certain persons or 
activities (which includes rules issued under 12 U.S.C. 5531). The CFPB 
preliminary concludes that this approach is appropriate because the 
CFPB lacks authority to apply this rulemaking to such persons or 
activities. However, this applies only ``to the extent'' that a person 
is beyond the CFPB's rulemaking authority. For example, if a covered 
person offers a consumer financial product or service that is excluded 
from the CFPB's rulemaking authority under 12 U.S.C. 5517 and another 
consumer financial product or service that is not excluded, the 
proposed rule would apply to the covered person's offering or provision 
of the latter product or service (even though it would not apply to the 
former).
    Second, under Sec.  1027.102(b), subpart C of the rulemaking (i.e., 
the prohibitions on clauses related to waivers of law, unilateral 
amendments, and free expression) would not apply to a ``small 
business,'' ``small organization,'' or ``small governmental 
jurisdiction'' as those terms are defined in 5 U.S.C. 601. A ``small 
business'' has ``the same meaning as the term `small business concern' 
under section 3 of the Small Business Act.'' \36\ A ``small business 
concern'' is ``one which is independently owned and operated and

[[Page 3570]]

which is not dominant in its field of operation,'' \37\ or which (along 
with its affiliates) is at or below the Small Business Administration 
(SBA) standard listed in 13 CFR part 121 for its primary industry as 
described in 13 CFR 121.107. A ``small organization'' is ``any not-for-
profit enterprise which is independently owned and operated and is not 
dominant in its field.'' \38\ A ``small governmental jurisdiction'' 
means ``governments of cities, counties, towns, townships, villages, 
school districts, or special districts, with a population of less than 
fifty thousand.'' \39\
---------------------------------------------------------------------------

    \36\ 5 U.S.C. 601(3).
    \37\ 15 U.S.C. 632(a).
    \38\ 5 U.S.C. 601(4).
    \39\ Id. sec. 601(5).
---------------------------------------------------------------------------

    The CFPB preliminary concludes that applying subpart C of the 
proposed rule to large entities would be appropriate because they are 
capable of imposing their terms on consumers and have more resources to 
enforce them. Studies have shown that large companies routinely use 
such terms,\40\ often applying to thousands or millions of consumers. 
Furthermore, the threat of the use of private contracting to oppress by 
constraining fundamental freedoms is greater when a consumer is dealing 
with a company with more market power and more resources. Large 
companies are more likely than small companies to have superior 
bargaining power over consumers, giving them more opportunity to impose 
one-sided terms in contracts of adhesion. The CFPB intends to monitor 
the market and determine whether an expansion of coverage to smaller 
entities may be necessary and appropriate at a later time.
---------------------------------------------------------------------------

    \40\ See e.g., Samples et. al., TL;DR: The Law and Linguistics 
of Social Platform Terms-of-Use, supra note 16, at 105; Andrea J. 
Boyack, Abuse of Contract: Boilerplate Erasure of Consumer 
Counterparty Rights at 51, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4756735 (Mar. 12, 2024) (forthcoming in the. 
Iowa L. Rev.).
---------------------------------------------------------------------------

    The CFPB also considered--but is not proposing--an exception for 
State or Federal entities. The CFPB is unaware of any government 
entities that provide consumer financial products or services with 
contracts that include the terms at issue in this proposal. That is 
likely the case because doing so could violate various constitutional 
constraints on government actors, including the First Amendment right 
to free speech, the right to Due Process, the Takings Clause, and the 
substantive rights being waived in legal waivers.
    The CFPB generally seeks comment on the coverage of the proposed 
rule, including whether the scope should be narrowed or expanded and 
whether additional exclusions would be appropriate.

V. Prohibited Credit Practices

Overview

    Subpart B of the proposed rule would codify for covered persons the 
already existing FTC Credit Practices Rule, which renders unlawful 
certain remedial provisions in consumer credit contracts.
    The FTC first issued the Credit Practices Rule in 1984 pursuant to 
its authority to prohibit unfair or deceptive acts or practices.\41\ 
The banking regulators subsequently issued their own companion credit 
practices rules applicable to banks, Federal credit unions, and savings 
associations.\42\ The CFPA repealed the rulemaking authority of the 
banking regulators under the FTC Act, and the regulators consequently 
repealed their rules. However, the banking regulators and the CFPB 
issued a joint interagency guidance in 2014 clarifying their 
understanding that those credit practices may continue to violate the 
prohibition against unfair or deceptive practices in section 5 of the 
FTC Act and sections 1031 and 1036 of the CFPA.\43\
---------------------------------------------------------------------------

    \41\ 49 FR 7740.
    \42\ See 50 FR 16695 (Apr. 29, 1985) (Federal Reserve Board); 50 
FR 19325 (May 8, 1985) (FHLBB); 52 FR 35060 (Sept. 17, 1987) (NCUA).
    \43\ Interagency Guidance Regarding Unfair or Deceptive Credit 
Practices, supra note 10.
---------------------------------------------------------------------------

    The CFPB now proposes to re-codify the Credit Practices Rule for 
all covered persons, including those currently subject to the FTC's 
Credit Practices Rule and other entities formerly subject to the 
companion rules issued by the banking regulators. This proposal is not 
expected to change existing business conduct in light of the existing 
FTC rule and the fact that financial institutions generally continue to 
treat these contract terms as unlawful.

Discussion

    The FTC's Credit Practices Rule was based on an extensive 
evidentiary record. Over a two-year period, the FTC took testimony from 
more than 300 witnesses and subpoenaed the credit files of 12 large 
finance companies.\44\ The FTC explained that ``consumers' ability to 
avoid certain remedies depends on their ability to shop and compare the 
language of different credit contracts.'' However, the FTC also found 
that--given the prevalence of standard-form contracts in the consumer 
credit industry--``although consumers may be able to bargain over terms 
such as the price of credit and the number or size of payments, there 
is no bargaining over the boilerplate contract terms that define 
creditor remedies.'' \45\ The FTC concluded that these remedies and 
practices were unfair because they caused substantial injuries to 
consumers that were not reasonably avoidable, and offered no 
countervailing benefits to consumers or competition.
---------------------------------------------------------------------------

    \44\ 49 FR 7741.
    \45\ Id. at 7745.
---------------------------------------------------------------------------

    Specifically (and as discussed in more detail below), the FTC's 
Credit Practices Rule prohibits lenders from using any of the following 
provisions: a confession of judgment, a waiver of exemption, an 
assignment of wages, or a security interest in household goods. The 
rule also prohibits lenders from misrepresenting the nature or extent 
of cosigner liability to any person or obligating a cosigner unless the 
cosigner is informed prior to becoming obligated of the nature of the 
cosigner's liability. Finally, the rule prohibits lenders from levying 
or collecting any delinquency charge on a payment, when the only 
delinquency is attributable to late fees or delinquency charges 
assessed on earlier installments, and the payment is otherwise a full 
payment for the applicable period and is paid on its due date or within 
an applicable grace period.
    The Credit Practices Rule does not apply to banks, savings 
associations, or Federal credit unions.\46\ However, the FTC Act (at 
the time) also required the Federal Reserve Board, the National Credit 
Union Administration, and the Federal Home Loan Bank Board (FHLBB) 
(later superseded by the Office of Thrift Supervision (OTS)) to issue, 
within 60 days after the FTC issued a rule under its authority to 
prohibit unfair or deceptive acts or practices, ``substantially similar 
regulations prohibiting acts or practices of banks or savings and loan 
institutions . . . or Federal credit unions . . ., which are 
substantially similar to those prohibited by rules of the [FTC].'' \47\ 
The Board, NCUA, and FHLBB adopted such regulations in 1985,\48\ and 
those rules were codified at 12 CFR parts 227, 706, and 535. In issuing 
those rules, the agencies did not make new findings, evidence, or 
conclusions. They relied on the extensive findings by the FTC.
---------------------------------------------------------------------------

    \46\ 15 U.S.C. 45(a)(2).
    \47\ See formerly 15 U.S.C. 57a(f)(1).
    \48\ See 50 FR 16696 (Apr. 29, 1985) (Federal Reserve Board); 50 
FR 19325 (May 8, 1985) (FHLBB); 52 FR 35060 (Sept. 17, 1987) (NCUA).
---------------------------------------------------------------------------

    In 2010, the CFPA transferred Federal consumer protection functions 
from the Board, OTS, NCUA, and other Federal agencies to the CFPB.\49\ 
The CFPA also repealed the requirement in the FTC Act

[[Page 3571]]

for those agencies to issue companion rules applicable to banks, 
Federal credit unions, and thrifts. Those agencies duly repealed their 
versions of the Credit Practices Rule.\50\
---------------------------------------------------------------------------

    \49\ 12 U.S.C. 5581.
    \50\ See 81 FR 8133 (Feb. 18, 2016) (Board's repeal of Reg AA); 
79 FR 59627 (Oct. 3, 2014) (NCUA's repeal of credit practices rule). 
Under the Dodd-Frank Act, the rulemaking authority of the OTS 
relating to all Federal savings associations was transferred to the 
OCC on July 21, 2011. The OCC did not have authority at any time to 
promulgate regulations under section 5 of the FTC Act, either before 
or after enactment of the Dodd-Frank Act. For that reason, the OCC 
omitted the OTS version of the credit practices rule when it 
republished the regulations applicable to Federal savings 
associations. 76 FR 48950. (Aug. 9, 2011). Thus, the OTS's credit 
practices rule was effectively repealed as of July 21, 2011.
---------------------------------------------------------------------------

    However, the Federal financial regulators--including the CFPB--also 
issued a joint interagency guidance in 2014 clarifying that the repeal 
of the credit practices rule for banking institutions did not condone 
those credit practices, and that the agencies would remain vigilant 
about policing banks for use of the credit practices under their 
general authority to prohibit unfair or deceptive acts or practices:

    The Agencies are issuing this statement to clarify that the 
repeal of credit practices rules applicable to banks, savings 
associations, and Federal credit unions should not be construed as a 
determination by the Agencies that the credit practices described in 
these former regulations are permissible. The regulations were 
issued on the basis of extensive findings that identified the unfair 
or deceptive practices prohibited in the rules. The Agencies believe 
that, depending on the facts and circumstances, if banks, savings 
associations, and Federal credit unions engage in the unfair or 
deceptive practices described in these former credit practices 
rules, such conduct may violate the prohibition against unfair or 
deceptive practices in Section 5 of the FTC Act and Sections 1031 
and 1036 of the Dodd-Frank Act. The Agencies may determine that 
statutory violations exist even in the absence of a specific 
regulation governing the conduct.\51\
---------------------------------------------------------------------------

    \51\ Interagency Guidance Regarding Unfair or Deceptive Credit 
Practices, supra note 10.

    The CFPB has preliminarily concluded that it would be appropriate 
to codify the Credit Practices Rule with respect to covered persons 
within its jurisdiction. Many nonbank covered persons are already 
subject to the FTC's Credit Practices Rule, and the CFPB has authority 
to enforce the Credit Practices Rule against them. Although banks, 
Federal credit unions, and savings associations within the CFPB's 
jurisdiction are technically not subject to the Credit Practices Rule, 
they have been on notice under the 2014 interagency guidance that they 
could violate the CFPA's prohibition on unfair or deceptive practices 
if they engaged in the practices prohibited by the Credit Practices 
Rule, and any private or public enforcer enforcing a State or Federal 
law that parallels the FTC Act may have a cause of action under the 
same logic as the Credit Practices Rule. Thus, in order to avoid any 
confusion or uncertainty about whether covered persons within the 
CFPB's jurisdiction may use these credit practices, this proposed rule 
would clarify that these credit practices are unlawful for all covered 
persons.
    The CFPB notes that codifying the Credit Practices Rules for all 
covered persons would be consistent with one of the CFPB's primary 
objectives under the CFPA--to ensure that ``Federal consumer financial 
law is enforced consistently, without regard to the status of a person 
as a depository institution, in order to promote fair competition.'' 
\52\ Presently, nonbank entities remain subject to the Credit Practices 
Rule while banks, Federal credit unions, and savings associations are 
technically not (although they are of course subject to the 2014 
interagency statement). The CFPB preliminarily concludes that any 
differential treatment for banks and nonbanks regarding the practices 
covered by the rule would serve no regulatory objective and provide no 
added benefit for consumers. Since engaging in these practices may 
nonetheless violate Federal law (and harm consumers) regardless of the 
type of entity, and the banking regulators have made entities under 
their supervision aware of that possibility for more than a decade, the 
CFPB does not expect that codification of the proposed rule will place 
significant additional burdens on entities based on their type of 
business. Moreover, the CFPB anticipates that the proposal will clarify 
regulatory requirements for all market participants and ensure that 
compliance burdens do not vary arbitrarily, which will promote fair 
competition.
---------------------------------------------------------------------------

    \52\ 12 U.S.C. 5511(b)(4).
---------------------------------------------------------------------------

Description of Prohibited Credit Practices

    The credit practices that would be prohibited under this proposed 
rule are the same as those described in the FTC's Credit Practices 
Rule.\53\
---------------------------------------------------------------------------

    \53\ Section 1027.201 of the proposed rule includes certain 
definitions applicable to subpart B, including cosigner, earnings, 
household goods, and obligation. Additionally, under proposed Sec.  
1027.205, ``[a]n appropriate State agency may apply to the CFPB for 
a determination that (i) There is a State requirement or prohibition 
in effect that applies to any transaction to which a provision of 
this subpart applies; and (ii) The State requirement or prohibition 
affords a level of protection to consumers that is substantially 
equivalent to, or greater than, the protection afforded by this 
subpart.'' If the CFPB ``makes such a determination, the provision 
of this subpart will not be in effect in that State to the extent 
specified by the CFPB in its determination, for as long as the State 
administers and enforces the State requirement or prohibition 
effectively.'' A State agency may apply for an exemption under the 
same procedures as those set forth in appendix B to Regulation Z (12 
CFR part 1026).
---------------------------------------------------------------------------

    Confessions of judgment. Proposed Sec.  1027.202(a) would prohibit 
a ``cognovit or confession of judgment (for purposes other than 
executory process in the State of Louisiana), warrant of attorney, or 
other waiver of the right of notice and the opportunity to be heard in 
the event of suit or process thereon.'' The cognovit is a legal device 
whereby the consumer, as part of the credit contract, consents in 
advance to the creditor obtaining a judgment without prior notice or 
hearing. The consumer either confesses judgment in advance of default 
or authorizes the creditor or an attorney designated by the creditor to 
appear and confess judgment against the consumer.\54\
---------------------------------------------------------------------------

    \54\ 49 FR 7748-49.
---------------------------------------------------------------------------

    Waivers of exemption. Proposed Sec.  1027.202(b) would prohibit an 
``executory waiver or a limitation of exemption from attachment, 
execution, or other process on real or personal property held, owned 
by, or due to the consumer, unless the waiver applies solely to 
property subject to a security interest executed in connection with the 
obligation.'' Many State laws provide exemptions for certain property 
of a debtor from being seized or sold to satisfy the debt. A waiver of 
exemption in a credit contract requires a consumer to forfeit or limit 
such an exemption and allows such property to be seized and sold to 
satisfy the debt.\55\
---------------------------------------------------------------------------

    \55\ Id. at 7768-7769.
---------------------------------------------------------------------------

    Wage assignments. Proposed Sec.  1027.202(c) would prohibit an 
``assignment of wages or other earnings unless: (1) The assignment by 
its terms is revocable at the will of the debtor; (2) The assignment is 
a payroll deduction plan or preauthorized payment plan, commencing at 
the time of the transaction, in which the consumer authorizes a series 
of wage deductions as a method of making each payment; or (3) The 
assignment applies only to wages or other earnings already earned at 
the time of the assignment.'' \56\ A wage assignment is a contractual 
transfer by a debtor to a creditor of the

[[Page 3572]]

right to receive wages directly from the debtor's employer. To activate 
the assignment, the creditor simply submits it to the debtor's 
employer, who then pays all or a percentage of the debtor's wages to 
the creditor. The debtor releases the employer from any liability 
arising out of the employer's compliance with the wage assignment, and 
may waive any requirement that the creditor first establish or allege a 
default.\57\
---------------------------------------------------------------------------

    \56\ Proposed Sec.  1027.201(b) would define ``earnings'' as 
``compensation paid or payable to an individual or for the 
individual's account for personal services rendered or to be 
rendered by the individual, whether denominated as wages, salary, 
commission, bonus, or otherwise, including periodic payments 
pursuant to a pension, retirement, or disability program.''
    \57\ Id. at 7755.
---------------------------------------------------------------------------

    Security interests in household goods. Proposed Sec.  1027.202(d) 
would prohibit a ``nonpossessory security interest in household goods 
other than a purchase money security interest.'' A security interest in 
household goods grants a creditor the right to seize personal items 
from a consumer. The rule (proposed Sec.  1027.201(c)) would define 
``household goods'' as ``clothing, furniture, appliances, one 
television and one radio, linens, china, crockery, kitchenware, and 
personal effects (including wedding rings) of a consumer and a 
consumer's dependents.'' \58\
---------------------------------------------------------------------------

    \58\ The term would not include: (1) Works of art; (2) 
Electronic entertainment equipment (except one television and one 
radio); (3) Items acquired as antiques; that is, items over one 
hundred years of age, including such items that have been repaired 
or renovated without changing their original form or character; and 
(4) Jewelry (other than wedding rings).
---------------------------------------------------------------------------

    Cosigners. Consumers who do not meet a creditor's standards for 
creditworthiness may be required to obtain one or more ``cosigners'' 
who agree to be liable for the debt. A cosigner is required to pay if 
the debtor defaults, but the cosigner receives no monetary 
consideration for undertaking the obligation.\59\ Proposed Sec.  
1027.203(a) would make it unlawful for a covered person ``directly or 
indirectly, to misrepresent the nature or extent of cosigner liability 
to any person,'' or ``directly or indirectly, to obligate a cosigner 
unless the cosigner is informed prior to becoming obligated, which in 
the case of open end credit shall mean prior to the time that the 
agreement creating the cosigner's liability for future charges is 
executed, of the nature of the cosigner's liability.'' Proposed Sec.  
1027.203(b) would further require a covered person to provide a 
cosigner with a disclosure, consisting of a separate document that 
shall contain the following statement and no other prior to the 
cosigner being obligated (which in the case of open end credit shall 
mean prior to the time that the agreement creating the cosigner's 
liability for future charges is executed):\60\
---------------------------------------------------------------------------

    \59\ 49 FR at 7773. The proposed rule (section 1027.201(a)) 
would define a ``cosigner'' as ``a natural person who renders 
themself liable for the obligation of another person without 
compensation,'' including ``any person whose signature is requested 
as a condition to granting credit to another person, or as a 
condition for forbearance on collection of another person's 
obligation that is in default.'' But the term ``shall not include a 
spouse whose signature is required on a credit obligation to perfect 
a security interest pursuant to State law.'' Furthermore, ``[a] 
person who does not receive goods, services, or money in return for 
a credit obligation does not receive compensation within the meaning 
of this definition.'' The rulemaking would also state that a person 
is a cosigner ``whether or not they are designated as such on a 
credit obligation.''
    \60\ Under proposed Sec.  1027.203(c), a covered person that 
provides the disclosure required by proposed Sec.  1027.203(b) ``may 
not be held in violation of paragraph (a) of this section.''

---------------------------------------------------------------------------
NOTICE TO COSIGNER

    You are being asked to guarantee this debt. Think carefully 
before you do. If the borrower doesn't pay the debt, you will have 
to. Be sure you can afford to pay if you have to, and that you want 
to accept this responsibility.
    You may have to pay up to the full amount of the debt if the 
borrower does not pay. You may also have to pay late fees or 
collection costs, which increase this amount.
    The creditor can collect this debt from you without first trying 
to collect from the borrower. The creditor can use the same 
collection methods against you that can be used against the 
borrower, such as suing you, garnishing your wages, etc. If this 
debt is ever in default, that fact may become a part of your credit 
record.
    This notice is not the contract that makes you liable for the 
debt.

    Pyramiding late charges. Proposed Sec.  1027.204(a) would make it 
unlawful, ``[i]n connection with collecting a debt arising out of an 
extension of credit to a consumer,'' for a covered person ``directly or 
indirectly, to levy or collect any delinquency charge on a payment, 
which payment is otherwise a full payment for the applicable period and 
is paid on its due date or within an applicable grace period, when the 
only delinquency is attributable to late fees or delinquency charges 
assessed on earlier installments.'' \61\ This practice is called 
``pyramiding'' late charges and 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. ``In `pyramiding' the 
accounting method works in this fashion: If a consumer's payment is due 
on the first day of January, for example, and the payment is not made 
until the 20th day of that month, the creditor assesses a late charge, 
for example, $5. The February payment and all subsequent payments are 
made on time. However, by allocating $5 of the February payment to the 
January late charge and only the remainder to the February payment, the 
creditor causes the February payment to be $5 `short', hence 
delinquent. Timely payments in succeeding months are given the same 
treatment, so that there is a delinquency or late charge for each 
month.'' \62\
---------------------------------------------------------------------------

    \61\ For purposes of this section, proposed Sec.  1027.204(b) 
states that ``collecting a debt means any activity, other than the 
use of judicial process, that is intended to bring about or does 
bring about repayment of all or part of money due (or alleged to be 
due) from a consumer.''
    \62\ 49 FR 7771.
---------------------------------------------------------------------------

D. Legal Authority

    Section 1031(b) of the CFPA provides the CFPB with authority to 
prescribe rules to identify and prevent unfair, deceptive, or abusive 
acts or practices (UDAAPs). Specifically, section 1031(b) authorizes 
the CFPB to prescribe rules ``applicable to a covered person or service 
provider identifying as unlawful unfair, deceptive, or abusive acts or 
practices in connection with any transaction with a consumer for a 
consumer financial product or service, or the offering of a consumer 
financial product or service.'' \63\ Section 1031(b) of the Act further 
provides that ``[r]ules under this section may include requirements for 
the purpose of preventing such acts or practices.'' \64\ The CFPB may 
declare an act or practice to be unfair if it ``causes or is likely to 
cause substantial injury to consumers which is not reasonably avoidable 
by consumers; and such substantial injury is not outweighed by 
countervailing benefits to consumers or to competition.'' The CFPB 
preliminary concludes that the credit practices it proposes to prohibit 
are unfair for the same reasons as the FTC in the Credit Practices 
Rule.
---------------------------------------------------------------------------

    \63\ 12 U.S.C. 5531(b).
    \64\ Id.
---------------------------------------------------------------------------

    First, the FTC found ``substantial consumer economic or monetary 
injuries from the use of these creditor remedies'' \65\:
---------------------------------------------------------------------------

    \65\ 49 FR 7743.
---------------------------------------------------------------------------

     Confessions of judgment deprive consumers of a notice of 
suit or hearing and opportunity to present claims and defenses. And 
once obtained, the confessed judgment can be turned into a lien on the 
consumer's property.\66\
---------------------------------------------------------------------------

    \66\ Id. at 7753-54.
---------------------------------------------------------------------------

     A waiver of exemption clause or a security interest in 
household goods can lead to the consumer losing the basic necessities 
of life and requiring the consumer to replace these items or face 
destitution.\67\
---------------------------------------------------------------------------

    \67\ Id. at 7743-44, see also id. at 7769-70.
---------------------------------------------------------------------------

     Wage assignment can occur without the due process 
safeguards of a hearing

[[Page 3573]]

and an opportunity to present defenses and counterclaims. This can lead 
to job loss or severely reduced income, either one of which could 
prevent the consumer from providing for his or her family or cause 
default on other obligations.\68\
---------------------------------------------------------------------------

    \68\ Id. at 7757-59.
---------------------------------------------------------------------------

     When a creditor seizes household goods pursuant to a non-
purchase money security interest in such goods, debtors lose property 
which is of great value to them and little value to the creditor. A 
non-purchase money security interest in household goods also enables a 
creditor to threaten the loss of all personal property located in the 
home, which may lead a debtor to make repayment arrangements that they 
would not willingly take but for the security interest.\69\
---------------------------------------------------------------------------

    \69\ Id. at 7762-7765.
---------------------------------------------------------------------------

     Pyramiding of late charges results in the consumer being 
unknowingly assessed multiple late charges for a single late payment, 
even though subsequent payments are timely made.\70\
---------------------------------------------------------------------------

    \70\ Id. at 7772.
---------------------------------------------------------------------------

     When creditors fail to inform potential cosigners of their 
obligations and liability, the cosigners may unexpectedly be subject to 
collection tactics when the principal debtor defaults (including the 
remedies described above). The sudden liability that can result from 
cosigner status can cause over-extension when a consumer is confronted 
with a debt, the timing of which cannot be controlled by the cosigner 
because it is due to nonpayment by the principal debtor. Because of the 
range of potential liabilities, many consumers might not have become 
cosigners had they known the likely costs of doing so. Cosigners thus 
undertake obligations which they might not have undertaken had they 
understood them and suffer economic and other hardship as a result when 
called upon to repay.\71\
---------------------------------------------------------------------------

    \71\ Id. at 7774. The FTC also noted that where a creditor 
affirmatively misrepresents a cosigner's obligations--for example, 
by telling the cosigner that they are merely a reference for the 
primary debtor--such a statement would be a deceptive act or 
practice because it would be misleading and material to a reasonable 
consumer. Id. at 7776. The FTC also has taken action against a for-
profit medical school for failing to provide the cosigner notice as 
required by the Credit Practices Rule. See FTC v. Human Res. Dev. 
Servs. Inc. dba Saint James School of Medicine (St. James Medical 
School), No. 22-cv-1919 (N.D. Ill. filed Apr. 14, 2022), https://www.ftc.gov/legal-library/browse/cases-proceedings/2123034-human-resource-development-services-inc-dba-saint-james-school-medicine-ftc-v. Instead, defendants included a notice that failed to include 
the specific language required by the Credit Practices Rule and that 
appeared in the middle of the contract. See id.
---------------------------------------------------------------------------

    Second, the FTC concluded that these injuries were not reasonably 
avoidable, principally because these credit practices were typically 
incorporated into standard form contracts ``over most of which there is 
no bargaining.'' \72\ The FTC noted that consumers have ``limited 
incentives to search out better remedial provisions in credit 
contracts.'' \73\ For one thing, the ``substantive similarities of 
contracts from different creditors mean that search is less likely to 
reveal a different alternative.'' \74\ The FTC also noted that because 
these credit remedies are relevant only once a consumer defaults, and 
default is relatively infrequent, ``consumers reasonably concentrate 
their search on such factors as interest rates and payment terms.'' 
\75\ The FTC also explained that comparison-shopping for credit 
contracts is difficult ``because contracts are written in obscure 
technical language, do not use standardized terminology, and may not be 
provided before the transaction is consummated.'' \76\ Nor could 
consumers avoid these credit remedies by avoiding default. ``When 
default occurs, it is most often a response to events such as 
unemployment or illness that are not within the borrower's control. 
Thus, consumers cannot reasonably avoid the substantial injury these 
creditor remedies may inflict.'' \77\
---------------------------------------------------------------------------

    \72\ 49 FR 7744.
    \73\ Id.
    \74\ Id.
    \75\ Id.
    \76\ Id.
    \77\ Id.
---------------------------------------------------------------------------

    Third, the FTC concluded that any countervailing benefits from 
these practices did not outweigh the substantial injuries. The FTC 
explained that even if restrictions on these contract clauses would 
result in costs to creditors--for example, increased collection costs, 
increased screening costs, larger legal costs, or increases in bad debt 
losses--the ``possible magnitude of these costs is diminished by the 
fact that the rule leaves untouched a wide variety of more valuable 
creditor remedies,'' such as repossession, suit, garnishment, or 
acceleration.\78\
---------------------------------------------------------------------------

    \78\ Id.
---------------------------------------------------------------------------

    The D.C. Circuit subsequently upheld the Credit Practices Rule 
against legal challenge, noting that the rule ``was painstakingly 
considered and significantly modified in response to the extensive 
comments and recommendations received during this long rulemaking 
proceeding.'' \79\
---------------------------------------------------------------------------

    \79\ Am. Fin. Servs. Ass'n v. FTC., 767 F.2d 957, 963 (D.C. Cir. 
1985).
---------------------------------------------------------------------------

    Like the prudential regulators in their rules implementing the 
Credit Practices Rule, the CFPB preliminarily concludes that these 
credit practices are unfair for the same reasons as provided by the 
FTC. The FTC relied on an extensive evidentiary basis for its 
conclusions, and there is no reason to believe the core findings have 
changed since the FTC issued the original rule. Similarly, the findings 
were not specific to any given creditor type, and therefore, the CFPB 
preliminarily concludes that the FTC's findings apply equally to 
entities under the CFPB's jurisdiction carved out of the FTC rule. 
Indeed, as described above, many of the principal conclusions by the 
FTC--for example, the prevalence of standard-form contracts and the 
lack of comparison-shopping--remain true today. At any rate, in the 
CFPB's experience, these practices are uncommon (thanks in large part 
to the Credit Practices Rule and the interagency guidance). However, 
when the CFPB has encountered these practices during exams of 
supervised entities, it has cited them as violations of the CFPA. For 
example, the CFPB cited as unfair a servicer's practice of applying 
borrowers' post-maturity auto-loan payments in a manner that resulted 
in the principal balance not being paid off and triggered late 
fees.\80\
---------------------------------------------------------------------------

    \80\ CFPB, Supervisory Highlights: Special Edition Auto Finance, 
Fall Issue 35, 7-8 (Oct. 2024) https://files.consumerfinance.gov/f/documents/cfpb_supervisory-highlights-special-ed-auto-finance_2024-10.pdf.
---------------------------------------------------------------------------

    The CFPB seeks comment on all aspects of the proposed codification 
of the Credit Practices Rule applicable to covered persons within the 
CFPB's jurisdiction.

VI. Other Prohibited Provisions

    Subpart C of the proposed rule would prohibit covered persons from 
including three other types of terms and conditions in contracts for 
consumer financial products or services: clauses requiring the consumer 
to waive substantive consumer legal rights or protections that were 
designed to benefit consumers, and their remedies; clauses allowing a 
covered person to unilaterally amend a material term of the contract; 
and clauses restraining a consumer's lawful free expression.\81\ The 
CFPB is proposing to ban these

[[Page 3574]]

clauses under its authority to prohibit unfair or deceptive acts or 
practices.
---------------------------------------------------------------------------

    \81\ Under proposed Sec.  1027.301(b), a covered person would 
not be permitted to ``use, enforce, or otherwise rely on'' these 
terms or conditions ``in an agreement between a consumer and any 
person for a consumer financial product or service.'' This provision 
would ensure, for example, that a covered person could not rely on a 
prohibited term or condition in an agreement they purchased from 
another person.
---------------------------------------------------------------------------

A. Clauses Waiving Consumers' Substantive Legal Rights or Protections

    Proposed Sec.  1027.301(a)(1) would prohibit covered persons from 
including in agreements for consumer financial products or services 
``[a]ny term or condition that disclaims or waives, or purports to 
disclaim or waive, any substantive State or Federal law designed to 
protect or benefit consumers, or their remedies, unless an applicable 
statute explicitly deems it waivable.'' The waivers of law covered by 
the proposed rule ``include, but are not limited to: (i) waivers of 
remedies to consumers for violations of State or Federal laws; and (ii) 
waivers of a cause of action to enforce State or Federal laws.'' The 
proposed rule would not, however, prohibit clauses with regard to 
procedural rights, like venue clauses, arbitration clauses prohibiting 
court adjudication, or class action waivers.
    There is a large body of substantive Federal and State law--
including statutes designed by legislators and the common law process 
developed by courts--to protect or benefit consumers. Congress has 
enacted numerous consumer protection laws, including the Federal 
consumer financial laws administered by the CFPB (such as the CFPA, the 
Truth in Lending Act (TILA), the Fair Credit Reporting Act (FCRA), the 
Fair Debt Collection Practices Act (FDCPA), and the Electronic Fund 
Transfers Act (EFTA)), the Bankruptcy Code, antitrust laws, and laws 
protecting servicemembers (such as the Military Lending Act and the 
Servicemembers Civil Relief Act). Many States have also passed 
analogous consumer protection or antitrust laws, and in some cases the 
protections afforded by State laws exceed those of Federal law. 
Consumers also have common law rights to bring claims, including, for 
example, for a breach of contract or a tort.
    These laws provide substantive protections for consumers. For 
instance, the CFPA (among other things) generally prohibits covered 
persons from engaging in unfair, deceptive, or abusive acts or 
practices in connection with transactions for consumer financial 
products or services,\82\ while the enumerated consumer laws codify 
specific consumer protections. Many of these laws also expressly grant 
consumers the right to privately enforce violations and to seek 
remedies, including monetary or injunctive relief. For instance, TILA 
provides consumers with a cause of action against ``any creditor who 
fails to comply with any requirement imposed under [TILA],'' and makes 
such a creditor liable to the consumer for actual damages and certain 
statutory damages.\83\
---------------------------------------------------------------------------

    \82\ 12 U.S.C. 5531.
    \83\ 15 U.S.C. 1640(a).
---------------------------------------------------------------------------

    Many Federal laws--including statutes enforced by the CFPB--also 
render consumer-protection provisions unwaivable. For instance, EFTA 
prohibits contract terms that contain a ``waiver of any right 
conferred'' by EFTA and prohibits waivers of any ``cause of action'' 
under EFTA.\84\ The Military Lending Act and its implementing 
regulations generally prohibit terms in certain consumer credit 
contracts that require servicemembers and their dependents to ``waive 
the borrower's right to legal recourse under any otherwise applicable 
provision of State or Federal law.'' \85\ The FTC also administers laws 
that forbid certain contractual waivers.\86\ And certain State laws 
similarly prohibit or restrict the use of waivers in consumer 
contracts.\87\
---------------------------------------------------------------------------

    \84\ 15 U.S.C. 16931.
    \85\ 10 U.S.C. 987(e)(2).
    \86\ See 16 CFR 444.2(a)(2) (FTC's 1984 Credit Practices Rule, 
prohibiting the use of contract terms purporting to waive a 
consumer's State law right to block creditors from seizing personal 
or real property of the consumer in which they do not hold security 
interests). The FTC also has interpreted section 604(b)(2)(A) of the 
Fair Credit Reporting Act (FCRA) to prohibit the inclusion of a 
waiver of consumer rights in a disclosure form required under that 
section, observing that ``it is a general principle of law that 
benefits provided to citizens by federal statute generally may not 
be waived by private agreement unless Congress intended such a 
result.'' FTC, Division of Credit Practices, Staff Opinion Letter 
(June 12, 1998), 1998 WL 34323756, at *1 (citing Brooklyn Savings 
Bank v. O'Neill, 324 U.S. 697 (1945)). In addition, while not an 
express prohibition on waivers, the FTC's Preservation of Consumers' 
Claims and Defenses rule, commonly known as the ``Holder Rule'' and 
also enforced by the CFPB, requires sellers of goods or services to 
consumers to include a provision in their finance contracts that 
ensures that if another person holds the loan or lease a consumer 
uses to finance acquisition of a good or service from a seller or 
lessor, then the holder is subject to the same consumer rights and 
defenses that the consumer had with respect to the seller or lessor, 
thereby emphasizing the importance of preserving consumer rights. 16 
CFR part 433.
    \87\ For instance, the California Consumer Privacy Act affords 
consumers certain rights to know how their information will be used, 
instructs businesses not to sell consumers' personal information, 
and deems ``void and unenforceable'' any contractual provision 
``that purports to waive or limit in any way rights under this 
title, including, but not limited to, any right to a remedy or means 
of enforcement.'' See generally Cal. Civ. Code sec. 1798.100 et seq. 
described at https://oag.ca.gov/privacy/ccpa ; Cal. Civ. Code sec. 
1798.192. Further, certain State laws, including those of 
California, Illinois, Kansas, and Tennessee, contain outright 
prohibitions of waivers of legal protections in general consumer 
protection laws. See Cal. Civ. Code. sec. 1751 (barring waivers of 
protections under California Consumers Legal Remedies Act); Ill. St. 
Ch. 815 sec. 505(10c), Waiver or modification (barring waiver or 
modification of protections under consumer fraud and deceptive 
practices statute); Kan. Stat. 50-625(a), Waiver (generally 
prohibiting waivers of rights or benefits under the Kansas Consumer 
Protection Act, unless otherwise specified in the statute); Tenn. 
Stat. 47-18-113(a) (generally prohibiting waivers ``by contract, 
agreement, or otherwise'' of provisions of the Tennessee Consumer 
Protection Act of 1977).
---------------------------------------------------------------------------

    In the CFPB's experience, however, covered persons sometimes 
include waivers of consumer protection laws in contracts for consumer 
financial products or services (including when those laws forbid such 
waivers). The CFPB has taken both supervisory and enforcement action 
against such practices as both unfair and deceptive. For example, in 
2013, the CFPB cited two mortgage servicers for the unfair practice of 
requiring all borrowers, regardless of their individual circumstances, 
to enter into across-the-board waivers of existing claims in order to 
obtain a forbearance or loan modification agreement.\88\ In 2021, the 
CFPB cited entities for the deceptive practice of requiring borrowers 
to agree to a waiver of any equity or right of redemption in the loan 
security agreement for cooperative units. Specifically, the waiver 
stated that in the event of default, lenders may sell the security at 
public or private sale and thereafter hold the security free from any 
claim or right whatsoever of the borrower, who waives all rights of 
redemption, stay or appraisal which the borrower has or may have under 
any rule or statute.\89\ In 2022, the CFPB entered into a consent order 
with Bank of America for, among other practices, unfairly requiring 
consumers to waive its liability as to consumers' garnishment-related 
protections in its deposit agreement and misrepresented to consumers 
that they could not go to court to attempt to prevent wrongful 
garnishments.\90\ The FTC has also taken action against a for-profit 
medical school that attempted to waive consumers' rights under Federal 
law.\91\
---------------------------------------------------------------------------

    \88\ CFPB, Supervisory Highlights: Winter 2013, at 6-7 (Jan. 
2014), https://files.consumerfinance.gov/f/201401_cfpb_supervisory-highlights-winter-2013.pdf.
    \89\ CFPB, Supervisory Highlights: Issue 24, Summer 2021, at 28 
(June 2021), https://files.consumerfinance.gov/f/documents/cfpb_supervisory-highlights_issue-24_2021-06.pdf.
    \90\ See Consent Order, In re Bank of America, N.A., No. 2022-
CFPB-0002 (May 4, 2022).
    \91\ See St. James Medical School, supra note 71. According to 
the FTC's complaint, among numerous other things, defendants failed 
to include the notice required by the FTC's Holder Rule in their 
credit agreements, and also included language attempting to waive 
those rights.
---------------------------------------------------------------------------

    These waiver clauses in contracts of adhesion undermine our system 
of constitutional democracy. Our

[[Page 3575]]

government is--as President Abraham Lincoln said--a ``government of the 
people, by the people, for the people.'' The United States Constitution 
implements that principle by vesting Federal lawmaking powers in the 
United States Congress \92\ and reserving other lawmaking powers 
(unless prohibited by the Constitution) ``to the States respectively, 
or to the people.'' \93\ At both the Federal and State levels, 
legislatures are elected by citizens and are empowered to pass laws 
that benefit their wellbeing. In enacting such laws, legislatures 
necessarily balance competing interests among citizens, and their 
legislative judgments and policy choices must be respected unless 
constitutionally invalid. Against this system of democratic governance, 
waiver-of-law clauses in form contracts of adhesion are distinctly 
anti-democratic. They allow companies to use contracts of adhesion to 
override laws that have been designed to protect consumers without 
meaningful consent by the consumer.
---------------------------------------------------------------------------

    \92\ U.S. Const. art. 1, section 1.
    \93\ U.S. Const. amend. X.
---------------------------------------------------------------------------

    This proposed rule would forbid a covered person from using any 
clause in a contract for a consumer financial product or service that 
requires a consumer to waive substantive consumer rights and legal 
protections conferred by State or Federal laws designed to protect or 
benefit consumers (unless the law is expressly waivable), or their 
remedies. This prohibition would cover waivers of substantive legal 
rights as well as waivers of a consumer's right to enforce those laws 
(such as a waiver of a cause of action, a cap on statutory damages, or 
a time limitation on consumer enforcement of the law). For example, a 
contractual clause requiring a consumer to waive certain provisions of 
TILA (or to waive the consumer's right to enforce TILA) would be 
prohibited under the proposed rule. However, the prohibition would not 
apply to waivers of procedural rights (e.g., venue clauses, arbitration 
clauses prohibiting court adjudication, or class action waivers). 
Although the CFPB also has concerns about such waivers, the CFPB is 
focusing on waivers of substantive rights in this proposed rule because 
contractual waivers of substantive rights allow companies to invalidate 
legislative judgments that certain business practices are unlawful.
    The CFPB seeks comment on this proposed prohibition of waiver 
clauses.

B. Unilateral Amendment Clauses

    Proposed Sec.  1027.301(a)(2) would prohibit covered persons from 
including in agreements for consumer financial products or services 
``[a]ny term or condition that expressly reserves the covered person's 
right to unilaterally change, modify, revise, or add a material term of 
a contract for a consumer financial product or service.'' Companies 
often include contractual clauses that grant them unfettered discretion 
to change or add to the terms of their agreement with the consumer 
without adequate notice to or assent from the consumer before the 
change becomes effective. Unilateral contract amendments can harm 
consumers since any modifications are likely to mainly benefit the 
company and the consumer has no option to reject the change. The CFPB 
proposes to ban these clauses because they allow covered persons to 
circumvent consumers' freedom to benefit from a contract by changing 
material terms of an agreement.
    The proposal would prohibit any amendment clause in a contract 
between a covered person and a consumer for a consumer financial 
product or service that grants the covered person the exclusive right 
to modify a material term of the contract in the future. By definition, 
these unilateral amendment clauses provide no meaningful opportunity 
for the consumer to affirmatively accept, negotiate, or reject any 
modifications by the company.
    Unilateral amendment clauses are typically drafted to provide a 
company with discretion to change a term of the contract or to add 
terms to the contract. Companies can thus use these clauses to change 
fees, dispute resolution procedures, terms of service, or privacy 
policies.\94\ ``In fact, unilateral modifications can change any aspect 
of a contract.'' \95\ For instance, in recent years, unilateral 
amendment clauses have become a popular way for companies to add 
arbitration clauses to consumer contracts or to change the rules of the 
arbitration process.\96\ And unilateral amendment clauses typically do 
not impose limits on when these changes can be made, meaning that a 
company may rely on such a clause to modify a contract months or even 
years after the agreement was consummated. In short, when a contract 
includes a unilateral amendment clause, ``[f]irms can virtually make 
any change they wish to their contracts, for whatever reason and at any 
time, without properly communicating this change.'' \97\ And changes 
implemented unilaterally will typically benefit the company, not the 
consumer. ``There is a concern . . . that businesses will initiate 
self-serving, opportunistic modifications in standard contract terms 
once consumers are already locked into the service.'' \98\
---------------------------------------------------------------------------

    \94\ See, e.g., David Horton, The Shadow Terms: Contract 
Procedure and Unilateral Amendments, 57 UCLA L. Rev. 605, 630-636 
(2010); Shmuel I. Becher & Uri Benoliel, Sneak In Contracts, 55 Ga. 
L. Rev. 657, 660 (2020).
    \95\ Becher & Benoliel, supra n. 94 at 661.
    \96\ Adam Levitin, Venmo's Unfair and Abusive Arbitration Opt-
Out Provision, Credit Slips (Apr. 26, 2022), https://www.creditslips.org/creditslips/2022/04/-venmos-unfair-and-abusive-arbitration-opt-out-provision.html.
    \97\ Shmuel I. Becher & Uri Benoliel, Dark Contracts, 64 B.C. L. 
Rev. 55, 68 (2023).
    \98\ Restatement of the Law, Consumer Contracts, supra note 28, 
at section 3 cmt. 1.
---------------------------------------------------------------------------

    Unilateral amendment clauses are commonly included by companies in 
consumer contracts or terms of use. For example, a recent study 
examined 100 companies' online terms and conditions for contracts and 
relationships with consumers.\99\ The sample set included companies in 
retail, computer and browsing services, streaming and entertainment, 
financial services, social media, and transportation.\100\ The study 
considered both private and public companies.\101\ The study found that 
all of the companies' terms and conditions included a unilateral 
modification clause.\102\ Only 15 of the companies' terms and 
conditions provided for notice to the consumer when the company made a 
unilateral change to a material term.\103\ The study also found that 
under these clauses, the consumer had no real opportunity to reject the 
modifications, short of terminating the transactional relationship with 
the company.\104\ Other studies have reached similar conclusions.\105\
---------------------------------------------------------------------------

    \99\ Boyack, Abuse of Contract: Boilerplate Erasure of Consumer 
Counterparty Rights, supra note 40, at 6.
    \100\ Id. at 7
    \101\ Id.
    \102\ Id. at 18.
    \103\ Id. at 19.
    \104\ Id. at 20.
    \105\ Becher & Benoliel, Sneak In Contracts, supra note 94, at 
681-682 (finding that more than 95 percent of companies with the 500 
top websites used unilateral amendment clauses); Samples et al., 
TL;DR: The Law and Linguistics of Social Platform Terms-of-use, 
supra note 16 at 103.
---------------------------------------------------------------------------

    In the CFPB's experience, unilateral amendment clauses are used by 
companies in the consumer finance market, and companies rely on such 
clauses to modify agreements in ways that are harmful to consumers. 
Unilateral amendments can be especially prejudicial when they thwart a 
consumer's expectations about the terms of or performance under a

[[Page 3576]]

contract (including when such a change conflicts with advertising or 
marketing about the contract on which the consumer relied in the first 
place).
    For instance, such clauses are commonly included in credit card 
agreements, and the harm arising from unilateral amendments to credit 
card agreements was one of the main reasons for congressional enactment 
of the Credit Card Accountability, Responsibility, and Disclosure Act 
(CARD Act) of 2009.\106\ Prior to the CARD Act's passage, credit card 
issuers routinely relied on unilateral amendment clauses to change 
fees, interest rates, and payment amounts after a consumer had taken 
out a credit card.\107\ The CARD Act was intended to curb the abuses 
wrought by these ``[a]ny time any reason'' changes to credit card 
agreements.\108\ As implemented by Regulation Z, the CARD Act requires 
that when a credit card issuer seeks to make ``a significant change in 
account terms,'' it must provide 45 days advance notice of the change 
and include in the notice a statement that the consumer ``has the right 
to reject the change or changes prior to the effective date of the 
changes'' and ``[i]nstructions for rejecting the change or changes, and 
a toll-free telephone number that the consumer may use to notify the 
creditor of the rejection.'' \109\
---------------------------------------------------------------------------

    \106\ Public Law 111-24, 123 Stat. 1734 (2009).
    \107\ See, e.g., Modernizing Consumer Protection in the 
Financial Regulatory System: Strengthening Credit Card Protections: 
Hearing Before the S. Comm. on Banking, Housing, and Urban Affairs, 
111th Cong. 199 (2009) (statement of Travis B. Plunkett).
    \108\ See 155 Cong. Rec. S2150 (daily ed. Feb. 11, 2009) 
(statement of Sen. Dodd); see also 15 U.S.C. 1637(i).
    \109\ 12 CFR 1026.9(c)(2)(iv).
---------------------------------------------------------------------------

    However, abuses arising from unilateral amendments remain a problem 
in consumer financial services. For example, the CARD Act does not 
require a change-in-terms notice for all modifications to a credit card 
agreement, and the CFPB recently warned that ``many of the largest 
credit card issuers reserved the right to change their rewards program 
at any time, for any reason, and in many cases without notice in terms 
and conditions typically separate from the cardholder agreements, in 
which changes to some terms are restricted and/or require prior 
communication.'' \110\ The CFPB noted that such clauses can allow 
issuers ``to alter rewards programs or devalue rewards as a safety 
valve [for the company], putting consumers at a fundamental 
disadvantage.'' \111\
---------------------------------------------------------------------------

    \110\ Consumer Fin. Prot. Bureau, Issue Spotlight: Credit Card 
Rewards, 11 (May 9, 2024) (citing agreements from American Express, 
Citi, Chase, and Wells Fargo).
    \111\ Id.
---------------------------------------------------------------------------

    The CFPB is concerned about unilateral amendment clauses because 
they undermine the consumer's freedom to benefit from the contract. A 
contract is based on the voluntary exchange of promises between the 
contracting parties that establish a ``meeting of the minds.'' Thus, as 
the Restatement (Second) of Contracts notes, ``the formation of a 
contract requires a bargain in which there is a manifestation of mutual 
assent to the exchange and a consideration.'' \112\ These same 
principles apply not only for the initial contract but any subsequent 
modifications.\113\
---------------------------------------------------------------------------

    \112\ Restatement (Second) of Contracts section 17(1) (1981); 
see also, e.g., Specht v. Netscape Commc'ns Corp., 150 F. Supp. 2d 
585, 587 (S.D.N.Y. 2001), aff'd, 306 F.3d 17 (2d Cir. 2002) 
(``Promises become binding when there is a meeting of the minds and 
consideration is exchanged. So it was at King's Bench in common law 
England; so it was under the common law in the American colonies; so 
it was through more than two centuries of jurisprudence in this 
country; and so it is today.)
    \113\ See, e.g., Dallas Aerospace, Inc. v. CIS Air Corp., 352 
F.3d 775, 783 (2d Cir. 2003) (``[f]undamental to the establishment 
of a contract modification is proof of each element requisite to the 
formulation of a contract, including mutual assent to its terms'').
---------------------------------------------------------------------------

    For that reason, courts have generally refused to enforce 
unilateral amendment clauses that do not allow for mutual assent. 
``Indeed, a party can't unilaterally change the terms of a contract; it 
must obtain the other party's consent before doing so. This is because 
a revised contract is merely an offer and does not bind the parties 
until it is accepted. And generally an offeree cannot actually assent 
to an offer unless he knows of its existence.'' \114\ Thus, as noted by 
the Restatement of Consumer Contracts, if a company ``can derogate, 
without any limitation, from rights and obligations that were stated 
when the original assent was manifested, or if the business awards 
itself unfettered discretion to specify its obligations under the 
original contract, such that the promise the business made to consumers 
is lacking sufficient meaningful commitment, the business's promise is 
illusory and the contract fails for lack of consideration.'' \115\
---------------------------------------------------------------------------

    \114\ Douglas v. U.S. Dist. Ct. for Cent. Dist. of California, 
495 F.3d 1062, 1066 (9th Cir. 2007); see also, e.g., In re 
Zappos.com, Inc., Customer Data Sec. Breach Litig., 893 F. Supp. 2d 
1058, 1066 (D. Nev. 2012); Lovinfosse v. Lowe's Home Centers, LLP, 
2024 WL 3732436 (E.D. Va. Aug. 8, 2024).
    \115\ Restatement of the Law, Consumer Contracts, supra note 28, 
section 5, reporters' notes a.
---------------------------------------------------------------------------

    As the Restatement of Consumer Contracts further explains, ``courts 
have developed a fairly consistent approach to determining the 
enforceability of modifications. In particular, the requirements of 
notice and opportunity to reject or terminate figure prominently in 
courts' reasoning. In almost all cases in which modifications were 
enforced and that involve the questions of notice as well as 
opportunity to reject or terminate, courts made explicit determinations 
that both the requirements of sufficient notice and opportunity to 
reject or terminate were satisfied.'' \116\ Thus, under the Restatement 
of Consumer Contracts, a modification of a standard-contract term is 
binding on a consumer only if the consumer received notice of the 
proposed modification and was provided a reasonable opportunity to 
reject the change.\117\ For example, the Restatement provides an 
example of a ``contract between an airline and a consumer allow[ing] 
the airline to modify the frequent-flyer program at its discretion,'' 
explaining that such a provision would be unenforceable ``if the 
airline does not afford the consumer a meaningful opportunity to reject 
it.'' \118\
---------------------------------------------------------------------------

    \116\ Id. section 3, reporters' notes f.
    \117\ Id. section 3(a). Under the Restatement, ``[a] consumer 
contract governing an ongoing relationship may provide for a 
reasonable procedure for adoption of modified terms under which the 
business may propose a modification of the standard contract terms 
but may not, to the detriment of the consumer, exclude the 
application of subsection (a), except that the established procedure 
may replace the reasonable opportunity to reject the proposed 
modified term with a reasonable opportunity to terminate the 
transaction without unreasonable cost, loss of value, or personal 
burden.'' Id. section 3(b).
    \118\ Id. section 5 illus. 5.
---------------------------------------------------------------------------

    Consistent with these principles, the proposed rule would prohibit 
any clause in a contract for a consumer financial product or service 
that provides the company the sole right to modify the contract. The 
CFPB recognizes that consumer contracts may need to be modified to 
account for changed circumstances after the contract is signed, and 
this proposed rule would not prohibit all such modifications. Nothing 
in the proposed rule would prohibit companies from implementing 
modifications that are consistent with applicable State or Federal 
law.\119\ Whether a particular

[[Page 3577]]

modification is consistent with applicable law will depend on the facts 
and circumstances and the applicable jurisdiction's common law, and is 
beyond the scope of this rulemaking. But the proposed rule would 
prohibit companies from relying on a unilateral amendment clause to 
make modifications.
---------------------------------------------------------------------------

    \119\ The CFPB recognizes that there are State or Federal 
statutes or regulations setting forth processes for companies to 
implement modifications for certain contract terms. For example and 
as noted above, the CARD Act and its implementing regulations create 
procedures for credit card issuers to implement modifications to a 
consumer's account agreement. For certain changes, the CARD Act and 
its implementing regulations require a company to provide consumers 
with notice and an opportunity to reject a modification. For other 
changes, the CARD Act and its implementing regulations affirmatively 
state that no advance notice of a modification is required. And the 
CARD Act and its implementing regulations are silent on changes for 
other terms. Nothing in this proposed rule would displace or affect 
those procedures for amending a contract. This rulemaking only 
prohibits the use of a contract term to reserve a unilateral right 
to amend that the company would not otherwise have by virtue of 
State or Federal law or regulation.
---------------------------------------------------------------------------

    The CFPB seeks comment on this proposed prohibition of unilateral 
amendment clauses.

C. Clauses Restraining Consumers' Free Expression

    Proposed Sec.  1027.301(a)(3) would prohibit covered persons from 
including in contracts for consumer financial products or services 
``[a]ny term or condition that limits or restrains, or purports to 
limit or restrain, the free and lawful expression of a consumer,'' 
except that this prohibition would not ``affect[] a covered person's 
ability to close an account that is being used to commit fraud or other 
illegal activity.'' This prohibition would apply to, for example, 
contractual clauses that limit a consumer's ability to make negative 
comments about a company or to freely express their political and 
religious views. And it would include any contractual mechanism for 
enforcing those limits, including fees, reserving rights to close 
accounts on that basis (e.g., ``debanking''), or terms that do not 
describe a particular remedial consequence but could give rise to a 
breach of contract claim. The proposed rule would not, however, 
prohibit contract clauses giving covered persons a right to close 
accounts based on the use of an account to commit fraud or illegal 
activity, because that would not constitute ``lawful expression.''
    The First Amendment of the Constitution protects people from, among 
other things, laws abridging free speech or prohibiting the free 
exercise of religion. The First Amendment ``reflects a profound 
national commitment to the principle that debate on public issues 
should be uninhibited, robust, and wide-open'' because ``speech 
concerning public affairs is more than self-expression; it is the 
essence of self-government.'' \120\ Free expression ``is powerful 
medicine'' because it ``put[s] the decision as to what views shall be 
voiced largely into the hands of each of us, in the hope that use of 
such freedom will ultimately produce a more capable citizenry and more 
perfect polity and in the belief that no other approach would comport 
with the premise of individual dignity and choice upon which our 
political system rests.'' \121\ The First Amendment applies even when 
speech is disagreeable or offensive. ``In an open, pluralistic, self-
governing society, the expression of an idea cannot be suppressed 
simply because some find it offensive, insulting, or even wounding.'' 
\122\
---------------------------------------------------------------------------

    \120\ Snyder v. Phelps, 562 U.S. 443, 452 (2011).
    \121\ Cohen v. California, 403 U.S. 15, 24 (1971).
    \122\ Fulton v. City of Philadelphia, 593 U.S. 522, 615 (2021).
---------------------------------------------------------------------------

    While government restraints on speech carry obvious risks due to 
the coercive power of government, infringement of speech by large 
private corporations can be similarly harmful, with the added concern 
that these entities are not subject to democratic accountability or 
transparency obligations. And in recent decades, many companies have 
begun to use contractual terms to prevent individuals from expressing 
themselves freely.\123\ In the market for consumer financial products 
and services, two such types of clauses are of particular concern to 
the CFPB, both of which would be prohibited under the proposed rule.
---------------------------------------------------------------------------

    \123\ Alan E. Garfield, Promises of Silence: Contract Law and 
Freedom of Speech, 83 Cornell L. Rev. 261, 268 (1998).
---------------------------------------------------------------------------

    First, some companies have begun including non-disparagement 
clauses--also colloquially known as ``gag'' clauses--that restrict 
consumers from providing negative reviews of the company's product or 
service. Originating in the health care sector, these types of clauses 
have migrated to many parts of the economy.\124\ The CFPB is aware of 
such abuses in the consumer finance market. For instance, the FTC has 
taken action against a credit repair firm for its use of non-
disparagement clauses in violation of the Consumer Review Fairness 
Act.\125\ The CFPB is also aware of reports that a nonbank mortgage 
lender had imposed certain non-disparagement provisions in certain loan 
modification agreements associated with settlement of pending legal 
claims, until committing to the New York State financial regulator to 
stop doing so.\126\
---------------------------------------------------------------------------

    \124\ Eric Goldman, Understanding the Consumer Review Fairness 
Act of 2016, 24 Mich. Telecomm. & Tech. L. Rev. 1, 2 (2017).
    \125\ FTC v. Grand Teton Professionals, LLC, et al., Case No. 
19-cv-933 (D. Conn) (Complaint filed June 17, 2019).
    \126\ Peter Rudegeair, Michelle Conlin, Exclusive: Ocwen 
Financial to stop gagging homeowners in mortgage deals, Reuters.com 
(June 3, 2014), https://www.reuters.com/article/us-banks-mortgages/exclusive-ocwen-financial-to-stop-gagging-homeowners-in-mortgage-deals-idUSKBN0EE1XG20140603 (last visited Dec. 2, 2022); Brena 
Swanson, Ocwen will stop using mortgage gag orders, Housingwire.com 
(June 3, 2014), https://www.housingwire.com/articles/30196-ocwen-will-stop-using-mortgage-gag-orders/.
_____________________________________-

    Numerous studies and surveys have confirmed the importance of 
online reviews across the economy. For example, one prominent study 
estimated that a one-star rating increase on Yelp.com translated to an 
increase of five to nine percent in revenues for a restaurant.\127\ 
Another study found that a one-point boost in a hotel's online ratings 
on travel sites is tied to an 11 percent jump in room rates, on 
average.\128\ To date, academic research has not focused specifically 
on markets for consumer financial products and services. But the CFPB 
expects consumer reviews to play an increasing role in helping 
consumers choose between financial providers given that many consumers 
now seek financial products online, including on shopping platforms 
that can simultaneously provide reviews. This can create an incentive 
for dishonest market participants to attempt to manipulate the review 
process, rather than compete based on the value of their services, 
which can frustrate a competitive marketplace.
---------------------------------------------------------------------------

    \127\ Michael Luca, Reviews, Reputation, and Revenue: The Case 
of Yelp.com, Harv. Bus. Sch. Working Paper No. 12-016, 14 (2016).
    \128\ Chris Anderson, The Impact of Social Media on Lodging 
Performance, 12(15) Cornell Hospitality Report 6, 11 (2012).
---------------------------------------------------------------------------

    In 2016, Congress unanimously enacted the Consumer Review Fairness 
Act,\129\ in response to abuses by companies that restricted consumer 
reviews. The Consumer Review Fairness Act generally prohibits non-
disparagement clauses in standard-form consumer contracts. Specifically 
(and with certain exceptions), it voids from inception any such 
contractual provision that prohibits, restricts, or penalizes ``an 
individual who is a party to the form contract'' to engage in a 
``written, oral, or pictorial review, performance assessment of, or 
other similar analysis of . . . the goods, services, or conduct of a 
person.'' \130\ As the legislative history of the statute explains, the 
``wide availability'' of consumer reviews ``has caused consumers to 
rely on them more heavily as credible indicators of product or service 
quality. In turn, businesses have sought to avoid negative reviews . . 
. through provisions of form contracts with consumers restricting such

[[Page 3578]]

reviews.'' \131\ Some States have also enacted prohibitions against 
non-disparagement or ``gag'' clauses.\132\
---------------------------------------------------------------------------

    \129\ 15 U.S.C. 45b.
    \130\ Id.
    \131\ H. Rept. 114-731, at 5 (2016). The legislative history 
also indicates that Congress was concerned that these clauses would 
diminish the overall value of consumer reviews, including by 
chilling ``negative yet truthful'' reviews. ``Non-disparagement 
clauses interfere with the benefits consumers derive from ready 
access to `crowd-sourced' reviews of products and services. If such 
clauses become widely adopted, negative yet ruthful reviews may be 
chilled, undermining the overall credibility of consumer reviews. 
The newfound utility of consumer reviews would then be reduced as 
trust in their veracity diminishes. H.R. 5111 seeks to curtail non-
disparagement clauses in order to preserve the credibility and value 
of online consumer reviews.'' Id. at 5-6.
    \132\ Cal. Civil Code sec. 1670.8 (``A contract or proposed 
contract for the sale or lease of consumer goods or services may not 
include a provision waiving the consumer's right to make any 
statement regarding the seller or lessor or its employees or agents, 
or concerning the goods or services.''); 815 Ill. Comp. Stat. Ann. 
505/2UUU (West) (same); Md. Code, Com. L. sec. 14-1325 (making it an 
unfair and deceptive trade practice to include a provision ``waiving 
the consumer's right to make any statement concerning [ ] The seller 
or lessor; [ ] Employees or agents of the seller or lessor; or [ ] 
The consumer goods or services.'').
---------------------------------------------------------------------------

    Second, some companies have also used contractual terms to prevent 
consumers from engaging in political or religious expression or to 
penalize them for doing so. For example, in 2022 PayPal amended its 
user agreement to levy a fine or close accounts based on consumers' 
exercise of free expression, even if it was unrelated to fraud or other 
illegal activity.\133\ In a similar vein, some consumer financial 
companies have been accused of ``de-banking'' persons or organizations 
based on their political or religious beliefs. For example, several 
State regulators recently accused a major bank of ``discriminating 
against religious ministries,'' including the bank's closure of the 
accounts of a Christian ministry because the bank did not want to serve 
the organization's ``business type.'' \134\ State attorneys general 
also sent a letter to the same bank about the bank's practice of 
``conditioning access to its services on customers having the bank's 
preferred religious or political views.'' \135\ Some State legislatures 
have also introduced or enacted laws that would prohibit such ``de-
banking.'' \136\
---------------------------------------------------------------------------

    \133\ See Emily Manson, After PayPal Revokes Controversial 
Misinformation Policy, Major Concerns Remain Over $2,500 Fine (Oct. 
27, 2022), https://www.forbes.com/sites/emilymason/2022/10/27/after-paypal-revokes-controversial-misinformation-policy-major-concerns-remain-over-2500-fine/.
    \134\ Letter from Andre Sorrell et al. to Brian Moynihan, 
https://treasurer.utah.gov/wp-content/uploads/04-18-2024-Letter-to-BoA-Regarding-Debanking.pdf (Apr. 18, 2024).
    \135\ Letter from Kris W. Kobach et al. to Brian T. Moynihan, 
(Apr. 15, 2024) https://dojmt.gov/attorney-general-knudsen-demands-action-from-bank-of-america-to-correct-debanking-practices/.
    \136\ See, e.g., Tenn. Code Ann. sec. 45-1-128.
---------------------------------------------------------------------------

    The CFPB seeks comment on this proposed prohibition of clauses 
restraining consumers' lawful free expression.

Legal Authority

    The CFPB proposes to prohibit these three types of terms and 
conditions in consumer financial products or services because their use 
constitutes unfair or deceptive acts or practices.
i. Deceptive Acts or Practices
    Under the CFPA, a representation or omission is deceptive if it is 
likely to mislead a reasonable consumer and is material.\137\ 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.'' \138\ It is well-established that 
material misrepresentations to consumers that are unsupported under 
applicable law can be deceptive.\139\ In particular, including an 
unenforceable material term in a consumer contract is deceptive, 
because it misleads consumers into believing the contract term is 
enforceable.
---------------------------------------------------------------------------

    \137\ Although the CFPA does not define ``deceptive,'' the CFPB 
has adopted the definition set forth by the FTC in its 1983 Policy 
Statement on Deception. See FTC Policy Statement on Deception (Oct. 
14, 1983), https://www.ftc.gov/bcp/policystmt/ad-decept.htm.
    \138\ Novartis Corp. v. FTC, 223 F.3d 783, 786 (D.C. Cir. 2000) 
(quoting In re Cliffdale Assocs., Inc., 103 F.T.C. 110, 165 (1984)).
    \139\ See, e.g., FTC v. World Media Brokers, 415 F.3d 758, 763 
(7th Cir. 2005).
---------------------------------------------------------------------------

    As the CFPB recently explained, waiver-of-law provisions in 
contracts for consumer financial products or services are often 
deceptive when the waivers are unlawful or unenforceable under Federal 
or State law.\140\ The inclusion of unlawful or unenforceable terms and 
conditions in consumer contracts is likely to mislead a reasonable 
consumer into believing that the terms are lawful and/or enforceable, 
when in fact they are not. Further, the representations made by the 
presence of such terms are often material, presumptively so when they 
are made expressly. In particular, consumers are unlikely to be aware 
of the existence of laws that render the terms or conditions at issue 
unlawful or unenforceable, so in the event of a dispute, they are 
likely to conclude they lawfully agreed to waive their legal rights or 
protections after reviewing the contract on their own or when covered 
persons point out the existence of these contractual terms and 
conditions. Research indicates providers are incentivized to include 
unenforceable terms because consumers tend to assume the terms in their 
contracts are enforceable (even if they harm the consumer's interests 
or deprive them of legal rights).\141\ 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. Deceptive acts and practices such as these pose 
risks to consumers, whose rights are undermined as a result, and 
distort markets to the disadvantage of covered persons who abide by the 
law by including only lawful terms and conditions in their consumer 
contracts.
---------------------------------------------------------------------------

    \140\ Consumer Financial Protection Circular 2024-03, supra note 
6.
    \141\ See, e.g., Meirav Furth-Matzkin & Roseanna Sommers, 
Consumer Psychology and the Problem of Fine Print Fraud, 72 Stan. L. 
Rev. 503, 508-09 (2020).
---------------------------------------------------------------------------

    For similar reasons, a contractual provision that restrains a 
consumer's free expression in violation of the Consumer Review Fairness 
Act would be deceptive. As the CFPB noted in a recent compliance 
bulletin, it would generally be deceptive to include a restriction on 
consumer reviews in a form contract, given that the restriction would 
be void from the inception under the Consumer Review Fairness Act.\142\ 
Consumers can be expected to read such language to mean what it says: 
that they are restricted in their ability to provide consumer reviews. 
But that is not the case, since the provision is void under applicable 
law. And the option to post candid reviews about products or services 
would be material to the many American consumers who do so. Moreover, 
enforcing the deception prohibition is particularly important in this 
context, given that consumer reviews are a significant driver of 
competition in the modern economy.
---------------------------------------------------------------------------

    \142\ Consumer Fin. Prot. Bureau, CFPB Bulletin 2022-05: Unfair 
and Deceptive Acts or Practices That Impede Consumer Reviews, (Mar. 
22, 2022), https://www.consumerfinance.gov/compliance/supervisory-guidance/cfpb-bulletin-2022-05-unfair-deceptive-acts-or-practices-that-impede-consumer-reviews/.
---------------------------------------------------------------------------

ii. Unfair Acts or Practices
    The CFPB may declare an act or practice to be ``unlawful on the 
grounds that [it] is unfair'' if the CFPB ``has a reasonable basis to 
conclude that (A) the act or practice causes or is likely to cause 
substantial injury to consumers which is not reasonably avoidable by 
consumers; and (B) such substantial injury is not outweighed by 
countervailing benefits to consumers or to competition.'' \143\ The use 
of each of the clauses that would be prohibited

[[Page 3579]]

under the proposed rule in contracts for consumer financial products or 
services would be an unfair act or practice.
---------------------------------------------------------------------------

    \143\ 12 U.S.C. 5531(c).
---------------------------------------------------------------------------

    Substantial injury. Each of the three types of clauses causes or 
would likely cause substantial injury to consumers.
    A contractual clause requiring a consumer to waive the protections 
of Federal or State law causes the consumer to forfeit legal rights 
designed for their benefit. These laws reflect a legislative judgment 
that it is in the public interest for consumers to be protected from 
certain business practices. Eliminating these protections through a 
consumer contract deprives the consumer of those legal rights. 
Consumers can also suffer concrete monetary injury from the inclusion 
of waiver-of-law clauses when, as a result of the waiver, they are 
exposed to business practices that would have been otherwise illegal, 
or, when the waiver reduces the monetary remedy that consumers can 
seek. These waivers shift the risk of such business practices from the 
company to the consumer. ``Consumers are clearly injured by a system 
which forces them to bear the full risk and burden of sales related 
abuses.'' \144\ This is particularly the case when a consumer cannot 
fully enforce a law because of a waiver-of-law provision. As noted 
above, many consumer protection laws grant consumers a statutory cause 
of action to enforce the law, enjoin the unlawful practice, and recover 
actual and/or statutory damages. When a consumer is contractually 
restricted from relying on such a cause of action--or when a waiver 
provision limits a company's legal liability or limits the time in 
which a consumer can bring a legal action against the company--
consumers are unable to stop the illegal practice and recover damages 
from the company. For example, in a 2022 case the CFPB alleged that 
Bank of America engaged in unfair acts and practices by using a deposit 
agreement that required consumers not to contest legal process and 
waive the bank's liability for unlawfully garnishing funds from a 
consumer's deposit account. According to the consent decree, in at 
least 3,700 instances, the bank's conduct resulted in substantial 
injury to affected consumers in the form of garnishment-related fees, 
frozen or held funds, and funds turned over to judgment creditors.\145\
---------------------------------------------------------------------------

    \144\ FTC, Preservation of Consumers' Claims and Defenses, 40 FR 
53506, 53523 (Nov. 18, 1975).
    \145\ See Consent Order, In re Bank of America, N.A., No. 2022-
CFPB-0002 (May 4, 2022).
---------------------------------------------------------------------------

    Unilateral amendment clauses injure consumers by facilitating 
involuntary changes that are a detriment to the consumer (including 
monetary detriment), and depriving consumers of the opportunity to 
provide meaningful consent to amended terms that may adversely affect 
them. As noted above, when a company can derogate from the material 
terms of an agreement with a consumer at its own discretion, a contract 
becomes illusory and the consumer does not obtain the benefit of the 
bargain in the contract they signed initially. They also deprive 
consumers of the ability to make a free and informed choice of whether 
to contract in the first place because the material terms of the 
agreement might change later in unpredictable ways. Furthermore, the 
changes effected through such clauses (e.g., diminution of credit-card 
rewards) typically inure to the detriment of consumers. In particular, 
when a modification undermines a consumer's expectations about the 
scope of contract, it resembles a traditional ``bait-and-switch'' 
scheme that has long been found to be unfair by the FTC.\146\
---------------------------------------------------------------------------

    \146\ See FTC Guides Against Bait Advertising, 16 CFR part 238 
et seq.; cf. Rossman v. Fleet Bank (R.I.) Nat. Ass'n, 280 F.3d 384, 
396-400 (3d Cir. 2002) (credit card issuer soliciting business with 
no-annual-fee offer while intending to later impose fee constitutes 
a bait-and-switch scheme).
---------------------------------------------------------------------------

    In particular, in the credit card market, consumers experience 
substantial injury when credit card companies use unilateral amendment 
clauses to amend the terms of a reward program without adequate notice 
or opportunity to provide meaningful consent. Consumers make decisions 
based on expectations about the value of credit card reward 
programs,\147\ and so they incur concrete and monetary harm associated 
with the use of unilateral amendment clauses to unilaterally decrease 
the accrual rates or otherwise downgrade those programs.
---------------------------------------------------------------------------

    \147\ See Consumer Fin. Prot. Bureau, Consumer Financial 
Protection Circular 2024-07: Design, Marketing, and Administration 
of Credit Card Rewards Programs, (Dec. 18, 2024), https://www.consumerfinance.gov/compliance/circulars/consumer-financial-protection-circular-2024-07-design-marketing-and-administration-of-credit-card-rewards-programs/.
---------------------------------------------------------------------------

    Contractual restraints on free expression deprive consumers of 
their ability to express themselves freely. This can cause harm when, 
for example, a consumer is prohibited from providing a negative review 
on or complaining about a faulty product or service. In such cases, the 
consumer is deprived of the ability to freely voice themselves about 
the quality of a product or service, which in turn deprives other 
consumers of the benefit of the negative review or complaint.\148\ When 
a contract limits the consumer's ability to speak or act freely on 
political or religious matters, it deprives consumers of a fundamental 
right to express themselves. It also leaves consumers with the 
untenable choice between maintaining access to the financial service in 
question or maintaining the right to free speech. While most unfairness 
matters involve ``monetary harm,'' the substantial injury prong is met 
for any form of injury that is not ``trivial or merely speculative.'' 
\149\ The CFPB preliminarily concludes that, based on the historical 
importance of free speech in the United States, limiting religious, 
political, or other forms of free speech is not a trivial consumer 
harm.
---------------------------------------------------------------------------

    \148\ See, e.g., FTC v. Roca Labs, Inc., 345 F. Supp. 3d 1375, 
1393 (M.D. Fla. 2018) (agreeing with the FTC that ``restricting the 
flow of information to consumers and the marketplace causes or is 
likely to cause substantial injury'').
    \149\ FTC Policy Statement on Unfairness (December 17, 1980), 
https://www.ftc.gov/legal-library/browse/ftc-policy-statement-unfairness.
---------------------------------------------------------------------------

    Not reasonably avoidable. The injuries caused by these terms and 
conditions in form contracts are not reasonably avoidable by consumers 
because consumers are typically unaware they are agreeing to these 
terms and conditions, and even if they were, are unable to negotiate 
the terms out of the agreement. These clauses are almost always 
presented to consumers as ``boilerplate'' or ``fine print'' language in 
contracts of adhesion on a ``take it or leave it'' basis. These terms 
are drafted by companies (or their lawyers), and consumers are allowed 
no opportunity to negotiate or reject them. Nor can consumers 
realistically comparison shop for any of these clauses among different 
providers, since these contracts typically ``are written in obscure 
technical language, do not use standardized terminology, and may not be 
provided before the transaction is consummated.'' \150\ Indeed, with 
the increasing popularity of digital transactions, standard contract 
terms have become more and more complex.\151\ ``The proliferation of 
lengthy standard-term contracts, mostly in digital form, makes it 
practically impossible for consumers to scrutinize the terms and 
evaluate them prior to manifesting assent.'' \152\ There are also 
limited incentives for consumers to seek out better terms because these 
terms relate to future events that a consumer may not be able to 
properly assess at the time they are initially shopping for the product 
or service. For example, a

[[Page 3580]]

consumer reviewing a unilateral amendment clause would be unlikely to 
predict what kinds of modifications a company might implement under 
such a clause. Under these circumstances, it should be unsurprising 
that many research studies have confirmed that consumers almost never 
read non-core terms in standard-form contracts. As noted above, for 
example, one prominent study found that far less than one percent of 
consumers can be expected to read such terms.\153\ At any rate, even if 
consumers were to review these terms before signing the agreement, 
their only opportunity to avoid the terms would be to decline the 
agreement in totality. And once the agreement is entered into, these 
clauses are implemented by the companies without any involvement by the 
consumer.
---------------------------------------------------------------------------

    \150\ 49 FR 7744.
    \151\ See e.g., Samples et al., supra note 16 at 105.
    \152\ Restatement of the law, Consumer Contracts, supra note 28, 
at introduction.
    \153\ See, e.g., Bakos et al., supra note 19 at 1.
---------------------------------------------------------------------------

    Consideration of countervailing benefits. The CFPB is not aware of 
any meaningful countervailing benefits to consumers or competition 
created by these clauses that would outweigh the associated harms, and 
invites commenters to raise any countervailing benefits that the agency 
will consider before finalizing any rule. These clauses will typically 
not be essential to the transaction and will serve no purpose in the 
deal between the company and the consumer. To the contrary, these types 
of clauses strip important rights or protections from consumers, 
including the right to be aware of and provide meaningful consent to 
contract amendments, the right to benefit from legal protections, and 
the right to free expression. The CFPB is also not aware of any 
research or findings demonstrating that consumers enjoy lower costs or 
prices in exchange for these clauses. Nor is the CFPB aware of any 
benefits these clauses provide to competition. Indeed, the CFPB 
preliminary concludes that these clauses dilute competition by 
insulating companies from the rule of law, legal liability, and 
negative feedback (or even being compared unfavorably to one's 
competitors), and also by allowing companies broad discretion to 
fashion rules and procedures to their own liking. And once one firm 
adds one of these non-salient fine print terms, other firms in the 
market may be incentivized to match, creating a race to the 
bottom.\154\
---------------------------------------------------------------------------

    \154\ Margaret Jane Radin, Boilerplate: The Fine Print, 
Vanishing Rights, and the Rule of Law 108 (2013) (``competition 
forces firms to offer progressively worse and more onerous terms'').
---------------------------------------------------------------------------

    As noted in the section 1022(b) Analysis below, the CFPB 
acknowledges that companies may incur costs associated with the 
increased incentive to comply with existing laws if they cannot waive 
those laws or sidestep public accountability by blocking criticism. For 
purposes of determining legally recognizable countervailing benefits, 
it would generally be inappropriate to consider companies' lawbreaking 
to be a benefit to consumers or competition. However, even were the 
CFPB to consider that foregone cost to companies a countervailing 
benefit, those costs are likely to be low, and the CFPB would only 
credit those costs to the extent they pass through to consumer prices. 
That is because the CFPB considers countervailing benefits to 
``consumers or competition,'' not companies, and the analysis is used 
to determine whether a practice is ``injurious in its net effects.'' 
\155\ As noted in the section 1022(b) Analysis, the CFPB does not 
anticipate a 100 percent pass-through rate.
---------------------------------------------------------------------------

    \155\ See FTC Policy Statement on Unfairness, supra note 149.
---------------------------------------------------------------------------

    Taking each of these clauses in turn, with respect to waiver of law 
clauses, the CFPB preliminarily concludes that that the harms are not 
outweighed by countervailing benefits associated with allowing 
companies to include clauses that nullify State and Federal 
legislatures' judgment on addressing a consumer harm and tools they 
have chosen to enable consumers to vindicate their legal rights. A 
consumer protection enacted by a legislature pursuant to a 
constitutionally valid process will generally have a legitimate purpose 
and a rational basis,\156\ and legislatures generally balance the 
benefits and costs and conclude that the legislation is net beneficial 
when a law is passed. It would be inappropriate for the CFPB to second-
guess that legislative judgment and conclude that a democratically 
passed consumer protection's benefits are outweighed by its costs.
---------------------------------------------------------------------------

    \156\ Minnesota v. Clover Leaf Creamery Co., 449 U.S. 456, 461-
63 (1981).
---------------------------------------------------------------------------

    Regarding unilateral amendment clauses, the CFPB preliminarily 
concludes that the countervailing benefits do not outweigh the harms. 
To be sure, companies may need to implement modifications during the 
course of an agreement, but consumers do not benefit from having such 
changes imposed on them without their awareness and consent. Nor do 
such changes benefit competition, since competition is benefited by 
consumers being able to consider concrete deals with terms they can 
rely on. If firms can change contractual terms at their discretion, 
consumers can have no confidence in the scope of consumer contracts and 
cannot properly comparison-shop among various providers.
    As noted below in the section 1022(b) Analysis, in theory some 
firms may be discouraged from offering certain consumer-beneficial 
terms if they are not free to change them at a later date (without 
providing appropriate notice and obtaining consent). The CFPB generally 
does not grant this theoretical countervailing benefit much weight 
because the likelihood that unilateral amendment clauses impact the 
terms a firm offers is quite small. Firms will still be able to amend 
contracts--the only change is they will need to go through an 
appropriate process under common law to do so. Moreover, to consider 
such a benefit would be to argue that the CFPB should not prohibit a 
bait-and-switch scheme because it would deter companies from offering 
the ``bait.'' If firms are unwilling to offer terms unless they have 
full flexibility to change them, these terms are likely ephemeral 
promises anyway.
    With respect to restraints on free expression, the CFPB is unaware 
of any countervailing benefit to allowing companies to include clauses 
that restrict consumers' ability to provide negative feedback or 
reviews on the companies, since distorting public reviews of a good or 
service does not help consumers and moreover such restrictions are 
already illegal in form contracts under the Consumer Review Fairness 
Act. Nor do there appear to be benefits to restricting a consumer's 
right to engage in constitutionally protected religious or political 
activity. While a company's management may disfavor certain speech or 
activities, it is not their purview to restrict such activities by 
private citizens and it is unclear what pecuniary gain the company 
itself would gain by constraining customers' speech involving topics 
having nothing to do with the company.
    Having said that, there are two theoretical countervailing benefits 
to consumers that the CFPB has considered in issuing this proposal. 
First, a scammer or fraudster who is a customer of a financial 
institution may communicate with other consumers in furtherance of an 
illegal scheme to defraud those consumers and induce payment to their 
account. In recognition of this potential countervailing benefit, the 
unfair practice identified by the CFPB only includes contract terms 
that limit ``lawful expression,'' which would not include contract 
terms giving covered persons a right to close an account that is being 
used to commit

[[Page 3581]]

fraud or other illegal activity. Second, a common argument raised in 
debates about platforms and free speech is that a company should not 
have to carry the message of its customers if they disagree with the 
message.\157\ Putting aside the question of whether companies' and 
natural persons' free speech rights should be given equal weight, or 
the other merits of such arguments, this rulemaking implicates only 
agreements for consumer financial products or services, not terms of 
service for social media services or other businesses that provide a 
forum for someone else's views.
---------------------------------------------------------------------------

    \157\ Moody v. NetChoice, LLC, 603 U.S. 707, 728 (2024) (``We 
have repeatedly faced the question whether ordering a party to 
provide a forum for someone else's views implicates the First 
Amendment. And we have repeatedly held that it does so if, though 
only if, the regulated party is engaged in its own expressive 
activity, which the mandated access would alter or disrupt. So too 
we have held, when applying that principle, that expressive activity 
includes presenting a curated compilation of speech originally 
created by others.'').
---------------------------------------------------------------------------

    Public policy. ``In determining whether an act or practice is 
unfair, the Bureau may consider established public policies as evidence 
to be considered with all other evidence.'' \158\ Public policy 
corroborates that the use of these three contractual clauses would be 
an unfair act or practice. As discussed above, evidence suggests that 
these clauses undermine principles of democratic governance, freedom of 
contract, and freedom of expression. In particular, a prohibition on 
unilateral amendment clauses is consistent with the recent Restatement 
of Consumer Contracts.\159\ A prohibition on waivers of substantive 
rights is consistent with the public policy as determined by State and 
Federal legislatures across the country when determining to pass each 
individual law. And a prohibition on restraints on free expression 
supports a broad conception of the freedom of speech and recognizes 
that banking and consumer finance should be treated as public utilities 
with a duty to serve.\160\
---------------------------------------------------------------------------

    \158\ 12 U.S.C. 5531(c)(2). ``Such public policy considerations 
may not serve as a primary basis for such determination.'' Id.
    \159\ Restatement of the Law, Consumer Contracts, supra note 28, 
sections 3, 5.
    \160\ Lev Menand and Morgan Ricks, Rebuilding Banking Law: Banks 
as Public Utilities (Sept 2023), https://cdn.vanderbilt.edu/vu-URL/wp-content/uploads/sites/412/2023/09/14140935/Banking-Full-Report-Final.pdf; cf. Biden v. Knight First Amend. Inst., 141 S. Ct. 1220, 
1222-24 (2021) (Thomas, J., concurring) (raising concerns about the 
ability of companies to constrain free speech and recognizing that 
doctrines involving common carriers or public accommodation may be 
an appropriate solution).
---------------------------------------------------------------------------

    The CFPB seeks comment on all aspects of the proposed prohibition 
of these clauses.

VII. Proposed Effective Date and Compliance Date

    If finalized, the proposed rule would go into effect 30 days after 
publication in the Federal Register. Under proposed Sec.  1027.104, 
covered persons subject to the rule would also be required to comply 
with the rule by 30 days after publication in the Federal Register. 
However, ``if an agreement for a consumer financial product or service 
between a covered person and a consumer was executed before [30 days 
after publication of the final rule in the Federal Register],'' 
compliance with the rule would be required by 180 days after 
publication of the final rule in the Federal Register.'' An extended 
compliance date for pre-existing agreements would be appropriate 
because companies may need additional time to review and conform any 
pre-existing agreements to the proposed rule. The CFPB is not proposing 
to prescribe any particular manner in which a covered person should 
conform a pre-existing agreement to this proposed rule. For instance, a 
covered person may (subject to applicable law) amend such an agreement 
to remove any terms or conditions prohibited by the proposed rule. Or a 
covered person may provide adequate notice to a consumer that it will 
not enforce a term or condition prohibited by the proposed rule.

VIII. Severability

    Under proposed Sec.  1027.103, the CFPB preliminarily intends that, 
if any provision of the proposed rule, if adopted as final, or any 
application of a provision, is stayed or determined to be invalid, the 
remaining provisions or applications are severable and shall continue 
in effect.

IX. Dodd-Frank Act Section 1022(b)(2) Analysis

A. Introduction

Overview
    In developing this proposed rule, the CFPB considered the potential 
benefits, costs, and impacts required by section 1022(b)(2) of the 
Dodd-Frank Act. Specifically, section 1022(b)(2) calls for the CFPB to 
consider the potential benefits and costs of a regulation to consumers 
and covered persons, including the potential reduction of access by 
consumers to consumer financial products or services, the impact on 
depository institutions and credit unions with $10 billion or less in 
total assets as described in section 1026 of the Dodd-Frank Act, and 
the impact on consumers in rural areas.\161\
---------------------------------------------------------------------------

    \161\ 12 U.S.C. 5512(b)(2)(A).
---------------------------------------------------------------------------

    The CFPB requests comment on the preliminary analysis presented 
below, as well as submissions of additional data that could inform the 
CFPB's analysis of the benefits, costs, and impacts of the proposed 
rule.
    The CFPB considers the benefits, costs, and impacts of the proposed 
provisions as compared to the status quo that existed prior to the 
issuance of this proposed rule. In formulating this baseline, the CFPB 
considers economic attributes of the relevant markets and the existing 
legal and regulatory structures applicable to covered persons. In 
subpart B, the proposed rule would codify the prohibition of certain 
credit practices. Bank and nonbank covered persons have generally been 
aware that these credit practices are or are likely unlawful in light 
of the FTC Credit Practices Rule and joint guidance from the CFPB and 
the prudential regulators warning that such practices may violate the 
CFPA and FTC Act even in the absence of an express regulatory 
prohibition if engaged in by banks, savings associations, and Federal 
credit unions. The CFPB therefore anticipates few impacts resulting 
from this provision, relative to the baseline for these types of 
covered persons and seeks comment regarding the impacts on covered 
persons who were not already subject to these laws. subpart C of the 
proposed rule would create new restrictions on the terms of covered 
persons' contracts for a consumer financial product or service, though 
in many cases these terms are also already prohibited, such as non-
disparagement clauses that violate the Consumer Review Fairness Act or 
waivers that violate the Military Lending Act. Therefore, subpart C may 
result in some substantive changes relative to the baseline. The 
estimated costs and benefits of both subparts are considered below. The 
CFPB seeks comment on this baseline.
Data
    The CFPB notes that in some instances, the data needed to analyze 
the potential benefits, costs, and impacts of the proposed rule are not 
available or are limited. In particular, data with which to quantify 
impacts of the proposed rule are especially limited; for example, data 
with which to quantify the incidence of prohibited clauses, incidence 
of the use of

[[Page 3582]]

prohibited clauses under baseline,\162\ estimates of investments into 
compliance with consumer protection laws that will be induced by the 
rulemaking, and estimates of the effect on consumer behavior induced by 
the inclusion of prohibited clauses in contract language under 
baseline. As a result, portions of this analysis rely in part on 
general economic principles and the CFPB's expertise in consumer 
financial markets to provide a qualitative discussion of the benefits, 
costs, and impacts of the proposed rule. The CFPB seeks comment, data, 
or analysis that would improve this analysis.
---------------------------------------------------------------------------

    \162\ That is, how often covered persons rely on a prohibited 
term in consumer relations under the baseline.
---------------------------------------------------------------------------

Statement of Need
    Before considering the benefits, costs, and impacts of the proposed 
provisions on consumers and covered persons, as required by section 
1022(b)(2), the CFPB believes it may be useful to provide the economic 
framework through which it is considering those factors in order to 
more fully inform the rulemaking, and in particular to describe the 
market failures that are the basis for the proposed rule.\163\
---------------------------------------------------------------------------

    \163\ Although section 1022(b)(2) does not require the CFPB to 
provide this background, the CFPB does so as a matter of discretion 
to more fully inform the rulemaking.
---------------------------------------------------------------------------

    In a perfectly competitive market, where consumers were able to 
fully understand and appropriately value each term or condition of 
their contracts, firms would have strong incentives to offer contracts 
that include only terms and conditions that, in expectation, generate 
net value that is shared between the firm and their customers. However, 
there is strong evidence that consumers rarely read the terms and 
conditions and are often unaware of the full implications of the 
contracts they sign. Form contracts are often long and complex, and 
require sophisticated legal knowledge to understand. Further, consumers 
have no meaningful opportunity to negotiate the contracts' terms and 
conditions, and therefore have little incentive to spend their limited 
time on understanding and valuing the contracts' terms and conditions. 
Even if consumers do fully understand the terms and conditions, the 
risks and benefits of each clause are often distant in time and 
probability and therefore extremely difficult for consumers to 
accurately assess. Finally, although the competitiveness of markets for 
consumer financial products and services varies from product to 
product, the search costs involved in reading, understanding, and 
valuing the terms and conditions offered for each product or service a 
consumer is considering likely creates sufficient market power for 
firms to impose contract terms and conditions that are less favorable 
to consumers than would be efficient. That is, the terms and conditions 
are likely to, on average, impose costs on consumers that exceed the 
benefits to the firms that impose them.
    Certain types of terms and conditions also impose negative 
externalities on the market as a whole by weakening incentives to 
comply with applicable consumer protection laws. For example, firms 
sometimes include clauses in their terms and conditions that purport to 
waive protections passed by elected officials in Federal or State 
government, surrender due process rights upon default, or allow firms 
to unilaterally amend the contract at any time. Some firms also seek to 
weaken reputational incentives by including clauses that restrict 
consumers' free speech.
    The proposed rule has two parts. First, it codifies practices on 
the use of certain remedies in credit contracts that have long been 
understood to be prohibited. Second, it forbids covered persons from 
including in their contracts any clause that waives legal rights 
designed to protect consumers, any clause that reserves to the covered 
person the right to unilaterally amend a material term of the contract, 
and any clause that restrains the consumer's free expression.
    The first part of the proposed rule-subpart B-would codify the 
already existing FTC Credit Practices Rule and is unlikely to have 
significant costs for covered persons because the credit practices it 
prohibits are generally understood to be prohibited at baseline. Under 
this baseline, many covered persons are already subject to the FTC 
Credit Practices Rule, and the prohibitions in subpart B would not 
result in any change for them, while banks and other prudentially 
supervised institutions that have not been covered by the Credit 
Practices Rule or its prudential regulator equivalents, repealed 
following the enactment of the CFPA, generally understand from the 2014 
guidance that the practices that subpart B would codify are likely to 
be prohibited. At baseline, some covered persons may face costs related 
to residual uncertainty about whether covered persons within the CFPB's 
jurisdiction may engage in the prohibited credit practices. For 
example, some covered persons may choose to consult legal counsel to 
determine whether a certain business practice is permissible. By 
reducing confusion or uncertainty about what is prohibited, the 
proposed rule may reduce these costs for covered persons.
    The second part of the proposed rule--subpart C--addresses the 
incentives for covered persons to comply with applicable consumer 
financial protection laws. Some consumer finance companies may alter 
private enforcement through the terms and conditions included in 
contracts of adhesion. The CFPB's economic framework assumes that when 
Congress and States have promulgated consumer protection laws that are 
applicable to consumer financial products and services (the underlying 
laws) they have done so to address a range of market failures. The 
underlying laws need enforcement mechanisms to ensure that firms 
providing financial products and services conform to these laws. Along 
with supervisory or public enforcement by Federal and State regulatory 
bodies and commercial incentives to maintain a good reputation, private 
enforcement mechanisms play a critical role in ensuring compliance with 
the underlying laws. While the CFPB assumes that the underlying laws 
address a range of market failures, it also recognizes that compliance 
with these underlying laws requires firms to incur costs. For example, 
there are costs required to distribute required disclosures, resolve 
disputes, or train and monitor employees for compliance with underlying 
laws.
    The CFPB has preliminarily determined, based on its experience and 
expertise in overseeing consumer finance markets, that weakening 
consumers' rights, as defined by elected legislatures and courts, is 
likely to lead to weaker compliance incentives. The economic costs of 
increased compliance would generally be less than the economic benefits 
of increased compliance. Thus, the terms and conditions that would be 
prohibited by subpart C of the proposed rule are likely to lower 
economic welfare by undermining compliance incentives.
    The provisions that would be prohibited by subpart C of the 
proposed rule generally undermine compliance incentives without 
offering any rights or benefits to consumers. Indeed, they generally 
constitute unfair or deceptive acts or practices. Many of the 
provisions prohibited by subpart C persist in the marketplace due to 
the market failures described above. Consumers are generally unaware of 
these provisions, cannot understand them, and have no meaningful 
opportunity to avoid them. However, even in an idealized marketplace 
where consumers were fully informed and firms did not have

[[Page 3583]]

market power, terms and conditions that weaken incentives to comply 
with the underlying laws would likely be economically inefficient 
because they impose costs on other consumers and firms that are not 
parties to the transaction. For example, consumers might sign a 
contract of adhesion agreeing to forfeit their right to provide 
negative reviews of a firm's product or service either because they 
have no meaningful choice or because the product is priced lower than 
competing products (and at the time of contracting, the consumer might 
focus only on the price, not the right they are giving up), and the 
firm might be willing to provide a discount in return for this 
agreement to ensure that any deficiencies in their product or service 
would not affect their reputation or ability to attract future 
customers. However, this restraint on free expression deprives the rest 
of the market of valuable information regarding the conduct of the firm 
or the quality of its product. This type of clause creates an 
additional market failure--insufficient provision of public 
information--that cannot be resolved through informed consent or 
negotiation.

B. Overview of Economic Effects

    This section provides an overview of the economic effects of 
subparts B and C of the proposed rule.
Overview of Economic Effects of Subpart B
    This subpart would codify the already existing FTC Credit Practices 
Rule, which was first issued in 1984 and applies to entities in the 
FTC's jurisdiction, and apply it additionally to banks, savings 
associations, Federal credit unions, and other covered persons under 
the CFPB's jurisdiction. Following the issuance of the FTC's rule, 
other prudential regulators issued companion credit practices rules 
applicable to banks, savings associations, and Federal credit unions; 
the Federal Reserve Board's rule applicable to banks was codified in 
Regulation AA. The Dodd-Frank Act repealed the rulemaking authority of 
the prudential regulators under the FTC Act and transferred that 
authority to the CFPB. The CFPB did not re-codify these rules when it 
was created, but issued joint guidance with the prudential regulators 
to make clear that the conduct that these rules covered still could 
violate the prohibitions against unfair and deceptive acts and 
practices under the FTC Act and the Dodd-Frank Act. This subpart 
explicitly re-codifies these credit practices rules. Because the 
conduct covered under this subpart is already generally understood by 
market participants to be unfair and deceptive, the CFPB does not 
anticipate that there will be any meaningful economic effects in 
response to the re-codification of these rules.
    Insofar as there are covered persons who are not currently subject 
to the FTC's Credit Practices Rule or within the scope of the 
interagency guidance on prohibited credit practices for banks, savings 
associations, and Federal credit unions, and therefore do not 
understand that the practices are currently prohibited, the 
implementation of this proposed rule would standardize credit practices 
across lenders of different types. This would require covered persons 
not currently in compliance with the requirements of the FTC's Credit 
Practices Rule and the former rules promulgated by the prudential 
regulators to invest in compliance with the proposed rule, for example, 
by removing any clauses with prohibited terms in existing contracts and 
including cosigner disclosure forms. For covered persons currently 
subject to the FTC's Credit Practices Rule or within the scope of the 
interagency guidance--that is, banks, savings associations, Federal 
credit unions, and any covered person under FTC jurisdiction--this 
would require potential competitors to also comply with the 
requirements of the existing and former rules, eliminating any undue 
competitive advantage those potential competitors currently hold and 
benefiting the covered persons currently refraining from the practices 
covered by those rules. From the perspective of the consumer, the 
standardization of credit practices across lenders of different types 
would reduce search costs. Moreover, as noted in the interagency 
guidance, the basis of the prohibited credit practices was their unfair 
or deceptive nature; \164\ hence their prohibition across a broader 
group of covered persons would benefit consumers by further shielding 
them from these practices. On the other hand, it is theoretically 
possible that some covered persons would reduce the provision of 
certain credit products due to the expanded scope of the proposed rule. 
However, even if there are entities that are not covered by the FTC's 
rule or the interagency guidance and use these prohibited terms, the 
rule is unlikely to affect credit access from those entities given the 
FTC's original conclusion that the Credit Practices Rule would ``not 
have a major impact on either the price or availability of credit.'' 
\165\ The magnitude of these effects depends on how many covered 
persons would be newly subjected to these requirements. The CFPB 
requests any data or comments that would help quantify how many covered 
entities would be newly subjected to the requirements of the credit 
practices rules as a result of this proposed rule and how many use any 
prohibited credit practices under the baseline.\166\
---------------------------------------------------------------------------

    \164\ See 49 FR 7740 (Mar. 1, 1984); 50 FR 16696 (Apr. 29, 
1985); 50 FR 19325 (May 8, 1985); and 52 FR 35060 (Sept. 17, 1987).
    \165\ 49 FR 7779. The FTC's post-hoc review on access to credit 
came to the same conclusion. 60 FR 24805, 24808 (May 10, 1995).
    \166\ Note that these covered persons would be limited to those 
that are not subject to the current interagency guidance--which 
covers banks, savings associations, and Federal credit unions--as 
well as those not subject to FTC jurisdiction.
---------------------------------------------------------------------------

    Additionally, it is possible that certain providers would attempt 
to engage in prohibited credit practices or may be uncertain as to 
whether certain business practices are permissible, despite current 
guidance from the CFPB and other prudential regulators. This subpart 
would reduce any residual confusion or uncertainty about what is 
prohibited, which may benefit covered persons. In the event that 
covered persons may incorrectly attempt to use these prohibited 
practices against consumers, it is possible that this re-codification 
incentivizes providers to reduce their use of these prohibited credit 
practices and thus reduces any costs incurred by consumers in defending 
themselves from these prohibited credit practices.

Overview of Economic Effects of Subpart C

    This subpart would prohibit covered persons from including in their 
contracts with consumers for consumer financial products or services 
(1) clauses that require consumers to waive legal rights designed to 
protect consumers, other than rights explicitly made waivable by 
relevant consumer laws; (2) clauses that allow a covered person to 
unilaterally amend a material term of the contract; and (3) clauses 
that restrict consumers' free expression. Collectively, these are 
referred to as prohibited terms and conditions. The CFPB considers 
these terms and conditions to be (1) deceptive insofar as clauses that 
purport to waive legal rights expressly granted by relevant consumer 
financial laws, or restrain speech protected by the Consumer Review 
Fairness Act are unenforceable but may be presented as if they are 
binding; and (2) unfair, as these terms and conditions cause injury 
that is not reasonably avoidable by consumers and not

[[Page 3584]]

outweighed by countervailing benefits to consumers or competition.\167\
---------------------------------------------------------------------------

    \167\ The CFPB has explained that the use of contract terms that 
are unenforceable often amounts to a deceptive act or practice, see 
CFPB Circular 2024-03, https://www.consumerfinance.gov/compliance/circulars/consumer-financial-protection-circular-2024-03/. In that 
sense, portions of this subpart codify existing interpretation of 
the CFPA. Under the Restatement (Second) of Contracts, revised 
contract terms are adopted only insofar as consumers receive notice 
of material changes, have opportunity to consider changes, and 
assent to changes. Unilateral changes to contract terms that lack 
notice and meaningful consent by the consumer violate this principle 
and are generally found to be unenforceable by courts, as noted 
above. Similarly, form contract prohibitions on consumers' free 
expression run afoul of the Consumer Review Fairness Act and are 
thus unenforceable. Finally, as noted above, the CFPB has taken 
enforcement action against covered persons who include in contract 
language waivers of consumer rights that are expressly waivable by 
statute.
---------------------------------------------------------------------------

    There are four main effects the adoption of subpart C of this 
proposed rule would cause. First, the inclusion of prohibited terms and 
conditions at baseline may have an effect on consumer behavior, even 
when such terms are unenforceable.\168\ Hence, the implementation of 
this rulemaking would likely ease this effect, which in turn would 
likely increase the incidence of consumer disputes. This would apply to 
formal disputes, where consumers exercise legal rights afforded to them 
under consumer financial laws, or to informal disputes, for example, in 
situations where a consumer exercises their free expression to lodge 
complaints against the covered person in public forums. In either case, 
the covered person would generally incur additional costs in countering 
such disputes through customer service, in formal legal or arbitration 
settings, or in informal settings such as response to consumer 
complaints in public forums. Consumers who may have been discouraged 
from pursuing valid disputes by the inclusion of prohibited terms in 
contracts would benefit from the increased incidence of disputes and 
associated relief. Second, insofar as covered persons may rely on 
prohibited terms in the event that a dispute arises--including reliance 
on unenforceable terms due to any residual uncertainty about the 
applicability of such terms--the prohibition of these terms and 
conditions in contracts incentivizes covered persons to comply with 
existing consumer financial laws. Covered persons would respond to this 
incentive by increasing investments in compliance, which in turn 
benefits consumers due to the lower likelihood that consumers would 
experience a violation of their rights under applicable consumer 
financial laws.\169\ Third, the prohibition of unilateral changes in 
contract terms would increase the costs of contract changes, which in 
turn may change the terms that the covered person would initially offer 
beyond the elimination of any prohibited terms. That is, a covered 
person who relies on a contract term allowing for unilateral changes 
under the baseline would be required to remove this term and instead 
comply with applicable Federal or State law in order to implement 
modifications.\170\ Insofar as this process is more costly than the 
process to change terms under the baseline, the covered person may opt 
to change the terms--beyond any prohibited terms--in the initially 
offered contract in anticipation of these increased costs.\171\ 
However, as noted above, unilateral changes may be found to be 
unenforceable by courts, absent evidence of sufficient notice and 
consumer consent. Hence, this effect will be limited by the 
enforceability of such terms under baseline. Finally, there would be 
administrative costs associated with identifying and removing any 
prohibited terms and conditions from contracts, though this cost is 
expected to be a fixed, one-time cost, in general.\172\ The CFPB does 
not have systematic data that would allow for the quantification of the 
incidence of these terms in consumer contracts nor their actual use in 
financial relationships. The CFPB requests any commentary or data that 
would help quantify the baseline as well as any costs or benefits 
associated with the aforementioned economic effects of the rulemaking.
---------------------------------------------------------------------------

    \168\ See, e.g., Tess Wilkinson-Ryan, The Perverse Consequences 
of Disclosing Standard Terms, 103 Cornell L. Rev., 117-175 (2017).
    \169\ For example, any covered persons that rely on waivers of 
consumer protection law, including both cause of action and 
remedies, under the baseline would be incentivized to increase their 
compliance with these laws given the prohibition of these waivers of 
law. Note that this incentive effect is not independent of the 
incidence of disputes effect described above. Specifically, covered 
persons are likely to recognize that the removal of any chilling 
effect the prohibited terms may have on consumer behavior would 
likely increase dispute incidence, all else equal. To lessen the 
probability of a dispute arising, covered persons would be 
incentivized to increase compliance with consumer protection laws. 
Even with this increased compliance, it is likely that the removal 
of the chilling effect would still lead to increased incidence of 
disputes.
    \170\ The specific process the covered person would have to 
follow depends on prevailing State and common law.
    \171\ This would have an ambiguous effect on consumers. On one 
hand, if as a result of increased costs of changing contracts, 
covered persons decide to change or remove terms that consumers 
value, this is costly to consumers. On the other hand, consumers 
being made aware of changes in contract terms and being offered the 
opportunity to consider these changes allows them to better respond 
to changes, which benefits them. For example, a covered person that 
rewards points on a credit card may lower the value of these points 
in the initially offered contract in anticipation of higher costs of 
changing the terms at a later date, which is costly for consumers. 
However, if the covered person decides to lower the value of these 
points after the contract is in force, they would not be able to do 
so unilaterally and must notify the consumer in advance, at a 
minimum giving the consumer opportunity to consider and respond to 
these changes. In response, the consumer may decide to redeem the 
points in advance of any devaluation or end the financial 
relationship and move to a different provider that offers more 
favorable terms. This would benefit the consumer insofar as they 
would not necessarily have this opportunity under the baseline.
    \172\ Given that the rule prohibits waivers of consumer rights 
under Federal or State consumer financial protection laws, it is 
possible that future changes in consumer financial protection laws 
may require review and editing of contracts. In that sense, this 
final effect may also lead to some variable costs for covered 
persons in the form of monitoring relevant consumer protection laws 
and ensuring that terms and conditions of relevant contracts comply 
with these laws. However, it should also be noted that, at baseline, 
covered persons must monitor and comply with relevant consumer 
protection laws, including any potential changes to relevant laws. 
In that sense, the additional cost here would be limited to 
reviewing and editing contracts to ensure compliance.
---------------------------------------------------------------------------

    Insofar as some of these effects increase the marginal costs to 
covered persons--e.g., increased costs of compliance with consumer 
finance laws or increased costs associated with dispute resolution 
which would be ongoing costs, in general, as opposed to being incurred 
one-time only--the CFPB believes that most providers would pass through 
some portion of these marginal cost increases to consumers.\173\ The 
rate at which firms pass through changes in their marginal costs to 
consumers through prices charged is called the pass-through rate--e.g., 
a pass-through rate of 100 percent means that the increase in marginal 
costs would not be absorbed by providers but rather fully passed 
through to consumers through increased prices, while a pass-through 
rate of 0 percent means that consumers would not see a price increase. 
The pass-through rate depends on many factors, including the 
elasticities of demand and supply, the market structure, and the model 
of competition. Existing estimates of pass-through rates in the credit 
card market are close to zero.\174\ Similarly, research on the effects 
of regulation on late payment

[[Page 3585]]

fees and overlimit fees on credit card and interchange fees on debit 
cards generally found low to non-existent pass-through rates.\175\ 
Beyond credit cards and debit cards, there is relatively limited 
evidence estimating the pass-through rate on all the relevant consumer 
finance markets covered by this rulemaking. The CFPB requests any 
comments or data that may aid the evaluation of relevant pass-through 
rates.
---------------------------------------------------------------------------

    \173\ Some of these increased costs--e.g., the cost of changing 
contract language to remove prohibited terms--can be considered 
fixed costs of business. Economic theory suggests that the profit-
maximizing response of an increase in fixed costs is not to pass 
that increase through to consumers.
    \174\ See Lawrence Ausubel, The Failure of Competition in the 
Credit Card Market, 81 a.m. Econ. Rev. 50 (1991); but see Todd 
Zywicki, The Economics of Credit Cards, 3 Chap. L. Rev. 79 (2000); 
Daniel Grodzicki, Competition and Customer Acquisition in the U.S. 
Credit Card Market (Working Paper, 2015): https://editorialexpress.com/cgi-bin/conference/download.cgi?db_name=IIOC2015&paper_id=308.
    \175\ See Sumit Agarwal, Souphala Chomsisengphet, Neale Mahoney 
& Johannes Stroebel, Regulating Consumer Financial Products: 
Evidence from Credit Cards, 130 Q. J. of Econ. 1 (2015); Benjamin 
Kay, Mark Manuszak & Cindy Vojtech, Bank Profitability and Debit 
Card Interchange Regulation: Bank Responses to the Durbin Amendment 
(Fed. Reserve Board, Working Paper No. 2014-77, 2014), https://www.federalreserve.gov/econresdata/feds/2014/files/201477pap.pdf. 
But see Todd Zywicki, Geoffrey Manne & Julian Morris, Price Controls 
on Payment Card Interchange Fees: The U.S. Experience, (Geo. Mason 
L. & Econ., Research Paper No. 14-18, 2014), http://papers.ssrn.com/sol3/Papers.cfm?abstract_id=2446080.
---------------------------------------------------------------------------

C. Potential Costs and Benefits to Covered Persons

    This section describes the benefits and costs to covered persons 
that the CFPB expects to occur under the proposed rule. Each of the two 
subparts of the proposed rule is analyzed in detail separately. The 
proposed rule would generally apply to ``covered persons'' under the 
CFPA, subject to certain exceptions. A covered person is ``(A) any 
person that engages in offering or providing a consumer financial 
product or service; and (B) any affiliate of a person described in 
subparagraph (A) if such affiliate acts as a service provider to such 
person.'' \176\ Section 1027.102 of the proposed rule would exempt two 
categories of covered persons from the rule. First, the rule would not 
apply to any person that is a `small entity' as that term is defined in 
5 U.S.C. 601, including any firm that is at or below the SBA standard 
for its primary industry. Second, the rule would not apply to ``any 
person to the extent that it is providing a product or service in 
circumstances excluded from the CFPB's rulemaking authority pursuant to 
12 U.S.C. 5517 or 5519.''
---------------------------------------------------------------------------

    \176\ 12 U.S.C. 5481.
---------------------------------------------------------------------------

    To derive an estimate of the number of affected entities under the 
proposed rule using publicly available data, the CFPB used data from 
the December 2023 NCUA and FFIEC Call Report Data and the 2017 Economic 
Census from the U.S. Census Bureau. Table 1 below presents entity 
counts for the North American Industry Classification System (NAICS) 
codes that generally align with consumer financial products or 
services. The markets defined by NAICS codes may include some entities 
that would not qualify as covered persons under the CFPA. It is also 
likely that some covered persons may not be counted in table 1. For 
example, the financial services they provide may not be their primary 
line of business. The CFPB seeks comment on the NAICS codes included in 
table 1, and, in particular, on whether there are any industries not 
included that contain a significant number of entities that will be 
affected by the final rule.

                                     Table 1--Entity Counts for NAICS Codes
----------------------------------------------------------------------------------------------------------------
                                                                                     Number of       Estimated
                                                                                     entities     number of non-
                 NAICS name(s)                            NAICS code(s)            operating all   SBA  entities
                                                                                       year            \177\
----------------------------------------------------------------------------------------------------------------
Credit Unions.................................  522110,.........................            4702             500
                                                522120,.........................
                                                522210..........................
Commercial Banking, Savings Institutions, and   522130..........................            4587            1165
 Credit Card Issuing.
Nondepository Credit Intermediation...........  522220,.........................            7403             438
                                                522291,.........................
                                                522292,.........................
                                                522299..........................
Activities Related to Credit Intermediation...  522310,.........................           11252             212
                                                522320,.........................
                                                522390..........................
Activities Related to Real Estate.............  531311,.........................           63564             709
                                                531312,.........................
                                                531320,.........................
                                                531390..........................
Portfolio Management & Investment Advice......  523920,.........................           34695             542
                                                523930..........................
Passenger Car Leasing.........................  532112..........................             199               0
Truck, Utility Trailer, and Recreational        532120..........................             920               0
 Vehicle Rental and Leasing.
Consumer Reporting............................  561450..........................             284              17
Debt Collection...............................  561440..........................            2750             116
                                               -----------------------------------------------------------------
    Total.....................................  ................................         130,356           3,699
----------------------------------------------------------------------------------------------------------------

     
---------------------------------------------------------------------------

    \177\ The Economic Census provides entity counts by revenue bins 
that generally do not correspond to the SBA revenue thresholds. 
Therefore, the CFPB estimates the number of entities that are above 
the small entity thresholds. In particular, for each NAICS code, the 
CFPB fits a generalized Pareto distribution to the share of firms in 
four revenue bins, as reported in the Economic Census: Under $1MM, 
$1-10MM, $10-25MM, and $25MM+. SBA regularly updates its size 
thresholds to account for inflation and other factors. The SBA Size 
Standards described here reflect the thresholds in effect at the 
publication date of this proposed rule. The 2017 Economic Census 
data are the most recently available data with entity counts by 
annual revenue. See Small Bus. Admin., SBA Size Standards (effective 
Mar. 17, 2023), https://www.sba.gov/document/support-table-size-standards.
---------------------------------------------------------------------------

    Subpart B of the proposed rule would codify the already existing 
FTC Credit Practices Rule, which was first issued in 1984,\178\ and 
apply it additionally to banks, savings associations, Federal credit 
unions, and other covered persons under the CFPB's jurisdiction. 
Because the conduct covered under this subpart is already generally 
understood to be unfair and deceptive, the CFPB does not anticipate 
that there would be

[[Page 3586]]

any significant economic effects in response to the proposed 
codification. However, it is possible that, at baseline, some covered 
persons attempt to engage in prohibited credit practices or incur costs 
related to determining whether a practice is prohibited. The proposed 
rule may therefore modestly benefit covered persons by emphasizing that 
these credit practices are prohibited.
---------------------------------------------------------------------------

    \178\ 49 FR 7740 (Mar. 1, 1984).
---------------------------------------------------------------------------

    Subpart C of the proposed rule would prohibit covered persons from 
including in their contracts with consumers for consumer financial 
products or services (i) clauses that require consumers to waive legal 
rights designed to protect consumers; (ii) clauses that allow the 
covered person to unilaterally amend the contract; and (iii) clauses 
that restrict consumers' free expression. This provision would impose 
one-time administrative costs associated with reviewing and revising 
contracts to identify and remove any prohibited terms and conditions. 
Covered persons currently using prohibited terms and conditions would 
likely face increased exposure to consumer disputes, including 
litigation. In response, covered persons currently using prohibited 
terms and conditions would incur costs related to lowering their 
exposure to disputes, for example by allocating more resources to 
training staff to comply with underlying laws, as well as increased 
costs related to countering disputes, either in formal litigation or 
arbitration or in informal settings.
    Subpart C likely would benefit some covered persons by reducing 
uncertainty about the legality of prohibited terms and conditions, as 
well as unintentional exposure to enforcement action by the CFPB or 
other State and Federal regulators. Covered persons not currently using 
terms and conditions that would be prohibited under subpart C may also 
benefit from this provision of the proposed rule. In general, firms 
that intentionally violate consumer protection laws or under-invest in 
compliance obtain a competitive advantage over their more compliant 
competitors. For example, firms that successfully deceive consumers 
about the true cost or quality of the products or services they offer 
by restricting the right of consumers to freely express their 
experiences with the provider may gain market share at the expense of 
firms that more accurately disclose costs or quality. In some cases, 
firms that unlawfully use terms and conditions to limit consumers' 
ability to resolve disputes may be able to offer lower prices to 
consumers up front, even if the prohibited terms and conditions leave 
consumers worse off on average. To the extent that the proposed rule 
incentivizes firms using prohibited terms and conditions to increase 
their compliance, firms which were previously compliant will benefit. 
Clauses that restrict free expression prevent consumers from obtaining 
information that would be relevant to their adoption or purchasing 
decisions and make it more difficult for high-quality firms to gain 
market share. Therefore, the prohibition on clauses restricting free 
expression will benefit firms that would gain market share if more 
information about consumers' experiences with their competitors was 
publicly available.
Potential Costs and Benefits to Covered Persons of Subpart B
    Subpart B of the proposed rule would codify the already existing 
FTC Credit Practices Rule, which was first issued in 1984, and apply it 
additionally to banks, savings associations, Federal credit unions, and 
other covered persons under the CFPB's jurisdiction. Because the 
conduct covered under this subpart is already generally understood to 
be unfair and deceptive and is, in the CFPB's experience, exceedingly 
uncommon, the CFPB does not anticipate that there will be any 
significant economic effects in response to the proposed codification. 
The CFPB seeks comment on whether any covered persons are not 
prohibited or discouraged from using these practices at baseline, for 
example because they are exempt from FTC authority and outside the 
scope of applicable interagency guidance. The CFPB also seeks comment 
on the incidence of these practices at baseline, including for any 
covered persons not currently prohibited or discouraged from using 
them.
    Despite the longstanding prohibition on and discouragement of these 
practices, it is possible that some covered persons attempt to engage 
in such practices or incur costs related to determining whether a 
practice is prohibited. The proposed rule may therefore modestly 
benefit covered persons by clarifying that these credit practices are 
prohibited. For example, it is possible that some covered persons that 
would consult outside legal counsel to assess the risks of engaging in 
a prohibited credit practice at baseline would no longer do so under 
the proposed rule.
    The CFPB does not have any data with which to quantify the extent 
of uncertainty regarding the credit practices subpart B would prohibit 
or the costs, if any, that firms bear as a result of such uncertainty. 
Therefore, the CFPB cannot quantify the benefits associated with 
reducing uncertainty about the legality of these practices. The CFPB 
requests comment or data on cases where covered persons may lack 
clarity about the applicability of current rules and guidance on credit 
practices, or where such lack of clarity may be resolved by the 
proposed rule's codification.
Potential Costs and Benefits to Covered Persons of Subpart C
    Subpart C of the proposed rule prohibits covered persons from 
including in their contracts with consumers for consumer financial 
products or services (i) clauses that require consumers to waive legal 
rights designed to protect consumers; (ii) clauses that allow the 
covered person to unilaterally amend the contract; and (iii) clauses 
that restrict consumers' free expression. The CFPB has preliminarily 
determined that these prohibited terms and conditions constitute unfair 
or deceptive acts or practices. Based on previous guidance \179\ and 
enforcement actions by the CFPB and other State and Federal regulators, 
the CFPB believes that some covered persons may already not use the 
terms and conditions covered by subpart C because their use may 
constitute prohibited UDAAPs or otherwise be unenforceable under common 
law or other statutory law.
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    \179\ See CFPB Consumer Financial Protection Circular 2024-03 
``Unlawful and unenforceable contract terms and conditions'' at 
https://www.consumerfinance.gov/compliance/circulars/consumer-financial-protection-circular-2024-03/.
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Costs of Reviewing and Revising Contracts
    This provision would impose one-time administrative costs 
associated with reviewing and revising contracts to identify and remove 
any prohibited terms and conditions. To precisely quantify the costs to 
covered persons, the CFPB would need representative data on the 
operational costs that covered persons would incur to read and 
understand the rule, identify any prohibited terms and conditions in 
their contracts, revise any non-compliant contracts, and fully 
implement use of the revised contracts. Given that the CFPB is unaware 
of the existence of representative data of this kind, the CFPB has made 
reasonable efforts to gather information on the one-time costs of 
reviewing contracts for compliance with the proposed rule and revising 
them if necessary. The following discussion combines available data 
with assumptions informed by the CFPB's experience to produce estimated 
costs for covered persons of three

[[Page 3587]]

representative sizes. Given the potential for wide variation in use of 
terms and conditions covered by proposed subpart C at baseline and the 
limited data available, these calculations may not fully quantify the 
costs to an individual covered person. That is, the CFPB expects that 
some firms would have higher or lower costs than the average costs 
described here. The CFPB requests comment on this approach, as well as 
any data or analysis that would inform its cost estimates.
    In general, the one-time costs of bringing contracts into 
compliance with the proposed rule would require four distinct tasks: 
(1) understanding the rule; (2) reviewing all contract types to 
identify any prohibited terms and conditions; (3) revising any contract 
containing a prohibited term and condition; and (4) implementing use of 
the revised contracts. As discussed above, the CFPB does not have 
representative data on the prevalence of terms and conditions that 
would be prohibited under the proposed rule. In order to avoid 
underestimating the costs of the proposed rule, the CFPB assumes that 
nearly all covered persons not exempt from the proposed rule would need 
to review every contract type they use for compliance with the proposed 
rule. Further, the CFPB assumes that nearly all contract types would 
need to be revised to comply with the proposed rule.\180\ The CFPB 
seeks comment or data on the accuracy of these assumptions.
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    \180\ For example, the proposed rule would generally require 
that unilateral amendment clauses explicitly describe the conditions 
under which contracts can be unilaterally amended, such as 
notification and options for opting out of the amendment. In the 
CFPB's experience, these clauses are common but often do not 
adequately inform consumers of their rights. Under the proposed 
rule, any contract containing a unilateral amendment clause would 
need to be revised.
---------------------------------------------------------------------------

    The first task would require firms to read the proposed rule and 
understand its definitions and requirements. Based on the CFPB's 
experience, this would take roughly two hours for the typical firm. 
Some firms may have higher costs. For example, some firms may need to 
take time to analyze whether they are covered persons subject to the 
proposed rule. The CFPB seeks information or analysis on the typical 
time burden that would be required to read and understand the proposed 
rule.
    The second task would require firms to review their contracts for 
the presence of terms and conditions that would be prohibited by the 
proposed rule. The CFPB understands that the types of terms and 
conditions prohibited by the proposed rule are not uncommon and expects 
that many covered persons would review their existing contracts for 
compliance with the proposed rule. The CFPB expects that firms would 
generally be able to complete this task by searching the text of the 
contract for a limited set of key words that signify waivers, 
amendments to the contract, or restrictions on expression and then 
evaluating the relevant clause for compliance. The CFPB expects that 
this would take between 60 and 90 minutes per contract, depending on 
the number of contracts to review and the sophistication of the firm. 
The CFPB seeks comment on the typical time burden that would be 
involved in reviewing existing contracts for compliance with the 
proposed rule. The CFPB also requests comment on whether any common 
terms or conditions that would be prohibited by the proposed rule would 
be difficult to identify.
    The third task would require firms to revise any existing contracts 
containing terms or conditions that would be prohibited by the proposed 
rule. Based on academic research and its experience, the CFPB expects 
that most contracts contain at least one term or condition that would 
need to be revised. The CFPB also expects that many prohibited terms 
and conditions would need relatively minor revisions that would not 
significantly change the legal risks or business practices of the 
firm.\181\ In other cases, firms may need to make complex decisions 
about how to revise their contracts. However, the CFPB also expects 
that many firms use similar terms and conditions across their 
contracts, and that even firms using relatively few contracts would not 
need to consider each term in each contract individually. Considering 
these factors, the CFPB expects that, on average, revising contracts 
for compliance would take between six and eight hours per type of 
contract. The CFPB requests comment on the appropriateness of this 
estimated burden, especially any data or analysis that would inform an 
alternative estimate.
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    \181\ For example, the CFPB is aware that some firms have 
established policies to notify consumers of changes to their 
contracts, despite having clauses which reserve the right to 
unilaterally amend the contract without notification. These firms 
would generally be able to comply with the proposed rule by 
describing this existing policy in the contract. Although this would 
require additional commitment to notify consumers of changes, it 
would not require the firm to develop or establish a new 
notification policy.
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    The final task involves implementing the revised consumer 
contracts. This is likely to involve updating consumer-facing websites, 
notifying existing customers of the changes, collecting and destroying 
outdated contracts, and printing out new paper copies of the revised 
contract for use in offices. Given the diverse set of industries and 
business models covered by the proposed rule, implementation costs are 
likely to vary significantly between firms. In addition, these kinds of 
printing and updating tasks will likely be incorporated into ongoing 
processes and reviews. However, based on its experience the CFPB 
expects this task to take approximately two to four hours per contract 
on average, depending on the number of contracts and the sophistication 
of the firm. The CFPB requests comment on the appropriateness of this 
estimated burden, as well as any data or analysis that would inform an 
alternative estimate.
    The CFPB assesses the average hourly base wage rate for each of 
these tasks at $51.21 per hour. This is the mean hourly wage for 
employees in four major occupational groups assessed to be most likely 
responsible for the compliance process: Management ($59.31/hr); Lawyers 
($84.84/hr); Business and Financial Operations ($39.82/hr); and Office 
and Administrative Support ($20.88/hr). The average hourly wage of 
$51.21 is multiplied by the private industry benefits factor of 1.42 to 
get a fully loaded wage rate of $72.72/hr. The CFPB includes these four 
occupational groups in order to account for the mix of specialized 
employees that are likely to participate in the identification, 
revision, and implementation of terms and conditions due to 
requirements imposed by the proposed rule. The CFPB assesses that 
Office and Administrative Support staff are likely to be responsible 
for gathering existing contracts and implementing use of any revised 
contracts, potentially including destruction of existing noncompliant 
contracts. Employees specialized in business and financial operations 
or in legal occupations are likely to be responsible for making 
decisions about how noncompliant contracts should be revised. Senior 
officers and other managers are likely to review the revised contracts 
and may provide additional information. The CFPB seeks comment on the 
occupations of staff that would be required to ensure compliance with 
proposed subpart C as well as any other information that would inform 
its estimate of the average hourly compensation of the necessary 
employees.
    The direct compliance costs for a given covered person will depend 
on its complexity in general, and, most importantly, on the number of 
different types of contracts it uses. Table 2 presents the estimated 
direct cost for

[[Page 3588]]

covered persons at three different levels of complexity, based on the 
assumptions described above. The total cost depends on the number of 
covered persons in each of the three representative categories of 
complexity. Table 2 also reports estimates of how many of the estimated 
number of non-exempt covered persons reported in table 1 may fall into 
each category, based on their total revenue as reported in the Economic 
Census. Specifically, the CFPB assumes that covered persons with under 
$25 million in annual receipts fall within the ``simple'' tier with ten 
covered contracts. Covered persons with annual receipts between $25 
million and $100 million are assumed to be in the ``intermediate'' 
complexity tier, with 25 contracts. Covered persons with annual 
receipts greater than $100 million are assumed to be in the ``complex'' 
tier, with 250 contracts. The CFPB believes that revenue is a 
reasonable and transparent indicator of the number of contracts used by 
covered persons, and is therefore appropriate for estimating the 
average time burden and cost to covered entities. The CFPB seeks 
information or analysis that could improve its estimates of the number 
of contracts used by different types of firms.
    The estimates detailed in table 2 are based on the assumption that 
most covered persons write their contracts in-house. Covered persons 
are likely to obtain compliant contracts from external contract 
providers if the benefits of doing so outweigh the costs. External 
contract providers, such as law firms or contract vendors, would likely 
be able to reduce duplication of time and effort by reviewing and 
revising contract terms that are used by many covered persons. If many 
covered persons rely on external contract providers to bring their 
contracts into compliance with the proposed rule, the total cost may be 
significantly lower than the estimate detailed in table 2. The CFPB 
requests comment on how covered persons may use external contract 
providers to comply with the proposed rule, as well as any data or 
analysis that would inform the cost estimates in table 2.

                          Table 2--Burden and Cost of Reviewing and Revising Contracts
----------------------------------------------------------------------------------------------------------------
                                                                    Intermediate (25
         Description of task            Simple (10 contracts)          contracts)        Complex (250 contracts)
----------------------------------------------------------------------------------------------------------------
1. Read rule, understand requirement,  2 hours................  2 hours................  2 hours.
 and analyze definitions.
2. Identify prohibited terms and       15 hours...............  25 hours...............  250 hours.
 conditions.
3. Revise contract to eliminate        80 hours...............  200 hours..............  1,500 hours.
 prohibited terms and conditions.
4. Update contracts usage............  40 hours...............  100 hours..............  500 hours.
                                      --------------------------------------------------------------------------
    Total time burden per entity:....  137 hours..............  327 hours..............  2,252 hours.
Avg. wage rate \182\.................  $72.72.................  $72.72.................  $72.72.
Total cost per entity................  $10,000................  $23,800................  $163,800.
Estimated number of entities \183\...  391....................  900....................  2,408.
Total estimated time burden:.........  53,567 hours...........  294,300 hours..........  5,422,816 hours.
Total Estimated cost:................  $3,895,400.............  $21,401,500............  $394,430,400.
----------------------------------------------------------------------------------------------------------------

    Covered persons may also need to periodically review their 
contracts for compliance with the proposed rule as applicable State and 
Federal laws change. The CFPB understands that most firms review their 
contracts periodically at baseline and expects that the proposed rule 
would only minimally increase the cost of these periodic reviews above 
baseline levels. The CFPB requests comment on how the proposed rule 
would change firms' processes for reviewing and updating their form 
contracts as well as any data or analysis that would inform estimates 
of the cost of those changes.
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    \182\ This is the mean hourly wage for employees in four major 
occupational groups assessed to be most likely responsible for the 
compliance process: Management ($59.31/hr); Lawyer ($84.84/hr); 
Business and Financial Operations ($39.82/hr); and Office and 
Administrative Support ($20.88/hr). The average hourly wage of 
$51.21 is multiplied by the private industry benefits factor of 1.42 
to get a fully loaded wage rate of $72.72/hr. [CITE BLS https://www.bls.gov/oes/current/oes231011.htm].
    \183\ The 2017 Economic Census provides firms counts for revenue 
ranges. Here, firms with $1-25MM in revenue are assumed to be in the 
``simple'' tier, with 10 different contracts on average. Firms with 
$25-100MM in revenue are assumed to be in the ``intermediate'' tier, 
with 25 different contracts on average. Firms with over $100MM in 
revenue are assumed to be in the ``complex'' tier, with 250 
different contracts on average. The CFPB assumes that Credit Unions, 
Commercial Banks, Savings Institutions, and Credit Card Issuers are 
complex. Firms below the SBA threshold for their industry are 
excluded from these counts.
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    The CFPB has considered the possibility that covered persons may 
pass through some of the costs related to reviewing and revising 
contracts to consumers as higher prices. In general, standard 
microeconomic theory suggests that increases in firms' fixed costs 
(i.e. costs that do not vary with sales volume) are unlikely to be 
passed through to consumers. For a given product or service, firms use 
the same form contract for every customer. Therefore, the costs of 
reviewing and revising contracts for compliance with the proposed rule 
are fixed at the product level and are unlikely to be passed through to 
consumers. The CFPB requests any comments or data that may aid the 
evaluation of relevant pass-through rates.
Costs of Increased Exposure to Consumer Disputes
    Covered persons currently using terms and conditions that would be 
prohibited under subpart C would likely face increased exposure to 
consumer disputes. This increased exposure may occur both through 
increased incidence of consumer disputes and through increased costs of 
countering disputes that do occur. Covered persons may also take costly 
actions to reduce their exposure to consumer disputes, but are likely 
to do so only when those actions reduce the net costs of the proposed 
rule. The CFPB is unaware of any comprehensive data quantifying the 
number of disputes that are deterred by the terms and conditions that 
would be prohibited at baseline or the extent to which the terms and 
conditions that would be prohibited reduce dispute resolution costs at 
baseline. Therefore, the CFPB is unable to quantify these costs and 
instead provides a qualitative discussion. The CFPB seeks any data or 
analysis that would aid in quantifying these costs. Similarly, covered 
persons have a wide variety of means with

[[Page 3589]]

which to reduce their exposure to consumer disputes and it is therefore 
difficult to anticipate which actions firms will take in response to 
increased exposure or the cost of such actions. Therefore, the CFPB 
provides a qualitative discussion of those costs and seeks comment on 
the actions covered persons may take to reduce their exposure to 
consumer disputes as well as the potential costs of such actions.
    At baseline, terms and conditions that would be prohibited under 
subpart C may also have an effect on consumer behavior, even when such 
terms are unenforceable.\184\ The proposed rule would ease this effect, 
which in turn would likely increase the incidence of consumer disputes. 
Consumer disputes may be formal, where customers exercise the legal 
rights afforded them under consumer financial laws, or informal, where 
consumers interact with firms' customer service or exercise their right 
to free expression by lodging complaints against the firm in public 
forums. Covered persons would likely incur increased costs related to 
responding to additional disputes. For example, some covered persons 
may hire additional customer service representatives to handle 
increased call volume or pay additional fees to resolve disputes in 
arbitration or in court. The CFPB does not have sufficient data to 
estimate the effect of these terms and conditions on consumer disputes 
at baseline and therefore cannot quantify this cost. The CFPB seeks 
comment on the extent to which consumer disputes would become more 
frequent as a result of the proposed rule. The CFPB also requests any 
data or analysis that would allow it to quantify marginal cost to 
covered persons of responding to additional consumer disputes.
---------------------------------------------------------------------------

    \184\ That is, such terms and conditions may lead consumers to 
believe that the expected value of pursuing a dispute is negative, 
and therefore not worth pursuing. In cases where the terms and 
conditions that would be prohibited are enforceable, this belief may 
be correct if such a term or condition would reduce the probability 
that the consumer prevails in the dispute or the compensation the 
consumer would receive if they prevailed. If the terms or conditions 
that would be prohibited are not enforceable, they may still chill 
disputes by deceiving the consumer about their probability of 
prevailing or their potential compensation.
---------------------------------------------------------------------------

    To the extent that covered persons use terms and conditions that 
would be prohibited under subpart C that are enforceable at baseline, 
the proposed rule may increase the cost of resolving disputes. Waivers 
of consumer protection law are often intended to reduce consumers' 
likelihood of prevailing in a formal dispute or to limit the remedies 
available to consumers who do prevail. By prohibiting these waivers, 
the proposed rule would increase the likelihood that disputes are 
resolved in consumers' favor and increase the cost of associated 
remedies for some disputes. The magnitude of the increases would depend 
on the specific fact pattern of individual disputes, because not all 
terms and conditions that would be prohibited would be relevant in all 
disputes. The CFPB is unaware of any comprehensive data on the number 
of court and arbitration decisions in which these types of terms and 
conditions are decisive, or the effect that they have on the final 
remedy. Further, the CFPB is unaware of any data or analysis sufficient 
to quantify the effects that terms and conditions that would be 
prohibited have on settlements of disputes that do not reach a final 
court or arbitrator decision. Therefore, the CFPB is unable to quantify 
this effect. The CFPB requests comment on the effects that these terms 
and conditions have on dispute outcomes. The CFPB seeks any data or 
analysis that would help quantify these costs.
    Covered persons currently using terms and conditions that would be 
prohibited under subpart C may mitigate the costs described above by 
taking actions to lower their exposure to disputes, for example by 
allocating more resources to training staff to comply with underlying 
laws. Standard microeconomic theory suggests that covered persons will 
take such costly actions only if the benefits they receive outweigh the 
costs. Therefore, the CFPB expects that covered persons would incur 
costs related to voluntary changes in their business practices if and 
only if those changes reduce the net costs of the proposed rule. Due to 
the wide variety of potential actions covered persons could take to 
reduce their exposure to consumer disputes and the lack of 
comprehensive data on the costs and benefits of those potential actions 
for individual firms, the CFPB is unable to quantify the impact of 
voluntary changes in business practices on the cost of the proposed 
rule.\185\
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    \185\ As discussed in Part C: Benefits to Consumers, these 
voluntary actions to reduce exposure to consumer disputes may have 
significant benefits to consumers.
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Costs From Reduced Flexibility in Amending Contracts
    As discussed in section VI.B. of the preamble, many covered persons 
use contracts containing clauses that provide covered persons with 
discretion to change a term of the contract or add terms to the 
contract without notification or meaningful consent from consumers. The 
proposed rule requires covered persons to clarify their notification 
and consent requirements in their contracts. At baseline, unilateral 
amendments are generally unenforceable in court unless requirements of 
sufficient notice and opportunity to reject or terminate are satisfied. 
The proposed rule would not prescribe new requirements for sufficient 
notice or opportunity to reject an amendment and would therefore not 
change the enforceability of unilateral amendments relative to 
baseline. The CFPB assumes that some covered persons implement contract 
amendments at baseline. However, the CFPB assumes that, at baseline, 
these contract amendments are not prevalent and are rarely challenged 
in court. The CFPB expects that this provision of the proposed rule 
will not require significant changes to current business practices or 
impose significant costs on covered persons relative to baseline.
    However, by requiring covered persons to commit to notification and 
consent requirements and describe those requirements in their 
contracts, the proposed rule would reduce some covered persons' 
discretion to unilaterally amend their contracts. This may make it more 
costly for some firms to amend their contracts. The CFPB is aware that 
discretion to unilaterally amend contracts may be particularly valuable 
to firms with specific business models or in certain industries. For 
example, some credit card issuers reserve the right to change their 
rewards programs at any time, which can potentially provide a valuable 
option to the company to devalue rewards in response to changing market 
conditions.\186\ The option to alter rewards programs might become less 
valuable to credit card issuers if they were required to notify 
consumers sufficiently in advance of any change in the redemption value 
of rewards points. The CFPB is unaware of any data or analysis 
sufficient to quantify the cost of marginally reducing discretion to 
amend contracts, such as by requiring additional time for notification. 
The CFPB requests any data or analysis that would inform estimates of 
the costs related to this provision for credit card issuers, as well as 
comments regarding any other industry or business model that would be 
affected by this provision.
---------------------------------------------------------------------------

    \186\ CFPB, Issue Spotlight: Credit Card Rewards at 11 (May 
2024).

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[[Page 3590]]

Costs From the Prohibition on Contractual Restraints on Free Expression
    Section 1027.301(a)(3) of the proposed rule would prohibit covered 
persons from including in their contracts with consumers for consumer 
financial products or services any clause that limits or restrains, or 
purports to limit or restrain, the lawful free expression of the user 
of a consumer financial product or service. This prohibition would 
prohibit contractual clauses that limit a consumer's ability to make 
negative comments about a company or to freely express their political 
or religious views.
    At baseline, non-disparagement clauses are generally prohibited in 
standard-form consumer contracts under the Consumer Review Fairness Act 
of 2016.\187\ As noted in section VI.C. of the preamble, some States 
have also enacted prohibitions against non-disparagement clauses. 
Although the CFPB is aware of some violations of these prohibitions in 
the consumer finance market, the CFPB assumes that nearly all covered 
persons are aware that non-disparagement clauses are prohibited and in 
compliance with applicable law. Therefore, the CFPB expects that 
restating the existing prohibition in the proposed rule will not impose 
any significant costs on covered persons.
---------------------------------------------------------------------------

    \187\ 15 U.S.C. 45b.
---------------------------------------------------------------------------

    The proposed rule also prohibits contractual terms that prevent 
consumers from engaging in political or religious expression or 
penalize them for doing so. Such terms purport to limit consumers' free 
expression on issues disfavored by the company's management, and such 
limitations generally are not within the purview of companies engaged 
in consumer finance markets. Furthermore, while a company's management 
might obtain a benefit in the form of advancing their own political or 
religious views or restraining views contrary to their own in the 
marketplace of ideas, consumer financial companies obtain no concrete 
financial benefit from limiting the free expression of consumers. The 
CFPB is unaware of any comprehensive data on the prevalence of such 
contractual terms and therefore cannot quantify the costs to covered 
persons of prohibiting them. The CFPB seeks comments regarding any 
covered persons or business models that would be impacted by this 
provision, as well as any data or analysis that would inform estimates 
of its cost.
Benefits to Covered Persons
    Subpart C is likely to benefit some covered persons by reducing 
uncertainty about the legality of prohibited terms and conditions, as 
well as unintentional exposure to enforcement action by the CFPB or 
other State and Federal regulators. Some covered persons currently 
using terms and conditions that would be prohibited may be doing so 
unintentionally, for example because they have purchased a contract 
from a vendor. Because such firms did not choose to include these terms 
and conditions in their contracts, the legal risks associated with 
using them may exceed the benefits. The CFPB does not have systematic 
data on the prevalence of these terms and conditions in contracts used 
by covered persons, or the extent to which covered persons are unaware 
of the presence of these terms and conditions in their contracts. 
Therefore, the CFPB cannot quantify the extent to which clarifying that 
these terms and conditions constitute unfair and deceptive acts or 
practices would reduce the costs of future enforcement actions related 
to use of terms and conditions that would be prohibited. The CFPB 
requests any additional information that would improve its 
understanding of this benefit.
    The CFPB anticipates that this provision of the proposed rule would 
cause most covered persons currently using the terms and conditions 
that it would prohibit to remove them from their contracts. This is 
likely to incentivize these firms to increase their compliance with 
underlying consumer protection laws. Firms that are complying with the 
law or following existing guidance by not using prohibited terms and 
conditions are often at a competitive disadvantage relative to firms 
that do not comply with the law. To the extent that this provision 
would induce more firms to comply with applicable consumer protections, 
firms that were previously compliant will benefit. As noted above, the 
CFPB does not have systematic data on the use of terms and conditions 
that would be prohibited, the number of firms currently not complying 
with consumer protection law, or the harm to compliant firms from their 
competitors' noncompliance. The CFPB is therefore unable to quantify 
this potential benefit to covered persons. The CFPB requests comments 
or data that would improve its understanding of this potential benefit.
    Clauses that restrict free expression prevent consumers from 
obtaining information that would be relevant to their adoption or 
purchasing decisions and make it more difficult for high-quality firms 
to gain market share. Therefore, the prohibition on clauses restricting 
free expression would benefit firms that would gain market share if 
more information about consumers' experiences with their competitors 
was publicly available. The magnitude of this benefit depends on the 
prevalence of clauses restricting free speech, the extent to which such 
clauses limit the information available to other consumers regarding 
disputes or negative experiences, and the impact that information would 
have on covered persons' market shares or prices if it were publicly 
available. The CFPB does not have sufficient data to quantify these 
factors, and therefore is unable to quantify this potential benefit to 
covered persons. The CFPB requests comments or data that would improve 
its understanding of this potential benefit.

D. Potential Costs and Benefits to Consumers

    This section describes the benefits and costs to consumers that the 
CFPB expects to occur under the proposed rule. Each of the two subparts 
of the proposed rule is analyzed in detail separately.
Potential Benefits to Consumers of Subpart B
    This subpart would re-codify Regulation AA, the FTC's Credit 
Practices Rule, and the companion credit practices rules of the 
prudential regulators, which established that these credit practices 
are prohibited. While these practices are largely considered unlawful 
pursuant to existing guidance from the CFPB and prudential regulators, 
it is possible that there are consumer contracts that currently include 
language covered in this subpart or that certain providers attempt to 
enforce these practices. The re-codification of the prohibition on 
these credit practices would incentivize any providers that currently 
engage in these practices through their use of terms and conditions in 
their contracts, or attempt to enforce such terms and conditions, to 
cease. This would benefit consumers by clarifying that these terms and 
conditions are unenforceable, reducing uncertainty and costs associated 
with defending themselves from unlawful practices, and reducing firms' 
incorrect application of these practices against consumers. However, 
the CFPB does not have systematic data on the prevalence of these 
practices in consumer contracts or on the frequency with which firms 
incorrectly attempt to enforce these

[[Page 3591]]

practices against consumers. Insofar as the scope of this proposed rule 
extends the scope of prohibited credit practices to covered persons not 
previously subject to the other rules, this would benefit consumers by 
standardizing the credit practices rule across different types of 
lenders, reducing search costs, and shielding consumers from unfair or 
deceptive credit practices. However, the CFPB does not have systematic 
data on the number of covered persons that would be newly subject to 
the prohibited credit practices rule nor the number of covered persons 
that use any such credit practices under the baseline. Against the 
baseline, the CFPB is unable to quantify the benefit of re-codifying 
these prohibited credit practices. The CFPB requests any comments or 
data that would help quantify these benefits.
Potential Benefits to Consumers of Subpart C
    The proposed rule would prohibit the use of three categories of 
terms and conditions, collectively referred to as prohibited terms and 
conditions. Even when they are generally unenforceable under the 
baseline, as is the case with clauses that purport to waive legal 
rights of consumers expressly made unwaivable under the law, these 
terms and conditions may still harm consumers by hampering private 
action because many consumers are unaware that such terms and 
conditions are prohibited or void. For example, when a consumer 
complains about a particular practice or harm, a firm using a 
prohibited term or condition may incorrectly claim that the consumer 
agreed to an enforceable limitation of their rights and thus has no 
rights to seek their desired remedy or a consumer who first consults 
the contract terms in the event a particular harm arises may reasonably 
assume that they have no right to seek remedy due to the presence of 
prohibited terms. In light of what the term or condition states and the 
likelihood of the firm standing behind it if a consumer complains, a 
reasonable consumer may believe that they have agreed to a limitation 
of their rights, and not pursue further action. The removal of 
prohibited terms would lessen this effect, increasing dispute incidence 
when consumers experience a particular harm. This is likely to benefit 
consumers through the associated dispute resolution and remedy of said 
harm. In addition, as noted above, covered persons have increased 
incentive to comply with existing consumer protection laws, which would 
also benefit consumers.
    While consumers would likely benefit from covered persons' 
increased compliance with consumer protection laws, fully quantifying 
this benefit requires data on the incidence of violations of consumer 
protection laws, including violations that are difficult to quantify, 
such as limitations on types of contacts and calls under the Fair Debt 
Collection Practices Act (FDCPA) and the Telephone Consumer Protection 
Act (TCPA) or a creditor taking more time to assure the accuracy of the 
information furnished to a consumer reporting agency or investigating 
disputes of this information. Moreover, these benefits would be related 
to the aforementioned costs of additional investment in compliance 
taken by covered persons in response to this rulemaking. The CFPB 
requests any comments or data that would help quantify the incidence of 
these violations, the monetary benefit of foregone violations, and 
increased investment in compliance by covered persons. Similarly, the 
increased incidence of disputes is likely to benefit consumers through 
remedies to these disputes; however, the CFPB lacks any systematic data 
that would allow a full quantification of this effect, especially 
considering that such a quantification requires measurement of the 
chilling effect on consumer behavior and that a significant share of 
these disputes would likely be resolved through internal consumer 
relations.\188\ The CFPB requests any comments or data that would help 
quantify the increased incidence of disputes that would arise due to 
the rule, the means by which they are resolved, and any monetary 
benefits associated with resolution.
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    \188\ See Tess Wilkinson-Ryan, The Perverse Consequences of 
Disclosing Standard Terms, 103 Cornell L. Rev. 117-175 (2017). The 
article provides some evidence of this effect. In an experimental 
setting, consumers who read about harsh company policies were more 
likely to believe they were legally enforceable if these policies 
appeared in the company's terms and conditions, rather than in some 
more informal setting. Notably, test subjects were asked to read 
about a particular policy presented as either a part of a contract 
or as a more informal policy and asked to assess its enforceability.
---------------------------------------------------------------------------

    The magnitude of these benefits depends on the share of consumer 
contracts that currently contain prohibited terms.\189\ Although the 
CFPB has documented examples of the use of these terms and conditions, 
the CFPB is unaware of any systematic data that would enable it to 
estimate the prevalence of (1) terms and conditions that waive legal 
rights provided by Federal or State laws, (2) clauses that allow for 
unilateral amendment of terms and conditions, or (3) terms and 
conditions that restrain a consumer's free expression. Therefore, the 
CFPB cannot quantify the benefit to consumers of prohibiting firms' use 
of these terms and conditions from their contracts. The CFPB requests 
any additional information that would improve its understanding of this 
benefit. Against that baseline, which the CFPB lacks data to quantify, 
the CFPB believes that the rulemaking will result in a significant 
reduction in the incidence of these terms and conditions relative to 
baseline, and thus, benefit consumers through the channels described 
above.
---------------------------------------------------------------------------

    \189\ Specifically, the presence of prohibited terms as well as 
particular incidence of waivers of law, provisions that allow for 
unilateral changes to terms, and constraints on consumers' free 
expression.
---------------------------------------------------------------------------

Potential Costs to Consumers
    The CFPB expects that costs to consumers would be small under the 
proposed rule. As discussed in part A of this section, Overview of 
Economic Effects, consumers may experience pass-through costs from 
covered persons if covered persons' marginal costs increase. As stated 
in that section, the CFPB requests any comments or data that would aid 
the evaluation of relevant pass-through rates.
    In addition, as discussed in part F of this section, Impact on 
Access to Consumer Financial Products and Services, at least some 
covered persons might determine that particular features of their 
products make the covered persons more susceptible to consumer disputes 
or litigation and decide to remove those features from their products. 
A covered person might make this decision even if such a feature is 
beneficial to consumers, though the fact that these terms would be 
deemed more susceptible to dispute or litigation may suggest otherwise. 
In this case, consumers would incur a cost due to the loss of this 
feature. The CFPB is not aware of any data showing this theoretical 
phenomenon to be prevalent among covered persons. The CFPB requests 
comment on the extent of this phenomenon in the context of the proposed 
rule, and it specifically requests data and suggestions about how to 
quantify both the prevalence of this phenomenon and the magnitude of 
consumer harm if the phenomenon exists.
    Finally, under the proposed rule, it is possible that some firms 
would increase the frequency with which they ask consumers for 
affirmative consent to changes in contract terms. If so, the time and 
effort it would take consumers to review these changes would be an 
additional cost to consumers relative to the baseline. The proposed 
rule would forbid covered persons from including in any contract with a 
consumer any

[[Page 3592]]

clause that would reserve to the covered person the right to 
unilaterally amend material terms of the contract. Therefore, under the 
proposed rule, covered persons that wish to amend their contracts would 
have to comply with the appropriate State or Federal law process for 
amending material terms. The proposed rule would not prescribe the 
manner in which assent to changes in contract terms must be attained. 
Nevertheless, State law or common law may require firms to attain 
affirmative consent from consumer, as, for example, via written or 
electronic signature. If so, it is plausible that the proposed rule 
would result in an additional burden for consumers who would need to 
review, and consent to, proposed changes to their contracts. The CFPB 
seeks data or analysis to quantify this potential cost to consumers.

E. Impact on Depository Institutions With No More Than $10 Billion in 
Assets

    Subpart B of the proposed rule would codify a prohibition on credit 
practices that are generally understood to be prohibited, pursuant to 
settled industry expectations and guidance from the CFPB and prudential 
regulators. The CFPB believes that by reducing confusion or uncertainty 
about what is prohibited, the proposed rule may reduce unnecessary 
costs for these depository institutions. The CFPB seeks comment or data 
to quantify the impact this may have on depository institutions with 
assets below $10 billion.
    There will be no direct impact of subpart C on small depository 
institutions (no more than $850 million in assets) as the rulemaking 
provides an exemption for small entities. Subpart C of the proposed 
rule would prohibit depository institutions with assets between $850 
million and $10 billion from including in their contracts with 
consumers for consumer financial products or services (1) clauses that 
require consumers to waive legal rights designed to protect consumers, 
other than rights explicitly made waivable by relevant consumer laws; 
(2) clauses that allow the covered person to unilaterally amend the 
contract; and (3) clauses that restrict consumers' free expression. 
Depository institutions with assets between $850 million and $10 
billion would incur one-time administrative costs involved in bringing 
contracts into compliance with this part of the proposed rule. The CFPB 
believes that all depository institutions subject to the proposed rule 
would need to review every contract they use and revise to bring into 
compliance. Furthermore, the costs associated with implementation of 
subpart C have been outlined earlier in table 2 in the Potential Costs 
and Benefits to Covered Persons of Subpart C section. The CFPB asks for 
any comment or data on the impact of the proposed rule on depository 
institutions with assets between $850 million and $10 billion.

F. Impact on Rural Areas

    Rural areas might be differently impacted to the extent that rural 
areas tend to be served by small entities. The proposed rule would not 
apply to any person that is a `small entity' as that term is defined in 
5 U.S.C. 601, including any firm that is at or below the SBA standard 
for its primary industry. Therefore, the impact of the rulemaking would 
likely be lower in rural areas compared to non-rural areas. The CFPB 
requests any comment or data about the impact of the proposed rule on 
rural areas.

G. Impact on Access to Consumer Financial Products and Services

    Subpart B of the proposed rule is unlikely to have any impact on 
consumers' access to financial products and services. As discussed 
earlier in the Statement of Need section, the CFPB believes that these 
credit practices are generally understood to be prohibited at baseline 
and, by reducing confusion or uncertainty about what is prohibited, the 
proposal would reduce costs for covered persons.
    Subpart C of the proposed rule would prohibit covered persons from 
including in their contracts with consumers for consumer financial 
products or services (1) clauses that require consumers to waive legal 
rights designed to protect consumers, other than rights explicitly made 
waivable by relevant consumer laws; (2) clauses that allow the covered 
person to unilaterally amend the contract; and (3) clauses that 
restrict consumers' free expression. Collectively, these are referred 
to as prohibited terms and conditions. As discussed in part A of this 
section, Overview of Economic Effects, the adoption of the rule could 
increase the marginal costs incurred by covered persons because of 
increased costs of compliance with consumer finance laws or increased 
costs associated with dispute resolution. The CFPB believes that most 
providers would pass through some portion of these marginal cost 
increases to consumers.\190\ As a result, it is possible that some 
consumers might experience price increases for some financial products 
and services. This may induce them to seek other financial products or 
services from a different provider, or to forgo using a particular 
financial product or service. However, the CFPB believes that the 
marginal cost increases discussed in the foregoing sections would be 
small, and as a result, under the proposed rule, the likelihood of 
price increases for certain financial products or services that would 
render them unaffordable would be very limited.
    Providers might determine that offering some features of certain 
financial products or services may be too costly and, as a result, 
decide to remove these features from their product offering. For 
example, a provider might conclude that a particular product feature 
might increase the incidence of consumer disputes even accounting for 
increased compliance under financial laws, and therefore decide to 
remove that feature entirely from the product or restructure the 
feature by reducing its availability. Similarly, a provider might 
update its product features based on external information, such as 
actions against the provider's competitors by either regulators or 
private actors. The ongoing component could also include changes to the 
general product design process. Product design could consume more time 
and expense due to additional rounds of legal and compliance review. 
The additional exposure to consumer disputes, including litigation, 
could also result in some products not being developed and marketed 
primarily due to the risk associated with consumer disputes. The CFPB 
requests any comments or data on the impact of the proposed rule on 
access to consumer financial products and services.
---------------------------------------------------------------------------

    \190\ Some of these increased costs--e.g., the cost of changing 
contract language to remove prohibited terms--can be considered 
fixed costs of business. Economic theory suggests that the profit-
maximizing response of an increase in fixed costs is not to pass 
that increase through to consumers.
---------------------------------------------------------------------------

X. Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act (RFA) generally requires an agency 
to conduct an initial regulatory flexibility analysis (IRFA) and a 
final regulatory flexibility analysis of any rule subject to notice-
and-comment rulemaking requirements, unless the agency certifies that 
the rulemaking will not have a significant economic impact on a 
substantial number of small entities (SISNOSE). The CFPB is also 
subject to specific additional procedures under the RFA involving 
convening a panel to consult with small business representatives before 
proposing a rule for which an IRFA is required. An IRFA is not required 
for this proposal because the proposal, if adopted, would not have a 
SISNOSE.

[[Page 3593]]

    Small institutions, for the purposes of the Small Business 
Regulatory Enforcement Fairness Act (SBREFA) of 1996, are defined by 
the Small Business Administration. Effective March 17, 2023, depository 
institutions with less than $850 million in total assets are determined 
to be small. For non-depository entities covered by the proposed rule, 
the standard is $47 million in receipts. According to the Q4 2023 
Federal Financial Institutions Examination Council Call Report, there 
are 3,422 banks with $850 million or less in assets. According to the 
Q4 2023 National Credit Union Administration Call Report, there are 
4,201 credit unions with $850 million or less in assets. Nonbank 
institutions covered under the proposed rule are subject to different 
size standards defined with respect to their average annual receipts. 
Table 3 below presents estimated small entity counts for the North 
American Industry Classification System (NAICS) codes that generally 
align with consumer financial products or services and the 
corresponding size standards. Note that the NAICS codes listed below 
all incorporate covered persons, but several also are likely to include 
many non-covered persons, and so these estimates are likely higher than 
the real number of small covered persons.

                     Table 3--Entity Counts for NAICS Codes and Corresponding Size Standards
----------------------------------------------------------------------------------------------------------------
                                                                     Estimated     Revenue size     Assets size
             NAICS name(s)                    NAICS code(s)          number of       standard        standard
                                                                  small entities  (million/year)     (million)
----------------------------------------------------------------------------------------------------------------
Credit Unions.........................  522110, 522120, 522210..           4,202  ..............            $850
Commercial Banking, Savings             522130..................           3,422  ..............             850
 Institutions, and Credit Card Issuing.
Nondepository Credit Intermediation...  522220, 522291, 522292,            6,965             $47  ..............
                                         522299.
Activities Related to Credit            522310, 522320, 522390..          11,040            28.5  ..............
 Intermediation.
Activities Related to Real Estate.....  531311, 531312, 531320,           62,855            19.5  ..............
                                         531390.
Portfolio Management & Investment       523920, 523930..........          34,153              47  ..............
 Advice.
Passenger Car Leasing.................  532112..................             199              47  ..............
Truck, Utility Trailer, and             532120..................             920              47  ..............
 Recreational Vehicle Rental and
 Leasing.
Consumer Reporting....................  561450..................             267              41  ..............
Debt Collection.......................  561440..................           2,634            19.5  ..............
                                       -------------------------------------------------------------------------
    Total.............................  ........................         126,657  ..............  ..............
----------------------------------------------------------------------------------------------------------------

    The CFPB is proposing an exemption for small entities from the 
provisions of subpart C, but does not propose to exempt small entities 
from the provisions of subpart B.
    In the practice of the CFPB, evaluating whether a proposed rule has 
a SISNOSE proceeds in several steps. First, the CFPB estimates the 
total number of small entities directly affected, and then it estimates 
the number of small entities significantly affected by the rulemaking. 
If the latter is substantial relative to the former, a SISNOSE exists. 
However, since the proposed rule contains an exemption for small 
entities for the provision of subpart C, no small entities would be 
directly and significantly affected by its provisions. The remaining 
question is whether a SISNOSE would result from the provisions of 
subpart B. The CFPB outlines below the reasoning for establishing that 
the proposed rule would not have a SISNOSE.
    Subpart B of the proposed rule would codify the already existing 
FTC Credit Practices Rule to apply it to covered persons under the 
CFPB's jurisdiction. Consistent with the FTC's Credit Practices Rule, 
subpart B would prohibit covered persons from entering into or 
enforcing an agreement that contains any of the following provisions: a 
confession of judgment, a waiver of exemption, an assignment of wages, 
or a security interest in household goods. The rulemaking would also 
prohibit covered persons from misrepresenting the nature or extent of 
cosigner liability to any person or obligating a cosigner unless the 
cosigner is informed prior to becoming obligated of the nature of the 
cosigner's liability. The rulemaking would also prohibit covered 
persons from levying or collecting any delinquency charge on a payment, 
when the only delinquency is attributable to late fees or delinquency 
charges assessed on earlier installments, and the payment is otherwise 
a full payment for the applicable period and is paid on its due date or 
within an applicable grace period.
    The FTC first issued the Credit Practices Rule in 1984. Although 
that rule generally applied only to nonbank creditors, prudential 
regulators subsequently issued their own credit practices rules 
applicable to banks, Federal credit unions, and saving associations. 
The rules issued by the prudential regulators were repealed upon 
enactment of the CFPA, which transferred those agencies' consumer 
financial protection authorities to the CFPB. However, in 2014 the 
Federal financial regulators--including the CFPB--issued a joint 
interagency guidance clarifying that financial institutions could 
violate the law by including in consumer credit contracts any 
provisions prohibited by the Credit Practices Rule.
    When the FTC originally enacted the Credit Practices Rule, it 
highlighted that the rule's prohibitions, which are mirrored by the 
prohibitions in subpart B, would have minimal effects on costs and 
availability of credit.\191\ In 1995, the Federal Trade Commission 
undertook a periodic review of the Credit Practices Rule and solicited 
data and comments on whether the rule has had a SISNOSE.\192\ Based on 
the comments received, the FTC did not find a sufficient basis to 
conclude that the Rule has had a SISNOSE. It is noteworthy that the 
FTC's notice attracted limited public interest and the comments 
received involved minimal discussion of issues relating to small 
entities. Further, in the only comment from a creditor that discussed 
the impact on small entities, the Credit Union National Association 
indicated that ``[g]enerally, credit unions have not reported any 
significant economic or

[[Page 3594]]

regulatory impact on their operations due to this rule.'' \193\
---------------------------------------------------------------------------

    \191\ 49 FR 7779.
    \192\ 60 FR 24805 (May 10, 1995).
    \193\ Id. at 24808.
---------------------------------------------------------------------------

    Nonbanks are already subject to the FTC Credit Practices Rule, and 
the prohibitions in subpart B would not result in any change, and thus 
would not cause any new costs, for nonbank small entities. As the 
background section above discusses, the practices in subpart B were 
prohibited for depository institutions prior to the enactment of the 
CFPA, and these institutions received interagency guidance that 
indicated that the practices in subpart B are likely illegal and 
involve substantial risks. In addition, the CFPB is unaware of small 
depository institutions that started using contractual terms prohibited 
in subpart B after the enactment of the CFPA.
    In sum, the CFPB concludes there would not be a SISNOSE because 
subpart C does not apply to small entities, subpart B merely duplicates 
an existing FTC regulation for small nonbanks, and subpart B is 
unlikely to have a significant economic impact on entities not covered 
by the FTC's existing regulation. No small entities would be directly 
affected by provisions in subpart C of the proposed rule because the 
proposed rule contains a small entity exemption for these provisions. 
As noted above, the FTC's original issuance of the Credit Practices 
Rule concluded there would be minimal effects on costs and availability 
of credit, and a 1995 periodic review of the Credit Practices Rule 
indicated that there had been no SISNOSE since the rule's publication 
in 1984. Until the enactment of the CFPA, the prohibitions in subpart B 
were expressly prohibited by rule for both banks and nonbanks. The 
proposal would not cause nonbanks in general, and small nonbanks in 
particular, to incur any additional costs, since the provisions of the 
Credit Practices Rule, which would be codified by subpart B, have 
continued to apply to them. For depository institutions, the 
prohibitions in subpart B would have a minimal effect on small entities 
since they had been illegal and remain discouraged as explained in 
interagency guidance. Even in an unlikely scenario involving limited 
use of subpart B's prohibited practices by small entities, consistent 
with earlier FTC analyses discussed above, the CFPB finds it very 
unlikely that the proposed rule would have more than a negligible 
impact on small entities. Further, in the CFPB's experience, use of 
these practices appears rare.
    Accordingly, the Director of the CFPB certifies that the proposed 
rule, if adopted, would not have a significant economic impact on a 
substantial number of small entities and that an IRFA therefore is not 
required. The CFPB seeks comment about this determination.

XI. Paperwork Reduction Act

    Under the Paperwork Reduction Act of 1995 (PRA), Federal agencies 
are generally required to seek the Office of Management and Budget's 
(OMB's) approval for information collection requirements prior to 
implementation.
    Under the PRA, the CFPB may not conduct or sponsor and, 
notwithstanding any other provision of law, a person is not required to 
respond to an information collection unless the information collection 
displays a valid control number assigned by OMB.
    The CFPB has determined that the proposed rule would not impose any 
new information collections or revise any existing recordkeeping, 
reporting, or disclosure requirements on covered entities or members of 
the public that would be collections of information requiring approval 
by the Office of Management and Budget under the Paperwork Reduction 
Act.
    The CFPB has a continuing interest in the public's opinions 
regarding this determination. At any time, comments regarding this 
determination may be sent to: The Consumer Financial Protection Bureau 
(Attention: PRA Office), 1700 G Street NW, Washington, DC 20552, or by 
email to [email protected].

List of Subjects in 12 CFR Part 1027

    Banks, banking, Consumer protection, Contracts, Credit unions, 
Finance, National banks, Savings associations.

Authority and Issuance

0
For the reasons set forth in the preamble, the CFPB proposes to add 
part 1027 to chapter X in title 12 of the Code of Federal Regulations, 
to read as follows:

PART 1027--AGREEMENTS FOR CONSUMER FINANCIAL PRODUCTS OR SERVICES

Subpart A--General
Sec.
1027.100 Authority and purpose.
1027.101 General definitions.
1027.102 Exclusions from coverage.
1027.103 Severability.
1027.104 Compliance date.
Subpart B--Credit practices
1027.201 Definitions.
1027.202 Unfair credit contract provisions.
1027.203 Unfair or deceptive practices involving cosigners.
1027.204 Unfair late charges.
1027.205 State exemption.
Subpart C--Prohibited terms and conditions
1027.301 Prohibition.

    Authority: 12 U.S.C. 5512, 12 U.S.C. 5531.

Subpart A--General


Sec.  1027.100  Authority and purpose.

    (a) Authority. This part is issued by the Consumer Financial 
Protection Bureau (CFPB) pursuant to section 1022(b)(1) and (c) and 
section 1031(b) of the Consumer Financial Protection Act of 2010, 
codified at 12 U.S.C. 5512(b)(1) and (c) and 12 U.S.C. 5531(b).
    (b) Purpose. The purpose of this part is to prescribe rules 
governing agreements for consumer financial products or services.
    (1) Subpart A contains general provisions and definitions used in 
this part.
    (3) Subpart B prohibits certain credit practices.
    (4) Subpart C prohibits certain other terms and conditions.


Sec.  1027.101  General definitions.

    For the purposes of this part the following definitions apply:
    (a) Consumer, consumer financial product or service, covered 
person, credit, person, and State have the same meanings as in 12 
U.S.C. 5481.
    (b) Include, includes, and including mean that the items named may 
not encompass all possible items that are covered, whether like or 
unlike the items named.


Sec.  1027.102  Exclusions from coverage.

    (a) This part shall not apply to any person to the extent that it 
is providing a product or service in circumstances excluded from the 
CFPB's rulemaking authority pursuant to 12 U.S.C. 5517 or 5519.
    (b) Subpart C shall not apply to any ``small business,'' ``small 
organization,'' or ``small governmental jurisdiction'' as those terms 
are defined in 5 U.S.C. 601.


Sec.  1027.103  Severability.

    The provisions of this part are separate and severable from one 
another. If any provision or any application of a provision is stayed 
or determined to be invalid, the remaining provisions or applications 
shall continue in effect.


Sec.  1027.104  Compliance date.

    The compliance date for subparts B and C is [30 days after 
publication of the final rule in the Federal Register], except that if 
an agreement for a consumer financial product or service

[[Page 3595]]

between a covered person and a consumer was executed before [30 days 
after publication of the final rule in the Federal Register], 
compliance with subparts B and C of this part for such an agreement is 
required by [180 days after publication of the final rule in the 
Federal Register].

Subpart B--Credit practices


Sec.  1027.201  Definitions.

    For the purposes of this subpart, the following definitions apply:
    (a) Cosigner means a natural person who renders themself liable for 
the obligation of another person without compensation. The term shall 
include any person whose signature is requested as a condition to 
granting credit to another person, or as a condition for forbearance on 
collection of another person's obligation that is in default. The term 
shall not include a spouse whose signature is required on a credit 
obligation to perfect a security interest pursuant to State law. A 
person who does not receive goods, services, or money in return for a 
credit obligation does not receive compensation within the meaning of 
this definition. A person is a cosigner within the meaning of this 
definition whether or not they are designated as such on a credit 
obligation.
    (b) Earnings means compensation paid or payable to an individual or 
for the individual's account for personal services rendered or to be 
rendered by the individual, whether denominated as wages, salary, 
commission, bonus, or otherwise, including periodic payments pursuant 
to a pension, retirement, or disability program.
    (c) Household goods means clothing, furniture, appliances, one 
television and one radio, linens, china, crockery, kitchenware, and 
personal effects (including wedding rings) of a consumer and a 
consumer's dependents. The term household goods does not include:
    (1) Works of art;
    (2) Electronic entertainment equipment (except one television and 
one radio);
    (3) Items acquired as antiques; that is, items over one hundred 
years of age, including such items that have been repaired or renovated 
without changing their original form or character; and
    (4) Jewelry (other than wedding rings).
    (d) Obligation means an agreement between a consumer and a 
creditor.


Sec.  1027.202  Unfair credit contract provisions.

    In connection with the extension of credit to consumers, it is an 
unfair act or practice for a covered person to enter into or enforce an 
agreement that contains any of the following provisions:
    (a) Confession of judgment. A cognovit or confession of judgment 
(for purposes other than executory process in the State of Louisiana), 
warrant of attorney, or other waiver of the right of notice and the 
opportunity to be heard in the event of suit or process thereon.
    (b) Waiver of exemption. An executory waiver or a limitation of 
exemption from attachment, execution, or other process on real or 
personal property held, owned by, or due to the consumer, unless the 
waiver applies solely to property subject to a security interest 
executed in connection with the obligation.
    (c) Assignment of wages. An assignment of wages or other earnings 
unless:
    (1) The assignment by its terms is revocable at the will of the 
debtor;
    (2) The assignment is a payroll deduction plan or preauthorized 
payment plan, commencing at the time of the transaction, in which the 
consumer authorizes a series of wage deductions as a method of making 
each payment; or
    (3) The assignment applies only to wages or other earnings already 
earned at the time of the assignment.
    (d) Security interest in household goods. A nonpossessory security 
interest in household goods other than a purchase money security 
interest.


Sec.  1027.203  Unfair or deceptive practices involving cosigners.

    (a) Prohibited practices. In connection with the extension of 
credit to consumers, it is:
    (1) A deceptive act or practice for a covered person, directly or 
indirectly, to misrepresent the nature or extent of cosigner liability 
to any person; and
    (2) An unfair act or practice for a covered person, directly or 
indirectly, to obligate a cosigner unless the cosigner is informed 
prior to becoming obligated, which in the case of open-end credit shall 
mean prior to the time that the agreement creating the cosigner's 
liability for future charges is executed, of the nature of his or her 
liability as cosigner.
    (b) Disclosure requirement. To prevent these unfair or deceptive 
acts or practices, a disclosure, consisting of a separate document that 
shall contain the following statement and no other, shall be given to 
the cosigner prior to becoming obligated, which in the case of open-end 
credit shall mean prior to the time that the agreement creating the 
cosigner's liability for future charges is executed:

Notice to Cosigner

    You are being asked to guarantee this debt. Think carefully 
before you do. If the borrower doesn't pay the debt, you will have 
to. Be sure you can afford to pay if you have to, and that you want 
to accept this responsibility.
    You may have to pay up to the full amount of the debt if the 
borrower does not pay. You may also have to pay late fees or 
collection costs, which increase this amount.
    The creditor can collect this debt from you without first trying 
to collect from the borrower. The creditor can use the same 
collection methods against you that can be used against the 
borrower, such as suing you, garnishing your wages, etc. If this 
debt is ever in default, that fact may become a part of your credit 
record. This notice is not the contract that makes you liable for 
the debt.

    (c) Effect of compliance. A covered person that is in compliance 
with paragraph (b) of this section may not be held in violation of 
paragraph (a) of this section.


Sec.  1027.204  Unfair late charges.

    (a) In connection with collecting a debt arising out of an 
extension of credit to a consumer, it is an unfair act or practice for 
a covered person directly or indirectly to levy or collect any 
delinquency charge on a payment, which payment is otherwise a full 
payment for the applicable period and is paid on its due date or within 
an applicable grace period, when the only delinquency is attributable 
to late fees or delinquency charges assessed on earlier installments.
    (b) For the purposes of this section, collecting a debt means any 
activity, other than the use of judicial process, that is intended to 
bring about or does bring about repayment of all or part of money due 
(or alleged to be due) from a consumer.


Sec.  1027.205  State exemption.

    (a) General rule. (1) An appropriate State agency may apply to the 
CFPB for a determination that:
    (i) There is a State requirement or prohibition in effect that 
applies to any transaction to which a provision of this subpart 
applies; and
    (ii) The State requirement or prohibition affords a level of 
protection to consumers that is substantially equivalent to, or greater 
than, the protection afforded by this subpart.
    (2) If the CFPB makes such a determination, the provision of this 
subpart will not be in effect in that State to the extent specified by 
the CFPB in its determination, for as long as the State administers and 
enforces the State requirement or prohibition effectively.

[[Page 3596]]

    (b) Applications. The procedures under which a State agency may 
apply for an exemption under this section are the same as those set 
forth in appendix B to Regulation Z (12 CFR part 1026).

Subpart C--Prohibited terms and conditions


Sec.  1027.301  Prohibition.

    (a) It shall be unlawful for a covered person to include in an 
agreement with a consumer for a consumer financial product or service 
any of the following terms or conditions:
    (1) Waivers of law. Any term or condition that disclaims or waives, 
or purports to disclaim or waive, any substantive State or Federal law 
designed to protect or benefit consumers, or their remedies, unless an 
applicable statute explicitly deems it waivable. Waivers of law 
include, but are not limited to:
    (i) Waivers of remedies to consumers for violations of State or 
Federal laws; and
    (ii) Waivers of a cause of action to enforce State or Federal laws.
    (2) Unilateral amendments. Any term or condition that expressly 
reserves the covered person's right to unilaterally change, modify, 
revise, or add a material term of a contract for a consumer financial 
product or service.
    (3) Restraints on expression. Any term or condition that limits or 
restrains, or purports to limit or restrain, the free and lawful 
expression of a consumer. Nothing in this subpart affects a covered 
person's ability to close an account that is being used to commit fraud 
or other illegal activity.
    (b) It shall be unlawful for a covered person to use, enforce, or 
otherwise rely on any term or condition in paragraph (a) of this 
section in an agreement between a consumer and any person for a 
consumer financial product or service.

Rohit Chopra,
Director, Consumer Financial Protection Bureau.
[FR Doc. 2025-00633 Filed 1-13-25; 8:45 am]
BILLING CODE 4810-AM-P`