Nonbank Public Registry Proposal

QUESTION 

I would like to know more about the public registry that the CFPB is now trying to set up. I don't think it's fair any more than I thought it was fair years ago when the CFPB wanted to list complaints against us lenders and brokers. 

It seemed then, as it does now, as a kangaroo court where we don't get to defend ourselves! At this time, when we're already suffering from low volume, the last thing we need is the CFPB starting up another public registry. 

Here's what I want to know: What is this new public registry all about? 

ANSWER 

The Consumer Financial Protection Bureau (CFPB) has had a public-facing facility called the Consumer Complaint Database (CCD) for years. Consumers who allege financial harm contact the CFPB and lodge complaints relating to a laundry list of possible products and services. 

Here is a list of some products and services covered in the CCD:

 

·       Checking and savings accounts

·       Credit cards

·       Credit repair services

·       Credit reports and other personal consumer reports

·       Debt collection

·       Debt settlement

·       Money transfers, virtual currency, and money services

·       Mortgages

·       Payday loans

·       Personal loans (i.e., installment and title loans)

·       Prepaid cards

·       Student loans

·       Vehicle loans or leases

However, let me disabuse you of one notion: the CCD does not publish information that directly identifies your company. But, the CFPB will contact you directly about the complaint, and, if you're not responsive or can't be reached, it will send the complaint to another federal agency to contact you. That said, the Bureau will also provide the complaint information to state and federal agencies that are involved in supervision (i.e., state banking departments), enforcement (i.e., FBI), and monitoring the market for consumer financial products and services (i.e., FTC). 

The CFPB is now proposing a public registry for terms and conditions in form contracts that waive or limit consumer rights and protections.[i] The registry specifically would apply to nonbanks.[ii] A form contract is a "take-it-or-leave-it" contract between two parties where the terms and conditions of the contract are determined by one of the parties, and the other party has little or no ability to negotiate more favorable terms, thereby putting them in a "take it or leave it" position. You may have heard the term "boilerplate" contract; it's pretty much the same thing. 

There are specified exceptions;[iii] however, all nonbanks subject to CFPB supervisory jurisdiction, including those operating in payday lending, private student loan origination, and mortgage lending and servicing, would be subject to this proposed rule. Larger participants operating in student loan servicing, automobile financing, consumer reporting, consumer debt collection, and international remittances would also be subject to the rule. 

Many of these boilerplate contracts are lengthy and filled with verbose legalese. This does not mean all such contracts are inherently adverse to the consumer. Imagine how ridiculous it would be if each sale of every product or service required new drafts resulting from negotiated, long-settled standards. But imagine if a company drafts unfair terms and conditions, by which I mean, among other things, they allow the seller to avoid all liability or unilaterally modify terms or terminate the contract. 

Here's the reality: some companies stick in the fine print and even not-so-fine-print certain terms and conditions that attempt to take away consumer protections, limit how consumers exercise their rights, or silence consumer complaints or criticism; indeed, the terms and conditions potentially undermine consumer financial protection law. These boilerplate contracts often deprive consumers of choice, leaving only one choice: sign the contract. 

Here are a few examples of some "take-it-or-leave-it" terms and conditions that can be legally "controversial," to say the least: bankruptcy rights, liability amounts, or complaint rights. These boilerplate contract clauses claim to waive or limit consumer rights and protections. Have you ever been warned to "read the fine print?" The CFPB, in effect, wants to be sure the consumer is warned about the "fine print." 

It may shock you, but in some cases, the terms and conditions in boilerplate contracts mislead consumers into believing the terms or conditions are legally enforceable. In any event, the CFPB is seeking a way, through the proposed public registry, to require nonbanks to submit information on terms and conditions in boilerplate contracts, where there are provisions to waive or limit consumers' rights and other legal protections. 

And, yes, that information would be posted in a public registry available to the public and, of course, to enforcement entities involved in consumer financial protection. The CFPB’s rule would require nonbanks that are subject to CFPB supervision and that use form contracts to impose terms and conditions that limit or purport to limit consumer rights and legal protections to register with the CFPB. 

The CFPB has provided some examples of terms and conditions in boilerplate contracts that are onerous, which is the term I use when I don’t want to say litigious. Here are four types of terms and conditions that would be included in the public registry.[iv]

Waive Servicemembers’ Legal Protections

The Military Lending Act (MLA) and the Servicemembers Civil Relief Act (SCRA) set limits on the cost of loans for military families and include numerous other important consumer protections. The MLA broadly prohibits waivers of legal protections and arbitration agreements, and the SCRA limits waivers of its protections. However, some companies include banned arbitration agreements to try to avoid accountability for loans to military families. Other companies have faced regulatory action related to how they obtain waivers of SCRA protections.

 

Undermine Credit Reporting Rights

In contracts for credit monitoring products, some consumer reporting companies use terms and conditions that seek to block the ability of consumers to pursue legal action, including through class action lawsuits, to remedy alleged violations of the Fair Credit Reporting Act. For example, a term or condition may seek to limit liability to a class of consumers when a consumer reporting company fails to investigate inaccurate information on numerous consumer reports reasonably.

 

Limit Lender Liability for Bank Fees from Lender’s Repeated Debit Attempts

In contracts for short-term small-dollar loans, some companies seek to waive liability for bank fees that borrowers incur when the lender engages in repeated attempts to debit payments from an account that lacks sufficient funds to cover the debit.

 

Mislead Consumers by Using Unenforceable Waivers in Mortgage Contracts

CFPB examiners have regularly identified deceptive acts and practices committed through mortgage lenders’ use of waivers and limitations inconsistent with the Truth in Lending Act’s restrictions on the use of waivers and limitations in such transactions.

 

So, what would happen if the proposed rule becomes final? The CFPB would provide the following information to the public regarding nonbank terms and conditions, presumably giving consumers a better understanding of their consumer and legal rights.[v] 

There are two explicit goals[vi] that the CFPB wants to effectuate, as follows: 

Identify and Collect Information on Form Contract Terms and Conditions that Seek to Waive or Limit Consumer Rights and Other Legal Protections 

Under the proposal, the CFPB would seek information on contract terms and conditions seeking to waive any constitutional, statutory, or common law legal protection, right, or defense; restrict the ability of consumers to complain; limit the time or place for consumers to bring legal actions; limit liability amounts; waive class action rights; and impose arbitration provisions. Both company information and information about the use of the terms and conditions would be published. 

Increase Market Transparency and Improve Risk-based Oversight 

When standard terms and conditions limit consumers' ability to protect themselves, increased public oversight is necessary, and the registry would provide important support for the CFPB’s monitoring of supervised markets. Specifically, collecting and publishing information about the identities of nonbanks and their contract terms and conditions would allow for enhanced risk-based government oversight. The CFPB and agencies from all levels of government would be able to consider the information when prioritizing their supervision and enforcement resources.

 

A final few words about the selection criteria to be applied. The proposed rule would require covered persons to register with the CFPB if they have one or more “covered orders.” A covered order refers to public court judgments or agency orders obtained or issued by a federal, state, or local agency. The covered order must have an effective date on or later than January 1, 2017, and must resolve alleged violations of a “covered law” in connection with the offering or provision of a consumer financial product or service. A covered law, in turn, generally includes:

- a Federal consumer financial law (which is the term of art for the approximately 20 laws, such as the Truth in Lending Act and the Electronic Funds Transfer Act, that the CFPB administers);

- any other law that the CFPB may enforce (such as the Military Lending Act);

- the prohibition on unfair or deceptive acts or practices (UDAPs) under section 5 of the FTC Act; and,

- a state law prohibiting unfair, deceptive, or abusive acts or practices (viz., identified in an appendix to the proposed rule).

 

A covered order must also contain provisions requiring the company to “take certain actions or refrain from taking certain actions,” that is, containing injunctive or remedial provisions. Various authorities beyond the CFPB, such as the Federal Trade Commission, state attorneys general, and state regulatory agencies, could issue such covered orders. 

 

Jonathan Foxx, Ph.D., MBA

Chairman & Managing Director

Lenders Compliance Group

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[i] Registry of Nonbank Covered Persons Subject to Certain Agency and Court Orders, Proposed Rule with request for public comment, Bureau of Consumer Financial Protection, 12 CFR Part 1092, Docket Number CFPB-2022-0080, RIN 3170-AB13, December 12, 2022

[ii] Nonbanks that are subject to the CFPB’s supervision and examination authority are: all nonbanks in the mortgage, private student lending, and payday industries; larger participants, as defined by CFPB regulations, in the following industries: consumer reporting, consumer debt collection, student loan servicing, international money transfer, and automobile financing; and companies designated for supervision pursuant to 12 U.S.C. 5514(a)(1)(C), which authorizes the CFPB to designate particular companies for supervision based on their risks to consumers (viz., I am not aware of any such designated companies).

[iii] For instance, the proposal excludes companies that are subject to CFPB supervision only because they are service providers to supervised nonbanks.

[iv] CFPB Proposes Rule to Establish Public Registry of Terms and Conditions in Form Contracts That Claim to Waive or Limit Consumer Rights and Protections, Announcement, January 11, 2023 Consumer Financial Protection Bureau

[v] The proposal states that the registry would not be implemented until at least January 2024.

[vi] Op. cit. iv