The Consumer Financial Protection Bureau proposed a rule Wednesday to rein in arbitration clauses in a second attempt to block companies from limiting consumers' legal rights or their ability to sue or remedy alleged violations of consumer protection laws.
The proposed rule would create a nonbank public registry of non-negotiable form contracts that the bureau says "mislead consumers into believing the terms or conditions are legally enforceable." For years companies have used the fine print in consumer contracts to limit liability amounts, waive class action rights, and force customers into arbitration. The bureau views such contracts as restricting the ability of consumers to complain and to file lawsuits.
The proposal, which is open for public comment for 60 days, is substantially different from a rule the CFPB
"Some companies seek to censor their customers and strip them of their rights by inserting fine print into non-negotiable contracts," CFPB Director Rohit Chopra said in a press release. "The CFPB is proposing a registry of these contract clauses to find out where people are unable to speak up when they've been harmed."
Chopra also issued a separate statement further explaining problems that consumers have experienced because of such contracts. He noted that when purchasing a product, downloading an app, or signing up for a service, consumers routinely are required to click a checkbox agreeing to "terms of service" that are not subject to negotiation. He referred to the forms as "take it or leave it" form contracts that typically are "one-sided and favor the company over the consumer."
In addition, Chopra cited some consumer contracts that have included "gag clauses" prohibiting a consumer from posting a negative online review or from filing a complaint, essentially limiting free speech. Most contracts seek to limit lawsuits.
"Many consumer contracts may include language that waives a consumer's right to file a lawsuit," Chopra said. "Waivers of liability, for instance, try to shift responsibility for harm from the company to the consumer, in an attempt to prevent consumers from suing when they are injured."
The bureau provided several examples of contracts with lengthy terms and conditions that consumers cannot negotiate. It said the use of such contracts to constrain consumers' legal rights contravenes consumer financial protection law.
"There is often little choice for consumers except to sign these form contracts due both to their market pervasiveness and the critical role the products and services play in people's daily lives," the bureau said.
Some companies require consumers to sign arbitration agreements to "avoid accountability for loans to military families," the CFPB said, citing the Military Lending Act, which broadly prohibits waivers of legal protections and arbitration agreements. A handful of companies have faced regulatory action because they sought to obtain waivers of protections under the Servicemembers Civil Relief Act, which sets limits on the cost of loans for military families, the bureau said.
In a second example, the CFPB took aim at credit reporting firms that use contracts to block the ability of consumers to pursue legal action, including through class actions, to remedy alleged violations of the Fair Credit Reporting Act. The CFPB specifically cited companies that have limited consumer class actions when a consumer reporting firm fails to reasonably investigate inaccurate information on numerous consumer reports.
Payday lenders could come under intense scrutiny as well. In a third example, the CFPB said some contracts for short-term, small-dollar loans seek to waive liability for bank fees borrowers incur when the lender repeatedly tries to debit payments from a bank account that has too little money to cover the payment.
Mortgage contracts also may be using unenforceable waivers that mislead consumers. The bureau cited CFPB examiners who have regularly identified deceptive acts and practices committed through mortgage lenders' use of waivers and limitations that may violate the Truth in Lending Act's restrictions on using waivers.
Under the proposal, the CFPB would seek and publicize information in consumer contracts that seek to waive any "constitutional, statutory, or common law legal protection, right, or defense." If finalized, the proposed rule would identify and collect information on the terms and conditions in form contracts that seek to waive or curb consumer rights: Both company information and information about the use of the terms and conditions would be published in a public registry.
"Collecting and publishing information about the identities of nonbanks and their contract terms and conditions would allow for enhanced risk-based government oversight," the bureau said. "The CFPB and agencies from all levels of government would be able to consider the information when prioritizing their supervision and enforcement resources".
