Joint Trades Respond to CFPB's Proposed Prohibitions on Certain Contract Terms

Ladies and Gentlemen:

The American Bankers Association, the Bank Policy Institute, and the Consumer Bankers Association^[1] are writing in response to the Consumer Financial Protection Bureau's (CFPB) proposed rule entitled "Prohibited Terms and Conditions in Agreements for Consumer Financial Products or Services (Regulation AA)."^[2] We appreciate the opportunity to comment on the proposed rule and urge the CFPB to rescind it for the reasons discussed herein.

The proposed rule would prohibit certain contractual provisions in agreements for consumer financial products or services under the CFPB's authority to prohibit acts or practices that are unfair, deceptive, or abusive (UDAAP) under the Dodd Frank Act.^[3] Specifically, 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; terms that reserve the financial institution's right to modify the contract after formation; and terms that limit free expression. The proposal would also codify certain terms long prohibited under the Federal Trade Commission's (FTC) Credit Practices Rule.^[4]

I. Summary of our Comments

The CFPB's prior leadership issued this proposal on January 14, 2025, after the 2024 presidential election. The election clearly indicated the likelihood of new leadership at the CFPB, and therefore, the CFPB should have halted the issuance of new proposals. Instead, it appears that the CFPB rushed to publish this proposal (among others) without the research and analysis necessary for a rule that would require extensive revisions to consumer financial contracts. For this, as well as other reasons set forth below, it is critically important that the CFPB's incoming leadership rescind this proposal.

First, the CFPB should rescind this proposal because it does not have the authority to prohibit the contract terms identified in the proposal. In a free market economy, contract terms clearly and conspicuously disclosed in a timely manner are generally considered lawful unless specifically prohibited by Congress or a state legislature. The CFPB cannot use its UDAAP rulemaking authority to ban contract provisions that Congress has not prohibited. Congress's decision to authorize the CFPB to name specific acts or practices in consumer finance as unfair, deceptive, or abusive through rulemaking does not give the CFPB legislative carte blanche to expand its authority beyond the bounds Congress has established. Yet, the CFPB attempts to arrogate to itself legislative authority that resides only in Congress and its state counterparts.

This is not the first time the CFPB has tried to usurp legislative authority using UDAAP; indeed, the CFPB's attempt to define discrimination as an "unfair" practice was invalidated by the federal district court for the Eastern District of Texas.^[5] As the court found in that case, the CFPB's attempt to leverage its UDAAP authority to regulate in an area governed by existing federal and state law clearly exceeded the agency's statutory authority. The court based its ruling in part on the major question doctrine, which holds that an agency cannot assert broad regulatory authority over matters of substantial economic and political significance without clear congressional authorization. Similarly, in this proposal, had Congress wished to give the CFPB the authority to prohibit specific contract terms in financial services or to give the agency jurisdiction to enforce state consumer protection laws, it would have done so explicitly. Rescinding the proposal because the CFPB lacks authority to implement its terms would also be consistent with Executive Order 14219, which urges agencies to rescind rules not "squarely authorized" by Federal law.^[6]

Second, even if the CFPB had the authority it claims - which it does not - the proposal is defective in several respects. It seeks to rely, in part, on data from the 1980s that underpinned the FTC's Credit Practices Rule. In addition, the Bureau provides only a cursory analysis of costs and benefits to support the proposed restrictions with respect to all consumer financial contracts. The CFPB's analysis contains inadequate supporting research and reflects no legal precedent. Indeed, the proposal would, for example, ban waivers based merely on supervisory findings included in two editions of the CFPB's supervisory highlights and an enforcement action that was settled without admission of wrongdoing by the defendant. These actions do not reflect independent support for the CFPB's assertion that it has the authority to prohibit contract terms. Rather, those actions, which were taken during former Director Chopra's leadership, reflect similar overreach.

Moreover, in contrast to this proposal, the FTC finalized its Credit Practices Rule in 1984, following an extensive survey and report issued in 1972, a proposed rule published in 1975 with a two- year comment period, and several public hearings and investigations of finance companies. Over the course of 12 years, the FTC collected, analyzed, and invited comment on a significant body of information and data. The Bureau has not meaningfully updated the data the FTC relied upon, and it has not developed a sufficiently robust record to support its proposal to prohibit contract terms that have been in use for decades in the competitive market for consumer financial products and services. It is also important to note that the Credit Practices Rule was promulgated when Chevron deference could be afforded to agency rules and before the Supreme Court had articulated the major questions doctrine.^[7]

To read the full comment letter, please click here, or click on the download button below.

[1] A description of the associations is contained in the Appendix.

[2] 90 Fed. Reg. 3566 (Jan. 14, 2025).

[3] 12 USC § 5531.

[4] 49 Fed. Reg. 7740 (Mar. 1, 1984).

[5] See Chamber of Commerce of the United States of America et al., v. Consumer Financial Protection Bureau et al., Case No. 6:22-cv-00381, Opinion and Order (E.D. Tex. 2023)).

[6] Executive Order 14219 of February 19, 2025, "Ensuring Lawful Governance and Implementing the President's 'Department of Government Efficiency' Deregulatory Initiative" 90 Fed. Reg. 10583 (Feb. 25, 2025).

[7] As noted, the FTC issued the Credit Practices Rule in 1984 that prohibits certain creditor remedies, including: confessions of judgment; wage assignments; security interests in household goods; waivers of exemption; pyramiding of late charges; and cosigner liability. When the final rule was promulgated, the American Financial Services Association specifically challenged the provisions relating to wage assignments and security interests in household goods. Among other claims, AFSA asserted that the FTC exceeded its statutory authority to define unfair acts or practices under section 5(a)(1) of the FTC Act. The D.C. Circuit upheld the FTC's rulemaking, relying in part on the 1984 Supreme Court decision of Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc. (767 F. 2d 957 (D.C. Circ. 1985)). 767 F.2d 957 (D.C. Cir. 1985, cert. denied, 475 U.S. 1011 (1986).The court explained that if "Congress has explicitly left a gap for the agency to fill, there is an express delegation of authority to the agency to elucidate a specific provision of the statute by regulation. Such legislative regulations are given controlling weight unless they are arbitrary, capricious, or manifestly contrary to the statute." Id. However, in 2024, the Supreme Court overruled Chevron in Loper Bright Enterprises v. Raimondo (144 S. Ct. 2244 (2024)), holding that courts must exercise their independent judgment when interpreting federal statutes implicating federal agencies and that statutory silence or ambiguity does not require courts to defer to an agency's interpretation.