On January 11, 2023, the Consumer Financial Protection Bureau (“CFPB” or the “Bureau”) announced designs to create a public registry of terms and conditions in form contracts. Under the proposed rule (“Rule”), certain nonbank entities, including nonbank student loan servicers, would be required to register and submit information related to its terms and conditions that purport to waive or limit consumer rights and protections, along with identifying company information. The Bureau has opened up the Rule for a sixty-day comment period (closing on March 13, 2023), after which decisions will be made on its final form.
What is being proposed?
If passed, the new Rule would obligate nonbank entities subject to CFPB’s supervisory jurisdiction to register their use of contract terms that operate to waive or limit consumer rights and legal protections. This information would be subsequently published and available for consumption by the public, including consumer financial protection watchdogs.
Why is CFPB taking this step?
According to Director Rohit Copra, CFPB’s renewed interest in consumer contracts emanates from allegedly questionable terms and conditions that consumers routinely agree to under the guise of a “take it or leave it” ultimatum. Specifically, CFPB suspects financial companies of longstanding practices to lure customers into inequitable terms and conditions that CFPB believes may be “one-sided” or, worse, undermine or violate consumer financial protection laws. Clauses that purport to waive legal protections, restrict a consumer’s ability to complain, limit recovery amounts or forum availability, or impose arbitration agreements on consumers are among the handful of widely utilized clauses that the proposed Rule seeks to more closely regulate. Through publication, CFPB hopes to expose violating companies while also educating itself and the general public on the types of terms and conditions available in today’s marketplace.
Impact on student loans
The CFPB believes that, as in the consumer debt collection market, student loan servicers may attempt to rely on waivers or other covered terms and conditions in creditor contract clauses to defend against legal actions by consumers. The notice states that examples of waivers that may pose risks to consumers include terms and conditions attempting to waive the ability to discharge loans prior to the filing of a bankruptcy petition. In addition, depending on the facts and circumstances and applicable law, student loan servicers may use creditor contracts to compel arbitration of claims consumers file in court. The CFPB states that while class actions can provide relief to student loan borrowers, arbitration agreements in private student loan contracts can be used to block that relief. Further, as with creditors and their debt collectors discussed above, loan servicers also could attempt to use terms and conditions for payment authorizations that attempt to limit or waive consumers’ rights to cancel these payments – including in circumstances that may violate the anti-waiver provision in the Electronic Funds Transfer Act, Section 914. Student loan providers often utilize nonbank loan servicers to collect payments on their behalf. Indeed, of the roughly forty-five million current student loan borrower accounts, an overwhelming majority of servicing is conducted by these nonbank servicers. If approved, the rule would subject any nonbank student loan servicers with more than one million dollars in annual receipts to the registration requirements. This alone would envelop the seven largest student loan servicers into the CFPB’s umbrella of authority, and allow the Bureau to supervise the entire life of a private student loan, from origination through final collection.
In 2017, the CFPB promulgated a rule that sought to regulate arbitration agreements in contracts for specified consumer financial products and services, but Congress later invalidated the rule by operation of the Congressional Review Act. Therefore, the current notice appears to be an attempt to require broader disclosure of arbitration bans and other limitations on borrower rights, but falls short of an outright ban.