The Consumer Financial Protection Bureau (CFPB) has issued a circular notifying the financial sector against engaging in any deceptive contract terms with customers.
The circular warned companies about using illegal or unenforceable terms in consumer financial products and services contracts.
“Companies use this fine print tactic to try to trick consumers into believing they have given up certain legal rights or protections,” a June 4 CFPB statement reads.
Institutions engaging in these actions are at risk of violating the Consumer Financial Protection Act, the agency warned
“This fine print may just be an attempt to confuse people about their rights,” the agency stated.
For example, some firms add a “general liability waiver” in contracts that claim to fully insulate them from lawsuits. However, most states already have laws that have carved out exemptions to these waivers, the CFPB noted.
There are consumer protection laws that cannot be taken away irrespective of what a contract states, the agency noted. The Military Lending Act prohibits credit contracts from having terms that make servicemembers and dependents waive their right to legal discourse.
Similarly, the Truth in Lending Act prohibits fine print in mortgage rules that force homeowners into arbitration or nonjudicial processes for resolving issues with mortgage transactions.
The CFPB stated that it “repeatedly” found examples of deceptive mortgage contract terms that purport to waive certain rights of borrowers that legally cannot be waived.
In one instance, the agency identified a bank that used contracts stating that customers could not approach courts to prevent wrongful garnishments. A garnishment enables a creditor to receive funds from the bank account of an individual who owes them money. However, this consumer right cannot be waived, the agency noted.
A remittance transfer service provider was found to have included misleading disclosure statements claiming that customers had limited rights to resolve any errors made by the firm. The CFPB pointed out that these provisions are unenforceable under the Electronic Fund Transfer Act and the Remittance Rule.
An auto loan service provider was found to have included language in contracts suggesting that customers could not exercise their bankruptcy rights. This is not enforceable as well.
The CFPB stated that it issued the circular to ensure that people’s interactions with financial institutions are free and fair. The agency has informed banks and financial firms that trying to silence customers from posting honest reviews online via contract terms could be illegal.
Last year, the CFPB proposed a rule requiring certain nonbank firms to provide the agency with contractual term details that claim to limit or waive customer rights.
“Federal and state laws ban a host of coercive contract clauses that censor and restrict individual freedoms and rights,” said CFPB Director Rohit Chopra.
Cracking Down on Deceptive Practices
In recent times, authorities have taken action against companies engaged in deceptive practices. On May 14, the CFPB announced that consumers “deceived” by Think Finance LLC would receive more than $384 million in compensation.Several state laws void any loans if interest rates are higher than the limit set by the state legislature. Think Finance’s charges were excessive, according to the agency.
The firm “made false demands and illegally took money from consumers’ bank accounts for debts that were not owed under laws in 17 states.”
The lawsuit was filed by the CFPB in November 2017. The 17 states are Arizona, Arkansas, Colorado, Connecticut, Illinois, Indiana, Kentucky, Massachusetts, Minnesota, Montana, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, and South Dakota.
On May 8, the CFPB announced the distribution of almost $40 million to more than 118,000 Americans “deceived” by fintech firm LendUp Loans.
The company allegedly offered consumers higher loan amounts and lower interest rates in the future if they repaid their existing loans on time. However, this did not happen, according to the agency.
