For the second time in a month, the Consumer Financial Protection Bureau (CFPB) has proposed a new rule that would require businesses to report already public information and thereby increase the burdens on, and risks to, the nonbank financial services industry, which may ultimately increase costs to consumers or slow the proliferation of new products that benefit consumers.
The CFPB issued a Notice of Proposed Rulemaking (NPRM) which would require nonbanks subject to CFPB supervision to file copies of their terms and conditions for consumer financial transactions on a public registry when those terms “seek to waive or limit individuals’ rights and other legal protections.” Failure to do so would constitute a violation of the CFPB’s authority under the Dodd–Frank Wall Street Reform and Consumer Protection Act.
The impact of this proposal, should it become law, would be to create a concentrated database of already generally public materials containing generally lawful limitations. The database would then permit the CFPB and other federal and state agencies, such as the Federal Trade Commission, state attorneys general, and banking regulators, to use the fact of the existence of these terms as a means of singling out lawful business practices with which the current leadership of those agencies may disagree. It also raises the stakes of the CFPB’s continuing efforts to bring additional companies—including major technology platforms—under their supervisory jurisdiction by subjecting those entities to these same requirements.
Examples of such terms and conditions provisions might include mandatory arbitration, choice of law, choice of venue, and waivers of class action. How broadly the rule could reach, however, would require difficult judgment calls on the part of reporting companies, as there will be little certainty in what must be reported. Caution would advise over- rather than under-reporting.
Although not enumerated in the CFPB director’s remarks, it also remains an open question as to whether damage caps, waivers of punitive damages, and indemnification agreements may be covered. The CFPB announcement suggests that adopting this proposal would permit better “risk-based” assessment of the conduct of supervised entities, leading to a reasonable inference that engaging in lawful conduct might lead to enhanced exams and other supervisory activities which can easily cross the line from prudential to punitive.
If this proposed rule were to become law, covered entities would face the prospect of additional diligence and reporting and, because the proposed standard of whether the term “seek[s] to waive or limit individuals’ rights and other legal protections” is both broad and poorly defined, the rule would likely lead to over-reporting rather than risk-taking out of a concern that the term is perceived as limiting the consumer protections described in the proposed rule.
Non-bank financial institutions affected by this proposal may want to consider filing comments with the CFPB noting the burden and risk as well as apparent concern that lawful conduct may lead to enhanced supervision, opening the question of whether the CFPB has the authority to promulgate such a rule in the first place. As with over-reporting as a prudential cautionary matter, entities such as platforms that are not financial institutions, but the CFPB has intimated may be treated as such, may also take the properly prudential measure of commenting, if only to propose clarifications to give them certainty.
Comments will be due 60 days from the date the NPRM is formally published in the Federal Register.