CFPB Proposes Non-Bank Registry of Contract Terms and Conditions: A Brief Summary of the Proposal and Some Thoughts

On January 11, 2023, the CFPB issued its expected proposed rule to require non-banks to register certain contract terms and conditions with the CFPB.  The public first learned about this proposal last week when the CFPB’s Fall 2022 Regulatory Agenda was issued, which I wrote about here.  The proposal weighs in at 223 pages and we will be digging into the details in the days and weeks to come.  For now, I briefly summarize the highlights of this groundbreaking proposed rule and provide some of my initial thoughts below.

1. Who is Subject? 

The proposal would apply to non-banks subject to CFPB supervision, which generally includes non-bank mortgage lenders, brokers, and servicers.  But note there is a specific conditional exclusion for using only agency and GSE instruments, as well as other general exclusions from coverage, which I’d summarized below.

·      Federal agencies

·      States and federally recognized Tribes

·      Service providers

·      Related persons

·      Entities subject to supervision because of a CFPB risk determination pursuant to a consent order that is for 2 years or less

·      Natural persons

·      Entities with less than $1 million in annual receipts from consumer financial products or services

·      De minimis activity.  This is defined as entering into contracts with “covered terms and conditions” (I’ll described this term below) less than 1,000 times in the previous calendar year or not obtaining a court or arbitrator decision in the previous calendar year to enforce a covered term or condition.

·      Agency and GSE forms.  This would apply to persons that used covered terms or conditions in the previous calendar year solely by entering into contracts for residential mortgages on forms made publicly available on the Internet required for insurance or guarantee by a Federal agency, or purchase by Fannie Mae, Freddie Mac, or Ginnie Mae.  But this does not apply if the person obtained a court or arbitrator decision in the previous calendar year on the enforceability of a covered term or condition.

Regarding the exclusion for using the GSEs’ standard instruments, the CFPB stated in the preamble that, “the Bureau and the general public already have access to these contracts on the websites of these Federal agencies or the enterprises they oversee. The Bureau already can use that information as part of its market monitoring and risk assessments. It therefore does not propose to require registration from supervised nonbanks whose sole use of covered terms or conditions consists of entering into those contracts.”  But the CFPB noted that the exemption would not apply if the company, “obtained a court or arbitrator decision enforcing a covered term in such a covered form contract,” because the CFPB and the public “do not have general knowledge of all such decisions, and the value in collecting information about them from a risk monitoring and assessment perspective therefore is similar to the value of registering decisions related to covered terms and conditions in other covered form contracts.”  In addition, the CFPB’s preamble notes that if a company uses other contracts with covered terms or conditions, it would not be eligible for this exemption. 

It is unclear how this carve-out from the GSE/agency form exemption interacts with the de miminis exemption, which is something to analyze further, especially for mortgage companies that use other notes or other instruments.  There may be additional issues we identify upon further review of the proposal.  The clarity and usefulness of this exemption should be an area of focus and comment for the mortgage industry. 

2. What Contracts are Covered?  

The proposal would require these covered non-banks to submit in a CFPB registration system certain information regarding their use of “covered terms or conditions” in “covered form contracts.”  Note that these are only contracts between the company and a consumer.  “Covered form contracts” is defined as an agreement between a covered non-bank and a consumer that is drafted prior to the transaction for use in multiple transactions involving different consumers that contains a “covered term or condition.”  “Covered terms or conditions” is defined as any clause, term, or condition that expressly purports to:

·      Preclude the consumer from bringing a legal action after a certain period of time

·      Specify a forum or venue where a consumer must bring a legal action in court

·      Limit the ability of the consumer to file a legal action seeking relief for other consumers or to seek to participate in a legal action filed by others

·      Limit liability to the consumer in a legal action including by capping the amount of recovery or type of remedy

·      Waive a cause of legal action by the consumer, including by stating a person is not responsible to the consumer for a harm or violation of law

·      Limit the ability of the consumer to make any written, oral, or pictorial review, assessment, complaint, or other similar analysis or statement concerning the offering or provision of consumer financial products or services by the supervised registrant

·      Waive, whether by extinguishing or causing the consumer to relinquish or agree not to assert, any other identified consumer legal protection, including any specified right, defense, or protection afforded to the consumer under Constitutional law, a statute or regulation, or common law, or

·      Require that a consumer bring any type of legal action in arbitration.

3. What Must be Submitted? 

Non-banks subject to the rule would be required to submit:

·      “Identifying information” and “administrative information”

·      The applicable consumer finance product or service, and each State or other jurisdiction where it was offered

·      For each “covered form contract”

o   the consumer financial product or service the contract was used for, and in which States, as well as all brand or trade names used for the product or service

o   the legal names of ay persons other than a consumer and the non-bank that typically entered into the applicable covered form contract

o   each covered term or condition in the contract (including additional information for certain specific terms and conditions, including the text of terms and conditions limiting liability or waiving causes of action)

o   the jurisdiction of choice of law provisions

o   if the standard form was provided by a third party for use by multiple market participants, the name of the third party provider of the contract and the form and version numbers

·      Whether the company obtained a court or arbitrator decision regarding the enforceability of a covered term or condition, whether the decision enforced or declined to enforce the term or condition, as well as certain additional information

4. Will the Information be Public? 

Yes, and the registry would identify the non-bank registrants.  The CFPB stated in the preamble of the proposal that, “the Bureau proposes to publish and maintain a publicly-available source of identifying information about supervised registrants and information about covered terms and conditions that supervised registrants use.”  The CFPB states that it, “has preliminarily determined that publication of supervised registrants’ identifying information would facilitate the ability of consumers to identify covered persons that are registered with the Bureau.” 

The proposed regulatory text would accomplish this by stating that the CFPB “shall publish and maintain a publicly-available source of information” about the registrants and terms and conditions.  In addition, the regulation would stated that the CFPB “shall publish information collected,” except for “administrative information,” and categories of information are protected from public disclosure because they are subject to FOIA’s fourth exemption for “trade secrets and commercial or financial information obtained from a person and privileged or confidential.”  This exclusion for “administrative information” does not extend to “identifying information,” which is defined as “existing information available to the supervised registrant that uniquely identifies the supervised registrant, which includes legal name(s), State of incorporation or organization, headquarters and principal place of business addresses, and unique identifiers issued by a government agency or standards organization.” 

The Bureau further explains the rationale for the publication of the data, stating that:

the Bureau has preliminarily determined that making the data collected publicly available would further the rationale of the proposal – namely, enhancing oversight of and awareness of supervised registrants’ use of covered terms and conditions in covered form contracts…. Regulators at all levels of government (not just the Bureau) could use the information the Bureau makes publicly available to set priorities.  Researchers could analyze the information the Bureau makes publicly available to gain valuable insight into the issues addressed in the nonbank registration system…. The public registry could broadly inform public debate about use of contracts of adhesion in consumer finance markets and beyond and help ground that debate in data. The public registry also could enable education of consumers about which consumer financial products and services contain covered terms or conditions that the consumers may or may not want…. Finally, publication may help to promote government accountability by making public certain information that the Bureau can use to prioritize its resources. Publication also would help the public to understand the impact of the Bureau’s nonbank registry initiative more broadly.

5. Legal Authority for the Rule? 

The CFPB stated that it is proposing the rule pursuant to Dodd-Frank Act sections 1022(b) and (c) and section 1024(b), to facilitate the Bureau’s market monitoring and supervision functions.  These provisions provide general rulemaking authority, and rulemaking authority under the CFPB’s market monitoring function and registration authority. 

Specifically, the CFPB cites section 1022(b)(1), which authorizes the CFPB to prescribe rules “as may be necessary or appropriate to enable the Bureau to administer and carry out the purposes and objectives of the Federal consumer financial laws, and to prevent evasions thereof.”  The CFPB also specifically cites Dodd-Frank Act sections 1022(c)(1)-(4), which authorizes the CFPB to issue rules to require persons to file information with the CFPB to conduct market monitoring.   The CFPB also specifically cites Dodd-Frank Act section 1022(c)(7)(A), which authorizes the CFPB to prescribe rules regarding registration requirements for non-banks, and allows the CFPB to “publicly disclose registration information to facilitate the ability of consumers to identify covered persons that are registered with the Bureau.”  The CFPB also specifically cites section 1022(c)(3), which authorizes the CFPB to publish information obtained by the CFPB in its market monitoring function through aggregated reports designed to protect confidential information. 

The CFPB also specifically cites Dodd-Frank Act section 1024(b), which authorizes the CFPB to exercise supervisory authority over non-bank covered persons, specifically noting section 1024(b)(7)(C), which authorizes the CFPB to issue rules regarding nonbanks under its supervision “to ensure that such persons are legitimate entities and are able to perform their obligations to consumers.” 

The preamble only mentions once Congress’ disapproval of the CFPB’s 2017 Arbitration Rule under the Congressional Review Act, which prohibits the CFPB from issuing a rule that is substantially similar to that 2017 rule.  But the CFPB discusses its view of the consumer risks from mandatory arbitration clauses at length, even citing to its 2015 arbitration study.  That 2017 rule would have required companies to submit information regarding their arbitration proceedings, including their arbitration clauses, to the CFPB for publication, so there are some similarities here.  I would expect this to be an area of public comment, and it could potentially be one of the issues raised in a legal challenge to the proposal.  

There could be other legal authority problems and ways to challenge the rule, given the general nature of these statutory authorities under Dodd-Frank, such as the Major Questions Doctrine. It could be argued that the creation of a vast database of contract terms and conditions has major economic and political significance and thus, cannot be created by the Bureau under its general registration authority. In addition, a challenge could be based on the recent decision in the 5th Circuit Court of Appeal that invalidated the CFPB’s Payday Loan rule because the CFPB’s funding structure violates the Appropriations Clause of the U.S. Constitution (the CFPB’s petition for a writ of certiorari to the U.S. Supreme Court appealing that decision is pending).

6. When are Comments Due? 

The proposal posted on the CFPB’s website states that comments will be due on March 13, 2023, or 30 days after publication in the Federal Register, whichever is later. 

As noted above, this proposal could have an impact on non-bank mortgage lenders, brokers, and servicers.  The potential exclusion for entities only using GSE contracts should be an area of focus, analysis, and comment for the mortgage industry.  In addition, non-bank providers of other consumer financial services products and services should thoroughly analyze and comment on this proposal.  The broad scope of entities and contracts covered should be an issue of concern for the entire industry. For one thing, the industry should think about the effects of this proposal, if it were to become a final rule, on its use of particular contract terms. Perhaps this is the CFPB’s intent of the proposal? Perhaps the real goal is to “name and shame” companies to force them to give up on contract provisions that the CFPB doesn’t like? And then what happens if companies gives up on their legal protections in their contracts and their risk calculus for their products and services increases? Do they raise their prices? These are some of the questions to think about when reviewing this proposal. In addition, it would be useful to think about potential bases for a legal challenge to the rule.

The proposal can be accessed here. 

If you would like to discuss this proposal, this blog post, or would like assistance drafting a comment letter, please email me at rich@garrishorn.com.