Earlier this week, the CFPB issued a proposed rule.  Among other things, the proposed rule would “forbid covered persons from including in their consumer contracts any terms or conditions that purport to waive substantive legal rights and protections” or that “reserve to the covered person the right to unilaterally amend a material term of the contract.”  The CFPB states that it “has preliminarily concluded that use of these clauses may constitute an unfair or deceptive act or practice” because they are contained in so-called “contracts of adhesion”—particularly electronic contracts which, the CFPB argues, are often unread or misunderstood by consumers.

With respect to consumer contract terms that “waive substantial legal rights,” the proposed rule explicitly states that it would “not prohibit clauses with regard to procedural rights, like venue clauses, arbitration clauses prohibiting court adjudication, or class action waivers.”  (Indeed, the CFPB previously attempted to ban the use of class action waivers in consumer arbitration clauses, only to have its final rule repealed by Congress. The proposed rule, however, would “cover waivers of substantive legal rights as well as waivers of a consumer’s right to enforce those laws (such as a waiver of a cause of action, a cap on statutory damages, or a time limitation on consumer enforcement of the law).” 

With respect to unilateral contract amendments, the proposed rule would prohibit covered persons from including in agreements “[a]ny term or condition that expressly reserves the covered person’s right to unilaterally change, modify, revise, or add a material term of a contract for a consumer financial product or service.”  The CFPB specifically notes that “[i]n recent years, unilateral amendment clauses have become a popular way for companies to add arbitration clauses to consumer contracts or to change the rules of the arbitration process.”  It further states that “under the Restatement of Consumer Contracts, a modification of a standard-contract term is binding on a consumer only if the consumer received notice of the proposed modification and was provided a reasonable opportunity to reject the change,” adding that:

The proposed rule would prohibit any clause in a contract for a consumer financial          product or service that provides the company the sole right to modify the contract. The CFPB recognizes that consumer contracts may need to be modified to account for changed circumstances after the contract is signed, and this proposed rule would not prohibit all such modifications. Nothing in the proposed rule would prohibit companies from implementing modifications that are consistent with applicable State or Federal law.  Whether a particular modification is consistent with applicable law will depend on the facts and circumstances and the applicable jurisdiction’s common law, and is beyond the scope of this rulemaking. But the proposed rule would prohibit companies from relying on a unilateral amendment clause to make modifications.

Given the imminent change in administrations, it remains to be seen whether the proposed rule will actually be finalized and implemented.  As we recently reported, the American Bankers Association has asked the incoming Trump administration to halt all regulatory actions affecting banks and extend all effective dates for final regulations impacting financial institutions.  But even if it does not survive, the proposed rule might still have an indirect impact on consumer arbitration clauses since it provides guidance to consumer advocates, plaintiffs’ attorneys and state attorneys general and other regulators of potential challenges to the enforcement of such clauses.

We will be following this proposed rule closely and will keep you updated.