Three Cheers for the CFPB’s Proposed Rule Obliging Nonbanks to Register Terms Waiving/Limiting Consumer Protections

by Jeff Sovern

As Allison posted on Wednesday, the CFPB has proposed a rule obliging nonbanks that it supervises to register the contractual standard terms they use that waive or limit consumer rights. The Bureau would then make the terms public. I think this is a great idea for several reasons.

We all know that consumers don’t read these terms, and if they read them, they don’t understand them. And even if they do read them and understand them, there isn’t much they can do about it because in many product sectors all or nearly all the providers include the terms. In other words, consumers are not in a position to protect themselves when they sign contracts containing troublesome terms. That means someone else has to protect consumers. Once upon a time, that meant private attorneys general, but arbitration clauses and the Supreme Court’s recent standing cases have made that less likely. Regulators can sometimes intervene, but their limited resources mean that they can’t bring every meritorious case; on top of that, sometimes regulators are more interested in protecting the industry than consumers.

But it’s hard to protect consumers if you don’t know what the facts are. That’s one reason the registry is such a good idea. It should help the Bureau determine what the most widespread problems are and where it can best put its resources.

Another argument for the registry is that it will help consumer protection groups, like Consumer Reports, ascertain which companies offer the most objectionable contracts. They can steer their subscribers away from such companies. Some companies might respond to such reporting by reconsidering their contract terms and making them more favorable to consumers. That’s another positive to the registry. Scholars too, are likely to find the information useful.

Those who truly favor the free market should also favor this proposal (though I’m not holding my breath). Economics 101 tells us that free markets require perfect information. But if consumers can’t understand contractual terms, we don’t have perfect information. That means that free marketers should prefer actions that promote perfect information, and this registry promises to do just that.

The industry and conservative lawmakers have already taken aim at the proposal. For example, Representative Patrick McHenry, chair of the House Financial Services Committee, is quoted in Jon Hill’s Law360 article, CFPB Unveils Plan For Nonbank Contract ‘Fine Print’ Registry, as saying that the registry would “facilitate the naming and shaming of firms to empower progressive activists.” Lawyers at the Ballard Spahr firm’s Consumer Finance Monitor Blog also have complained about shaming. But these contracts are not secret documents: businesses give them to consumers to agree to every day. All the registry would do is make it easier to collect the information. If there is nothing wrong with the terms–as consumer finance industry lawyers presumably believe because they insert them in their contracts–there is nothing to be ashamed of. Is this really naming and shaming–or is it accountability?

I am still making my way through the proposal and may have more to say in the future.


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