2025-00633. Prohibited Terms and Conditions in Agreements for Consumer Financial Products or Services (Regulation AA)

Table 1—Entity Counts for NAICS Codes

NAICS name(s)	NAICS code(s)	Number of entities operating all year	Estimated number of non-SBA entities 177
Credit Unions	522110, 522120, 522210	4702	500
Commercial Banking, Savings Institutions, and Credit Card Issuing	522130	4587	1165
Nondepository Credit Intermediation	522220, 522291, 522292, 522299	7403	438
Activities Related to Credit Intermediation	522310, 522320, 522390	11252	212
Activities Related to Real Estate	531311, 531312, 531320, 531390	63564	709
Portfolio Management & Investment Advice	523920, 523930	34695	542
Passenger Car Leasing	532112	199	0
Truck, Utility Trailer, and Recreational Vehicle Rental and Leasing	532120	920	0
Consumer Reporting	561450	284	17
Debt Collection	561440	2750	116
Total		130,356	3,699

 

Subpart B of the proposed rule would codify the already existing FTC Credit Practices Rule, which was first issued in 1984,^[178] and apply it additionally to banks, savings associations, Federal credit unions, and other covered persons under the CFPB's jurisdiction. Because the conduct covered under this subpart is already generally understood to be unfair and deceptive, the CFPB does not anticipate that there would be ( print page 3586) any significant economic effects in response to the proposed codification. However, it is possible that, at baseline, some covered persons attempt to engage in prohibited credit practices or incur costs related to determining whether a practice is prohibited. The proposed rule may therefore modestly benefit covered persons by emphasizing that these credit practices are prohibited.

Subpart C of the proposed rule would prohibit covered persons from including in their contracts with consumers for consumer financial products or services (i) clauses that require consumers to waive legal rights designed to protect consumers; (ii) clauses that allow the covered person to unilaterally amend the contract; and (iii) clauses that restrict consumers' free expression. This provision would impose one-time administrative costs associated with reviewing and revising contracts to identify and remove any prohibited terms and conditions. Covered persons currently using prohibited terms and conditions would likely face increased exposure to consumer disputes, including litigation. In response, covered persons currently using prohibited terms and conditions would incur costs related to lowering their exposure to disputes, for example by allocating more resources to training staff to comply with underlying laws, as well as increased costs related to countering disputes, either in formal litigation or arbitration or in informal settings.

Subpart C likely would benefit some covered persons by reducing uncertainty about the legality of prohibited terms and conditions, as well as unintentional exposure to enforcement action by the CFPB or other State and Federal regulators. Covered persons not currently using terms and conditions that would be prohibited under subpart C may also benefit from this provision of the proposed rule. In general, firms that intentionally violate consumer protection laws or under-invest in compliance obtain a competitive advantage over their more compliant competitors. For example, firms that successfully deceive consumers about the true cost or quality of the products or services they offer by restricting the right of consumers to freely express their experiences with the provider may gain market share at the expense of firms that more accurately disclose costs or quality. In some cases, firms that unlawfully use terms and conditions to limit consumers' ability to resolve disputes may be able to offer lower prices to consumers up front, even if the prohibited terms and conditions leave consumers worse off on average. To the extent that the proposed rule incentivizes firms using prohibited terms and conditions to increase their compliance, firms which were previously compliant will benefit. Clauses that restrict free expression prevent consumers from obtaining information that would be relevant to their adoption or purchasing decisions and make it more difficult for high-quality firms to gain market share. Therefore, the prohibition on clauses restricting free expression will benefit firms that would gain market share if more information about consumers' experiences with their competitors was publicly available.

Potential Costs and Benefits to Covered Persons of Subpart B

Subpart B of the proposed rule would codify the already existing FTC Credit Practices Rule, which was first issued in 1984, and apply it additionally to banks, savings associations, Federal credit unions, and other covered persons under the CFPB's jurisdiction. Because the conduct covered under this subpart is already generally understood to be unfair and deceptive and is, in the CFPB's experience, exceedingly uncommon, the CFPB does not anticipate that there will be any significant economic effects in response to the proposed codification. The CFPB seeks comment on whether any covered persons are not prohibited or discouraged from using these practices at baseline, for example because they are exempt from FTC authority and outside the scope of applicable interagency guidance. The CFPB also seeks comment on the incidence of these practices at baseline, including for any covered persons not currently prohibited or discouraged from using them.

Despite the longstanding prohibition on and discouragement of these practices, it is possible that some covered persons attempt to engage in such practices or incur costs related to determining whether a practice is prohibited. The proposed rule may therefore modestly benefit covered persons by clarifying that these credit practices are prohibited. For example, it is possible that some covered persons that would consult outside legal counsel to assess the risks of engaging in a prohibited credit practice at baseline would no longer do so under the proposed rule.

The CFPB does not have any data with which to quantify the extent of uncertainty regarding the credit practices subpart B would prohibit or the costs, if any, that firms bear as a result of such uncertainty. Therefore, the CFPB cannot quantify the benefits associated with reducing uncertainty about the legality of these practices. The CFPB requests comment or data on cases where covered persons may lack clarity about the applicability of current rules and guidance on credit practices, or where such lack of clarity may be resolved by the proposed rule's codification.

Potential Costs and Benefits to Covered Persons of Subpart C

Subpart C of the proposed rule prohibits covered persons from including in their contracts with consumers for consumer financial products or services (i) clauses that require consumers to waive legal rights designed to protect consumers; (ii) clauses that allow the covered person to unilaterally amend the contract; and (iii) clauses that restrict consumers' free expression. The CFPB has preliminarily determined that these prohibited terms and conditions constitute unfair or deceptive acts or practices. Based on previous guidance ^[179] and enforcement actions by the CFPB and other State and Federal regulators, the CFPB believes that some covered persons may already not use the terms and conditions covered by subpart C because their use may constitute prohibited UDAAPs or otherwise be unenforceable under common law or other statutory law.

Costs of Reviewing and Revising Contracts

This provision would impose one-time administrative costs associated with reviewing and revising contracts to identify and remove any prohibited terms and conditions. To precisely quantify the costs to covered persons, the CFPB would need representative data on the operational costs that covered persons would incur to read and understand the rule, identify any prohibited terms and conditions in their contracts, revise any non-compliant contracts, and fully implement use of the revised contracts. Given that the CFPB is unaware of the existence of representative data of this kind, the CFPB has made reasonable efforts to gather information on the one-time costs of reviewing contracts for compliance with the proposed rule and revising them if necessary. The following discussion combines available data with assumptions informed by the CFPB's experience to produce estimated costs for covered persons of three ( print page 3587) representative sizes. Given the potential for wide variation in use of terms and conditions covered by proposed subpart C at baseline and the limited data available, these calculations may not fully quantify the costs to an individual covered person. That is, the CFPB expects that some firms would have higher or lower costs than the average costs described here. The CFPB requests comment on this approach, as well as any data or analysis that would inform its cost estimates.

In general, the one-time costs of bringing contracts into compliance with the proposed rule would require four distinct tasks: (1) understanding the rule; (2) reviewing all contract types to identify any prohibited terms and conditions; (3) revising any contract containing a prohibited term and condition; and (4) implementing use of the revised contracts. As discussed above, the CFPB does not have representative data on the prevalence of terms and conditions that would be prohibited under the proposed rule. In order to avoid underestimating the costs of the proposed rule, the CFPB assumes that nearly all covered persons not exempt from the proposed rule would need to review every contract type they use for compliance with the proposed rule. Further, the CFPB assumes that nearly all contract types would need to be revised to comply with the proposed rule.^[180] The CFPB seeks comment or data on the accuracy of these assumptions.

The first task would require firms to read the proposed rule and understand its definitions and requirements. Based on the CFPB's experience, this would take roughly two hours for the typical firm. Some firms may have higher costs. For example, some firms may need to take time to analyze whether they are covered persons subject to the proposed rule. The CFPB seeks information or analysis on the typical time burden that would be required to read and understand the proposed rule.

The second task would require firms to review their contracts for the presence of terms and conditions that would be prohibited by the proposed rule. The CFPB understands that the types of terms and conditions prohibited by the proposed rule are not uncommon and expects that many covered persons would review their existing contracts for compliance with the proposed rule. The CFPB expects that firms would generally be able to complete this task by searching the text of the contract for a limited set of key words that signify waivers, amendments to the contract, or restrictions on expression and then evaluating the relevant clause for compliance. The CFPB expects that this would take between 60 and 90 minutes per contract, depending on the number of contracts to review and the sophistication of the firm. The CFPB seeks comment on the typical time burden that would be involved in reviewing existing contracts for compliance with the proposed rule. The CFPB also requests comment on whether any common terms or conditions that would be prohibited by the proposed rule would be difficult to identify.

The third task would require firms to revise any existing contracts containing terms or conditions that would be prohibited by the proposed rule. Based on academic research and its experience, the CFPB expects that most contracts contain at least one term or condition that would need to be revised. The CFPB also expects that many prohibited terms and conditions would need relatively minor revisions that would not significantly change the legal risks or business practices of the firm.^[181] In other cases, firms may need to make complex decisions about how to revise their contracts. However, the CFPB also expects that many firms use similar terms and conditions across their contracts, and that even firms using relatively few contracts would not need to consider each term in each contract individually. Considering these factors, the CFPB expects that, on average, revising contracts for compliance would take between six and eight hours per type of contract. The CFPB requests comment on the appropriateness of this estimated burden, especially any data or analysis that would inform an alternative estimate.

The final task involves implementing the revised consumer contracts. This is likely to involve updating consumer-facing websites, notifying existing customers of the changes, collecting and destroying outdated contracts, and printing out new paper copies of the revised contract for use in offices. Given the diverse set of industries and business models covered by the proposed rule, implementation costs are likely to vary significantly between firms. In addition, these kinds of printing and updating tasks will likely be incorporated into ongoing processes and reviews. However, based on its experience the CFPB expects this task to take approximately two to four hours per contract on average, depending on the number of contracts and the sophistication of the firm. The CFPB requests comment on the appropriateness of this estimated burden, as well as any data or analysis that would inform an alternative estimate.

The CFPB assesses the average hourly base wage rate for each of these tasks at $51.21 per hour. This is the mean hourly wage for employees in four major occupational groups assessed to be most likely responsible for the compliance process: Management ($59.31/hr); Lawyers ($84.84/hr); Business and Financial Operations ($39.82/hr); and Office and Administrative Support ($20.88/hr). The average hourly wage of $51.21 is multiplied by the private industry benefits factor of 1.42 to get a fully loaded wage rate of $72.72/hr. The CFPB includes these four occupational groups in order to account for the mix of specialized employees that are likely to participate in the identification, revision, and implementation of terms and conditions due to requirements imposed by the proposed rule. The CFPB assesses that Office and Administrative Support staff are likely to be responsible for gathering existing contracts and implementing use of any revised contracts, potentially including destruction of existing noncompliant contracts. Employees specialized in business and financial operations or in legal occupations are likely to be responsible for making decisions about how noncompliant contracts should be revised. Senior officers and other managers are likely to review the revised contracts and may provide additional information. The CFPB seeks comment on the occupations of staff that would be required to ensure compliance with proposed subpart C as well as any other information that would inform its estimate of the average hourly compensation of the necessary employees.

The direct compliance costs for a given covered person will depend on its complexity in general, and, most importantly, on the number of different types of contracts it uses. Table 2 presents the estimated direct cost for ( print page 3588) covered persons at three different levels of complexity, based on the assumptions described above. The total cost depends on the number of covered persons in each of the three representative categories of complexity. Table 2 also reports estimates of how many of the estimated number of non-exempt covered persons reported in table 1 may fall into each category, based on their total revenue as reported in the Economic Census. Specifically, the CFPB assumes that covered persons with under $25 million in annual receipts fall within the “simple” tier with ten covered contracts. Covered persons with annual receipts between $25 million and $100 million are assumed to be in the “intermediate” complexity tier, with 25 contracts. Covered persons with annual receipts greater than $100 million are assumed to be in the “complex” tier, with 250 contracts. The CFPB believes that revenue is a reasonable and transparent indicator of the number of contracts used by covered persons, and is therefore appropriate for estimating the average time burden and cost to covered entities. The CFPB seeks information or analysis that could improve its estimates of the number of contracts used by different types of firms.

The estimates detailed in table 2 are based on the assumption that most covered persons write their contracts in-house. Covered persons are likely to obtain compliant contracts from external contract providers if the benefits of doing so outweigh the costs. External contract providers, such as law firms or contract vendors, would likely be able to reduce duplication of time and effort by reviewing and revising contract terms that are used by many covered persons. If many covered persons rely on external contract providers to bring their contracts into compliance with the proposed rule, the total cost may be significantly lower than the estimate detailed in table 2. The CFPB requests comment on how covered persons may use external contract providers to comply with the proposed rule, as well as any data or analysis that would inform the cost estimates in table 2.

Table 2—Burden and Cost of Reviewing and Revising Contracts

Description of task	Simple (10 contracts)	Intermediate (25 contracts)	Complex (250 contracts)
1. Read rule, understand requirement, and analyze definitions	2 hours	2 hours	2 hours.
2. Identify prohibited terms and conditions	15 hours	25 hours	250 hours.
3. Revise contract to eliminate prohibited terms and conditions	80 hours	200 hours	1,500 hours.
4. Update contracts usage	40 hours	100 hours	500 hours.
Total time burden per entity:	137 hours	327 hours	2,252 hours.
Avg. wage rate  182	$72.72	$72.72	$72.72.
Total cost per entity	$10,000	$23,800	$163,800.
Estimated number of entities  183	391	900	2,408.
Total estimated time burden:	53,567 hours	294,300 hours	5,422,816 hours.
Total Estimated cost:	$3,895,400	$21,401,500	$394,430,400.

Covered persons may also need to periodically review their contracts for compliance with the proposed rule as applicable State and Federal laws change. The CFPB understands that most firms review their contracts periodically at baseline and expects that the proposed rule would only minimally increase the cost of these periodic reviews above baseline levels. The CFPB requests comment on how the proposed rule would change firms' processes for reviewing and updating their form contracts as well as any data or analysis that would inform estimates of the cost of those changes.

The CFPB has considered the possibility that covered persons may pass through some of the costs related to reviewing and revising contracts to consumers as higher prices. In general, standard microeconomic theory suggests that increases in firms' fixed costs ( i.e. costs that do not vary with sales volume) are unlikely to be passed through to consumers. For a given product or service, firms use the same form contract for every customer. Therefore, the costs of reviewing and revising contracts for compliance with the proposed rule are fixed at the product level and are unlikely to be passed through to consumers. The CFPB requests any comments or data that may aid the evaluation of relevant pass-through rates.

Costs of Increased Exposure to Consumer Disputes

Covered persons currently using terms and conditions that would be prohibited under subpart C would likely face increased exposure to consumer disputes. This increased exposure may occur both through increased incidence of consumer disputes and through increased costs of countering disputes that do occur. Covered persons may also take costly actions to reduce their exposure to consumer disputes, but are likely to do so only when those actions reduce the net costs of the proposed rule. The CFPB is unaware of any comprehensive data quantifying the number of disputes that are deterred by the terms and conditions that would be prohibited at baseline or the extent to which the terms and conditions that would be prohibited reduce dispute resolution costs at baseline. Therefore, the CFPB is unable to quantify these costs and instead provides a qualitative discussion. The CFPB seeks any data or analysis that would aid in quantifying these costs. Similarly, covered persons have a wide variety of means with ( print page 3589) which to reduce their exposure to consumer disputes and it is therefore difficult to anticipate which actions firms will take in response to increased exposure or the cost of such actions. Therefore, the CFPB provides a qualitative discussion of those costs and seeks comment on the actions covered persons may take to reduce their exposure to consumer disputes as well as the potential costs of such actions.

At baseline, terms and conditions that would be prohibited under subpart C may also have an effect on consumer behavior, even when such terms are unenforceable.^[184] The proposed rule would ease this effect, which in turn would likely increase the incidence of consumer disputes. Consumer disputes may be formal, where customers exercise the legal rights afforded them under consumer financial laws, or informal, where consumers interact with firms' customer service or exercise their right to free expression by lodging complaints against the firm in public forums. Covered persons would likely incur increased costs related to responding to additional disputes. For example, some covered persons may hire additional customer service representatives to handle increased call volume or pay additional fees to resolve disputes in arbitration or in court. The CFPB does not have sufficient data to estimate the effect of these terms and conditions on consumer disputes at baseline and therefore cannot quantify this cost. The CFPB seeks comment on the extent to which consumer disputes would become more frequent as a result of the proposed rule. The CFPB also requests any data or analysis that would allow it to quantify marginal cost to covered persons of responding to additional consumer disputes.

To the extent that covered persons use terms and conditions that would be prohibited under subpart C that are enforceable at baseline, the proposed rule may increase the cost of resolving disputes. Waivers of consumer protection law are often intended to reduce consumers' likelihood of prevailing in a formal dispute or to limit the remedies available to consumers who do prevail. By prohibiting these waivers, the proposed rule would increase the likelihood that disputes are resolved in consumers' favor and increase the cost of associated remedies for some disputes. The magnitude of the increases would depend on the specific fact pattern of individual disputes, because not all terms and conditions that would be prohibited would be relevant in all disputes. The CFPB is unaware of any comprehensive data on the number of court and arbitration decisions in which these types of terms and conditions are decisive, or the effect that they have on the final remedy. Further, the CFPB is unaware of any data or analysis sufficient to quantify the effects that terms and conditions that would be prohibited have on settlements of disputes that do not reach a final court or arbitrator decision. Therefore, the CFPB is unable to quantify this effect. The CFPB requests comment on the effects that these terms and conditions have on dispute outcomes. The CFPB seeks any data or analysis that would help quantify these costs.

Covered persons currently using terms and conditions that would be prohibited under subpart C may mitigate the costs described above by taking actions to lower their exposure to disputes, for example by allocating more resources to training staff to comply with underlying laws. Standard microeconomic theory suggests that covered persons will take such costly actions only if the benefits they receive outweigh the costs. Therefore, the CFPB expects that covered persons would incur costs related to voluntary changes in their business practices if and only if those changes reduce the net costs of the proposed rule. Due to the wide variety of potential actions covered persons could take to reduce their exposure to consumer disputes and the lack of comprehensive data on the costs and benefits of those potential actions for individual firms, the CFPB is unable to quantify the impact of voluntary changes in business practices on the cost of the proposed rule.^[185]

Costs From Reduced Flexibility in Amending Contracts

As discussed in section VI.B. of the preamble, many covered persons use contracts containing clauses that provide covered persons with discretion to change a term of the contract or add terms to the contract without notification or meaningful consent from consumers. The proposed rule requires covered persons to clarify their notification and consent requirements in their contracts. At baseline, unilateral amendments are generally unenforceable in court unless requirements of sufficient notice and opportunity to reject or terminate are satisfied. The proposed rule would not prescribe new requirements for sufficient notice or opportunity to reject an amendment and would therefore not change the enforceability of unilateral amendments relative to baseline. The CFPB assumes that some covered persons implement contract amendments at baseline. However, the CFPB assumes that, at baseline, these contract amendments are not prevalent and are rarely challenged in court. The CFPB expects that this provision of the proposed rule will not require significant changes to current business practices or impose significant costs on covered persons relative to baseline.

However, by requiring covered persons to commit to notification and consent requirements and describe those requirements in their contracts, the proposed rule would reduce some covered persons' discretion to unilaterally amend their contracts. This may make it more costly for some firms to amend their contracts. The CFPB is aware that discretion to unilaterally amend contracts may be particularly valuable to firms with specific business models or in certain industries. For example, some credit card issuers reserve the right to change their rewards programs at any time, which can potentially provide a valuable option to the company to devalue rewards in response to changing market conditions.^[186] The option to alter rewards programs might become less valuable to credit card issuers if they were required to notify consumers sufficiently in advance of any change in the redemption value of rewards points. The CFPB is unaware of any data or analysis sufficient to quantify the cost of marginally reducing discretion to amend contracts, such as by requiring additional time for notification. The CFPB requests any data or analysis that would inform estimates of the costs related to this provision for credit card issuers, as well as comments regarding any other industry or business model that would be affected by this provision.

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Costs From the Prohibition on Contractual Restraints on Free Expression

Section 1027.301(a)(3) of the proposed rule would prohibit covered persons from including in their contracts with consumers for consumer financial products or services any clause that limits or restrains, or purports to limit or restrain, the lawful free expression of the user of a consumer financial product or service. This prohibition would prohibit contractual clauses that limit a consumer's ability to make negative comments about a company or to freely express their political or religious views.

At baseline, non-disparagement clauses are generally prohibited in standard-form consumer contracts under the Consumer Review Fairness Act of 2016.^[187] As noted in section VI.C. of the preamble, some States have also enacted prohibitions against non-disparagement clauses. Although the CFPB is aware of some violations of these prohibitions in the consumer finance market, the CFPB assumes that nearly all covered persons are aware that non-disparagement clauses are prohibited and in compliance with applicable law. Therefore, the CFPB expects that restating the existing prohibition in the proposed rule will not impose any significant costs on covered persons.

The proposed rule also prohibits contractual terms that prevent consumers from engaging in political or religious expression or penalize them for doing so. Such terms purport to limit consumers' free expression on issues disfavored by the company's management, and such limitations generally are not within the purview of companies engaged in consumer finance markets. Furthermore, while a company's management might obtain a benefit in the form of advancing their own political or religious views or restraining views contrary to their own in the marketplace of ideas, consumer financial companies obtain no concrete financial benefit from limiting the free expression of consumers. The CFPB is unaware of any comprehensive data on the prevalence of such contractual terms and therefore cannot quantify the costs to covered persons of prohibiting them. The CFPB seeks comments regarding any covered persons or business models that would be impacted by this provision, as well as any data or analysis that would inform estimates of its cost.

Benefits to Covered Persons

Subpart C is likely to benefit some covered persons by reducing uncertainty about the legality of prohibited terms and conditions, as well as unintentional exposure to enforcement action by the CFPB or other State and Federal regulators. Some covered persons currently using terms and conditions that would be prohibited may be doing so unintentionally, for example because they have purchased a contract from a vendor. Because such firms did not choose to include these terms and conditions in their contracts, the legal risks associated with using them may exceed the benefits. The CFPB does not have systematic data on the prevalence of these terms and conditions in contracts used by covered persons, or the extent to which covered persons are unaware of the presence of these terms and conditions in their contracts. Therefore, the CFPB cannot quantify the extent to which clarifying that these terms and conditions constitute unfair and deceptive acts or practices would reduce the costs of future enforcement actions related to use of terms and conditions that would be prohibited. The CFPB requests any additional information that would improve its understanding of this benefit.

The CFPB anticipates that this provision of the proposed rule would cause most covered persons currently using the terms and conditions that it would prohibit to remove them from their contracts. This is likely to incentivize these firms to increase their compliance with underlying consumer protection laws. Firms that are complying with the law or following existing guidance by not using prohibited terms and conditions are often at a competitive disadvantage relative to firms that do not comply with the law. To the extent that this provision would induce more firms to comply with applicable consumer protections, firms that were previously compliant will benefit. As noted above, the CFPB does not have systematic data on the use of terms and conditions that would be prohibited, the number of firms currently not complying with consumer protection law, or the harm to compliant firms from their competitors' noncompliance. The CFPB is therefore unable to quantify this potential benefit to covered persons. The CFPB requests comments or data that would improve its understanding of this potential benefit.

Clauses that restrict free expression prevent consumers from obtaining information that would be relevant to their adoption or purchasing decisions and make it more difficult for high-quality firms to gain market share. Therefore, the prohibition on clauses restricting free expression would benefit firms that would gain market share if more information about consumers' experiences with their competitors was publicly available. The magnitude of this benefit depends on the prevalence of clauses restricting free speech, the extent to which such clauses limit the information available to other consumers regarding disputes or negative experiences, and the impact that information would have on covered persons' market shares or prices if it were publicly available. The CFPB does not have sufficient data to quantify these factors, and therefore is unable to quantify this potential benefit to covered persons. The CFPB requests comments or data that would improve its understanding of this potential benefit.

D. Potential Costs and Benefits to Consumers

This section describes the benefits and costs to consumers that the CFPB expects to occur under the proposed rule. Each of the two subparts of the proposed rule is analyzed in detail separately.

Potential Benefits to Consumers of Subpart B

This subpart would re-codify Regulation AA, the FTC's Credit Practices Rule, and the companion credit practices rules of the prudential regulators, which established that these credit practices are prohibited. While these practices are largely considered unlawful pursuant to existing guidance from the CFPB and prudential regulators, it is possible that there are consumer contracts that currently include language covered in this subpart or that certain providers attempt to enforce these practices. The re-codification of the prohibition on these credit practices would incentivize any providers that currently engage in these practices through their use of terms and conditions in their contracts, or attempt to enforce such terms and conditions, to cease. This would benefit consumers by clarifying that these terms and conditions are unenforceable, reducing uncertainty and costs associated with defending themselves from unlawful practices, and reducing firms' incorrect application of these practices against consumers. However, the CFPB does not have systematic data on the prevalence of these practices in consumer contracts or on the frequency with which firms incorrectly attempt to enforce these ( print page 3591) practices against consumers. Insofar as the scope of this proposed rule extends the scope of prohibited credit practices to covered persons not previously subject to the other rules, this would benefit consumers by standardizing the credit practices rule across different types of lenders, reducing search costs, and shielding consumers from unfair or deceptive credit practices. However, the CFPB does not have systematic data on the number of covered persons that would be newly subject to the prohibited credit practices rule nor the number of covered persons that use any such credit practices under the baseline. Against the baseline, the CFPB is unable to quantify the benefit of re-codifying these prohibited credit practices. The CFPB requests any comments or data that would help quantify these benefits.

Potential Benefits to Consumers of Subpart C

The proposed rule would prohibit the use of three categories of terms and conditions, collectively referred to as prohibited terms and conditions. Even when they are generally unenforceable under the baseline, as is the case with clauses that purport to waive legal rights of consumers expressly made unwaivable under the law, these terms and conditions may still harm consumers by hampering private action because many consumers are unaware that such terms and conditions are prohibited or void. For example, when a consumer complains about a particular practice or harm, a firm using a prohibited term or condition may incorrectly claim that the consumer agreed to an enforceable limitation of their rights and thus has no rights to seek their desired remedy or a consumer who first consults the contract terms in the event a particular harm arises may reasonably assume that they have no right to seek remedy due to the presence of prohibited terms. In light of what the term or condition states and the likelihood of the firm standing behind it if a consumer complains, a reasonable consumer may believe that they have agreed to a limitation of their rights, and not pursue further action. The removal of prohibited terms would lessen this effect, increasing dispute incidence when consumers experience a particular harm. This is likely to benefit consumers through the associated dispute resolution and remedy of said harm. In addition, as noted above, covered persons have increased incentive to comply with existing consumer protection laws, which would also benefit consumers.

While consumers would likely benefit from covered persons' increased compliance with consumer protection laws, fully quantifying this benefit requires data on the incidence of violations of consumer protection laws, including violations that are difficult to quantify, such as limitations on types of contacts and calls under the Fair Debt Collection Practices Act (FDCPA) and the Telephone Consumer Protection Act (TCPA) or a creditor taking more time to assure the accuracy of the information furnished to a consumer reporting agency or investigating disputes of this information. Moreover, these benefits would be related to the aforementioned costs of additional investment in compliance taken by covered persons in response to this rulemaking. The CFPB requests any comments or data that would help quantify the incidence of these violations, the monetary benefit of foregone violations, and increased investment in compliance by covered persons. Similarly, the increased incidence of disputes is likely to benefit consumers through remedies to these disputes; however, the CFPB lacks any systematic data that would allow a full quantification of this effect, especially considering that such a quantification requires measurement of the chilling effect on consumer behavior and that a significant share of these disputes would likely be resolved through internal consumer relations.^[188] The CFPB requests any comments or data that would help quantify the increased incidence of disputes that would arise due to the rule, the means by which they are resolved, and any monetary benefits associated with resolution.

The magnitude of these benefits depends on the share of consumer contracts that currently contain prohibited terms.^[189] Although the CFPB has documented examples of the use of these terms and conditions, the CFPB is unaware of any systematic data that would enable it to estimate the prevalence of (1) terms and conditions that waive legal rights provided by Federal or State laws, (2) clauses that allow for unilateral amendment of terms and conditions, or (3) terms and conditions that restrain a consumer's free expression. Therefore, the CFPB cannot quantify the benefit to consumers of prohibiting firms' use of these terms and conditions from their contracts. The CFPB requests any additional information that would improve its understanding of this benefit. Against that baseline, which the CFPB lacks data to quantify, the CFPB believes that the rulemaking will result in a significant reduction in the incidence of these terms and conditions relative to baseline, and thus, benefit consumers through the channels described above.

Potential Costs to Consumers

The CFPB expects that costs to consumers would be small under the proposed rule. As discussed in part A of this section, Overview of Economic Effects, consumers may experience pass-through costs from covered persons if covered persons' marginal costs increase. As stated in that section, the CFPB requests any comments or data that would aid the evaluation of relevant pass-through rates.

In addition, as discussed in part F of this section, Impact on Access to Consumer Financial Products and Services, at least some covered persons might determine that particular features of their products make the covered persons more susceptible to consumer disputes or litigation and decide to remove those features from their products. A covered person might make this decision even if such a feature is beneficial to consumers, though the fact that these terms would be deemed more susceptible to dispute or litigation may suggest otherwise. In this case, consumers would incur a cost due to the loss of this feature. The CFPB is not aware of any data showing this theoretical phenomenon to be prevalent among covered persons. The CFPB requests comment on the extent of this phenomenon in the context of the proposed rule, and it specifically requests data and suggestions about how to quantify both the prevalence of this phenomenon and the magnitude of consumer harm if the phenomenon exists.

Finally, under the proposed rule, it is possible that some firms would increase the frequency with which they ask consumers for affirmative consent to changes in contract terms. If so, the time and effort it would take consumers to review these changes would be an additional cost to consumers relative to the baseline. The proposed rule would forbid covered persons from including in any contract with a consumer any ( print page 3592) clause that would reserve to the covered person the right to unilaterally amend material terms of the contract. Therefore, under the proposed rule, covered persons that wish to amend their contracts would have to comply with the appropriate State or Federal law process for amending material terms. The proposed rule would not prescribe the manner in which assent to changes in contract terms must be attained. Nevertheless, State law or common law may require firms to attain affirmative consent from consumer, as, for example, via written or electronic signature. If so, it is plausible that the proposed rule would result in an additional burden for consumers who would need to review, and consent to, proposed changes to their contracts. The CFPB seeks data or analysis to quantify this potential cost to consumers.

E. Impact on Depository Institutions With No More Than $10 Billion in Assets

Subpart B of the proposed rule would codify a prohibition on credit practices that are generally understood to be prohibited, pursuant to settled industry expectations and guidance from the CFPB and prudential regulators. The CFPB believes that by reducing confusion or uncertainty about what is prohibited, the proposed rule may reduce unnecessary costs for these depository institutions. The CFPB seeks comment or data to quantify the impact this may have on depository institutions with assets below $10 billion.

There will be no direct impact of subpart C on small depository institutions (no more than $850 million in assets) as the rulemaking provides an exemption for small entities. Subpart C of the proposed rule would prohibit depository institutions with assets between $850 million and $10 billion from including in their contracts with consumers for consumer financial products or services (1) clauses that require consumers to waive legal rights designed to protect consumers, other than rights explicitly made waivable by relevant consumer laws; (2) clauses that allow the covered person to unilaterally amend the contract; and (3) clauses that restrict consumers' free expression. Depository institutions with assets between $850 million and $10 billion would incur one-time administrative costs involved in bringing contracts into compliance with this part of the proposed rule. The CFPB believes that all depository institutions subject to the proposed rule would need to review every contract they use and revise to bring into compliance. Furthermore, the costs associated with implementation of subpart C have been outlined earlier in table 2 in the Potential Costs and Benefits to Covered Persons of Subpart C section. The CFPB asks for any comment or data on the impact of the proposed rule on depository institutions with assets between $850 million and $10 billion.

F. Impact on Rural Areas

Rural areas might be differently impacted to the extent that rural areas tend to be served by small entities. The proposed rule would not apply to any person that is a `small entity' as that term is defined in 5 U.S.C. 601, including any firm that is at or below the SBA standard for its primary industry. Therefore, the impact of the rulemaking would likely be lower in rural areas compared to non-rural areas. The CFPB requests any comment or data about the impact of the proposed rule on rural areas.

G. Impact on Access to Consumer Financial Products and Services

Subpart B of the proposed rule is unlikely to have any impact on consumers' access to financial products and services. As discussed earlier in the Statement of Need section, the CFPB believes that these credit practices are generally understood to be prohibited at baseline and, by reducing confusion or uncertainty about what is prohibited, the proposal would reduce costs for covered persons.

Subpart C of the proposed rule would prohibit covered persons from including in their contracts with consumers for consumer financial products or services (1) clauses that require consumers to waive legal rights designed to protect consumers, other than rights explicitly made waivable by relevant consumer laws; (2) clauses that allow the covered person to unilaterally amend the contract; and (3) clauses that restrict consumers' free expression. Collectively, these are referred to as prohibited terms and conditions. As discussed in part A of this section, Overview of Economic Effects, the adoption of the rule could increase the marginal costs incurred by covered persons because of increased costs of compliance with consumer finance laws or increased costs associated with dispute resolution. The CFPB believes that most providers would pass through some portion of these marginal cost increases to consumers.¹⁹⁰ As a result, it is possible that some consumers might experience price increases for some financial products and services. This may induce them to seek other financial products or services from a different provider, or to forgo using a particular financial product or service. However, the CFPB believes that the marginal cost increases discussed in the foregoing sections would be small, and as a result, under the proposed rule, the likelihood of price increases for certain financial products or services that would render them unaffordable would be very limited.

Providers might determine that offering some features of certain financial products or services may be too costly and, as a result, decide to remove these features from their product offering. For example, a provider might conclude that a particular product feature might increase the incidence of consumer disputes even accounting for increased compliance under financial laws, and therefore decide to remove that feature entirely from the product or restructure the feature by reducing its availability. Similarly, a provider might update its product features based on external information, such as actions against the provider's competitors by either regulators or private actors. The ongoing component could also include changes to the general product design process. Product design could consume more time and expense due to additional rounds of legal and compliance review. The additional exposure to consumer disputes, including litigation, could also result in some products not being developed and marketed primarily due to the risk associated with consumer disputes. The CFPB requests any comments or data on the impact of the proposed rule on access to consumer financial products and services.

X. Regulatory Flexibility Act Analysis

The Regulatory Flexibility Act (RFA) generally requires an agency to conduct an initial regulatory flexibility analysis (IRFA) and a final regulatory flexibility analysis of any rule subject to notice-and-comment rulemaking requirements, unless the agency certifies that the rulemaking will not have a significant economic impact on a substantial number of small entities (SISNOSE). The CFPB is also subject to specific additional procedures under the RFA involving convening a panel to consult with small business representatives before proposing a rule for which an IRFA is required. An IRFA is not required for this proposal because the proposal, if adopted, would not have a SISNOSE. ( print page 3593)

Small institutions, for the purposes of the Small Business Regulatory Enforcement Fairness Act (SBREFA) of 1996, are defined by the Small Business Administration. Effective March 17, 2023, depository institutions with less than $850 million in total assets are determined to be small. For non-depository entities covered by the proposed rule, the standard is $47 million in receipts. According to the Q4 2023 Federal Financial Institutions Examination Council Call Report, there are 3,422 banks with $850 million or less in assets. According to the Q4 2023 National Credit Union Administration Call Report, there are 4,201 credit unions with $850 million or less in assets. Nonbank institutions covered under the proposed rule are subject to different size standards defined with respect to their average annual receipts. Table 3 below presents estimated small entity counts for the North American Industry Classification System (NAICS) codes that generally align with consumer financial products or services and the corresponding size standards. Note that the NAICS codes listed below all incorporate covered persons, but several also are likely to include many non-covered persons, and so these estimates are likely higher than the real number of small covered persons.

Table 3—Entity Counts for NAICS Codes and Corresponding Size Standards

NAICS name(s)	NAICS code(s)	Estimated number of small entities	Revenue size standard (million/year)	Assets size standard (million)
Credit Unions	522110, 522120, 522210	4,202		$850
Commercial Banking, Savings Institutions, and Credit Card Issuing	522130	3,422		850
Nondepository Credit Intermediation	522220, 522291, 522292, 522299	6,965	$47
Activities Related to Credit Intermediation	522310, 522320, 522390	11,040	28.5
Activities Related to Real Estate	531311, 531312, 531320, 531390	62,855	19.5
Portfolio Management & Investment Advice	523920, 523930	34,153	47
Passenger Car Leasing	532112	199	47
Truck, Utility Trailer, and Recreational Vehicle Rental and Leasing	532120	920	47
Consumer Reporting	561450	267	41
Debt Collection	561440	2,634	19.5
Total		126,657