The Evolution of Consumer Financial Protections: Regulation AA is Back on the Agenda
The financial crisis of 2008, respectively, exposed abusive practices in the consumer lending industry, particularly in mortgage lending, which prompted sweeping regulatory reforms implemented under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). Dodd-Frank was a landmark financial reform designed to increase oversight and prevent predatory lending. The Consumer Financial Protection Bureau (CFPB) was also established as a result of the regulation in an effort to centralize authority over the banking agencies in the name of consumer protection.
As part of this regulatory restructuring, Regulation AA, which incorporated the Federal Trade Commission’s (FTC) Credit Practices Rule (FTC Act), was repealed for banks and other financial institutions in 2014. The FTC Act is the original consumer protection law, written to counter the prevailing business practice of “caveat emptor,” a Latin phrase that translates to “Let the buyer beware.” In other words, the buyer alone was responsible for checking the quality and suitability of goods before purchase, the seller having no responsibility whatsoever to the buyer regarding the sale of goods and services, allowing the seller to make any claims about the product, truthful or not. The FTC Act was written as a counter to this “hostile-to-the-consumer” principle.
The Credit Practices Rule deemed certain provisions in a consumer credit contract to be an unfair act or practice, which included the following –
- Confession of judgment clauses, where a consumer essentially waives their right to a jury trial, were prohibited;
- Waiver of exemption clauses, where the consumer waives their rights under any law that protects the consumer’s real or personal property from seizure or sale, were only permitted when the property was pledged as collateral;
- Assignment of wages clauses, where the consumer gives the lender the right to receive the consumer’s wages or earnings, were limited to specific circumstances; and
- Non-possessory security interests in household goods, when the debt was not incurred to purchase the goods, were prohibited.
In 2010, the Dodd-Frank Act incorporated the FTC’s Policy Statements into law and also added a new category of acts and practices defined as “Abusive.” As a result, the original law prohibiting “unfair and deceptive acts and practices,” or “UDAP” as it came to be known, was transformed into “UDA(A)P,” standing for “Unfair, Deceptive and Abusive Acts or Practices.” Recent enforcement actions by regulators, especially by the CFPB, demonstrate the heightened regulator interest and emphasis on UDA(A)P, which brings us to the proposed Rule under Regulation AA.
On January 14, 2025, the CFPB proposed a new rule under the previously repealed Regulation AA to explicitly prohibit unfair contract terms in consumer financial agreements. The Rule seeks to:
- Codify the FTC’s Credit Practices Rule under the CFPB’s direct authority, reinforcing protections against abusive lender practices.
- Prohibit additional contract terms that:
- Waive consumer rights granted by federal or state law.
- Allow financial institutions to unilaterally amend material terms of a contract.
- Restrict consumers’ free expression, such as penalizing negative reviews or complaints.
- Empower state attorneys general to enforce these rules against national banks, providing stronger legal avenues for consumer protection.
By reinstating and expanding the protections previously provided under Regulation AA, the CFPB aims to close loopholes that allow financial institutions to exploit consumers through non-negotiable, one-sided contracts.
The proposed Rule is expected to face strong industry pushback, particularly under the new Trump administration, as there is a question as to whether the CFPB is even constitutional due to its centralized oversight. However, advocates argue that these protections are essential to restoring balance in financial agreements.
The CFPB’s proposed Rule represents a significant shift back toward stronger consumer financial protections, filling the regulatory gap left by the repeal of Regulation AA. If enacted, it would not only reinstate key prohibitions from the original Credit Practices Rule but also introduce new protections addressing modern financial contract abuses. As public comments are collected and the Rule progresses, the debate over balancing consumer rights and financial industry flexibility will shape the future of fair lending practices in the United States.
It will be interesting to see how this proposed Rule and other items on the current agenda of the CFPB shake out in the coming months under the new administration. As always, we will continue to monitor the regulatory landscape and keep you in the know of any regulatory matters. If you have any questions about this article or any compliance issue at your institution, don’t hesitate to reach out to one of our advisors through a consultation request.