Is Reg AA making a comeback?

The financial services industry would be wise to take notice

For those who closely monitor agency activity, you may have noticed that the Consumer Financial Protection Bureau’s (CFPB’s) Spring 2024 Regulatory Agenda slipped Reg AA into its semiannual list of possible proposed rules^[1]. The only information provided is that the CFPB is “considering whether to issue regulations regarding the inclusion or enforcement of certain provisions in contracts for consumer financial products or services.”

What could it mean? Is Reg AA making a comeback? Given the history of Reg AA and the CFPB’s current approach to unfair, deceptive, or abusive acts or practices (UDAAP), the financial services industry would be wise to take notice.

History of Regulation AA

Regulation AA was originally issued by the Board of Governors of the Federal Reserve System (Board). At its core, Reg AA’s Credit Practices Rule, which effectively applied to all banks and their subsidiaries, prohibited certain practices by banks that the Board declared unfair or deceptive. Specifically, the Credit Practices Rule deemed certain provisions in a consumer credit contract to be an unfair act or practice, effectively outlawing these types of provisions in a consumer credit contract^[2]. The four types of provisions that were covered were:

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.

The Credit Practices Rule also prohibited misrepresenting the nature or extent of a consumer cosigner’s liability and was the source of the cosigner notice commonly used with consumer contracts. In addition, the Credit Practices Rule deemed it an unfair act or practice to charge late fees on late fees.

In 2010, the Dodd-Frank Act repealed the Federal Trade Commission Act, which was the source of the Board’s rulemaking authority for Reg AA^[3], and gave the CFPB rulemaking authority for UDAAP. However, the Dodd-Frank Act did not transfer Reg AA to the CFPB. This led the Board to repeal Reg AA in 2016^[4]. To date, the CFPB has not issued a replacement.

This does not mean that financial institutions can ignore Reg AA. Even though it has been repealed, five banking regulators jointly issued Interagency Guidance Regarding Unfair or Deceptive Credit Practices^[5]. This Interagency Guidance effectively continued Reg AA’s restrictions.

CFPB’s current approach to UDAAP

As stated, to date, the CFPB has not issued any regulations under its UDAAP rulemaking authority. Instead, the CFPB has preferred to issue guidance and bring enforcement actions against financial institutions it believes have engaged in UDAAP^[6].

Proponents of this approach typically argue that providing a specific list of actions or contractual provisions that violate UDAAP would potentially overlook certain actions or contractual provisions that should also be considered UDAAP and would require a constantly updated regulation to close “loopholes.” Opponents of this approach typically argue that without a regulation listing specific activities and contractual provisions as UDAAP, financial institutions will not have enough information to determine what constitutes UDAAP. They argue further that enforcement actions without a regulation do not give financial institutions enough warning of what constitutes UDAAP before being penalized for engaging in something the CFPB determines is UDAAP.

What would a new Regulation AA look like?

It seems unlikely that the current iteration of the CFPB will simply republish the former Reg AA. Why wait so many years to do this if the CFPB plans to adopt the exact same regulation that existed prior to 2016? Instead, if the CFPB does reissue Reg AA under its UDAAP authority, it is likely that the CFPB will issue an expanded list of acts or practices that constitute UDAAP. Notably, the CFPB recently issued CFPB Circular 2024-03, that deemed including unlawful or unenforceable terms and conditions in contracts for consumer financial products and services to be a deceptive act or practice^[7]. Is it possible the potential reappearance of Reg AA and the issuance of the new CFPB Circular are connected? Regardless, whatever the CFPB does with Reg AA, it is also likely to preserve some ability to continue issuing guidance and bringing enforcement actions on contractual provisions the CFPB deems to be UDAAP, even if not specifically prohibited in a new Reg AA.

Financial institution next steps

Agency watchers would be wise to not only keep an eye out for a proposed Reg AA by the CFPB, but to continue to monitor the CFPB’s guidance and enforcement actions related to UDAAP. Even if the CFPB publishes a new Reg AA, the CFPB’s guidance and enforcement actions related to UDAAP will likely continue to be an important piece of a financial institution’s understanding of UDAAP. Keeping a close eye on all the financial institution regulators can help minimize a financial institution’s risk by helping them avoid UDAAP.

[1] CFPB Spring 2024 Regulatory Agenda
[2] Regulation AA
[3] >12 U.S. Code Ch. 53 - Wall Street Reform and Consumer Protection
[4] Repeal of Regulation AA
[5] Interagency Guidance Regarding Unfair or Deceptive Credit Practices
[6] CFPB Enforcement Actions
[7] Consumer Financial Protection Circular 2024-03