Eric Goldberg is a Partner at Akerman LLP and former Managing Counsel for Regulations at the CFPB
On December 13th, the CFPB took a substantial step towards improving the regulatory climate for fintech innovation when it released a long-awaited proposal that would (1) revise the Bureau’s no-action letter policy and (2) establish a regulatory sandbox. Alongside the proposed trial disclosure policy put out for comment in September, these policies round out the Bureau’s new approach to regulatory innovation. If finalized, the policies would substantially expand the Bureau’s ability to use its Office of Innovation to encourage companies to evolve the market for consumer finance products and services. The goal of the Office of Innovation—formerly called Project Catalyst—is to facilitate innovation and create an environment where companies can advance new products with undue regulation.
Proposed No-Action Policy Revisions
In the first part of its recent proposal, the Bureau proposes revisions to its no-action letter policy with the goal of encouraging more applicants and issuing more letters. Under the to-be-replaced existing policy, the Bureau stated it would issue no-action letters that are non-binding on the Bureau, other regulators, or courts, could be revoked immediately upon providing notice, and could require as a condition of issuance that the recipient share data with the Bureau to monitor the impact of the no-action letter on consumers. In addition, the policy states that the Bureau would only issue letters “rarely.” Perhaps not surprisingly, the Bureau has, to date, issued only one letter under this policy.
To achieve its stated goal of issuing substantially more no-action letters the Bureau has proposed substantial changes, including:
• Allowing trade associations to apply on behalf of their members. This would allow associations to shield individual member companies from having to apply publicly and on their own.
• Establishing that the Office of Innovation will make decisions on applications. The current policy does not identify a decision making process, but the only letter issued came from the Assistant Director for Supervision and Enforcement, indicating that those charged with enforcing the law authorized the issuance of a no action letter. The role of staff outside the Office of Innovation in evaluating applications under the new policy is not clear.
• Requiring that the Bureau make decisions on applications within 60 days (the current policy has no deadline for the Bureau to complete its review).
• Being more open to requests for no-action letters regarding unfair, deceptive, and abusiveness (UDAAP) conduct. Under the current policy, the Bureau said that UDAAP-focused no-action letters would be “particularly uncommon,” the Bureau now says it has “no such expectation.”
• Establishing that letters would be valid until revoked; that revocation would be unlikely; and that in most cases the Bureau would give advance notice of revocation to allow recipients time to alter their conduct accordingly.
• Eliminating a requirement that recipients share data with the Bureau. The Bureau’s ability to monitor consumer impact would solely derive from its ability to do so via its existing supervision and enforcement authorities.
Taken together, it is likely that these changes would achieve the Bureau’s goal of encouraging more applications and issuing more no-action letters. Applicants also have more incentive to apply because they will – in the Bureau’s words – have “greater assurance that the Bureau itself stands behind the no-action relief provided by the letters.” This may be particularly advantageous for providers of products that raise UDAAP concerns, given the lack of written rules (so far) defining UDAAP.
Proposed Product Sandbox
In addition to the proposed revisions to the no-action letter policy, the Bureau also seeks to establish what it calls a “product sandbox.” This part of the proposal would grant applicants relief for a 2-year period. The Sandbox would allow for three types of relief: (1) a regulatory approval that provides that the Bureau approves a product that relies on a statutory safe harbor provision in either Regulation E (governing electronic transactions and payments), Regulation Z (governing credit disclosures), or Regulation B (governing equal lending); (2) an exercise of the Bureau’s authority to grant regulatory or statutory exemptions under either of these three regulations; or (3) a statement of no-action similar to what would be granted under the revised no-action letter policy. Notably, the Bureau contends that a recipient of an exemption would be immune from enforcement actions by other regulators. Additionally and unlike no-action letter recipients, sandbox participants would be required to share data on consumer impacts with the Bureau. If finalized, this would be the first regulatory sandbox established by a federal financial regulator.
The biggest outstanding questions raised by this proposal are whether and how other regulators will view no-action and sandbox letters from the Bureau (except for sandbox participants who have received an exemption and are immune from enforcement). Unlike the most successful operator of a regulatory sandbox, the United Kingdom’s Financial Conduct Authority, the Bureau is just one of several regulators that can enforce consumer finance law. Given the patchwork nature of our regulatory system, the deference other regulators or courts would give to a no-action letter from the Bureau is not clear because the Bureau asserts in its proposal that its no-action letters are not to be considered binding legal interpretations. The absence of such certainty could cause providers to be wary of relying too heavily on a no action letter. While the Bureau expressly states in its proposal its desire to coordinate with other regulators to minimize this concern, it has provided little detail on the extent of such cooperation. Given that many providers are subject to state enforcement, absent an assurance from specific states, a provider may incur some risk from state regulatory enforcement if it chooses to follow a Bureau no-action letter.
An additional question is whether, in response to concerns from consumer groups, the Bureau will narrow either policy. Consumer groups have expressed concern about the permanent nature of no-action letter, the Bureau’s limited oversight of recipients (given no data sharing requirement), and that the letters can narrow significant regulatory provisions without a public rulemaking process through which the Bureau can hear consumers’ concerns.
Both of these policies are proposals open for public comment until February 11, 2019. After that, staff will review the comments and consider revisions. New Bureau Director Kathy Kraninger, who was not involved in the policies’ development, will ultimately decide whether and when to finalize the Bureau’s new approach to innovation. While the Bureau will not consider formal applications before it finalizes the policies, in the interim it does welcomes informal inquiries from potential applicants.
Providers – including established financial institutions and fintech companies – should consider commenting on the proposals before the deadline. Furthermore, these companies should also consider whether any aspect of their products and services might be good candidates for an application under these programs and consider engaging with Office of Innovation staff on an informal basis.