Updated: Sep 12, 2019
Yesterday, the Consumer Financial Protection Bureau (CFPB) issued three new policies “to promote innovation and facilitate compliance: the No-Action Letter (NAL) Policy, Trial Disclosure Program (TDP) Policy, and Compliance Assistance Sandbox (CAS) Policy.” The Bureau originally proposed the policies in 2018 and subsequently received commentary on each policy from a variety of stakeholders.
“Innovation drives competition, which can lower prices and offer consumers more and better products and services. New products and services can expand financial options, especially to unbanked and underbanked households, giving more consumers access to the benefits of the financial system. The three policies we are announcing today are common-sense policies that will foster innovation that ultimately benefits consumers.” said CFPB Director Kathleen L. Kraninger as part of the release.
So what are these policies? While I haven’t digested all 300+ pages of material (have no fear, I will, and report back), below is some high level information. Unsurprisingly, the policies noted that consumer groups generally opposed these policies – different reasoning for each. It would not be surprising if we saw several challenges to the policies begin to appear in the courts.
But in the meantime…
No-Action Letter Policy
The Bureau’s press release stated that “[r]egulatory uncertainty can hinder the development of innovative products and services that benefit consumers. NALs provide increased regulatory certainty through a statement that the Bureau will not bring a supervisory or enforcement action against a company for providing a product or service under certain facts and circumstances. The new NAL Policy improves on the Bureau’s 2016 NAL Policy by having, among other things, a more streamlined review process focusing on the consumer benefits and risks of the product or service in question.”
Simultaneously, the Bureau issued its first NAL under the new NAL Policy in response to a request by the Department of Housing and Urban Development (HUD) on behalf of more than 1,600 housing counseling agencies (HCAs) that participate in HUD’s housing counseling program. By way of background: “In 2018, HUD brought concerns to the Bureau about HCAs and lenders not entering into agreements that would fund counseling services due to uncertainty about the application of the Real Estate Settlement Procedures Act (RESPA).
Expressing similar concerns, the Coalition of HUD Intermediaries filed a comment letter in February 2019 noting the insufficiency of the Bureau’s old NAL Policy and supporting the new NAL proposed policy. The no-action letter essentially states that the Bureau will not take supervisory or enforcement action under RESPA against HUD-certified HCAs that have entered into certain fee-for-service arrangements with lenders for pre-purchase housing counseling services. The NAL, which is an exercise of the Bureau’s supervisory and enforcement discretion, is intended to facilitate HCAs entering into such agreements with lenders and will enhance the ability of housing counseling agencies to obtain funding from additional sources.”
Many consumer groups and State AG’s provided comments to the policy and questioned the need and true purpose of the Policy. Consumer groups argued that certain No-Action letters would be de facto legislative rules, that the proposed policy would be arbitrary and capricious
The NAL policy can be found here: https://files.consumerfinance.gov/f/documents/cfpb_final-policy-on-no-action-letters.pdf
The HUD NAL may be found here: https://files.consumerfinance.gov/f/documents/cfpb_HUD-no-action-letter.pdf
The associated HUD NAL template may be found here: https://files.consumerfinance.gov/f/documents/cfpb_HUD-no-action-letter-template.pdf
The associated HUD NAL application may be found here: https://files.consumerfinance.gov/f/documents/cfpb_HUD-no-action-letter-application.pdf
Trial Disclosure Program Policy
Under the new TDP Policy, entities seeking to improve consumer disclosures may conduct in-market testing of alternative disclosures for a limited time upon permission by the Bureau. The Dodd-Frank Act gives the Bureau the authority to provide certain legal protections for entities to conduct trial disclosure programs, as outlined in the TDP Policy. The new policy streamlines the application and review process.
Specifically, the TDP Policy states that “the Bureau may permit covered persons to conduct trial disclosure programs, limited in time and scope, for the purpose of providing trial disclosures designed to improve upon model forms within the Bureau’s jurisdiction. Such permission may include providing a legal safe harbor; i.e., the Bureau may deem a covered person conducting such a program to be in compliance with, or exempt from, a requirement of a rule or enumerated consumer law. Such trial disclosure programs must be subject to standards and procedures that are designed to encourage covered persons to conduct such programs. Similarly, although Bureau rules must provide for public disclosure of such programs, such public disclosure may be limited to the extent necessary to encourage covered persons to conduct effective trials.” See generally 12 U.S.C. 5532.
In the policy, the Bureau noted that “several consumer groups declared that the proposed Policy exceeds the Bureau’s authority under Dodd-Frank Act section 1032(e) in various respects,” including that the proposed Policy exceeded the Bureau’s because that section of the Act does not authorize trial disclosure programs that change or deviate from substantive disclosure requirements. Consumer groups expressed concerns that the Policy exceeded authority in several other ways as well. The Bureau did not agree with any of these contentions.
There is certainly a history of litigation surrounding challenges to the CFPB’s authority. In 2016, a federal court found that CFPB had exceeded its authority in attempting to gain information from an accreditor of for-profit educational institutions through the issuance of a civil investigative demand (“CID”). In April 2016, Judge Richard J. Leon issued an opinion denying the CFPB’s motion to enforce the CID critical of the CFPB’s attempt to obtain such information and admonished the CFPB for exceeding its authority. He states in the Opinion that "although it is understandable that new agencies like the CFPB will struggle to establish the exact parameters of their authority, they must be especially prudent before choosing to plow head long into fields not clearly ceded to them by Congress."
The TDP may be another area where the CFPB finds itself challenged in the federal courts.
The TDP policy can be found here: https://files.consumerfinance.gov/f/documents/cfpb_final-policy-to-encourage-tdp.pdf
Compliance Assistance Sandbox Policy
The CAS Policy enables testing of a financial product or service where there is regulatory uncertainty. After the Bureau evaluates the product or service for compliance with relevant law, an approved applicant that complies in good faith with the terms of the approval will have a “safe harbor” from liability for specified conduct during the testing period. Approvals under the CAS Policy will provide protection from liability under the Truth in Lending Act, the Electronic Fund Transfer Act, or the Equal Credit Opportunity Act.
Industry commenters uniformly supported the Proposed Sandbox Policy. One of two groups of State Attorneys General also did so. With one exception, consumer and civil rights organizations—together with a second group of State Attorneys General, and a group of State financial regulators—opposed the
Proposed Sandbox Policy. Their predominant objection was that it would permit regulated entities to evade their legal responsibilities. “The Bureau believes this objection is ultimately misplaced, but acknowledges that the proposal may not have been sufficiently clear on this point. Approvals are intended to facilitate compliance in the face of regulatory uncertainty. The relief they provide is from regulatory uncertainty, not from regulatory obligation.”
The CAS policy can be found here: https://files.consumerfinance.gov/f/documents/cfpb_final-policy-on-cas.pdf
As with all regulation, the devil will be in the details. FinTEx is proponent of responsible innovation and these policies may provide a framework for just that.
Stay tuned for additional updates.
FinTEx General Counsel
Co-Chair of FinTEx Regulatory Member Group