Innovative companies face stiff challenges when trying to comply with moribund US consumer protection rules that have not kept pace with technological advancements in the financial services industry. The no-action letter policy ("Policy" or "2016 Policy") that the Consumer Financial Protection Bureau ("CFPB" or "Bureau") released in 20161 was a commendable attempt by the Bureau to address those challenges. But the Policy had a number of shortcomings. The initial flurry of excitement waned as companies studied what they needed to do to request a no-action letter—and the limited protections that letters would provide them. In nearly three years, the Bureau issued only one no-action letter under the 2016 Policy.2
Companies that have opted against seeking a no-action letter under the 2016 Policy may have good reason to revisit their decision if the Bureau finalizes changes to the Policy that it recently proposed ("Proposed Amendments"). The Proposed Amendments would, if promulgated, require less sharing of sensitive data and provide letter recipients with greater protections, such as more assurances that they would not face enforcement actions if the Bureau were to change its mind later. The Proposed Amendments also would offer protection against findings that the company's acts or practices are later deemed unfair, deceptive or abuse (i.e., "UDAAP" relief). The Bureau also proposed a new process that will allow companies to request participation in the Product Sandbox. Companies allowed to play in this sandbox will, in theory, be shielded from claims not just by the Bureau but also by private plaintiffs and other agencies that have authority to enforce federal consumer protection laws (such as state attorneys general).
Companies that provide innovative consumer financial products should study the Proposed Amendments carefully and evaluate whether they are likely to provide useful protections. We also encourage companies and trade associations to submit comment letters to the Bureau if they identify problems with the Proposed Amendment or if they have suggestions for the Bureau on how to address consumer advocacy groups' criticisms. The deadline to submit comments is February 11, 2019.
The 2016 Policy provides a process for companies developing products or services involving regulatory uncertainty to apply for a no-action letter from Bureau staff.3 As only one company has obtained a no-action letter to date, the "Bureau believes this strongly suggests that both the process required to obtain a no-action letter and the relief available under the 2016 Policy have not provided firms with sufficient incentives to seek no-action letters from Bureau staff."4 The no-action letters available under the 2016 Policy provide limited protection from lawsuits and enforcement actions and require firms to disclose extensive information (including information that many firms might consider proprietary and confidential). Further, the Bureau will grant a no-action letter only if the Bureau determines that there is "substantial uncertainty" about whether the product or proposal that is the subject of the letter complies with certain regulatory requirements under the Bureau's purview. By applying for a no-action letter, a company acknowledges that there are ambiguities in the law. A no-action letter indicates that presently Bureau staff will not exploit those ambiguities to bring an enforcement action against the applicant but provides no assurances that class action plaintiffs' lawyers or state attorneys general will interpret the law the same way, even if the interpretation that concerns the applicant is far-fetched and might not survive judicial scrutiny. Thus, the invitation of public scrutiny of the applicant's business practices and position may give pause to parties considering a no-action letter application.
The Proposed Amendments incorporate many of the public comments the Bureau received when it proposed the 2016 Policy and aims to provide a no-action program similar to those offered by other regulatory agencies. The Proposed Amendments include two parts: (1) proposed revisions to the Policy with respect to no-action letters and (2) a description of a new "BCFP Product Sandbox." We describe the highlights of each below.
Less burdensome application process. The Bureau intends to streamline the process of applying for a no-action letter.
- Under the Proposed Amendments, the CFPB's review of no-action letter applications would consider fewer factors and focus more on several key factors, chiefly the potential benefits of the proposed product or service, the extent to which the applicant identifies and controls for potential risks to consumers and the extent to which no-action relief is needed.
- The CFPB's review would no longer consider as a factor the extent to which a no-action letter would be limited in duration. Rather, the Bureau's default position would be that a no-action letter has no time limit.
- The CFPB would no longer expect applicants to commit to sharing data about the subject product or service of the no-action letter. Stakeholders had expressed concerns during the 2016 Policy's comment period that the volume of information required was unduly burdensome.
Through the new simplified application process, the Bureau expects to be able to provide an approval or denial within 60 days of having a complete application.
Broader applicant pool. Another way in which the Bureau is incentivizing applications is by allowing for a broader applicant pool. Under the Proposed Amendments, trade associations may apply for a no-action letter on behalf of one or more of their members. If the trade association lacks sufficient information, then the Bureau can issue a provisional no-action letter that specific industry participants can later use by providing additional information. Earlier the Bureau had declined to grant no-action letter treatment to trade associations on behalf of their members.
Potentially greater protections. The Bureau advertises that a no-action letter issued under the Proposed Amendments would provide greater relief to successful applicants.
- Whereas the CFPB offered "a non-binding staff recommendation of no-action relief" earlier, the Proposed Amendments contemplate no-action letters "issued by duly authorized officials of the Bureau." The Bureau's idea is that this commits it to its no-action letter in a more meaningful way.
- In contrast to the CFPB's earlier Policy, under which UDAAP-focused no-action relief was expected to be "particularly uncommon," the Bureau expects that a no-action letter under the Proposed Amendments would state that, subject to the recipient's good faith compliance with the letter, the Bureau would not bring supervisory or enforcement action against the recipient under its authority to prohibit UDAAPs or under any other statute or regulation under the Bureau's jurisdiction.
- Whereas the earlier 2016 Policy provided relief for a limited period, the Proposed Amendments provide as a default relief for an unlimited period.
- The Proposed Amendments offer new protections against revocation of no-action letter relief. While the Bureau reserves the right to revoke no-action letters under certain circumstances, it will provide notice and opportunity to respond to any revocation it is contemplating. In addition, in the case of revocation for failure to substantially comply in good faith with the terms and conditions of the no-action letter, the Proposed Amendments would provide a chance to cure the defect. Further, absent the failure of the recipient to in good faith substantially comply with the terms of the letter, a revocation would be prospective only. In any event, the Bureau expects that revocations would be "quite rare." In contrast, the earlier Policy provided that no-action letters were subject to revocation or modification at the discretion of Bureau staff and may be immediate upon notice.
- The Bureau also will, upon request of the applicant, "coordinate with other regulators." This could expand the protection that an applicant receives. However, it could, the Bureau notes, slow down the 60 day time frame for a decision.
The Proposed Amendments provide an alternative to no-action letters for companies: participation in the regulatory "sandbox," which provides relief in one of two forms. First, the Bureau would provide approvals pursuant to one of three statutory safe harbor provisions in the Truth in Lending Act, the Equal Credit Opportunity Act ("ECOA") and the Electronic Funds Transfer Act. Second, the Bureau will provide exemptions by order from certain statutory provisions in ECOA, the Home Ownership and Equity Protection Act and the Federal Deposit Insurance Act. Such approvals or exemptions will provide more detail, including the Bureau's legal and rational basis for the issuance of the approval or exemption. Unlike no-action letters, which are presumed to be in effect indefinitely, the Bureau plans to limit its approval and exemption relief in the sandbox to two years in most cases. Companies may apply to the Bureau for an extension either by submitting information on how the product or service is benefitting consumers and not causing material harm 90 days before the expiration date, or by resubmitting a new application. The Bureau would also require applicants to commit to data sharing.
The carrot that the Bureau dangles to prospective sandbox players is the prospect of stronger protections from liability than no-action letters provide. The Bureau indicates that relief under the product sandbox would include the additional benefit, to the maximum extent permitted by the relevant statute or regulation, that "the recipient would be immune from enforcement actions by any Federal or State authorities, as well as from lawsuits brought by private parties." In reviewing applications for participation in the sandbox, the Bureau intends to take a similar approach as it would with no-action letter applications under the Proposed Amendments—i.e., it would provide an approval or denial within 60 days of receiving a complete application.
Reception of the Proposed Amendments
The possibility of a faster, easier application process that will yield additional relief may be attractive to institutions considering applying under the Proposed Amendments.
However, consumer groups are already criticizing them. First, those groups have claimed that the Proposed Amendments would create excessive exemptions from consumer protection laws. Some of these criticism are overstated, e.g., that the Bureau is trying "to erase itself out of existence."5 Moreover, the Bureau has noted that the Proposed Amendments are intended to bring "the Bureau's policy more into alignment with no-action letter programs offered by other Federal regulators."6 Second, consumer groups argue that the Bureau's action exceeds its statutory authority and have predicted "legal challenges."7 Specifically, consumer groups claim that the Bureau lacks authority to insulate sandbox players from liability in actions by third parties.
Recently confirmed CFPB director Kathleen Kraninger has declined to take a public position on the proposal and indicated that she would need to examine the issue more closely during the comment period.8
Institutions considering availing themselves of the Proposed Amendments should carefully consider the criticisms along with the benefits touted by the Bureau. Industry stakeholder should also consider submitting comments on how the Bureau may defend itself from consumer group attacks, including articulating legal support for the Bureau's authority to provide the relief described in the Proposed Amendments.
3 https://files.consumerfinance.gov/f/201602_cfpb_no-action-letter-policy.pdf. A more detailed summary and analysis of the 2016 Policy by one of the authors of this client update is available here: https://www.bankingtech.com/2016/03/viewpoint-no-action-letters-from-the-cfpb-what-to-consider-before-you-ask-for-one/.
4 Under the 2016 Policy, no-action letters consist of "non-binding staff-level no-action recommendations." 83 Fed. Reg. 64036.
6 83 Fed. Reg. 64036–37.
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