The Consumer Financial Protection Bureau (CFPB or "Bureau") continues to support innovation in financial services by finalizing three interrelated policies, as well as a state-focused coordination and information-sharing initiative. These activities further the efforts initiated by former acting director Mick Mulvaney in the creation of the CFPB Office of Innovation. The Bureau's commitment and attention to innovation are timely, inasmuch as a variety of issues, including in the burgeoning space of Non-QM mortgage origination and alternative underwriting, seem likely to be affected by the Bureau's policies.
On September 6, 2019, the Bureau announced its Policy on the Compliance Assistance Sandbox. Building on its 2016 No-Action Letter Policy and the proposed policies from 2018, the CFPB presented three new policies "to promote innovation and facilitate compliance":
- The Compliance Assistance Sandbox Policy
- No-Action Letter Policy
- Trial Disclosure Program Policy
In addition, on September 10, 2019, the CFPB launched the American Consumer Financial Innovation Network (ACFIN).
These developments offer multiple avenues for fintechs, finserv providers, and even established market participants to explore new or novel ideas. However, companies should be cautious and make sure they understand the process, limitations, and nuances behind each new policy.
Compliance Assistance Sandbox Policy ("CAS Policy")
The CAS Policy is intended to "enable[] testing of a financial product or service where there is regulatory uncertainty" by providing "binding assurance that specific aspects of a product or service are compliant with specified legal provisions." Applicants may be granted "approvals" that will provide safe harbor under the Truth in Lending Act (TILA), the Equal Credit Opportunity Act (ECOA), and the Electronic Fund Transfer Act (EFTA). Such approvals will be time limited, typically lasting two years, with a possibility for extensions.
Entities contemplating applying under the CAS Policy must remain mindful of its shortcomings. First, the Bureau "does not foresee" that an approval under the CAS Policy would preempt state law, leaving applicants exposed to scrutiny by state regulators. Second, a denied application will be published publicly.1 Finally, the approvals are limited to the safe harbors provided under TILA, ECOA, and EFTA.
An alternative route under the CAS Policy would be to work with third parties, such as trade associations, where the third party would apply for a "template" approval. Although such an approval would not provide a direct statutory safe harbor, "entities may use the template as a basis to apply for compliance assistance under substantially the same terms as those contemplated in the template."
No-Action Letter Policy ("NAL Policy")
Under the new NAL Policy, the Bureau may issue No-Action Letters to provide an entity with "the Bureau's discretionary determination not to exercise supervisory or enforcement activity against specific aspects of a product or service." The NAL Policy is open not only to "emerging" or "fintech" firms, but also to "any firm interested in testing innovative products and services." Moreover, as with the CAS Policy, the Bureau may issue "template" approvals. Entities applying under the CAS Policy may concurrently request a No-Action Letter using the same application.
On September 10, 2019, the Bureau issued the first No-Action Letter under the new policy. The United States Department of Housing and Urban Development (HUD) applied for, and received, a No-Action Letter on behalf of the housing counseling agencies participating in the HUD's Housing Counseling Program. Prior to the No-Action Letter, entering into Housing Counseling Funding Agreements with the HUD entailed compliance risk under RESPA Section 8 and Regulation X, which prohibits the giving or receiving of anything of value for referrals of any business incident to or a part of a real estate settlement service.
The letter states that the CFPB "will not make supervisory findings or bring a supervisory or enforcement action against any Recipient under (a) its authority to prevent unfair, deceptive, or abusive acts or practices, or (b) Section 8 of the Real Estate Settlement Procedures Act (RESPA) and Section 1024.14 of Regulation X." In addition, the Bureau issued a "No-Action Letter Template" for lenders and other entities not included in the scope of the No-Action Letter that participate in the Housing Counseling Program.
Trial Disclosure Policy ("TDP Policy")
The new TDP Policy "streamlines the application and review process" for entities seeking to conduct in-market testing of alternative forms of mandatory disclosures. Similar to the CAS and NAL Policies, the TDP Policy is (a) open to long-established products and applications, (b) provides for "template" approvals, and (c) still exposes the entity to scrutiny from the state regulators.
The American Consumer Financial Innovation Network ("ACFIN")
The ACFIN charter outlines three main objectives for the organization:
- Establish coordination between Members to benefit consumers by facilitating innovation that enhances competition, consumer access, or financial inclusion.
- Minimize unnecessary regulatory burdens and bolster regulatory certainty for innovative consumer financial products and services.
- Keep pace with the evolution of technology in markets for consumer financial products and services in order to help ensure those markets are free from fraud, discrimination, and deceptive practices.
Pursuant to these goals, the Bureau and its member state regulators (currently consisting of the Attorneys General of: Alabama, Arizona, Georgia, Indiana, South Carolina, Tennessee, and Utah) will "share information to facilitate coordination among the members, and coordinate on innovation-related policies and programs."
Ideally, ACFIN and the above policies will harmoniously interact to create an avenue for new or novel ideas to be tested without the fear of regulatory scrutiny. However, the actual impact of the Bureau's determinations on state regulators' enforcement and investigatory decisions remains to be seen. This should not be a roadblock to companies pursuing these new avenues, but they should remain cautious as they proceed.
- The CFPB downplayed the potential for disclosure, stating that (a) the applicants will be given an opportunity to request reconsideration; (b) no identifying information will be included; and (c) denials are expected to be relatively unusual, as preliminary discussions are recommended prior to submission and applicants are able to freely withdraw applications prior to a denial.