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CFPB Confirmation and Regulatory Sandbox

CFPB Confirmation and Regulatory Sandbox

In December of 2018, the Senate confirmed Kathy Kraninger because the second Director of the Shopper Monetary Safety Bureau (“CFPB”). The trail Director Kraninger will chart is unsure, however the CFPB has already begun initiating modifications to which the monetary providers business ought to concentrate. As an example, in mid-December 2018, the CFPB issued a proposed rule to switch its No-Motion Letter Program (the “Program”) and to determine a regulatory “sandbox” (a proper course of to briefly exempt corporations from sure statues and laws to allow them to check new merchandise with shoppers). Under, we offer a quick historical past of the Program in addition to a dialogue of the important thing parts of the proposed rule.

THE CFPB’S NO-ACTION LETTER PROGRAM 

In 2016, the CFPB established the Program to offer restricted enforcement aid to monetary establishments trying to develop “consumer-friendly innovations” for “emerging products or services” the place the regulatory implications to the services or products are unsure [1]. Via the Program, monetary establishments submitted purposes to the CFPB describing, amongst different issues, their product; the product’s substantial potential profit to shoppers (that aren’t offered by pre-existing merchandise), the potential shopper dangers, and the necessity for a No-Motion Letter (“Letter”) in mild of considerable regulatory uncertainty. If the CFPB accepted the appliance, it might concern a Letter informing the applicant that it had no current intention to provoke an enforcement or supervisory motion with respect to the required services or products. A Letter didn’t, nevertheless, represent a protected harbor for the recipient, or the CFPB’s interpretation or official coverage relating to the statutes and laws cited within the software. Furthermore, the CFPB reserved the proper to conduct supervisory actions, to research a recipient’s compliance with the phrases of the Letter, and to switch or revoke the Letter at its discretion. In change for a Letter, the recipient agrees to offer the CFPB with knowledge related to the exercise described within the Letter, upon request.

The CFPB issued its first and, to-date, solely Letter in September of 2017 to Upstart Community, Inc (“Upstart”). Upstart is a FinTech firm that gives a web-based lending platform to attach credit-thin shoppers to its financial institution associate. For credit-thin shoppers, Upstart might use various date along with shoppers’ conventional knowledge to guage credit score danger by means of an automatic underwriting mannequin, enabling its financial institution associate to extra precisely worth credit score for these shoppers. The corporate sought a Letter with respect to its potential legal responsibility underneath the Equal Credit score Alternative Act (“ECOA”) and Regulation B in mild of its use of other knowledge. As a situation of granting the Letter, the CFPB required Upstart to share its lending and compliance info to “mitigate risk to consumers and aid the Bureau’s understanding of the real-world impact of alternative data on lending decision-making.” [2] The Letter expires in three years, however Upstart might search a renewal.

THE LIMITATIONS OF THE FORMER NO-ACTION LETTER PROGRAM 

The Program has been criticized as insufficient for quite a lot of causes. First, the Letters don’t bind the CFPB, different regulators, or the courts, so they supply restricted safety or danger mitigation to the applicant. Notably, the CFPB can modify or rescind a Letter at any level and for any cause. Furthermore, Letters aren’t protected harbors and don’t shield recipients from future investigations, or enforcement or supervisory actions, by the CFPB (or another regulatory physique). Letters may even not preclude lawsuits by personal events. Second, the Letters don’t present a lot, if any authority, since they don’t represent a willpower by the CFPB or its employees relating to the related statutes and laws, or an interpretation of these legal guidelines. Third, the Letters are meant to be issued on a slender foundation, making use of solely to the information, circumstances, and product makes use of particularly outlined within the software and solely with respect to the precise statutes and laws cited within the software. Any deviation just isn’t topic to the CFPB’s assurance that it has no current intention to deliver an enforcement motion. Fourth, the CFPB requires knowledge in change for the Letter, thereby subjecting recipients to a further on-going administrative obligation. Fifth, if a recipient violates the phrases of the Letter, the CFPB has the correct to provoke retrospective enforcement or supervisory actions. Sixth, by design, the CFPB intends to situation only a few Letters per yr. The Program, subsequently, isn’t tailor-made to deal with the precise variety of revolutionary merchandise in any given yr.

As famous above, the CFPB acquired just one software for the Program, probably because of the numerous limitations and protections provided by the Program. To advertise higher participation, within the fall of 2018, the CFPB introduced its intent to switch the Program.

THE CFPB’S PROPOSED RULE TO MODIFY THE NO-ACTION LETTER POLICY AND TO IMPLEMENT A REGULATORY SANDBOX

No-Motion Letter Program Modification 
Led by the Workplace of Innovation, the CFPB revealed a proposed rule and coverage describing the revamped Program within the Federal Register on December 13, 2018. In response to the proposal, the Program didn’t present companies with “sufficient incentives to seek [Letters].” [3] To treatment this drawback, the CFPB proposes to “bring certain aspects of the [Program] into alignment with [similar] programs offered by other Federal regulators.” [4] Particularly, the CFPB proposes a number of key modifications.

First, underneath the proposal, the CFPB will comply with chorus from making supervisory findings or initiating supervisory or enforcement actions with respect to the exercise coated in a Letter underneath any statute or regulation that it will probably implement (together with its authority beneath Dodd-Frank to deliver enforcement actions to curtail unfair, misleading, or abusive acts and practices (“UDAAP”)), topic to the recipient’s good religion and substantial compliance with the phrases of the Letter. Furthermore, the CFPB won’t provoke an enforcement motion for a recipient’s actions whereas the Letter was in impact, if the CFPB rescinds the Letter for any cause aside from the recipient’s failure to considerably adjust to the Letter in good religion. Beforehand, there was some ambiguity as as to if and to what extent the CFPB was prepared to concern a Letter that coated its UDAAP authority, and this variation makes the Letter’s protections extra concrete.

Second, the Program won’t be restricted to some Letters per yr, and Letters won’t be issued with an expiration date. This proposed coverage change expands the advantages of the Program to probably all business members, quite than proscribing it to the few who submit their purposes the quickest.

Third, the Program will settle for purposes from commerce associations, service suppliers, and different third-parties. Beforehand, the CFPB said it will not situation a Letter if the appliance was submitted by a commerce affiliation. This alteration would broaden the Program’s attain, and would permit extra stakeholders to take part.

Fourth, recipients of a Letter wouldn’t be required to share knowledge with the CFPB, thereby minimizing the prices of acquiring a Letter.

Fifth, when issuing a Letter, the CFPB will coordinate, as applicable underneath the Dodd-Frank Act, with different federal and state regulators. The CFPB will discover partaking in agreements with State regulators that situation comparable no-action aid paperwork. This proposal would broaden the protections the Program supplies, probably minimizing a recipient’s publicity to federal and state legal guidelines.

The proposed rule would additionally streamline the appliance itself, decreasing the variety of questions and asking for much less info. If issued as proposed, the CFPB would decide whether or not to grant a Letter based mostly on the good thing about the services or products to shoppers, the extent to which the applicant can management danger, and the extent to which aid is definitely wanted. Letters would nonetheless be revealed publicly, however the CFPB will make a extra concrete effort to stop the disclosure of confidential info and would permit candidates to withdraw their software in the event that they consider confidential info can be disclosed.

Regulatory Sandbox 

Along with revamping the Program, the CFPB has proposed making a product sandbox (“Sandbox”) to offer three forms of aid from statutory and/or regulatory provisions: (1) no motion beneath the Program, (2) an “approval,” or (three) an “exemption.” This aid would prolong as much as two years, topic to additional extension.

An “approval” would apply the protected harbors beneath the Fact-in-Lending Act, the ECOA, and the Digital Fund Switch Act, as relevant, to the recipient’s services or products, thereby immunizing the recipient from federal or state enforcement actions and personal litigation. A recipient should, nevertheless, comply, in good religion, with the phrases and circumstances of the approval for the protected harbors to use.

An “exemption” is a press release by the CFPB that the recipient needn’t adjust to, or is in compliance with, statutory or regulatory provisions beneath which the CFPB is statutorily approved to challenge an exemption, and regulatory provisions underneath which the CFPB can difficulty an exemption. Like an approval, an exemption would shield a recipient from federal or state enforcement actions and personal litigation, offered it complies, in good religion, with the CFPB’s phrases and circumstances.

The CFPB proposes to grant purposes to take part within the Sandbox on the identical foundation because it proposes to grant Letters. Individuals should report details about how its related services or products is affecting “complaint patterns, default rates, or similar metrics” so the CFPB can measure “tangible harm to consumers.” [5] Moreover, individuals are required to compensate shoppers for “material, quantifiable, economic harm” ensuing from the coated merchandise and providers. [6] The CFPB won’t provoke an enforcement motion for a recipient’s actions whereas the Letter was in impact, if the CFPB rescinds the Letter for any purpose aside from the recipient’s failure to considerably adjust to the Letter in good religion. Furthermore, it’ll coordinate its efforts with different federal and state regulators.

CONCLUSION 

2019 has simply begun, however the CFPB is already posed to make necessary modifications beneath its new management. As industries topic to the Dodd-Frank Act develop and implement aims for the yr, business members and different stakeholders ought to critically contemplate submitting feedback to the proposed rule to reform the Program and to implement a Product Sandbox. The general public remark interval ends on February 11, 2019. The eventual remaining rule and coverage change to the Program might have vital implications for the monetary providers business, because the proposed Program reform might present essential statutory and/or regulatory aid to business individuals.


Notes:
[1] CFPB Declares First No-Motion Letter to Upstart Community, Press Launch, Shopper Monetary Safety Bureau (Sept. 14, 2017), https://www.consumerfinance.gov/about-us/newsroom/cfpb-announces-first-no-action-letter-upstart-network/ (last accessed Jan. four, 2019).
[2] Upstart No Motion Letter, Shopper Monetary Safety Bureau (Sept. 14, 2017), https://files.consumerfinance.gov/f/documents/201709_cfpb_upstart-no-action-letter.pdf (last accessed Jan. four, 2019).
[3] 83 Fed. Reg. 64036, 64036 (Dec. 13, 2018).
[4] Id.
[5] Id. at 64040.
[6] Id.