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12.17.2018 | Legal Update

On December 13, 2018, the Bureau of Consumer Financial Protection (the “Bureau”), through its Office of Innovation, published two policy proposals consisting of (i) proposed changes to the Bureau’s Policy on No-Action Letters and (ii) a new Product Sandbox.^[1]  According to the Bureau, these proposals are designed to promote more frequent cooperation between the Fintech industry and the Bureau and are consistent with recent pro-innovation directives from the U.S. Department of the Treasury.  Congressional oversight is expected, and interagency coordination will be critical to ensuring that these regulations protect consumers and encourage innovation while maintaining a level playing field between banks and nonbanks.

Background

The Bureau’s revised Policy on No-Action Letters (the “No-Action Policy”) would amend its current policy, in place since February 2016.^[2] The Product Sandbox is the newest proposal by the Bureau’s Office of Innovation. The Product Sandbox follows the Bureau’s proposed Disclosure Sandbox^[3] and the Bureau’s new membership in the Global Financial Innovation Network.^[4] The Bureau is accepting comments on the proposal until February 11, 2019.

Overview of the Proposal

Revision of 2016 No-Action Letter Policy

The No-Action Policy aims to expand the policy to increase its very limited use to date (there is only one no-action letter under the current policy^[5]), to one encouraging more frequent use. The Bureau intends to do this by, among other things, streamlining the application process (including reducing the burden of certain requirements) and expanding the types, nature, and scope of relief available.

Streamlined Application Process. First, the No-Action Policy seeks to streamline the application process by more closely aligning it with certain aspects of no-action letter programs offered by other federal financial regulatory agencies, such as the Securities and Exchange Commission.^[6] The proposal aims to remove “redundant or unduly burdensome” requirements previously in place, such as a commitment by the applicant to share data with the Bureau. It is specifically designed with an ultimate goal of a 60-day timeline from the date an application is deemed complete to the time of approval or denial of such application. The proposal also expands the availability of no-action relief to trade associations which can apply on behalf of their respective members, as well as third-party service providers. Finally, the Bureau noted that it is looking for ways to coordinate with other regulators at both the federal and state levels to seek ways in which relief can be granted jointly, such as entering into agreements with these agencies, and reducing duplicative efforts.

Expanding Available Relief. On top of streamlining the no-action application process, the proposal expands the timeframe, authoritative weight, and policy scope of no-action letters. As part of this effort, the proposal eliminates any limitation on the time for which relief can be granted, allowing for more flexibility to adopt timeframes that are most appropriate for each proposal. The Bureau is also proposing that no-action letters would be issued by “duly authorized officials of the Bureau”, rather than a recommendation by staff, providing recipients greater comfort that they can rely on the relief. Finally, the scope of the no-action relief available would explicitly include relief from the prohibition on unfair, deceptive, and abusive acts and practices (“UDAAP”). Because UDAAP violations are a part of many of the Bureau’s enforcement actions, this relief is of particular significance to marketplace participants seeking regulatory relief.

Product Sandbox

The Product Sandbox provides the same relief as a no-action letter, while adding binding orders. These orders will be issued as “approval relief” under certain safe harbor provisions or “exemption relief” from specific statutes or regulations. An approved Sandbox is expected to be in place for a limited period (about two years on average) which can be extended under certain circumstances. Unlike the No-Action Policy, the Product Sandbox would include a requirement to share certain data with the Bureau.

For approval relief, the Bureau intends to rely on three safe harbor provisions under the Truth in Lending Act^[7], the Equal Credit Opportunity Act^[8], and the Electronic Fund Transfer Act^[9].  Under these provisions, good-faith compliance with each applicable law prohibits civil liability, including in actions brought by private parties and State attorneys general.  Under exemption relief, the Bureau would rely on statutory and regulatory provisions, upheld or applied by various courts, that allow for exemptions by order that constitute safe harbors from liability.^[10]

For the application itself, each Sandbox applicant would need to provide the Bureau with information including:

• a description of the product and how it is advertised and offered, including any consumer disclosures;
• a proposed duration of Sandbox participation and other limiting parameters such as number of consumers or geographic location;
• an explanation of consumer benefits and how to measure those benefits;
• an explanation of potential consumer risks and how the applicant intends to mitigate such risks (including, but not limited to, restitution of economic harms to consumers as a result of the Sandbox participation);
• identification of the relevant consumer law or regulation from which relief is being sought and the type of relief being sought;
• a description of the data the applicant intends to collect and share with the Bureau and a schedule for sharing the data; and
• identification of any other regulators the applicant would like the Bureau to coordinate with.

Once complete, the Bureau staff would review and approve or deny each application, with the intention of doing so within 60 days. Extensions to the Sandbox period will be available when consumers are tangibly benefiting and not being materially harmed by applicable products. And just as in the no-action context, the Bureau is interested in seeking agreements with other federal and state regulatory agencies with respect to Sandbox products.

Conclusion

The Bureau’s proposal is a significant step that represents an embrace by the Bureau to adopt regulations that promote innovation. At the same time, the Bureau, as well as the other financial services regulatory agencies, should ensure no-action and sandbox relief is consistent with their respective statutory consumer protection mandates and includes, among other things, coordination with agencies at both the federal and state levels.

[1] 83 FR 64036 (Dec. 13, 2018).

[2] 81 FR 8686 (Feb. 22, 2016).

[3] 83 FR 45574 (Sep. 10, 2018).

[4] https://www.consumerfinance.gov/about-us/blog/bcfp-office-innovation-proposes-disclosure-sandbox-fintech-companies-test-new-ways-inform-consumers/.

[5] See Bureau No-Action Letter to Upstart Network, Inc. (Sep. 14, 2017).

[6] The Bureau also cites the no-action letter policies of the Commodity Futures Trading Commission, the Federal Housing Finance Agency, and the Federal Energy Regulatory Commission.

[7] 15 U.S.C. § 1640(f).

[8] 15 U.S.C. § 1691e(e).

[9] 15 U.S.C. § 1693m(d).

[10] Citing Williams v. Chartwell Fin. Servs., Ltd., 204 F.3d 748, 754 (7th Cir. 2004).

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.