CFPB finalizes product sandbox proposal and changes to trial disclosure, no-action letter policies; discloses plans to propose interpretive letter program

By Alan S. Kaplinsky on September 12, 2019

Posted in HUD, Regulatory and Enforcement

The CFPB has finalized its proposed revisions to its Policy to Encourage Trial Disclosure Programs” (TDP Policy) and policy on “no-action” letters (NAL Policy) and has also finalized its proposal to create a new “product sandbox” policy. In addition, the CFPB has announced the creation of the American Financial Innovation Network (ACFIN) to facilitate coordination between the CFPB, other federal regulators, and state regulators and the CFPB’s issuance of the first NAL under the revised NAL Policy. The final policies, which are scheduled to be published in tomorrow’s Federal Register, are applicable as of September 10, 2019.

While not mentioned in the CFPB’s press release or Director Kraninger’s remarks about the final policies, the Bureau states in the Supplementary Information to the final sandbox policy that it “intends to separately propose an interpretive letter program as soon as practical.” The Bureau expresses its agreement with commenters on its sandbox proposal “that the present lack of an interpretive letter or advisory opinion program represents a gap in the Bureau’s plans for providing compliance assistance to stakeholders under the Federal consumer financial laws.” It indicates that because it did not propose such a program in the sandbox proposal and there would be significant public interest in the structure of such a program, the Bureau believes it would be appropriate to seek public comment before establishing such a program.

Each of the final policies encourages potential applicants to contact the CFPB’s Office of Innovation for “an informal, preliminary discussion” of a contemplated proposal before submitting a formal application. In the Supplementary Information to the NAL Policy, the CFPB states that during these informal discussions, it intends to discuss which of its policies is best suited for the product or service that is the subject of an application.

Product Sandbox. While the CFPB’s proposal referred to a “Product Sandbox,” the final policy is renamed the “Policy on the Compliance Assistance Sandbox” (CAS Policy). Key differences between the Bureau’s proposal and the CAS Policy include:

The proposal provided that an approved sandbox applicant would receive relief consisting of (1) approvals, as applicable, under the provisions of the TILA, ECOA, and EFTA that provide a safe harbor from liability under such laws in federal or state enforcement actions and private lawsuits for actions taken or omitted in good faith in conformity with Bureau approvals, and (2) exemptions granted by Bureau order (i) from statutory or regulatory provisions as to which the Bureau has statutory authority to issue exemptions by order (such as provisions of the ECOA, HOEPA, and FDIA), or (ii) from regulatory provisions as to which the Bureau has general authority to issue exemptions. The CAS Policy does not provide for exemptions. An approved sandbox applicant will only receive an approval under one or more of the three statutory safe harbors. While the Bureau states in the Supplementary Information that it concluded the statutory exemptions by order did not need to be included in the CAS Policy, it believes regulatory exemptions would be an important component of the CAS Policy and “will at a later date issue a proposal to establish a program by order through a separate notice-and-comment rulemaking.”
The CAS Policy provides that an approval will state that “subject to good faith compliance with specified terms and conditions, the Bureau concludes that for the reasons stated therein that offering or providing the described aspects of the product or service complies with the Federal consumer financial law identified therein.” The Bureau states in the Supplementary Information that “the compliance assistance available under the Policy, however, concerns Federal consumer financial law, not State law, and the Bureau does not foresee that such assistance would preempt State law.” This would appear to mean that an approved sandbox applicant would remain at risk for claims by state regulators or private actions alleging violations of state law based on non-compliance with federal law requirements that are incorporated into or tracked by state law.
The Bureau states in the Supplementary Information that the CAS Policy refers to termination of an approval rather than revocation “because the effect of approvals for the period that they are provided by the Bureau cannot be revoked.”
The CAS Policy revises the structure of third party applications (e.g. trade associations) to allow a third party to apply for a “template” approval. Such approval would be “non-operative, meaning that no party can rely on it to trigger the statutory safe harbor.” Entities could then use the template to apply for compliance assistance under substantially the same terms as those contemplated in the template, and the Bureau will evaluate each application on an individual basis.

NAL Policy. The NAL Policy, initially issued in 2016, sets forth the CFPB’s standards and procedures for issuing NALs. Key differences between the Bureau’s proposal and the final NAL Policy include:

The Bureau states in the Supplementary Information that the NAL Policy is not intended to be limited to new or emerging products.
In response to comments from consumer groups that NALs might be viewed as official interpretations to which courts will defer, the NAL Policy provides that an NAL will include a statement that it “does not purport to express any legal conclusions regarding the meaning or application of the laws and/or regulations within the scope of the letter.”
The NAL Policy revises the structure of third party applications by adopting the “template” approval approach used in the CAS Policy and addresses how the CFPB will handle NAL applications involving products or services that are substantially similar to those that are the subject of an existing NAL.

TDP Policy. The TDP Policy, initially adopted in October 2013, sets forth the Bureau’s standards and procedures for granting waivers to individual companies, on a case-by-case basis, of federal disclosure requirements to allow those companies to test trial disclosures. The TDP Policy relies on the Bureau’s authority under Dodd-Frank Section 1032(e) to permit providers of consumer financial services and products “to conduct a trial program that is limited in time and scope, subject to specified standards and procedures, for the purpose of providing trial disclosures to consumers.” Key differences between the Bureau’s proposal and the final TDP Policy include:

A waiver will include a statement that “subject to good faith, substantial compliance with the [waiver document], the Bureau deems the [waiver] recipient to be in compliance with, or exempt from, described Federal disclosure requirements and that as result of this action, there is no predicate under the described Federal disclosure requirements for a private suit or Federal or State enforcement or supervisory action based on the recipient’s permitted use of the trial disclosures in question within the scope of the waiver.” In response to industry concerns about the ability of a state AG to use Dodd-Frank Section 1042 to bring a UDAAP action against the recipient of a waiver, the Bureau states in the Supplementary Information that “there would be no basis for such a title X UDAAP action predicated on a violation of the Federal disclosure requirements within the scope of the waiver.” According to the Bureau, a state AG “would have to show, despite the consumer protections built into the Policy and despite the Bureau’s issuance of a waiver under the Policy, which the Bureau would not issue if it believed the relevant conduct was unfair, deceptive, or abusive, the applicable elements of its title X UDAAP action had been established.” The Bureau states further that it intends to coordinate with Federal and State regulators to attempt to secure their support for a trial disclosure program, or at least a commitment not to initiate enforcement actions predicated on permitted use of trial disclosures. It nevertheless appears that in addition to enforcement and private actions alleging violations of state law based on non-compliance with federal disclosure requirements that are incorporated into or tracked by state law, a waiver recipient would remain at risk of a UDAAP action by a state AG.
The TDP Policy provides that the Bureau will consider requests from applicants to extend waiver protection to identified or described agents.
The TDP Policy provides that if a waiver is terminated, the recipient’s use of the trial disclosures prior to the termination cannot be the basis for a retroactive action.
The Bureau states in the Supplementary Information that the TDP Policy “does not exclude applications involving disclosures associated with long-established products or applications that describe a new method for providing disclosures.”
The TDP Policy revises the structure of third party applications (e.g. trade associations) to allow a third party to apply for a “template” approval. Like a template approval under the CAS Policy, a template approval would be “non-operative,” meaning that it does not provide permission to any party to conduct a trial disclosure program. Entities could then use the template to apply for a waiver based on the template, and the Bureau will evaluate each application on an individual basis.

ACFIN. The ACFIN charter states that the ACFIN “is a network of Federal and State officials and regulators with authority over markets for consumer financial products and services” that may include state attorneys general, state financial regulators, and federal financial regulators. In addition to the CFPB, the initial members are the Attorneys General of Alabama, Arizona, Georgia, Indiana, South Carolina, Tennessee, and Utah, and the Florida Office of Financial Protection. The network’s objectives are to establish coordination among members to facilitate innovation, minimize regulatory burdens and bolster regulatory certainty for consumer financial products and services, and to keep pace with changes in markets for such products and services to help ensure they are free from fraud, discrimination, and deceptive practices. To accomplish those objectives, members seek to cooperate with each other through the coordination of the innovation-rated policies, procedures and activities “with the opportunity to also coordinate on no-action letters, or sandbox trials if desired” and sharing information, as appropriate, related to innovation in markets for consumer financial products and services.

First NAL under new policy. The CFPB’s first NAL under the new NAL Policy was issued 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. HUD had raised 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). As described by the Bureau, the NAL “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.”