In addition to releasing a finalized No-Action Letter (NAL) Policy, the Consumer Financial Protection Bureau (CFPB) also issued a revised Trial Disclosure Policy and Compliance Assistance Sandbox Policy on September 10.
Trial Disclosure Policy
Through its revised Trial Disclosure Policy, the CFPB has created the CFPB Disclosure Sandbox. Now, entities seeking to improve consumer disclosures may conduct in-market testing of alternative disclosures for a limited time upon permission by the CFPB. The Dodd-Frank Act gives the CFPB the authority to provide certain legal protections for entities to conduct trial disclosure programs. The new policy largely streamlines the application and review process, provides greater protection from liability (which also extends to agents of the waiver recipient), and allows for a time-limited extension for successful disclosure tests.
Industry commenters were generally supportive of the CFPB’s proposed changes to the Trial Disclosure Policy, but requested greater protection from liability and greater assurance that any information or data provided to the CFPB would be protected from public disclosure and disclosure to other federal and state regulators. To the extent consumer groups recommended revisions, they urged the CFPB to limit the scope of the proposed revisions or build in consumer protections that go beyond those included in the original 2013 policy. In response, the CFPB adopted certain suggested revisions designed to increase consumer protections. It believes such revisions are consistent with a specific congressional intent for the agency to encourage entities to conduct trial disclosure programs limited in time and scope pursuant to specified standards and procedures. This includes new provisions for recipients to report to the CFPB, on a regular cycle for the duration of the program, information about the effects of trial disclosures on relevant objective indicators of consumer behavior (e.g., complaint patterns and default rates). Additionally, the CFPB adopted a number of suggested revisions that it believes will further encourage companies to conduct trial disclosure programs. “Show us that different disclosures work better and we will use that information to improve our rules,” said CFPB Director Kathleen L. Kraninger.
Compliance Assistance Sandbox Policy
The Compliance Assistance Sandbox Policy enables testing of a financial product or service where there is regulatory uncertainty. The CFPB uses the Official Interpretations (Commentary) as its primary means of fulfilling its interpretive mission. The CFPB stated that, similar to other forms of guidance the agency uses, the Compliance Assistance Sandbox Policy is intended to supplement the Commentary. After the CFPB evaluates a product or service for compliance with relevant law, an approved applicant that complies in good faith with the terms of the approval will have a “safe harbor” from liability for specified conduct during the testing period (applicants to the sandbox can also apply for an NAL under the CFPB’s NAL Policy). Compliance assistance provided under the policy will be limited to specific applications of federal law, as well as to the facts stated in the application. Approvals will provide protection from liability under the Truth in Lending Act, the Electronic Fund Transfer Act, or the Equal Credit Opportunity Act; however, at this time, the safe harbor relief would not extend to other financial consumer statutes administered by the CFPB, nor, in the CFPB’s view, would it preempt state consumer laws. The CFPB expects that approvals will usually be time limited, typically to two years, but recipients may apply for extensions under specified procedures. A given approval may ultimately be used to help support an amendment to a regulation or the Commentary, negating the need for further extensions of one-off assistance.
With one exception, consumer and civil rights organizations, together with a group of state attorneys general and a group of state financial regulators, opposed the proposed Sandbox Policy, and their predominant objection was that it would permit regulated entities to evade their legal responsibilities. In response, the CFPB asserted that this objection is ultimately misplaced, but has clarified that the relief sandbox approvals provide is assistance from regulatory uncertainty, not from regulatory obligation. Unlike the proposed version of the sandbox, there are no regulatory exemptions or statutory exemptions from existing law.
According to Director Kraninger, this sandbox “is an environment where innovators, whether at startups or established companies, can develop new technologies to address consumer needs.” She expects that many innovators will be able to use the sandbox “to test new financial products and services without the chilling effect of concerns about triggering supervision or enforcement or creating private liability about possible violation of these laws.”
We are encouraged by these developments and believe that the different options available have the potential to help facilitate innovation and reduce regulatory uncertainty with respect to the provision of consumer financial services and products.