CFPB moves to ease fintechs’ regulatory fears
The Consumer Financial Protection Bureau issued three new policies to promote innovation, removing the threat of legal liability for fintech companies that test products benefiting consumers.
The three policies unveiled Tuesday include the agency's final fintech sandbox framework, a revised policy for sending firms "no-action" letters and a program permitting companies to test alternative consumer disclosures.
Together, the steps offer a legal safe harbor and relief from supervisory and enforcement actions for developing new products and services.
Separately, the CFPB said it is partnering with seven Republican attorneys general to launch the American Consumer Financial Innovation Network, to share information and coordinate with states on “innovation-related policies and programs."
The bureau also issued its first no-action letter under the changes to the Obama-era policy. It is intended to benefit 1,600 housing counseling agencies that have entered into certain fee-for-service arrangements with mortgage lenders for housing counseling services. (The letter was sent to the Department of Housing and Urban Development.)
The CFPB proposed the three policies in 2018 under former acting Director Mick Mulvaney. The policies go beyond similar efforts developed by the Obama administration that were criticized for not offering enough regulatory relief.
“The three policies we are announcing today are common-sense policies that will foster innovation that ultimately benefits consumers,” CFPB Director Kathy Kraninger said in a press release. "Innovation drives competition, which can lower prices and offer consumers more and better products and services. New products and services can expand financial options, especially to unbanked and underbanked households, giving more consumers access to the benefits of the financial system.”
The bureau said the revamped no-action letter policy would “provide increased regulatory certainty through a statement that the Bureau will not bring a supervisory or enforcement action against a company for providing a product or service under certain facts and circumstances.”
The bureau said HUD raised concerns in 2018 about housing counseling agencies not entering into agreements with mortgage lenders due to uncertainty about the application of the Real Estate Settlement Procedures Act. RESPA prohibits certain practices such as kickbacks in exchange for services.
The CFPB said the no-action letter “is an exercise of the Bureau’s supervisory and enforcement discretion,” and is intended to facilitate housing counseling agencies entering into agreements with lenders that will enhance their ability “to obtain funding from additional sources.”
The CFPB’s prior 2016 no-action had been finalized by former CFPB Director Richard Cordray, but it was considered a disappointment because the bureau granted only one company a no-action letter. The CFPB said the new policy includes a streamlined review process focused on consumer benefits and risks associated with the product or service.
Meanwhile, the CFPB is changing the name of what was proposed as a "product sandbox." Instead, the agency is calling it a "compliance assistance sandbox." It will enable the testing of a financial product or service where there is some regulatory uncertainty.
Approved applicants that comply with the terms will be given a broad “safe harbor” from liability for certain conduct under the Truth in Lending Act, the Electronic Fund Transfer Act or the Equal Credit Opportunity Act.
Yet in prepared remarks for an event in Atlanta to unveil the policies, Kraninger said the safe harbor will still be consistent with existing statutes.
"Unlike the proposed version of the sandbox, there are no regulatory exemptions or statutory exemptions from existing law," Kraninger said.
At the event, which coincided with the CFPB's opening a regional office in Atlanta, Kraninger said online and mobile banking were examples of how innovation can improve consumers' lives.
"We cannot predict the particular innovations that will develop in the coming years, but by engaging, we can help ensure that consumer protection includes having access to a vibrant, competitive consumer financial market," she said.
The CFPB trial disclosure policy streamlines the application and review process and gives permission to companies to conduct testing of alternative consumer disclosures for a limited time. The Dodd-Frank Act gives the CFPB the authority to provide certain legal protections for entities to conduct trial disclosure programs.
The agency's innovation initiatives have met resistance from certain state attorneys general, who are concerned about granting firms legal immunity. In February, 22 Democratic attorneys general sent a letter to Kraninger opposing the draft proposals at the time, saying the CFPB did not have the authority to exempt fintech companies from state law.
The CFPB appears to want to attract support from other states. On the launch of the network to share information with state attorneys general, the CFPB said it had invited "all state regulators" to join but only seven states have done so. They are Alabama, Arizona, Georgia, Indiana, South Carolina, Tennessee and Utah.
“I will continue to work to encourage other state regulators to join this important new initiative that will foster collaboration among Federal and State regulators,” Kraninger said in the press release. “ACFIN will provide a platform for Federal and State regulators to coordinate with each other as they develop new rules of the road and apply existing ones.”
The network “seeks to keep pace with market innovations and help ensure they are free from fraud, discrimination, and deceptive practices,” the CFPB said in the release.
The U.S. Chamber of Commerce praised the policies announced Tuesday, calling them long overdue.
“By clarifying the regulatory rules of the road, the CFPB can enable lenders to find new and better ways to serve consumers,” David Hirschmann, president and CEO of the chamber’s Center for Capital Markets Competitiveness, said in a press release.