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Fintech in Brief: Issues to Consider in Connection with the CFPB’s Proposed Product Sandbox and Policy Changes for No-Action Letters

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Bank, nonbank, and Fintech providers of consumer financial products and services may be able to reduce their exposure to compliance risk under the December 13, 2018 No Action Letter (“NAL”) Policy changes proposed by the Consumer Financial Protection Bureau (the “CFPB”). The CFPB’s proposed changes to its existing NAL process may serve as a means of preclearing new or existing consumer products or services with the CFPB, thereby eliminating or limiting the likelihood of subsequent CFPB-initiated enforcement actions and potential civil liability under specified consumer protection statutes.

However, there are outstanding key regulatory coordination questions that regulated entities should monitor as they consider whether to take advantage of these proposed changes. In addition, the proposal is likely to receive extensive comments from the industry, Congress, state officials, consumer groups, and the general public before the CFPB issues a final policy statement.

Enhanced Scope of No-Action Relief: Application Beyond Innovative Products/Services and Increased Authoritative Weight

The proposed NAL policy presents a number of additional benefits that likely increase its appeal when compared with the 2016 NAL Policy. For example, the CFPB’s 2016 NAL Policy linked the issuance of a nonbinding NAL to the testing of an innovative product or service. It also imposed mandatory data collection and other commitments. Under the new proposal, the NAL is a standalone process de-linked from the testing of innovative products or services (innovative products and services are covered in the proposed Product Sandbox process published alongside the proposed NAL policy changes). This is a major policy shift that could reduce potential regulatory risk for entities subject to the CFPB’s oversight. Although an approved Product Sandbox product or service will receive a NAL under the proposal, only the proposed Product Sandbox process seems intended to promote financial product innovation and foster more frequent cooperation between regulated entities and the CFPB. Consequently, it appears that consumer financial products or services would no longer need to be innovative or new to enjoy the benefits of a NAL from the CFPB.

The proposed NAL process may be more attractive to banks, nonbanks, and Fintechs because it is intended to streamline the NAL application process, eliminate the requirement of mandatory data collection and sharing, and, most significantly, expand the types of supervisory and enforcement relief available. The CFPB’s NAL authority would include issuing exemptions from statutory and regulatory requirements and the advance exercise of discretion in supervisory and enforcement matters.

If promulgated as proposed, banks, nonbanks, and Fintechs may find the expanded authoritative weight and policy scope of NALs to be the most attractive. The CFPB is proposing that NALs will 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. Under the proposed NAL process, the scope of no-action relief available would encompass the consumer protection statutes specifically entrusted to the CFPB (e.g., Truth in Lending Act, Equal Credit Opportunity Act, Electronic Fund Transfer Act) and relief from the prohibition on unfair, deceptive, or abusive acts or practices (“UDAAP”) under Section 1031of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Because UDAAP violations are a part of many of the CFPB’s enforcement actions and UDAAP itself is not well-defined largely due to the absence of any official rulemaking, this relief is of particular significance to marketplace participants seeking regulatory relief and clarity.

Regulatory Coordination is Key

Relief for banks, nonbanks, and Fintechs, however, may be limited by the overlapping prudential and consumer protection jurisdiction of the federal banking agencies (the “FBAs”) and state licensing authorities and/or state attorneys general despite the CFPB’s primary enforcement authority over federal consumer protection statutes. For example, the FBAs retain enforcement authority over any consumer protection statute not transferred to the CFPB under the Dodd-Frank Act. A prime example is the prohibition on unfair or deceptive acts or practices under Section 5(a) of the Federal Trade Commission Act. Moreover, the FBAs’ prudential safety and soundness oversight and enforcement powers with respect to compliance risk management deficiencies are not constrained. Unless the FBAs follow the CFPB’s lead and issue parallel NALs, banks may still face exposure to compliance risk. Therefore, it is essential that the CFPB coordinate any NAL relief with the FBAs despite the latter agencies’ longstanding practice of not issuing NALs in either the prudential or consumer compliance context. A similar level of NAL coordination and collaboration is needed with state authorities for products or services to the extent state authorities have jurisdiction under the preservation of state law provisions of the Dodd-Frank Act. Indeed, as the CFPB’s recent enforcement activity has decreased, FBAs and state attorneys general may seek to fill what they see as a void in such activity, making this type of coordination critical for regulated entities as they consider applying to the CFPB for NAL relief.


NALs themselves may not provide complete protection to participating banks, nonbanks, and Fintechs. An approved consumer financial product or service may still present supervisory issues and liability if it is mis-sold to consumers. A bank, nonbank, or Fintech should ensure that its sales practices for a NAL-approved consumer product or service are properly designed and monitored.

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.

Initial Fintech in Brief Advisory: 
Bureau of Consumer Financial Protection Proposes Product Sandbox and Policy Changes for No-Action Letters

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