A group of 21 states and the District of Columbia submitted a comment letter opposing the Consumer Financial Protection Bureau’s effort to revise and boost its Policy on No-Action Letters (“NAL Policy”) and the creation of a CFPB Product Sandbox. The NAL Policy and Product Sandbox will allow companies to provide innovative financial services and products under a relaxed regulatory regime. In a February 11 letter, the states express concern that relaxed regulation could lead to consumer harm and are asking the CFPB to reevaluate its proposed policies given the significant risks to consumers and the entire U.S. financial system.
As an initial matter, the participating states doubt whether the CFPB can take such action without the formal rulemaking procedures required by the Administrative Procedure Act because the proposals create substantive CFPB policy. Under the revised policy, the immunity granted to companies ties the states’ hands because “approvals or exemptions granted by the CFPB … confer on the recipient immunity” from both federal and state authority. However, even if the CFPB does have the authority to take the action without formal rulemaking, the states point out that there are other issues that are of importance.
A company could apply to the CFPB for a no-action letter that would give the company an official assurance by a duly authorized CFPB official that the CFPB will not pursue enforcement measures against the company. The purpose is to foster technological innovation, but it is effectively a “get-out-of-jail-free card” for a company trying new products and services. The revised NAL Policy would also speed up the time in which the CFPB would grant or deny an application for a no-action letter to 60 days.
The Product Sandbox would grant companies similar relief under the NAL Policy, but would also provide two forms of additional exemption relief: “1. Approvals by order under three statutory safe harbor provisions (approval relief); and 2. Exemptions by order from statutory provisions under statutory exemption-by-order provisions (statutory exemptions), or from regulatory provisions that do not mirror statutory provisions under rulemaking authority or other general authority (regulatory exemptions).” The Product Sandbox also fosters technological innovation by allowing companies to test new disclosures for financial services and products.
Given the effects of the 2008 financial crisis, the states oppose the revised policy because the potential benefits are outweighed by the risks. The states point out various issues that undermine the potential effectiveness of the proposed policy, focusing primarily on the potential for consumer harm and the lack of understanding of emerging technology. For example, marketplace lenders may “rely on machine-learning or other types of artificial intelligence to make underwriting decisions,” but the “lenders may be unable to determine why a particular decision was made.” The states claim that until technology and its implications for consumers are better understood, it is ill-advised to give companies such broad relief from enforcement actions. The states assert that the CFPB’s commitment to fostering technological advances should not be used in a way that jeopardizes consumer protection.