On February 18, 2016, the Consumer Financial Protection Bureau (CFPB) finalized its policy statement on No-Action Letters (NALs and the NAL Policy), clearing the way for financial services companies and developers to seek individualized guidance on whether the CFPB may pursue supervisory or enforcement action based on the company’s specific products and services. Similar to mechanisms of other financial regulators, such as the Securities and Exchange Commission’s no-action letters and the Financial Crime Enforcement Network’s administrative letter rulings, the NAL Policy seeks to provide a means for companies to obtain clarity on how specific provisions of the federal consumer financial laws may be applied to its new products and services, thereby reducing regulatory uncertainty.
Receipt of a favorable NAL would benefit financial-technology companies seeking to develop innovative products and services new to the financial services industry, but fearing agency intervention. In addition, although the NAL Policy may provide limited benefit to traditional, well-established consumer financial companies, these companies should be cognizant of the implications of having this mechanism available and not utilizing it for its most innovative products and services.
I. Summary of NAL Policy
Under the NAL Policy, Applicants may submit a request to the CFPB for an interpretation of whether the Applicant’s proposed product or service would violate any of the federal consumer financial laws. Effectively, the Applicant would request a notification from the CFPB staff that, based on the facts provided in the Applicant’s submission, the CFPB does not intend to recommend initiation of an enforcement or supervisory action against the Applicant based on the proposed product or service. The NAL Policy contains the following five sections:
Section A – Submission Procedures. The NAL Policy requires a robust narrative of the product or service on which the Applicant is requesting guidance, specifically enumerating 15 information requests the submission must fulfill, including a comprehensive, detailed description of the product or service offering and the product’s benefits and risks to consumers.
Section B – CFPB Responses. The CFPB expressly states that it maintains sole discretion on whether to respond to a request for an NAL and in what manner, such as granting the request in full or in part, or denying the request in full or in part.
Section C – Assessment Factors. To decide whether and how to respond to the applicant, the NAL Policy enumerates 10 factors on which CFPB staff will evaluate submissions, including the effectiveness of the product disclosures and terms and conditions, evidence of the product’s benefits to consumers, and the usefulness of the information that the Applicant commits to providing to the CFPB as a result of the issuance of an NAL.
Section D – Contents and Limitations of NALs. The NAL Policy provides that a favorable NAL would likely include a statement that, “subject to the conditions and limitations set forth, the staff has no present intention to recommend initiation of an enforcement or supervisory action against the requester in respect to the particular aspects of its product under the specific identified provisions and applications of statutes or regulations that are the subject of the [NAL].” Importantly, the NAL Policy provides the caveat that such statement does not mean the company will not be subject to supervisory activity or enforcement investigations.
Section E – Disclosure of NAL Request Information. The NAL Policy establishes that treatment of the Applicant’s submission, and whether to disclose a version or summary of such submission, is governed by 12 C.F.R. Part 1070, the CFPB’s rules regarding disclosure of records and information.
II. Potential Benefits
For certain types of consumer financial services companies engaged in developing new products and services, the NAL Policy may offer a considerable benefit. However, as the NAL Policy establishes, the CFPB envisions the policy applying to certain types of Applicants whose products meet specific qualifications, and prospective Applicants should evaluate whether they qualify prior to requesting an NAL. As one example, the CFPB clearly states that the timetable on which the product or service is expected to be offered has a significant impact on whether it will issue a response to the Applicant’s request. For companies developing products or services meeting the CFPB’s qualifications, the benefits of receiving an NAL may be significant.
The greatest benefit of receiving a favorable NAL is that it would provide comfort to the Applicant that, based on the current model, it is unlikely to become subject to a CFPB enforcement proceeding. In a regulatory environment where the CFPB has demonstrated an aggressive and sometimes creative approach to supervision and enforcement, this type of blessing—as opposed to continued uncertainty—could provide the company with the confidence to continue successful development and growth.
This form of regulatory assurance may then be used in furthering the business objectives of the company. For example, evidence of a favorable NAL may provide comfort to potential investors deciding whether to participate in investment rounds of start-up fintech companies. A favorable NAL would provide investors with an additional degree of assurance, a step beyond what could be obtained through regulatory due diligence. Indeed, it is often the regulatory uncertainty that inhibits fintech companies from quickly securing investors, and an NAL may be the most effective mechanism available to quell investor concerns. For this reason alone, companies meeting the CFPB’s qualifications should evaluate the costs and benefits of pursuing an NAL.
III. Points of Caution
For a number of reasons, and in some ways not dissimilar to NALs of other regulatory agencies, companies exploring the CFPB NAL process should proceed with caution.
First, issuances of NALs will likely be infrequent and, once issued, the value of the agency interpretations may be limited. Issuance of an NAL will require input and coordination from several divisions within the CFPB, which often have different perspectives, and will require the devotion of the CFPB’s limited resources. Moreover, once received, the NAL Policy explicitly reserves the right for the CFPB to modify or revoke its interpretation at any time for any reason. In order to appropriately shape the contents of an NAL request and properly evaluate its likelihood of success, a company would be well-advised to work with an industry professional with direct experience in the CFPB’s internal structure and processes, and who knows how best to address the agency’s differing departmental goals and objectives.
In addition, although the NAL Policy confirms that information received in connection with an NAL request will be treated in accordance with the CFPB’s rules regarding disclosure of records and information, such rules do not estop the CFPB from using that information to craft and structure supervisory and enforcement activity. Although this aspect of the CFPB’s authority does not impact the value of receiving a favorable NAL, it does pose a risk, as experience indicates that CFPB enforcement staff will utilize any and all information available to form a basis for enforcement. Prospective applicant companies should be mindful of this important enforcement aspect when drafting a CFPB NAL requests.
Finally, although the development of new products and services does not require application to the CFPB for an NAL, all financial services companies should consider the consequences of proceeding with the offering of a product or service where there is a significant degree of uncertainty relating to the application of the federal consumer financial laws and the company has elected not to request an NAL. In resolving enforcement matters, the CFPB will consider mitigating factors. Where the CFPB has provided the industry with a mechanism to clarify regulatory uncertainty, and the company has not attempted to avail itself of such resource, that fact may also be considered.
For the right company, receipt of a favorable NAL from the CFPB could have a significant impact on the growth and success of its business. This may be particularly true for innovative start-up fintech companies seeking validation of its product’s or service’s compliance with the federal consumer financial laws. All financial services companies engaged in developing or offering new products and services should thoroughly evaluate the potential risks and benefits of applying—or even not applying—to the CFPB for an NAL.