Financial services providers that fear an enforcement or supervisory action from the Consumer Financial Protection Bureau may soon have an escape route, but it could come with strings attached in the form of new compliance obligations.

Earlier this month, the CFPB proposed a new policy that would allow agency staff to issue no-action letters to companies whose new financial products or services stand to substantially benefit consumers, but raise risks due to regulatory uncertainty. The proposed policy is particularly suited for certain emerging products or services under which existing laws and regulations don’t necessarily apply. The proposed policy is part of the CFPB’s Project Catalyst, an agency initiative to drive innovation in consumer-friendly financial products and services.

“A no-action letter would offer some level of assurance to a particular company that its new innovative product will not attract an enforcement or supervisory action,” Kristen Birdsall, an associate in the Financial Services Regulatory and Compliance Practice Group of law firm Dykema, says. “This is a positive step toward facilitating innovative products that will be beneficial to consumers.”

The catch, however, is that the policy as currently proposed offers limited protections. “The ability for this policy to foster innovation is dampened by the fact that the letters only state a present intention to not initiate an enforcement or supervisory action, and the CFPB reserves the right to revoke a no-action letter at any time,” Birdsall says.

Donald Lampe, a partner with law firm Morrison & Foerster, says the type of requests that most likely would not receive a no-action letter response are those in which there is an ongoing regulatory action concerning the product, or if the request relates to a product or service that is marketed with unfair, deceptive, or abusive acts or practices, he says.

Additionally, the letter would not create any legal precedent for the marketplace as a whole, meaning other companies shouldn’t rely on a no-action letter issued to other companies on a similar product. “What it would mean is that, subject to some limitations, our staff would not recommend initiating supervisory or enforcement action against the requester with respect to the provisions specified in the letter,” Dan Quan, senior advisor to the director of the CFPB, wrote in a blog on the agency’s Website. “It would not, however, prevent any other regulator or person from asserting that the product violated legal requirements.”

“A no-action letter would offer some level of assurance to a particular company that its new innovative product will not attract an enforcement or supervisory action.”
Kristen Birdsall, Associate, Dykema

“We anticipate that no-action letters would be issued infrequently, and they would be issued in the staff’s sole discretion only after the applicant makes a thorough and persuasive demonstration that all the policy’s criteria, including the likely provision of consumer benefit, are met,” Quan wrote.

With so much uncertainty surrounding proposed policy, financial services providers may ask themselves whether it’s even worth the effort to submit a no-action request if there can be no reasonable forecast of outcome, Lampe says.

If granted, the no-action letter would be published on the CFPB’s Website. It would further include a statement that the CFPB has no present intention to initiate an enforcement or supervisory action against that particular financial services provider with respect to the specific financial product or service under the identified law or regulatory provisions.

Compliance Burdens

Requests for a no-action letter further could also involve a substantial compliance undertaking by the company making the request. As part of the application process, for example, the company must provide a thorough description of the financial product involved, including how the product will work and the terms under which it will be offered; the roles and relationships of all involved parties; and the manner in which the product will be offered and used by consumers.

One issue of concern this creates for financial services providers is the “extent to which proprietary or trade secret information would be protected, since the required product-level information is very detailed,” Lampe says.

The company must also explain how the product will substantially benefit consumers; suggest proposed methods for testing whether such benefits are realized; explain the potential consumer risks compared to other products currently available in the marketplace; and detail how the company plans to address and minimize these risks.

“In effect, this would require the requester to design a consumer-benefit testing framework, even before the product or service is ready for the marketplace and to identify ‘consumer risks,’ even though that term is not defined in any statute or regulation,” Lampe says.

As part of the application process, the company must explain why the no-action letter is necessary, including an explanation of how the application of a specific law or regulation is uncertain and shouldn’t be applied to the financial product or service. Applicants must also describe why that regulatory uncertainty cannot be remedied other than through the no-action letter process, such as modifying the financial product.

A Different Direction

The CFPB’s proposed framework differs in certain respects from other federal agency no-action letter processes, including the Securities and Exchange Commission’s. The CFPB’s proposal, for example, does not specifically address whether no-action requests can be withdrawn to avoid a denial being issued if the agency already has reached a decision. The SEC’s no-action letter process, in comparison, typically allows requests to be withdrawn prior to the issuance of a formal denial, Lampe says.


Below is a brief summary of the Consumer Financial Protection Bureau’s proposed policy on no-action letters.
In specifying the purposes, objectives, and functions of the Bureau in Section 1021 of the Dodd-Frank Act, Congress authorized the Bureau to exercise its authorities for the purpose of ensuring that markets for consumer financial products and services operate transparently and efficiently to facilitate access and innovation. In line with the Bureau’s authority, it is proposing the policy that is laid out in the next section below.
Under the proposed policy, Bureau staff would, in its discretion, issue no-action letters (NALs) to specific applicants in instances involving innovative financial products or services that promise substantial consumer benefit where there is substantial uncertainty whether or how specific provisions of statutes or regulations implemented by the Bureau would be applied—for example if, because of intervening technological developments, the application of statutes and regulations to a new project is novel and complicated.
The policy is also designed to enhance compliance with applicable federal consumer financial laws. A [no-action letter] would advise the recipient that, subject to its stated limitations, the staff has no present intention to recommend initiation of an enforcement or supervisory action against the requester with respect to a specified matter. NALs would be subject to modification or revocation at any time in the sole discretion of the staff, and may be conditioned on particular undertakings by the applicant with respect to product or service usage and data-sharing with the Bureau.
Issued NALs would be publicly disclosed. NALs would be non-binding on the Bureau, and would not bind courts or other actors who might challenge a NAL-recipient’s product or service, such as other regulators or parties in litigation. The Bureau believes that there may be significant opportunities to facilitate innovation and access, and otherwise substantially enhance consumer benefits, through the proposed policy.
Source: CFPB.

Another difference is that the SEC may review no-action letters at the agency level involving matters of substantial importance when novel or complex matters are presented. “In its current form, the CFPB proposal does not provide for this level of review by the agency,” Lampe says.

Industry representatives say they are still reviewing the proposed policy to better understand what effect it will have on financial services providers. ACA International said in a prepared statement that it is “conducting a detailed analysis of the proposed no-action letter policy to determine whether to submit comments on behalf of the credit and collection industry.”

Financial services industry experts encourage others to do the same. “I am hopeful that some form of this proposal will come to fruition,” Birdsall says, “and that, with the help of input from industry, some of the barriers to its utility will be addressed in the final proposal.”

The CFPB is seeking comments on the proposed policy until Dec. 15.