An increasingly common strategy for safely testing innovative technology is to put it through its paces in an isolated “sandbox” testing environment. Now, the Consumer Financial Protection Bureau is looking to establish a similar process for financial disclosure requirements.
Last month, the Bureau outlined its proposed creation of a “disclosure sandbox” and initiated a public comment process.
The idea, although controversial, is not an entirely new one. The Dodd-Frank Act authorized the CFPB to create legal protections for companies seeking to conduct trial disclosure programs, limited in time and scope, and designed to improve upon existing disclosures. That led to the Bureau’s 2013 initiative, Project Catalyst, a trial disclosure program effort that was abandoned without granting a single application.
The Bureau is now proposing to resurrect that failed initiative “in order to more effectively encourage companies to conduct trial disclosure programs.”
The proposed review would focus on the quality and persuasiveness of the application, especially the extent to which the trial disclosures are likely to be an improvement over existing disclosures, and the extent to which the testing program mitigates consumer risk. The planned policy reiterates that the CFPB may grant waivers for disclosures “that improve upon existing requirements based upon cost-effectiveness, delivery mechanism, or consumer understanding.”
The Bureau’s expectation is that a two-year testing period will be appropriate in most cases, although it left open the potential of extensions to successful trial disclosure programs.
The new policy seeks coordination with other state, federal, or international regulators that offer similar programs. Applications may be submitted by groups, including trade associations, on behalf of their members.
Although the CFPB claims its goal is to foster innovations needed to improve financial product disclosures, consumer groups are arguing that the “sandbox proposal would deny consumers key information.”
On Oct. 11, a coalition of 50 public interest groups sharply criticized the proposal, which they say will “gut important consumer-protection rules, especially for FinTech companies.”
They also argued that the CFPB is exceeding its authority under the Dodd-Frank Act and “does not have the authority to create potentially unlimited exemptions from the very regulations it is obligated to enforce.”
Among those signing the letter: Allied Progress; Americans for Financial Reform; the Center for Responsible Lending; the Consumer Federation of America; Public Citizen; and U.S. PIRG.
“Instead of conducting limited, carefully drawn trials of model disclosures that could improve consumer understanding, the CFPB would allow firms to obfuscate or eliminate important information in the name of ‘financial innovation,’ a label often applied to defend practices in mortgage lending that led to the 2008 crisis,” they wrote.
“Instead of conducting limited, carefully drawn trials of model disclosures that could improve consumer understanding, the CFPB would allow firms to obfuscate or eliminate important information in the name of ‘financial innovation,’ a label often applied to defend practices in mortgage lending that led to the 2008 crisis.”
Letter, Coalition of 50 public interest groups
“ ‘Sandbox’ is an innocuous-sounding name that obscures a dangerous precedent for the public interest. The agency would allow companies to stop providing information that people need to help avoid predatory products and decide what works best for themselves,” says Linda Jun, senior policy counsel at Americans for Financial Reform.
“The reckless and unlawful scope of the CFPB’s proposal is breathtaking,” says Lauren Saunders, associate director of the National Consumer Law Center. “The CFPB has no authority to allow ‘trials’ that go on for years and years and that allow entire industries to skip important consumer disclosures, such as the total cost of a loan or the required notice that the loan price was marked up due to information on the consumer’s credit report.”
Among the problems with the proposal, according to consumer advocacy groups, is that it would apply to a very broad assortment of companies, including FinTech companies, payday lenders, check cashers, debt settlement services, debt collectors, credit reporting agencies, any bank or lender, and other businesses loosely affiliated with the financial services industry. “They could all use this policy to evade proper disclosure,” they wrote.
“The proposal trusts companies to inform the CFPB when their own actions ought to be investigated,” the letter adds. “It does not propose to commit itself to monitor the trials while they are going on or provide any evaluation or public reports at all. The trials could apply to an entire industry and last for many years. A single petition from a trade group could cover thousands of its members. Consumers might not even know what requirements apply to what companies. ‘Trials’ that fundamentally change disclosure regulations could go on for a decade or longer.”
By allowing petitions by trade associations on behalf of thousands of members for thousands of potential products, “the program could allow entire industries to violate the express provisions of consumer protection laws without narrowly tailored guardrails.” By contrast, the groups wrote, Dodd-Frank authority permits only “narrowly defined and limited pilots of model disclosure forms by an individual company.”
The proposal allows legal waivers “based only on industry cost savings,” with no “improvement in consumer understanding and even with potential consumer harm,” the argument continued.
Another complaint: there is no requirement for data collection during the program or oversight. “The bureau is relying on the companies (potentially thousands, with no direct agreement with the bureau) to notify the bureau of material changes that should be investigated,” the letter says.
Despite these concerns, many of those overseen by the CFPB, and potentially covered by the proposal, are praising the plan, albeit with suggestions for improving it.
“Even though community banks might conceive of superior ways to inform and educate the customer, the risk of liability discourages deviating from model disclosures,” says Michael Emancipator, assistant vice president and regulatory counsel for the Independent Community Bankers of America. “Complicated disclosures have the perverse effect of actually dis-informing consumers. Poorly designed disclosures can obfuscate important and practical effects of a financial product.”
Trial disclosures, he wrote, could include multiple iterations of presenting the same information, depending on the consumer’s preference. Visual learners may want to see charts and graphs, while social learners may want to communicate and be informed orally.
ICBA supports a provision that permits multiple companies to participate in a single trial.
“Community banks do not typically have research and development divisions dedicated to exploring new ways to inform and educate their customers through the development of new disclosures,” Emancipator wrote. “In contrast, there are numerous think tanks, academic centers, and other associations that spend considerable time producing empirical research and developing recommendations on ways to better disclose product information.”
He recommended that the Bureau create an expedited waiver approval process for other companies that wish to participate in a previously approved trial. If a large company applies and receives a waiver for a trial disclosure, then “it would be beneficial for other, unaffiliated companies to similarly participate in the trial disclosure program.”
Similarly, there could be scenarios where a third party, such as a large data processing vendor with thousands of bank clients, develops new disclosure content. The Bureau could amend the policy to include a mechanism allowing clients of that vendor to utilize approved trial disclosures, even if the bank client was not a party to the original waiver application.
In order for the plan to be successful, it must coordinate with federal and state regulatory authorities covered by the proposal, says Kelly McNamara Corley, executive vice president and general counsel for Discover Financial Services.
The Bureau should also provide a safe harbor from federal enforcement and private litigation during and after the trial period. “No entity would be inclined to participate in the program if it could result in an enforcement action even while operating within the parameters set forth in the waiver,” McNamara Corley wrote.
The American Land Title Association encouraged the Bureau to provide additional guidance regarding how the delivery of trial disclosure program data to the Bureau would not violate federal or state privacy laws.
The U.S. Chamber of Commerce, the American Bankers Association, and the Consumer Bankers Association jointly authored a comment letter on the proposal.
The letter urged the Bureau to protect the confidentiality of sensitive commercial information.
“Applications for trial disclosure programs are likely to include highly sensitive commercial information, particularly when the company seeks to [apply it] in relation to an innovative new product,” they wrote. “Premature release of the disclosure could reveal key details about a new product and deprive the company of its commercial advantage gained by being first.”
The Bureau, they said, should not publish any detail about a trial disclosure until the first public use of the disclosure. The CFPB should also should commit to applying an exception from disclosure under the Freedom of Information Act for “trade secrets and commercial or financial information” that is “privileged or confidential” to the company’s trial disclosure.
“A reasonable company will not pursue a trial disclosure if doing so will give its competitors insight on products and services that have not been released publicly,” the letter says.
As for state officials, many are divided on the plan, typically along party lines.
Attorneys General of Arizona, Arkansas, Georgia, Louisiana, Oklahoma, and South Carolina applauded the effort.
In contrast, AGs in Illinois, the District of Columbia, California, Maryland, New Jersey, Washington, Massachusetts, North Carolina, Oregon, and Virginia slammed the plan.