State attorneys general, consumer advocates, community activists, and banking regulators are criticizing proposed legal protections for banks and technology firms that develop “innovative” financial products.
The protections would come from the Consumer Financial Protection Bureau, which in December unveiled what it calls a “regulatory sandbox” that will allow firms to develop untested fintech products and services without fear of reprisals from regulators. While the criticism rolls in, financial industry groups are rallying behind the plan, even asking the CFPB to expand the legal safe havens.
The critics include 22 Democratic state attorneys general, 77 consumer and community groups, and the Conference of State Bank Supervisors. Last week, they sent disapproving comment letters to the CFPB over the bureau’s plans to expand its “no-action letter” policies, in one case calling the plans a “Sahara desert parched of consumer protections.”
A no-action letter is essentially a promise by a federal agency not to bring an enforcement action against a bank that launches a financial product or service. It’s intended to encourage banks to develop and market innovative products that benefit consumers by easing concerns a bank might run into legal woes if a government agency subsequently determines the new product has run afoul of legal and regulatory restrictions.
“As the chief consumer protection officers of our states, we understand the importance of encouraging responsible innovation in the consumer financial marketplace,” the attorneys general wrote in a Feb. 11 letter, led by New York State’s top lawyer, Letitia James. “But our experience has taught us that not all innovation is created equal, and many risks posed by emerging technologies can be difficult, if not impossible, to foresee.”
“In our view, these facts counsel in favor of a cautious and deliberative regulatory approach to new consumer financial products and services,” they said. “The Proposed Policies do not reflect such an approach.”
“We see no sound basis for the CFPB tying its hands in this way, particularly when it comes to the type of sophisticated technologies increasingly employed in the consumer financial sector,” the state attorneys general said. “Unless and until these technologies — and their implications for consumers — can be better understood, it would be irresponsible to give companies employing them what may effectively be a permanent get-out of-jail-free card.”
The attorneys general also chastised the CFPB’s plan to expedite the application process for a no-action letter, reducing the amount of information that applicants need to submit to the bureau. The CFPB’s proposal, unveiled late last year, envisions acting on no-action applications within 60 days of receipt.
“These changes all but ensure that the CFPB will render decisions hastily and without access to data — such as loan default or demographic data — necessary to make an informed decision,” they said.
The coalition of consumer advocacy and activist groups echoed the concerns there would be a hasty and uninformed application process, saying a 60-day review period would amount to little more than “rubber-stamp approvals.”
The Democratic attorneys general and the state bank regulators accused the federal agency of tying their hands, because a recipient of no-action treatment would be immune from enforcement actions by state authorities. The CFPB’s Dec. 13 proposal would also provide protection from lawsuits brought by private parties.
“The CFPB has no authority to issue such sweeping immunity absent formal rulemaking,” the attorneys general said. “Even if the CFPB could grant broader immunity, doing so in this context would be ill-advised. … The use of sophisticated technologies in the consumer financial market is not well understood, even by the creators of such technologies. A prudent and balanced approach to regulation would reflect this uncertainty and proceed cautiously.”
The Conference of State Bank Supervisors — a nationwide consortium of state banking regulators — argued that the plan exceeds the bureau’s authority under the Dodd-Frank Act.
“While the Bureau can choose not to enforce federal consumer financial laws under its purview, the Bureau is not authorized to prevent state officials from enforcing federal consumer financial laws,” it said. The group is demanding amendments that clarify there would be no safe harbor from enforcement of state consumer protection laws.
Financial industry groups, on the other hand, are rallying behind the CFPB’s plan.
The Competitive Enterprise Institute, a Washington-based “pro-market” policy group that advocates deregulation, called the bureau’s plans “commonsense solutions to regulatory problems for financial technology firms.” Noting that some U.S. banking laws go back to the Civil War, the CEI wrote: “Fintech companies are often faced with ambiguity as to which laws, regulations, and agencies govern them.”
“Companies trying to do the right thing may find themselves on the wrong side of the law — or rather, dated interpretations of the law — as a result,” the organization said. “Having ‘flexible’ regulatory tools such as no-action letters and regulatory sandboxes can mitigate some of these problems.”
A joint comment letter submitted by the American Bankers Association, U.S. Chamber of Commerce, Consumer Bankers Association and Housing Policy Council called on the CFPB to go even further in offering fintechs legal protections, including a proposal to sideline state regulators.
They say the final policy should acknowledge that state regulator or private litigant intervention would “chill” the use of the no-action letters and the sandbox program, the industry groups wrote in their Feb. 11 letter. “The addition of these statements also may discourage state and federal regulators as well as private litigants from initiating a claim against the product or service that is subject to a no-action letter.”
The CFPB is considering the comments before moving to finalize a policy.