Regulator strategies for encouraging innovation may be more relevant as firms move to digital offerings

Last year, the Bureau of Consumer Financial Protection (CFPB) issued final guidance on three policies intended to promote innovation by giving financial firms more opportunities and compliance flexibility to try new technologies, practices and methods. Taken together, these policies present companies with an opportunity to work with the CFPB to ensure compliance with the various consumer protection regulations that have specific formatting, font or paper size requirements or safe harbor forms – many of which were drafted when transactions, if they occurred at all electronically, were on larger computer screens rather than today’s smartphones and tablets.

The three policies are:

• The CFPB’s new No-Action Letter (NAL) Policy, which provides more certainty that the CFPB will not bring a supervisory or enforcement action against a company for providing a product or service under certain criteria, and establishes a streamlined review process focusing on the consumer benefits and risks of that product or service.
• The Compliance Assistance Sandbox (CAS) Policy, which will evaluate a product or service for compliance with relevant laws and will offer approved applicants a safe harbor for certain specified conduct during the testing period, protecting them from liability under the Truth in Lending Act, the Electronic Fund Transfer Act, and/or the Equal Credit Opportunity Act.
• The CFPB’s Trial Disclosure Program (TDP) Policy, which creates the CFPB Disclosure Sandbox, through issuance of its revised Policy to Encourage Trial Disclosure Programs. Under the new TDP policy, “entities seeking to improve consumer disclosures may conduct in-market testing of alternative disclosures for a limited time upon permission by the Bureau,” consistent with Dodd-Frank provisions giving CFPB authority to provide certain legal protections for entities to conduct trial disclosure programs. The new policy also streamlines the application and review process.

Of particular importance in any digital transaction is ensuring that if federally mandated disclosures are provided electronically instead of on paper, they comply with all legal requirements in the applicable consumer protection law.  Taken together, these policies present companies with an opportunity to work with the CFPB to ensure compliance with the various consumer protection regulations that have specific formatting, font or paper size requirements or safe harbor forms – many of which were drafted when transactions, if they occurred at all electronically, were on larger computer screens rather than today’s smartphones and tablets. To date, seven companies have currently been granted an application under the NAL Policy.

The CFPB is hosting a tech sprint from October 5 through October 9 that aspires to find innovations that will offer improvements over existing adverse action notices required under the Equal Credit Opportunity Act and the Fair Credit Reporting Act. These improvements may include realizing the legislative purposes behind the adverse action notices more effectively than existing disclosure methods.

If you are looking to provide legally required disclosures electronically in a manner that, while compliant with the law, may deviate from the model forms, or if you are looking to potentially expand your lending base by incorporating artificial intelligence into your lending algorithms, and would like to work with the CFPB to ensure that you are doing so in a legally compliant manner, reach out to any of the authors or your contact at DLA Piper to discuss further options.