On February 18, 2016, the CFPB released its final policy regarding the issuance of No-Action Letters (NALs). While some in the industry question the efficacy of the new policy, lenders and other consumer financial service providers should be aware of the policy so they can utilize it if and when appropriate.
The NAL policy, which was first proposed in October 2014, is part of the CFPB’s “Project Catalyst” – an effort to encourage innovation by reducing what many see as substantial regulatory uncertainty facing the financial services industry today. Under the new policy, institutions can apply to the CFPB for a NAL with respect to new “financial products or services that promise substantial consumer benefit where there is substantial uncertainty whether or how specific provisions of statutes implemented or regulations issued by the Bureau would be applied.” If the application is granted, the CFPB will issue a NAL stating that, “subject to its stated limitations, the staff [of the Bureau] has no present intention to recommend initiation of an enforcement or supervisory action against the requester with respect to” that product.
While many agree that this effort by the CFPB to increase regulatory certainty is a step in the right direction, the NAL policy has been met with a fair amount of skepticism. One concern industry members have raised is whether this policy will actually have much of an impact given its limited scope. NALs will only be granted for new products that “provide substantial consumer benefit different from the present marketplace” the legality of which the Bureau deems truly ambiguous. Existing products and products that are not unusually beneficial for consumers will not be entitled to regulatory clarification through this mechanism. The policy itself recognizes that its application will be limited, stating that NALs will be provided only “rarely and on the basis of exceptional circumstances” and that the Bureau expects to receive only one to three actionable applications each year. Additionally, the application process for a NAL requires applicants to provide extremely detailed information to the Bureau about themselves and their products – something industry members may be reluctant to do, particularly since the chances of being granted a NAL are so small.
The utility of a NAL, even if a company is able to obtain one, is also uncertain, because there are limitations on the scope of protection that NALs will provide: they can be limited to certain aspects of a product or limited in time; they can be revoked or modified at any time; they are not binding on courts, other regulators, or even the CFPB itself; and they may be conditioned on certain undertakings by the applicant, like heightened data-sharing with the Bureau.
One concern raised during the comment period that the CFPB was able to address in the final policy was the policy’s application to questions concerning unfair, deceptive, or abusive acts or practices (UDAAP). The proposed policy expressly excluded UDAAP issues from NAL treatment. During the comment period, however, industry members argued that the Bureau should not categorically exclude UDAAP issues from the NAL policy because (1) a NAL stating that the Bureau did not intend to pursue a claim under a particular law or regulation would be illusory if the NAL didn’t also say it wouldn’t pursue a UDAAP claim as to that product, and (2) UDAAP is an area that is particularly fraught with uncertainty at present, and it would be unfortunate to rule out potential guidance on UDAAP compliance. In its final policy, the CFPB acknowledged the validity of these concerns and removed the categorical exclusion of UDAAP issues from its policy, though it cautioned that it still does not intend to devote significant resources to issuing NALs on UDAAP questions.
In light of the limitations of the NAL policy, it is best for financial institutions to consider NALs as merely one tool, helpful in certain limited circumstances, to obtain guidance on regulatory questions. Institutions will continue to rely primarily on existing sources of regulatory guidance, like advice of counsel and publicly-available interpretive guidance from regulators, in determining whether they are in compliance as to the vast majority of their products and practices. But, should the right circumstances come along, institutions can keep in mind the new NAL policy as an additional tool for gaining clarity on how best to comply with applicable laws and regulations.