CFPB scraps no-letter-of-action and compliance assistance sandbox programs and creates new Competition and Innovation Bureau
The CFPB announced earlier this week that as part of a new approach to consumer credit innovation, it is replacing its Office of Innovation and Operation Catalyst with a new office, the Office of Competition and Innovation, and scrapping its No Action Letters ( NAL) and Compliance Assistance Sandbox (CAS) programs. In its press release, the CFPB states that “[a]fter a review of these programs, the agency concludes that the initiatives have proven ineffective and that some firms participating in these programs have made public statements that the Bureau has provided them with benefits that the Bureau has not expressly granted. He also “encourages[es] businesses, start-ups, as well as members of the public to file regulatory petitions asking for clarity on particular rules. According to the CFPB, this approach “will help level the playing field and promote competition by ensuring that all measures taken by the CFPB will apply to all companies in the market”.
In describing the work of the new office, the CFPB says it “will focus on how to create market conditions where consumers have choice, the best products win and the big incumbents cannot stifle competition by exploiting their network effects or their market power”. More specifically, through the new office (which will be housed within the Research, Markets and Regulation Division of the CFPB), the CFPB will:
- Explore ways to reduce barriers for consumers switching accounts and providers;
- Examine market structure issues that create barriers to innovation (which could include a focus on the payment network market or the credit reporting system, which the CFPB describes as “essential to our financial system but which have only a few dominant players”);
- Examine how big players can gain an edge over smaller players (such as big tech companies which, according to the CFPB, are “also looking for new ways to join consumer credit markets and can threaten fair competition”);
- Through its regulation under Section 1033 on consumer access to their financial data, address concerns that innovators may not bring their products or services to market because they do not have access to the data digital stored by major banks; and
- Host events where entrepreneurs, small business owners, and tech professionals “can collaborate, explore barriers, and share frustrations with government regulators” and publicly share the results of these events.
Since the CFPB announcement does not address the status of previously issued NALs or approvals previously issued under its CAS program, we assume that these NALs and approvals have not been withdrawn. It is curious that the CFPB calls the earlier programs “inefficient” after touting the success of the underwriting model that was the subject of an NAL issued to UpStart. In a blog post, the CFPB reported that results shared by UpStart showed that Upstart’s model using alternative data and machine learning approved 27% more applications than a traditional loan model and produced APRs. means lower by 16%. According to the CFPB, the expansion of access to credit reflected in the results occurred “across all racial, ethnic and gender segments tested” and “significantly expands[ed]access in “many consumer segments,” such as “near-privileged” consumers, applicants under 25, and consumers with incomes below $50,000.
We assume that the CFPB’s preference for regulatory petitions is intended to encourage companies to use the new process for submitting such petitions that the CFPB announced in February 2022. In the history of the CFPB, only one regulatory petition has been granted. This petition was filed by the Bank Policy Institute and the American Bankers Association asking the CFPB to establish rules to codify the “Interagency Statement Clarifying the Role of Supervisory Guidelines” issued in September 2018. In response to the petition, for codify interagency reporting, the CFPB published a proposed rule on the role of prudential guidance which was finalized in January 2021. As evidenced by this regulation, regulation is generally a slow process.