The CFPB announced earlier this week that as part of a new approach to innovation in consumer finance, it is replacing its Office of Innovation and Operation Catalyst with a new office, the Office of Competition and Innovation, and eliminating its No Action Letter (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 proved to be ineffective and that some firms participating in these programs made public statements indicating that the Bureau had conferred benefits upon them that the Bureau expressly did not.” It also “encourag[es] companies, start-ups, as well as members of the public to file rulemaking petitions to ask for greater clarity on particular rules.” According to the CFPB, this approach “will help level the playing field and foster competition by ensuring any actions the CFPB takes will apply to all companies in the market.”
In describing the work of the new office, the CFPB states that it “will focus on how to create market conditions where consumers have choices, the best products win, and large incumbents cannot stifle competition by exploiting their network effects or market power.” More specifically, through the new office (which will be housed in the CFPB’s Division of Research, Markets, and Regulation), the CFPB will:
- Explore ways to reduce barriers to consumers in switching accounts and providers;
- Look at market-structure problems that create obstacles to innovation (which could include a focus on the payment networks market or the credit reporting system, both of which the CFPB describes as “essential to our financial system but have only a few dominant players”);
- Look at how bigger players can gain advantage over smaller players (such as big tech companies which, according to the CFPB, “are also seeking new ways to join consumer finance markets and may threaten fair competition”);
- Through its Section 1033 rulemaking on consumer access to their financial data, address concerns that innovators may not be getting their products or services to market because they do not have access to digital data stored by the big banks; and
- Convene events at which entrepreneurs, small business owners, and technology professionals “will be able to collaborate, explore obstacles, and share frustrations with government regulators” and share the results of such events publicly.
Since the CFPB’s announcement does not address the status of previously issued NALs or approvals previously issued through its CAS program, we assume those NALs and approvals have not been withdrawn. It is curious that the CFPB calls the prior programs “ineffective” after having touted the success of the underwriting model that was the subject of a 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 lending model and yielded 16% lower average APRs. According to the CFPB, the expansion of credit access reflected in the results occurred “across all tested race, ethnicity, and sex segments” and “significantly expand[ed]” access in “many consumer segments,” such as “near prime” consumers, applicants under 25 years of age, and consumers with incomes under $50,000.
We presume that the CFPB’s preference for rulemaking petitions is meant to encourage companies to use the new process for submitting such petitions that the CFPB announced in February 2022. In the CFPB’s history, only one rulemaking petition has been granted. That petition was filed by the Bank Policy Institute and the American Bankers Association seeking rulemaking by the CFPB to codify the “Interagency Statement Clarifying the Role of Supervisory Guidance” issued in September 2018. In response to the petition, to codify the Interagency Statement, the CFPB issued a proposed rule on the role of supervisory guidance which was finalized in January 2021. As that rulemaking evidences, rulemaking is typically a slow-moving process.