On May 22, 2020, the Consumer Financial Protection Bureau (CFPB) introduced two new No-Action Letter (NAL) "templates," described as part of the Bureau's ongoing efforts to both spur the introduction of new personal finance and Financial Technology (FinTech) products, and to encourage financial institutions to provide swift and efficient COVID-19 relief programs.
The first NAL template enables mortgage servicers that use an online platform to implement loss-mitigation application processes designed by Brace Software, Inc. (Brace) to request a NAL from the CFPB. The second NAL template, granted to the Bank Policy Institute (BPI), covers the provision of standardized, small-dollar credit products by depository institutions which can use the template to request their own NALs. The NAL templates, unlike actual NALs, are not independently binding on the Bureau.
These new templates are the second and third instances in which the CFPB has granted a NAL template to "facilitators" not covered by the CFPB's supervisory authority (BPI is a trade association) or to service providers (Brace is a software-as-a-service (SaaS) provider) since the CFPB's revamped NAL policy, introducing the "template" process, was adopted in September 2019. Nonetheless, consumer advocates and many state regulators have been critical of the CFPB's NAL and related innovation-focused policies and programs, claiming they will allow financial institutions to evade the law and are antithetical to the CFPB's consumer protection mission.
Yet the timing of these new NAL templates and the nature of the financial services they cover may indicate the CFPB's desire to signal that its policy is working as intended. Covered financial institutions and other facilitators (such as trade associations) seeking regulatory assurance for their products and services geared toward providing consumer relief in the wake of the economic uncertainty created by COVID-19 may find the NAL and NAL template process to be a fruitful and efficient path to greater regulatory certainty.
Background for the CFPB's No-Action Letter Policy
The CFPB initially proposed a No-Action Letter Policy in 2014 and finalized the Policy in 2016. Through 2018, however, the CFPB had issued only one NAL, to a marketplace lender that sought to clarify that its automated model for underwriting unsecured, non-revolving loans did not present a violation of the Equal Credit Opportunity Act and Regulation B.
This dearth was in keeping with the initial, cautious version of the policy which had indicated that NALs would only be issued "rarely and on the basis of exceptional circumstances."1 Covered institutions were wary as well, given that NALs were explicitly non-binding on the CFPB. Additional concerns revolved around the high threshold for a substantive showing necessary to qualify for a NAL, confidentiality issues, a required demonstration that there is no better way to address the uncertainty for which the NAL is requested, and timing issues regarding when a product is ripe for assessment.
In late 2018, as previously discussed by DWT, the CFPB proposed a liberal overhaul of the policy in an attempt to persuade more institutions – including banks and other traditional lenders and not just FinTechs – to avail themselves of the NAL process and spur financial innovation "that promise[s] substantial benefit to consumers." That overhauled policy was finalized in September of 2019.
Notable significant policy updates included making NALs binding on the CFPB, streamlining the process and timeline for obtaining a NAL, and creating the NAL templating process. The templating process was designed to be utilized not just by covered financial institutions, but also by third party "facilitators" such as advocacy groups or trade associations, or by service providers whose covered financial institution clients may desire more regulatory clarification before using a new or innovative service.
The approval of a NAL template is non-binding on the CFPB – but covered institutions that then request a NAL based on the template would receive binding NALs, if granted. And even though non-binding, NAL templates may still provide helpful guidance and a reference point for entities looking to introduce similar products to those approved in previous NAL templates.
The introduction of the templating process came along with the introduction of several other CFPB "innovation" initiatives, including the Compliance Assistance Sandbox, "in which companies can obtain a safe harbor for testing innovative products and services for a limited period of time while sharing data with the [CFPB]," and the Trial Disclosure Sandbox, "in which companies can obtain a safe harbor for testing for a limited period of time disclosures that improve upon existing disclosures, while sharing data with the [CFPB]." Current CFPB Director Kathleen Kraninger has signaled her support of the NAL policy as well as the CFPB's other new innovation initiatives as a means of "facilitat[ing] innovation and reduc[ing] regulatory uncertainty."2
In the six months since the CFPB's fall 2019 NAL policy update, two additional NALs have been granted:
- The first was to the U.S. Department of Housing and Urban Development (HUD) on behalf of HUD-approved housing counseling agencies, assuring the recipient housing counseling agencies that the CFPB would not take action against them under the Real Estate Settlement Procedures Act (RESPA) for "enter[ing] into certain fee-for-service arrangements with lenders for pre-purchase housing counseling services."
- The second was granted to a covered financial institution pursuant to the CFPB's first NAL template – also requested by HUD – and indicated that the CFPB would not take action against the financial institution under RESPA or its Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) authority for the same type of arrangement.
Mortgage Loss Mitigation No-Action Letter Template
The first new NAL template introduced last week allows mortgage services to seek a NAL in connection with their implementation of loss-mitigation programs through the use of an online platform developed by Brace. The platform represents a digitization of Fannie Mae Form 710, the standard loss mitigation application used by most mortgage servicers, and provides both a consumer-facing user interface and an internal servicer workflow.
Brace's NAL application emphasized that it was a SaaS provider, rather than an actual provider of loss mitigation services, and did not create the content of any Regulation X-required notices that mortgage loan servicers might provide to borrowers through the platform. Brace's platform, as described in its application, functions solely as a conduit for communication between borrower and servicer and as a processing system for servicers.
Pursuant to the NAL policy, the NAL template lists certain certifications that mortgage loan servicer NAL applicants must make in order to receive the protections intended by the NAL template. These include:
- That the servicer will abide by the regulatory "answers" that the NAL template provides, including that a loss mitigation application is not considered "received" by the servicer under the Regulation X loss mitigation rule3 until a borrower clicks "submit" on the Brace online application form, even though the servicer has access to any information a borrower enters into the platform before clicking "submit"; and
- That a servicer will treat a cease communication request that a borrower may make through the Brace platform as a cease and desist request made "in writing" pursuant to the Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. 1692c(c).
Mortgage loan servicer applicants may also request that a NAL cover a servicer's additional uses of the Brace platform by providing detailed descriptions of those uses and the laws and regulations that apply.
The CFPB's press release makes clear that the Bureau considers the introduction of this NAL template to be a means of providing regulatory assurance that it considers Brace's platform a consumer-friendly solution for mortgage servicers struggling with the sudden need to provide loss-mitigation options for vast swaths of their portfolios once borrowers near the end of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) or similar forbearance periods,4 while also remaining in compliance with the extensive matrix of regulations and guidelines surrounding mortgage loss mitigation. This aligns with similar messaging from the CFPB and other federal regulatory agencies encouraging the provision of consumer relief and promising regulatory flexibility.
Nevertheless, servicers may be hesitant to take advantage of this NAL template as state regulatory regimes governing mortgage loss mitigation would not be covered by a CFPB-issued NAL. For example, while the NAL template introduced last week addresses certain federal Regulation X mortgage servicing rules for loss mitigation, a servicer must also consider New York's new business conduct rules for mortgage loan servicers, which – after a recent deadline extension – must be complied with by June 15, 2020.
Those rules largely track Regulation X but with several differences in, among other things, the timing and content for required notices during the loss mitigation application process. But with a service or product that undeniably provides consumer benefit – such as a user-friendly mortgage loss mitigation application process – the benefits of pursuing a NAL to clarify regulatory uncertainty may outweigh the potential drawbacks.
Small-Dollar Loan Products No-Action Letter Template
The second new NAL template expands the ability of insured depository institutions to provide standardized small-dollar credit products without triggering UDAAP allegations from the CFPB. The BPI template allows deposit-taking institutions to seek a NAL covering the provision of such products so long as they are :
- Under $2,500;
- Structured as either an installment loan or line of credit;
- Provided to consumers with an existing deposit account at the lending institution;
- Underwritten pursuant to certain criteria including a consumer's transaction history with the lending institution; and
- Providing certain "guardrails" to avoid common "cycle-of-debt" traps associated with short-term lending, including prohibiting balloon payments, rollovers, and borrower collateral, among other protections.
Applicants for NALs based on the BPI template would have to provide a detailed description of the exact short-term lending product they propose to provide, including interest rates and any fees. As the CFPB's NAL policy contemplates, each lending institution must apply for a NAL on an individual basis in order to provide small-dollar loans under the NAL template. A NAL template on its own does not immediately authorize institutions to begin providing small-dollar loans without fear of invoking UDAAP concerns, even if the bank or credit union utilizes the guardrails described above.
Small-dollar credit NAL applications made pursuant to the BPI template require many more certifications than NAL applications for users of the Brace mortgage servicing product. This is consistent with the template-provided guardrails for a product that most banks have heretofore considered too risky to offer.
Yet, like the mortgage loss mitigation NAL template, the CFPB's press release also makes clear that the Bureau considers provision of small-dollar lending pursuant to the template to be a laudable way of easing consumer access to much-needed credit during the COVID-19 crisis. Such consideration is in line with May interagency guidance (see also March guidance on the same topic) from the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of the Currency, which called upon covered financial institutions to "offer responsible small-dollar loans to customers for both consumer and small business purposes."
Consumer advocates, however, are sure to take issue with this new NAL template, in line with criticism over the aforementioned interagency guidance on small-dollar lending.5 Although the CFPB introduced the template as "includ[ing] important protections for consumers who seek small-dollar loan products," consumer groups may be concerned about the potential for overly-broad UDAAP dispensation for small-dollar products – since these sorts of loans are typically part of a segment of the lending industry prone to UDAAP allegations. Especially with apparent rollbacks of certain features of the CFPB's not-yet-in-effect Payday Lending Rule, including the Ability-to-Repay (ATR) requirements and automatic debit withdrawal guidelines, consumer advocates may view the BPI NAL template as an inadequate replacement for the Payday Lending Rule.
Notably, neither the new template nor the CFPB press release reference the Payday Lending Rule, which presents the potential for conflicting guidance given the ongoing discussions about what the rule should ultimately look like. Thus, despite the continued regulator encouragement for banks to provide small-dollar consumer loans, including through the NAL template, depository institutions may still consider the risk to be too great, as BPI itself has acknowledged.
Ongoing No-Action Letter Policy Concerns
In addition to potential concerns related specifically to these two new NAL templates, there remains ongoing concern by both the financial industry and consumer groups related to the CFPB's No-Action Letter Policy generally. Consumer groups, as well as consumer advocates in Congress including House of Representatives Financial Services Committee Chair Maxine Waters, have stated that the Policy creates a "consumer protection desert."6 The introduction of these two new NAL templates last week in two areas that have traditionally been a CFPB regulatory, supervision and enforcement focus – mortgage servicing and small dollar lending – is sure to continue disturbing consumer advocates.
Financial institutions may likewise be reticent to take advantage of the NAL Policy, though for different reasons. Receiving a NAL or NAL template publicizes products and practices in a way that may single the applicant out for scrutiny from state regulators that have been vocally critical of the CFPB's NAL policy. The CFPB's liberalization of the NAL Policy in 2019 did not assuage concerns on this front – and institutions may be particularly wary of proactive state regulators with views divergent from the current CFPB.
On the other hand, some states have begun to experiment with similar innovation-focused policies. For example, Arizona, Nevada, Utah, and Wyoming have all created regulatory "sandboxes" similar to the CFPB's Compliance Assistance Sandbox.
If a financial institution's or service provider's product has demonstrable consumer benefit, and the NAL application and issuance process clarifies and provides guidance to resolve self-identified areas of potential regulatory concern, there would be a good "story" to tell skeptical state regulators. But until federal and state regulators coordinate their approach to such policies, financial industry's reluctance to experiment may continue to hinder the CFPB's stated NAL policy goal of spurring financial innovation.
Although the full impact of the two NAL templates introduced last week remains to be seen, it is clear that the CFPB is intent on pursuing its new NAL Policy, particularly to encourage innovation related to providing pandemic-related consumer relief and credit.
DWT will continue to monitor the CFPB's introduction of new NALs, NAL templates, or other developments related to the NAL Policy. Additionally, DWT continues to assist financial service providers interested in obtaining further information related to either of the two new NAL templates, including how to apply for similar treatment from the CFPB.
The facts, laws, and regulations regarding COVID-19 are developing rapidly. Since the date of publication, there may be new or additional information not referenced in this advisory. Please consult with your legal counsel for guidance.
DWT will continue to provide up-to-date insights and virtual events regarding COVID-19 concerns. Our most recent insights, as well as information about recorded and upcoming virtual events, are available at www.dwt.com/COVID-19.
3 "Receipt" of a loss mitigation application, even if incomplete, triggers certain servicer obligations and timing requirements. 12 CFR 1024.41(b)(2).
4 As of mid-May, 4.7 million Americans were already in government or bank forbearance programs, representing 8.8% of all active mortgages. See https://www.blackknightinc.com/blog-posts/4-7m-homeowners-now-in-forbearance-but-pace-is-slowing-considerably/.
5 See, e.g., the April 7, 2020, letter from five Democratic Senators on the Senate Committee on Banking, Housing, and Urban Affairs, including Ranking Member Sherrod Brown (D-OH), to the CFPB.
6 See, e.g., https://www.nclc.org/media-center/pr-consumer-bureau-s-shocking-new-no-consumer-protection-policy.html; https://democrats-financialservices.house.gov/news/documentsingle.aspx?DocumentID=401656.