The CFPB is proposing significant revisions to its “Policy to Encourage Trial Disclosure Programs” (TDP Policy), which sets forth the Bureau’s standards and procedures for exempting individual companies, on a case-by-case basis, from applicable federal disclosure requirements to allow those companies to test trial disclosures.  The revisions are intended to address the TDP Policy’s numerous shortcomings, which the Bureau acknowledges “failed to effectively encourage trial disclosure programs: The Bureau did not permit a single such program in the nearly five years since the Policy was issued.”  (The CFPB finalized the existing TDP Policy in October 2013.)  Comments on the proposal must be received by October 10, 2018.

The TDP Policy relies on the Bureau’s authority under Dodd-Frank Section 1032(e) to permit providers of consumer financial services and products “to conduct a trial program that is limited in time and scope, subject to specified standards and procedures, for the purpose of providing trial disclosures to consumers.”  The proposal follows Acting Director Mulvaney’s July 2019 appointment of Paul Watkins to serve as Director of the Bureau’s Office of Innovation.  Before joining the CFPB, Mr. Watkins was in charge of fintech initiatives in the Arizona Attorney General’s office and led the state’s successful efforts to create the first “regulatory sandbox” in the United States which allows new financial technologies and products to be tested in a controlled environment with reduced regulatory risk.  In the Bureau’s proposal, the TDP Policy is referred to as “the Bureau’s Disclosure Sandbox.”

As detailed below, the proposal would make several “industry-friendly” changes to the existing TDP Policy.  The changes would streamline the application process and reduce the review timeframe, provide procedures for extensions of successful trial disclosure programs, and provide for coordination by the CFPB with sandbox programs offered by other regulators.

The revised TDP Policy’s description of the protection from liability provided by a waiver is consistent with how the CFPB previously described such protection in connection with the existing Policy.  However,  unlike the CFPB’s previous description which was only in the Supplementary Information accompanying the existing TDP Policy, the CFPB is proposing to include the description in the text of the revised Policy.  It would state:

For permitted trial disclosure programs, therefore, the Bureau will, for a defined period, deem a participating company to be in compliance with, or exempt from, identified Federal disclosure requirements.  As a result of this determination by the Bureau, no basis exists under those provisions for a private suit based on the company’s use of the trial disclosure.  The same is true with respect to other Federal and State regulators even if they have enforcement authority or supervisory authority as to the enumerated laws for which the Bureau has rulemaking authority.  There can be no predicate for an enforcement action by such a regulator that is based on a statutory or regulatory provisions waived by the Bureau.  (footnote omitted).

While the proposal would substantially improve the existing TDP Policy, the existing Policy’s primary shortcoming would remain, namely that a company that receives a trial disclosure waiver from the CFPB would still be at risk for violating the CFPA UDAAP prohibition.  The prohibition is often of greatest concern to companies because of the continuing lack of clarity as to what constitutes an “unfair,” “deceptive” or “abusive” act or practice.  Dodd-Frank Section 1032(e) provides that a covered person that receives a CFPB waiver “shall be deemed to be in compliance with, or may be exempted from, a requirement of a rule or an enumerated consumer law.”  (The proposal, as does the existing Policy, would require an applicant for a waiver to identify “the statutory and regulatory requirements to be temporarily waived.”)

The “enumerated consumer laws” as defined by Dodd-Frank do not include the CFPA and the proposal indicates that the term “rule” as used in Section 1032(e) includes rules implementing an “enumerated consumer law” and rules implementing the CFPA, including rules promulgated by the CFPB under its authority to prevent UDAAPs or “to enable full, accurate and effective disclosure.”  Thus, a waiver would only insulate a company from UDAAP liability under a rule issued by the CFPB that relies on its UDAAP authority, such as the payday loan rule.  While there is little likelihood that the CFPB, under the leadership of Acting Director Mulvaney or a Director appointed by President Trump, would initiate a UDAAP enforcement action against a company to whom it had issued a waiver, there is a risk that such an action could be brought by a state attorney general or regulator using its authority under Dodd-Frank Section 1042 to file civil actions to enforce the provisions of the CFPA.

Among the issues not addressed in the proposal are:

• What protection, if any, a waiver would give a company from state law liability.  For example, many states have disclosure requirements that incorporate or track federal requirements.  It is not clear if such requirements would be preempted for companies receiving a CFPB waiver.
• Whether a company whose waiver is revoked would lose its protection from liability retroactively or from the date that the revocation is effective
• Whether waivers will only be granted in connection with financial products or services that involve technological or other innovations and will not be granted in connection with conventional products or services.  Although the Bureau refers to “facilitating innovation in financial products and services through enabling responsible companies to research informative, cost-effective disclosures in test programs,” the proposal does not expressly indicate whether the CFPB only intends to give waivers in connection with innovative financial products or services.

The proposal would make the following key revisions to the TDP Policy:

• Bureau assessment of applications for trial disclosure program waivers. The revised TDP Policy would provide that in addition to individual companies, applications can be submitted by a trade association or other group seeking approval to test trial disclosures on a group basis.  It would state that an application could include “the elimination of disclosure requirements, modifications to an existing model form or other disclosures, changed delivery mechanisms, or replacement of a model form or existing disclosure requirements with new disclosures or forms.”  The list of factors considered by the CFPB in assessing an application would be substantially reduced to eliminate factors determined to be redundant or otherwise unnecessary and thereby focus the Bureau’s review on “the quality and persuasiveness of the application, especially the extent to which the trial disclosures are likely to be an improvement over existing disclosures, and the extent to which the testing program mitigates risks to consumers.”  The revised TDP Policy would provide that the Bureau “intends to grant or deny formal, complete applications within 60 days of submission.”
• Waiver procedures. In addition to allowing the Bureau to revoke a waiver if a company does not follow the terms of a waiver, the revised Policy would allow the Bureau to revoke a waiver if it determines that a disclosure “is causing a material, adverse, impact on consumer understanding.”  It would further provide that the Bureau “intends to require companies to notify the Bureau of material changes in customer service inquiries, complaint patterns, default rates, or other information that should be investigated by the Bureau to determine if the trial disclosures may be causing a material, adverse, impact on consumer understanding.”  The revised TDP Policy would indicate that the Bureau expects “a two-year testing period…to be appropriate in most cases.”
• Waiver extensions. A new section would be added that sets forth the procedures for requesting the extension of a waiver and the factors the Bureau would consider in deciding whether to grant an extension.  The revised TDP Policy would provide that “upon the presentation of persuasive test result data,” the Bureau expects to grant waiver extensions “for a period at least as long as the period of the original waiver.”  In the proposal’s supplementary information, the CFPB indicates that “to the extent that testers are able to show that trial disclosures succeed in improving upon existing requirements, the Bureau will endeavor to amend disclosure rules accordingly and to permit the use of validated trial disclosures until such amendment is effective.”  The revised TDP Policy would provide that the Bureau anticipates permitting extensions longer than the period of original waiver when it is considering such an amendment.  It would also provide that “during the time period pending a rule amendment,” the Bureau “intends to consider means of making the improved disclosure available to other covered entities.”
• Coordination with other regulators. A new section would be added that sets forth the Bureau’s plans for coordinating the TDP Policy with “state sandbox programs” (which for purposes of the revised TDP Policy would refer to “a regulatory structure where a participant obtains limited or temporary access to a market in exchange for reduced regulatory barriers to entry or reduced regulatory uncertainty.”  The revised TDP Policy would provide that the Bureau “is interested in entering into agreements with State authorities designed to improve upon existing disclosure requirements by allowing covered persons to test disclosures within the state sandbox.”  It would state further than the Bureau expects in specified circumstances that such covered persons “could receive permission to conduct a trial disclosure program pursuant to the Bureau’s agreement with the State authority, rather than through the process [described in the TDP Policy].”  The proposal would list the features that the Bureau would want such agreements to contain.  (Currently, Arizona is the only state that has enacted a “sandbox.”)

We hope that the CFPB will next be revisiting its no-action letter policy which also has numerous shortcomings that we have criticized.  In its June 2017 report, the Treasury Department recommended that the CFPB change the requirements for no-action letters to make them less onerous by aligning CFPB policy with “the more effective policies of the SEC, CFTC, and FTC,” with specific changes to CFPB requirements to include expanding the scope of the CFPB’s policy beyond new products.