CFPB No-Action Letters Smooth Path to Mortgage Innovation

The Consumer Financial Protection Bureau finally released in February its long-awaited policy pertaining to no-action letters for financial products and services. Obtaining such a letter is important to any lender or institution concerned that its use of innovative developments could trip over current regulations. No-action letters provide the recipient with a statement that the bureau will not take action against a party for utilizing a particular process or technology. However, no-action letters do not bind other agencies, and the CFPB reserves the right to rescind them at any time. Importantly, the CFPB made clear that NALs will not be available as general opinions on lending practices. Rather, it will reserve NALs to address matters pertaining to technological developments giving rise to novel products not envisioned at the time existing statutes and regulations were issued, and to address substantial regulatory uncertainty currently posing a barrier to marketplace innovation. In issuing a no-action letter, the bureau will consider the extent to which the product enables consumers to meaningfully understand and appreciate the terms, characteristics, costs, benefits and risks associated with the product; the extent to which the product provides “substantial benefits to consumers”; and the extent to which the products control for, or mitigate, risks. Lenders and third-party service providers should consider whether an NAL fits their product and, if so, initiate a request before demand creates a backlog and jams the agency’s actions. While an NAL is not a guarantee against later enforcement it would be a strong benefit to demonstrating the agency’s view of a product before widespread deployment. In fact, a lender not at least attempting to obtain an NAL prior to implementing a unique and innovative product with an unclear regulatory future would be well-advised to rethink its strategy. While the CFPB’s offer to provide no-action letters may seem focused on increasing the adoption of new technology, there is no doubt that an entity adopting such a technology without seeking the CFPB’s input would draw its wrath should the product later be determined to violate federal lending laws. Hence, not only is submitting an NAL application advisable for applicable businesses — it may be a virtual necessity.

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