Payment Law Advisor Legal Commentary and Resources for the Payment Industry

Bureau’s Proposal for a “Disclosure Sandbox”

Posted in Regulatory and Compliance

On September 10, 2018, the Bureau of Consumer Financial Protection (the “Bureau”) published a notice of proposed policy guidance to create a “Disclosure Sandbox.” The proposed policy to provide a Disclosure Sandbox would be designed to allow a covered person to apply for a “trial disclosure program waiver” that, generally speaking, would allow the person to test a new type of a required disclosure or a new method of delivering the disclosure while the Bureau temporarily waives the application of certain statutory or regulatory requirements.  The Bureau’s proposed Disclosure Sandbox is not new—flowing from authority to allow a limited safe harbor under section 1032(e) of the Consumer Financial Protection Act of 2010—but this initiative is designed to fix its self-described “failed” policy that had been adopted in 2013 to encourage trial disclosures (the “2013 Policy”).

In proposing to revise the 2013 Policy, the Bureau has advanced four goals for the Disclosure Sandbox:

  1. reducing the application burden and review time frame;
  2. increasing guidance regarding the testing time frame;
  3. specifying procedures for extensions of successful trial disclosure programs; and
  4. providing for coordination with existing or future programs offered by other regulators designed to facilitate innovation.

Consistent with the 2013 Policy, the Bureau is proposing to deem a participating covered person to be in compliance with identified requirements for a period of time. The Bureau’s proposal appears to be designed to create a more stable framework for a covered person because the Disclosure Sandbox would allow a two-year period to be clear of the specified federal law.[1]  Consequently, while the covered person is conducting the in-market testing, the Bureau’s determination will preclude any private action under the enumerated consumer law or regulation for which the Bureau has authority, and will preempt and foreclose any similar action by another Federal or a State regulator based on a law or regulation that is within the scope of the waiver.[2]

Under the proposal, a covered person that wishes to participate in a disclosure trial program would be required to submit an application that, among other elements, would need to:

  • describe the proposed new disclosures or delivery mechanism(s);
  • provide a reasonable basis for expecting and measuring an improvement from the new disclosure or delivery mechanism;
  • identify the duration of the test and the statutory and regulatory requirements to be temporarily waived;
  • identify the potential risks to consumers and possible strategies to mitigate those risks; and
  • commit to share testing data with the Bureau and provide a schedule for doing so.

Comments to the proposed rule were due on October 10, 2018. Several consumer groups strongly criticized the proposed rule, arguing that the rule would be outside the Bureau’s authority and would allow certain credit industry segments to ignore consumer protection requirements for an unlimited time and in a manner that may harm the consumer.

The Bureau’s proposed revisions to the 2013 Policy follow efforts by other regulators to create “sandboxes” for market participants in consumer financial products or services, including by the Arizona Attorney General and the Office of the Comptroller of the Currency.

If adopted as proposed, the Disclosure Sandbox will allow an approved covered person to operationalize a new disclosure program—which may involve new language or formats for an existing type of disclosure or may be focused on a new method for delivery—and thereby take advantage of the Bureau’s temporary shelter from liability due to certain federal statutory or regulatory requirements.

Despite assurances to act promptly on a “complete” application, the Bureau’s proposed Disclosure Sandbox still involves plenty of advance planning and ongoing regulatory commitments—all followed by an exit strategy upon conclusion of the testing period[3]—which, taken together, could continue to dampen participation.

In addition, a covered person seeking to explore its options for the Disclosure Sandbox still must consider some practical, regulatory burdens for continuing its business during the testing period. For example, disclosure requirements under state laws or regulations could complicate the process for developing the disclosure(s) or delivery method(s) for the trial disclosure program waiver in the Disclosure Sandbox. Engaging service providers to adjust existing systems for a temporary period could prove to be a time-consuming process or run into other inefficiencies. Additionally, a covered person’s existing internal risk controls may pose institutional obstacles for presenting a complete application that the Bureau could approve for a trial disclosure program waiver.

 

[1] See 83 Fed. Reg. 45,574, 45,575 (Sept. 10, 2018).

[2] See 83 Fed. Reg. at 45,576; 12 U.S.C. § 5532(e)(2) (authorizing a safe harbor from liability or regulatory enforcement action).

[3] See 83 Fed. Reg. at 45,577 (requiring the applicant to “provide an exit strategy by describing how the testing entity or entities will address the disclosure for the test population at the conclusion of the test period).