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1 1 (January 15, 2025)

handle is hein.crs/govesbx0001 and id is 1 raw text is: Congressional Research Service nforming the IegisI9tive debate since 1914 0 January 15, 2025 Regulatory Sandboxes at the Consumer Financial Protection Bureau Policymakers in recent years have considered implementing regulatory sandboxes in financial services. Regulatory sandboxes are frameworks set up by regulators where firms are exempt from legal risk of certain regulations. Firms that violate the terms of the sandbox are open to potential regulator recourse. Sandboxes typically occur under close regulatory supervision and generally to test a novel product in the marketplace. Regulatory sandboxes in financial services exist at the state level in at least 10 states, internationally in countries such as the United Kingdom, and at the federal level at the Consumer Financial Protection Bureau (CFPB), the topic of this InFocus. Legislation was introduced in the 118h Congress to expand federal regulators' sandbox policies in financial services (e.g., H.R. 9309/S. 4951, H.R. 6584, H.R. 7440, and S. 4919). Overview of Sand boxes Sandboxes are used commonly in a number of industries but prominently in financial services. Regulatory sandboxes can potentially encourage financial firms to test new technologies or lending methods without legal risk. This is because particularly consumer-facing financial firms often worry about regulatory burden and uncertainty associated with novel lending activities. This might be especially beneficial for start-ups, firms making changes to existing products, or firms less familiar with financial regulation. According to the World Bank in 2020, worldwide there were 73 financial technology (fintech) sandboxes in 57 different countries. Generally, sandboxes have an application and approval process, with timelines for firms to receive safe harbor from regulations. Sandboxes are offered for set periods of time to bring products into legal compliance or alleviate regulatory risk as a temporary solution to regulatory uncertainty. Regul atory Considerat ions Sandboxes are often implemented through No-Action Letters (NALs), through which regulators promise not to take legal action against applicants for engaging in activities specified in the NAL. These agreements can be terminated if a firm oversteps the bounds of the NAL. Sandboxes are often accompanied by provisions for baseline consumer protections and sometimes require firms to outline steps to compensate harmed consumers. Sandboxes are generally offered through the agencies with primary enforcement authority over the laws from which financial institutions are being provided safe harbor. Because firms often have multiple regulators in the United States, sandboxes often contend with multiple regulators. egu'atory Sandboxes at the CFPB While other federal financial regulators, such as the Office of the Comptroller of the Currency and Financial Crimes Enforcement Network, and numerous states have implemented sandboxes, the CFPB has been particularly active in this space in recent years The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank, P.L. 111-203) states that one of the CFPB's statutory objectives is to ensure that markets for consumer financial products and services operate transparently and efficiently to facilitate access and innovation. Some CFPB directors have exercised this authority to implement regulatory sandbox programs. While Dodd-Frank expressly requires the CFPB to issue a number of rulemakings, it does not mandate a sandbox regime. Instead, the act gives the CFPB director fairly broad authority to set the CFPB's priorities (12 U.S.C. §5492). This broad discretion, coupled with changes in CFPB leadership, has led to divergent sandbox policies over time. The CFPB finalized its initial NAL policy in 2016 under the name Project Catalyst. Overall, this policy enabled the CFPB to offer NALs to firms with substantial consumer benefit where there is substantial uncertainty surrounding the application of statutes to that policy. Under this program, in 2017 the CFPB issued a NAL to a nonbank lender called Upstart to utilize alternative data, including education and work history, to underwrite consumer loans. Following a leadership change at the bureau, the CFPB made additional modifications to the sandbox in 2018 and 2019 and created the Office of Innovation. The policy motivation behind this shift was to provide additional regulatory certainty to entities under the sandbox. These changes centered around a more streamlined review process, two new policies, an expansion of NAL coverage, and a partnership with state attorneys general. This office offered programs including a disclosure sandbox, a compliance assistance sandbox, and a revised NAL program. In total, the CFPB granted 10 NALs or other similar orders at the Office of Innovation. These included * A new NAL issued to Upstart in November 2020. * NALs issued to the Bank Policy Institute and Bank of America to experiment with using cash flow in underwriting small dollar loans. * A Compliance Assistance Statement of Terms (CAST) issued to PayActiv, an Earned Wage Access (EWA)

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