CFPB’s Innovation Sandbox Too Slow for Fast-Moving Startups

The Consumer Financial Protection Bureau (CFPB) has terminated special regulatory treatments for two companies, Payactiv and Upstart, in less than one month, losing more than 20% of the firms using special procedures that seek to foster innovation. First, on June 8, the bureau terminated Upstart’s no-action letter (NAL) and last week, on June 30, the CFPB rescinded Payactiv’s sandbox approval order.

Surprisingly, the requests to terminate the special regulatory treatment came from the companies, rather than the agency, raising questions about the requirements imposed by the agency to benefit from this special treatment.

For Upstart, the NAL provided a special regulatory treatment by immunizing the lender from being charged with fair lending law violations with respect to its underwriting algorithm, while the NAL remained in force. NALs are a great tool for companies that wish to implement new products or services and don’t want to have unexpected regulatory issues.

Yet, as the bureau said in the NAL granted to Upstart, the issuance of a letter doesn’t mean that the agency endorses the company’s product, just that the agency doesn’t intend to open any proceeding against the company for the product covered by the letter.

However, to benefit from the NAL, the CFPB had to review and evaluate any changes to Upstart’s model before the company could implement them. This review caused some delays in the business decisions, according to Upstart, and for this reason, the company requested the termination of the NAL to “be able to make changes to its model without need for CFPB review and approval.”

See also: Upstart’s Request to End Regulatory Immunity Raises Question on CFPB’s Tool

For Payactiv, the sandbox approval order gave the company special regulatory treatment, including a temporary safe harbor from liability under the Truth in Lending Act and Regulation Z with respect to some of the company’s products.

Similarly to the case with Upstart, the company wanted to make changes to its fee model that would have required previous approval by the CFPB, but instead of waiting for this review, Payactiv requested termination of the order to “make changes quickly and flexibly.”

NALs and regulatory sandbox orders are designed to offer companies a safe environment to experiment with new products, fostering innovation without incurring additional regulatory risks. However, the CFPB has granted these special treatments only to nine companies since they were first implemented in 2017, and the list is now down to seven after these two companies requested a termination.

As a comparison, the U.K.’s Financial Conduct Authority, who also instituted regulatory sandboxes in 2016, received more than 500 applications since its launch, and it has accepted an average of over 20 firms every year. While the two programs are different and they offer different levels of protection, the goal of fostering innovation in a safe regulatory environment is the same.

The demand in the U.K. to enter in a regulatory sandbox is so high that the regulator decided earlier this year to start accepting companies on a rolling basis, rather a certain number of firms every year.

Read more: CFPB to Push for Consumer Finance Innovation, Competition

The bureau is seeking new ways to foster innovation and it may have taken some steps in this direction, although the results are yet to be seen. On May 24, the CFPB announced that it opened the Office of Competition and Innovation that will replace the Office of Innovation, whose primary purpose was to process applications for NALs and sandboxes that applied to an individual company’s specific product offering. The CFPB said that after reviewing these programs, it concluded that they proved to be ineffective.

The new office, according to the agency, will put forth a broader initiative, allowing for analysis of open market obstacles and looking to understand how bigger players are hurting smaller ones. It will also host incubation events and make it easier for people to switch financial providers.