CFPB Innovation ‘Sandbox’ Likely to Fuel State AG Enforcement

SAN DIEGO — Companies that participate in the Consumer Financial Protection Bureau’s proposed innovation-focused “sandbox” rules to spur innovation may be penalized by state attorneys general, lawyers said at the Auto Finance Innovation Summit last week.

The CFPB released proposals earlier this year meant to encourage innovation in the consumer financial services space by allowing companies to try out new technologies and strategies without the fear of regulatory repercussions, said Ballard Spahr Partner and Practice Leader of the firm’s Consumer Financial Services Litigation Group Christopher Willis. However, the risks associated with qualifying for these privileges may deter companies from participating, as companies may face stiffer scrutiny from the 21 state attorneys general who have shown resistance to the policies, including California, Illinois, and New York, said McGlinchey Stafford Attorney Robert Savoie.  

“We’ve had strong resistance by a number of states that say, ‘We don’t like these CFPB proposals, we view them as licenses to violate the law and [harm] consumers,’” Willis said, adding that these states “seem highly motivated to come after [participants] under some state law.”  

Another risk for lenders is the CFPB sandbox requirement to publicly disclose the strategies and technologies they are implementing. Savoie said those disclosures are written admission that companies may be uncertain about the compliance of the technology they are testing. “So, you’re going to tell 50 state regulatory agencies what you’re doing, providing excessive detail — as a condition of receiving the no-action [sandbox privilege] letter — that there is an issue of law that is uncertain,” he said.  

Because of the risks, Willis expects the policies, if enacted, to be ineffective. “The number of companies that I think will feel motivated from a risk-benefit [standpoint] to participate in these programs will be vanishingly small,” he said.