CFPB Fintech Group Poised for Renaissance After Restructuring

By Lydia Beyoud

The CFPB’s fintech innovation team appears to come out a winner in the agency’s recent reshuffling of its organizational chart.

Placed under the direct supervision of the director’s office and rechristened the Office of Innovation, the group formerly known as Project Catalyst is likely to get more resources and support from the agency’s acting chief, Mick Mulvaney. The move is all part of Mulvaney’s interest in encouraging “consumer friendly innovation,” a Consumer Financial Protection Bureau spokesman told Bloomberg Law by email.

The work being done by Project Catalyst will transition to the Office of Innovation, along with its staff, the spokesman said. Mulvaney announced the new name and placement under the director’s office in a May 9 email detailing a restructuring of multiple agency units.

“Between this and Mulvaney’s statement about wanting to stand up a regulatory sandbox, you can read the tea leaves on the general regulatory philosophy over there,” Brian Knight, director of the Program on Financial Regulation and a Senior Research Fellow at the Mercatus Center, a free-market think tank housed at George Mason University. The Office of Innovation will likely have a stronger hand in moving forward with some of its initiatives than it did under the previous administration, Knight said.

One of the most common criticisms of Project Catalyst, founded in 2012 as a Silicon Valley-style innovation hub tasked with understanding and pursuing financial services technology and innovation, was that it never lived up to its full potential.

The issuance of a single “no-action letter” over the course of the group’s existence is one example of great, if unfulfilled, expectations.

Rep. Patrick McHenry (R-N.C.), one of the House’s most ardent fintech supporters, went so far as to call Project Catalyst “a failure” and its no action letter program a “flop,” but not for a lack of trying, according to an April 25 op-ed. But McHenry’s office said it was hopeful Mulvaney’s move could respark the CFPB’s fintech team.

“We are encouraged to see Acting Director Mulvaney’s renewed focus on Project Catalyst and the Bureau’s Office of Innovation. Fintech is revolutionizing the financial industry and it is imperative our federal government play an active role,” McHenry’s spokesman Jeff Butler told Bloomberg Law by email.

No Action Letters Revamp

Renewed focus on the use and value of no-action letters is one of the major areas where the Office of Innovation could redefine its role, Rob Morgan, Vice President of Emerging Technologies with the American Bankers Association, a banking trade group, told Bloomberg Law.

“If you look at the current no-action letters, there’s a line that says we’re not considering action at this point, but that doesn’t mean anything for the future,” Morgan said. The CFPB can also revoke the no-action letter at any time.

Removing some of the uncertainty attached to the current CFPB no-action letter policy could bring more banks and startups through the Office of Innovation’s doors, Morgan said. Financial institutions, startups and regulators should partner to work on innovative products and figure out what controls are needed to protect consumers, he said.

“As long as the bank abides by those rules, they shouldn’t be punished or subject to enforcement actions after the fact,” Morgan said.

Diminished CID Worries

Others expect to see a reduced threat of civil investigative demands, known as CIDs, to flow from meetings with the Office of Innovation.

One of the concerns fintech companies had in meeting with Project Catalyst during the previous administration, whether or not they were well-founded, was that they could end up on the wrong side of a CFPB inquiry after speaking with the team, Catherine Brennan, a partner at Hudson Cook in Hanover, Md., told Bloomberg Law.

“I don’t think people have that same sort of concern from Mulvaney because he’s made it abundantly clear that he wants to cease the CFPB being the top cop on the beat for consumer protection,” Brennan said.

With the lessened threat of investigations, more fintech companies may seek out the Office of Innovation to demonstrate what they’re working on and what the ground rules should be for new applications and technologies, Brennan said.

Interagency Dialog

Another hoped-for development from the Office of Innovation is greater coordination with federal and state regulators on fintech policy, multiple sources said.

“Financial regulators need to be bringing these technology issues to the center of their agendas,” Jo Ann Barefoot, CEO of Barefoot Innovation Group, a fintech and regtech consulting company, told Bloomberg Law.

Fintech innovation “is the most important thing facing the industry and regulators; we’re in the process of digitizing financial services, and we don’t have the right institutions, cultures, processes to do that well,” said Barefoot, a former Deputy Comptroller of the Currency.

The Office of Innovation has an opportunity to help drive a coherent set of fintech policies among administrators, she said. “I fervently hope that the direction they will take this is to move toward interagency collaboration in pilots and sandboxes,” Barefoot said.

State Sandbox Coordination

The CFPB could also explore how to coordinate with state-based regulatory sandboxs. Arizona recently established a framework to help startups work closely with regulators to test their products and services on a limited group of consumers without falling afoul of enforcement actions.

“There are absolutely tools that they can use to help with the states,” the Mercatus Center’s Knight said. The threat of a federal enforcement action or private cause of action to companies seeking to participate in a state-level regulatory sandbox is real, he said.

As the lead federal consumer protection agency, the CFPB has an important role to play in establishing policies on whether it would defer to state regulators overseeing sandboxes, or whether it would retain the right to penalize a sandbox participant if something goes awry, Knight said.

To contact the reporter on this story: Lydia Beyoud in Washington at lbeyoud@bloomberglaw.com

To contact the editor responsible for this story: Michael Ferullo at mferullo@bloomberglaw.com

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