Did you know what a “no-action letter” is? Were you aware that the CFPB had an office of innovation? We recently caught up with Alexandra Villarreal O’Rourke, Financial Services Partner, FinTech Practice Group Co-leader at McGuireWoods, to learn more about the budding partnership of FinTech and the CFPB.
We love talking to Alex because she has a unique combination of technical, financial services, and legal expertise. We hope you enjoy the conversation!
Photo: Alexandra Villarreal O’Rourke, McGuireWoods
Patrick Rivenbark: Alex, thanks for joining us! Tell us a little bit about yourself first.
Alexandra Villarreal O’Rourke: Thanks for having me. I’m a partner at McGuireWoods, a national law firm with offices all over the country as well as London and Brussels. I co-lead our FinTech group which means I do a lot of regulatory advising and general advising for FinTech companies. Essentially, I work with banks and non-banks that have regulatory questions or are interacting with regulators in some way.
As part of my practice, I work with FinTechs to understand how the laws apply to them: their technology and business. Most recently, I was at the CFPB, the Consumer Financial Protection Bureau in DC, where I was a senior counsel expertise in FinTech. I worked very closely with the CFPB’s office of innovation called Project Catalyst, and I worked on broad policy initiatives to encourage innovation to foster progress in our industry.
PR: Thank you! Needless to say, you know what you’re talking about when it comes to regulation and finance. Please expand a little more on Project Catalyst. What is it? Why did it start?
AVO: Project Catalyst is, as I said, the CFPB’s office of innovation. Its goal is to serve as a liaison between the Bureau and the innovation community – not just within FinTech companies but also innovators within traditional financial institutions as well. So, encouraging consumer-friendly innovation is really their goal.
They do this in a few ways. They engage by hosting office hours, which means they open the Bureau’s doors to FinTech companies and innovators to hear and learn about consumer-friendly innovation. The conversations let innovators engage with the Bureau on how to leverage technology in a consumer-friendly and responsible way. Project Catalyst also establishes research partnerships on consumer-friendly initiatives.
They also manage the No-Action Letter Program, which we will talk a little bit more, but it is one of the ways in which the Bureau opines on new technologies that might not fit neatly within the current regulatory schemes.
PR: Let's talk about that particular No-Action Letter Program. In reviewing a company, what do they broadly review when they are looking at a company?
AVO: The no-action letter is intended to encourage consumer-friendly innovation by addressing areas of legal uncertainty. An example is best: let’s say you are a company that is using new types of credit data or a new type of underwriting model that might not have been traditionally used before. Some of the laws that apply to underwriting were written in the ‘70s. The frameworks and court decisions on those laws didn’t exactly anticipate the technology we have today, so now there is a really specific question – “Does this new use of underwriting technology comply with the law?” This is where the No-Action Program comes in – it’s designed to answer questions where the law’s application to a particular innovation might be unclear.
The company will present why they think the law is uncertain and why they think the product or service complies with the law. They will then ask the CFPB: “Can you tell us what you think?”
It’s important to note that the no-action letter is not a seal of approval. It is a way for the Bureau to inform a company about their application (including how the tech and safeguards work) and that the way they use the data won’t result in any enforcement action regarding a particular area of the law.
PR: That makes sense. What if a company doesn’t engage to the CFPB?
AVO: The scenario the no-action letter is trying to avoid is a situation where a company is doing something that is really consumer-friendly but there is no outlet for meaningful conversation.
Let's say they are using certain data to create access to credit for an underserved market. It's great for consumers – everybody loves it, the idea is really promising – but they are doing it in a way that is a technical misfit with the law. It violates some technical part of some law. And maybe the law is written in a way that’s not completely clear.
In a world without the no-action letter process, this is what would happen: the Bureau would just bring an enforcement action against you right away since you’re violating the law. The idea is, if you have a process where people can bring questions to you, you can address situations earlier (when they are easier to fix) and before enforcement is necessary. It’s a way to encourage innovators to come to the Bureau with their new ideas instead of just hoping the Bureau doesn't come after them.
PR: Most recently, the first no-action letter was issued to the Upstart Network. Can you explain what happened and its significance?
AVO: Sure. And, to be clear, everything I’m going to share with you is from public information that came out when the no-action letter was announced. The Upstart Network is a lending platform that incorporates some non-traditional sources of data, such as education and employment history, in their credit decisions. The no-action letter for Upstart is a great example of the program at work. The Upstart Network presented to the CFPB about their technology and said, essentially, “We are not sure how fair lending laws apply to what we are doing.”
It's not carte blanche but the no-action letter essentially says that the Bureau staff is not planning to recommend enforcement or supervisory action on the fair lending law as it applies to Upstart’s underwriting model. That is a huge deal for the market because it is the first time the Bureau has essentially publically acknowledged that non-traditional credit data can be used in underwriting a way that doesn’t run afoul of fair lending laws.
What’s great about the situation now: Upstart is actually going to share data with the Bureau about how their model expands access to credit for traditionally underserved populations. That’s a huge opportunity for the Bureau to see, especially in terms of alternative data, what promise using this data might hold. Now, the Bureau is getting input from a FinTech company. It really highlights the program’s intention to be a partnership program; it's not a one-way street. I mean, obviously Upstart is very happy to know that the Bureau does not currently have concerns with what they are currently doing, but the Bureau is also going to get the benefit of working with that company.
PR: How do you hope this will help the move the industry forward with the CFPB?
AVO: Yeah, so, the No-Action Program has been around for quite a while now, maybe two years. I think that until now there was some skepticism in the market about the Bureau ever finding the right company. I think the Upstart letter is almost like a proof of product for Project Catalyst. It shows that they actually do intend to issue no-action letters and believe it’s a partnership.
The Bureau wants to engage with innovators; they want to hear your ideas. Innovators can view Project Catalyst as a sounding board and not just a regulator to be afraid of. I think it actually will encourage more engagement like office hours and collaboration with the ecosystem.
PR: A truly engaged regulator as a partner can only be good for the industry and, importantly the consumer. Alex, thank you so much for talking with us and helping us understand the no-action program. I certainly learned something new!
AVO: No problem! My pleasure.