On September 14, 2017, the Consumer Financial Protection Bureau (CFPB or Bureau) issued its first no-action letter to Upstart Network, Inc., a company based in San Carlos, California that provides an online lending platform for consumers to apply for personal loans, including credit card refinancing, student loans, and debt consolidation. Upstart evaluates consumer loan applications using traditional factors such as credit score and income, and incorporates alternative data (non-traditional sources of information) such as education and employment history in making credit and pricing decisions.
According to the CFPB, the objective of the no-action letter program is to “facilitate consumer-friendly innovations where regulatory uncertainty may exist for certain emerging products or services.” The CFPB’s Project Catalyst, an initiative designed to encourage consumer-friendly developments in the consumer financial marketplace, facilitates the no-action letter program.
Under the terms of the no-action letter issued by Bureau staff, Upstart will regularly report certain information to the CFPB regarding the loan applications it receives, how it decides which loans to approve, and how it will mitigate risk to consumers, as well as information on how its model expands access to credit for traditionally underserved populations. The CFPB states that it “expects that this information will further its understanding of how these types of practices impact access to credit generally and for traditionally underserved populations, as well as the application of compliance management systems for these emerging practices.” The no-action letter expires three years from its issuance, but the company may seek a renewal.
From a compliance perspective, the CFPB’s no-action letter signifies that Bureau staff has no present intent to recommend initiation of supervisory or enforcement action against Upstart with respect to the Equal Credit Opportunity Act (ECOA) and its implementing regulation, Regulation B, as they specifically relate to the company’s model for underwriting and pricing applicants as described in the company’s application materials. The CFPB cautions that this no-action letter is specific to the facts and circumstances of Upstart and “does not serve as an endorsement of the use of any particular variables or modeling techniques.”
This action marks an additional step in the CFPB’s exploration of the use of alternative data to help make credit more accessible and affordable for consumers who are credit invisible or lack sufficient credit history. In February 2017, the CFPB issued a request for information to solicit information concerning the use of alternative data (which could include things such as bill payments for mobile phones and rent, electronic transactions such as deposits and withdrawals, and other information that may be less closely tied to a person’s financial conduct), modeling techniques in the credit process, and the use of emerging technologies for underwriting.