On Thursday, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) issued its first no-action letter to Upstart Network, Inc., an online lender. The no-action letter green-lights the lender’s use of alternative data in marketing and pricing decisions. In exchange, Upstart will report lending and compliance information to the CFPB.
California-based Upstart provides an online lending platform that enables people with limited credit or work history to obtain credit. Upstart touts its ability to identify differences in risk between “thin file” applicants by using signals beyond traditional credit scores. Primarily, Upstart compliments traditional underwriting signals with a borrower’s work history and education. Upstart may take into account the school attended, degree obtained, and current employment to analyze the borrower’s financial capacity and propensity to pay. Upstart claims in the no-action letter application that including this information provides borrowers who otherwise may not qualify for credit the opportunity to borrow on more favorable terms.
Since launching its lending platform in 2014, Upstart has originated over 80,000 loans totaling more than $1 billion. The loans range from $1,000 to $50,000 with an average loan of $12,000. The repayment term is either 36 months or 60 months. The typical borrower is 28 years old and uses the loan to pay down credit card debt. Others consolidate payday or other unsecured debt, reduce student loan debts, or pay for graduate school tuition. Interest rates range from 4% to 25.9%.
CFPB’S NO-ACTION LETTER POLICY
The CFPB’s letter marks the first of its kind since the Bureau announced the no-action letter policy in early 2016. Under the program, companies implementing a new product or service can apply for a statement from the Bureau that would reduce regulatory uncertainty. Applicants must submit responses to a series of questions, including detailed descriptions of the product or service and the benefits and risks to consumers. The Bureau implemented the policy to incentivize companies to develop safe and innovative products and approaches. Anticipating that it will issue no-action letters in only exceptional circumstances, the CFPB will publish a no-action letter that it grants, but will not publish the denial of a request for a no-action letter.
CFPB’S NO-ACTION LETTER TO UPSTART
The no-action letter to Upstart indicates that the Bureau has no present intent to recommend initiation of supervisory or enforcement action against Upstart with respect to the Equal Credit Opportunity Act. According to the terms of the letter, Upstart has agreed to provide the Bureau with certain information regarding loan applications, the criteria used to decide which loans to approve, how it will mitigate risk to consumers, and how its model expands access to credit for underserved populations. The Bureau will use this information as part of the inquiry into alternative data that it launched earlier this year.
The scope of the no-action letter is limited to Upstart’s automated model for underwriting applicants for unsecured non-revolving credit. The Bureau went to great lengths to limit the effect of the letter, claiming that the letter could not be viewed as an interpretation, waiver, safe harbor, or something similar.
IMPLICATIONS OF THE LETTER
Although the no-action letter reveals that the CFPB remains committed to completing its inquiry into the use of alternative data to expand credit, it offers little guidance outside of the contours of Upstart’s platform and Upstart may still have to deal with fair lending issues with the CFPB down the road. With respect to this first no-action letter, initial reactions from the industry reveal disappointment in light of the fact that the letter offers little industry guidance.