Dive brief:

  • Bureau of Consumer Financial Protection (CFPB) At the request of the company, alternative lender Upstart’s no-action letter ended on Wednesday.
  • “Upstart has requested termination because it wants to change the time-sensitive model if that is not possible CFPB The proper level of observation and review was to be conducted, “the CFPB Wrote in Wednesday’s order.
  • The upstart move comes later CFPB It said last month that it would emphasize its no-action letter policy and product development sandbox, which the bureau has “proven ineffective.”

Dive Insight:

The CFPB has, since 2014, allowed individual companies to apply for no-action letters protecting them from regulatory action when developing specific products in safe ports. The pruning of Upstart’s no-action letter leaves the event without its longest-running participant – although participation was sparse.

Upstart, which uses alternative credit data such as borrower education and job history as part of a formula such as borrower education and job history, became the first company to receive a three-year CFPB no-action letter in 2017. CFPB issued another. Letter in November 2020 for another three years.

Upstart notified CFPB in April, according to a 2020 letter, that it intends to add several new variables to its underwriting and pricing models. The CFPB, however, asked for more time to review and “rigorously evaluate the consequences of the changes.”

The CFPB, next month, set up its Competition and Innovation Office, which aims to tackle innovation barriers such as “incubation events” such as sprints, hackathons, tabletop exercises and war games – in place of innovative contracts, such as dealing with no-individual companies.

Three days later, Upstart asked to reduce the duration of its no-action letter to 18 months – effectively ending it immediately. (Requested Friday, May 27, before Memorial Day Weekend. The 18-month period ends on May 30, the holiday.)

“Our request was motivated by the need to keep our risk models accurate and up-to-date in times of significant economic change,” said Nat Hoops, vice president of Upstart and head of regulatory affairs and public policy, in a blog post on Wednesday. .

Hoops said the company is in contact with CFPB’s new innovation office “and will continue to have transparent and cooperative relationships with CFPB and other financial regulators.”

In its order, CFPB stated that Upstart was “properly identified” and that its review would “prevent them from making quick business decisions regarding its model.”

Upstart’s relationship with CFPB has been fruitful. The alternative data model developed by the company helped approve 27% more loans – an average annual percentage rate of 16% lower – in the first two years of its no-action letter period, Upstart reported in 2019.

“We have developed our fair credit program to meet or exceed the CFPB’s highest standards for compliance under the Equal Credit Opportunity Act (ECOA). Process and rigor have made us a great company, “Hoops wrote in a blog post on Wednesday. “We appreciate the time, attention and dedication shown by the bureau’s staff for the upstart [no-action letter] In the last six years.

The CFPB, in its order, however, took care to note that the Bureau “never approved Upstart’s model”.

“People are in danger of being misinterpreted [no-action letter] The CFPB concludes that Upstart’s model complies with the ECOA, “the bureau said in its order, adding that such an assessment would require further analysis.

Upstart, meanwhile, said it would “continue to rigorously test every loan application for fairness, including pre-testing every model update before implementation.”

“Effective collaboration between the government and financial technology innovators is critical to improving financial access for the millions of creditors left behind by the current U.S. credit system,” Hoops wrote Wednesday.