Upstart Receives First No-Action Letter Issued by Consumer Financial Protection Bureau

upstart receives no action letter from CFPB

Upstart is one of the first consumer lending platforms to leverage artificial intelligence and machine learning to price credit and automate the borrowing process. We’re pleased to announce that today we received a “No Action” letter from the Consumer Financial Protection Bureau (CFPB), a federal agency overseeing consumer protection in the financial sector. The purpose of such letters is to reduce potential regulatory uncertainty for innovative products that may offer significant consumer benefit. This is the first No Action letter the CFPB has issued since the policy’s inception, and we believe it represents a significant leap forward for the lending industry.

Today, many lenders use traditional credit score-based models to decide who is approved for loans and at what interest rate. While these scorecard methods are simple and intuitive, we believe they are limited in their ability to quantify risk.

How do we know? More than four in five Americans have never defaulted on a loan, yet less than half have access to prime credit. A smarter credit model should recognize that a far higher percentage of Americans are credit-worthy. Upstart’s model goes beyond credit scores, using non-conventional variables at scale to improve consumers’ access to credit while delivering superior loan performance. The model improves constantly, learning and optimizing in response to daily loan-level repayment data.

Because the system is self-improving, Upstart can now approve more than three times the number of applicants we could have when we launched in 2014. Our model makes credit more accessible to consumers who wouldn’t otherwise qualify on fair terms, such as younger borrowers and recent immigrants.

Beyond expanding access to credit, our model has the potential to reduce the price of credit to many Americans. In fact, our analysis suggests that Upstart’s use of non-traditional variables allows us to offer credit at an APR 560 basis points lower than if we relied on traditional variables alone.

Innovation and fair lending

The use of alternative variables and emerging technologies such as AI/ML raise well-founded fears that we are in uncharted territory. It’s critical that such powerful tools operate in compliance with fair lending laws, but traditional ways of testing this compliance have been inadequate to date.

To this end, we’ve worked to develop sophisticated methods to monitor and report our model’s compliance with fair lending laws and regulations. We’ll continue to share the results of this monitoring with the CFPB on an ongoing basis and hope it will inform their broader work. In addition to the No Action Letter, we’re proud to have pioneered new ways to manage compliance for innovative lending technology that improves consumer access to credit.

Good for business

An underwriting model powered by data science has also helped Upstart grow and thrive as a company. Approving more borrowers with no degradation of credit means we can pass along savings to the consumer while also improving our own bottom line. More than $1B in Upstart loans have been originated to date, with monthly originations more than tripling since the beginning of 2017. We’ve also maintained superior loan performance — and, more importantly, have recently achieved GAAP profitability.

Upstart aims to bring affordable credit to all who deserve it, and today’s news is an important step forward in both realizing this goal and in leading the broader credit industry toward a more innovative future.