CPFB issues first no-action letter

Upstart Network has received the first no-action letter from the Consumer Financial Protection Bureau for its use of alternative data in credit and pricing decisions.

Upstart Network has received the first no-action letter from the Consumer Financial Protection Bureau for its use of alternative data in credit and pricing decisions.

As a condition of the no-action letter, Upstart will regularly report lending and compliance information to the CFPB to mitigate risk to consumers and aid the bureau’s understanding of the real-world impact of alternative data on lending decision-making.

This action comes as the bureau continues to explore the use of alternative data to help make credit more accessible and affordable for consumers who are credit invisible or lack sufficient credit history.

Upstart Network provides an online lending platform for consumers to apply for personal loans, including credit card refinancing, student loans and debt consolidation. The company evaluates consumer loan applications using traditional factors such as credit score and income, as well as incorporating non-traditional sources of information such as education and employment history.

The CFPB’s no-action letter “represents a significant leap forward for the lending industry,” Upstart said in a blog post announcing the approval. “The use of alternative variables and emerging technologies … raise well-founded fears that we are in uncharted territory.”

“We’ve worked to develop sophisticated methods to monitor and report our model’s compliance with fair lending laws and regulations,” Upstart said. “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.”

The no-action letter signifies the bureau has no present intent to recommend initiation of supervisory or enforcement action against Upstart with respect to the Equal Credit Opportunity Act. The letter applies to Upstart’s model for underwriting and pricing applicants as described in the company’s application materials. The no-action letter is specific to the facts and circumstances of the particular company and does not serve as an endorsement of the use of any particular variables or modeling techniques.

The bureau is exploring ways that alternative data may be used to improve how companies make lending decisions. In February, the CFPB launched an inquiry into the use of alternative data sources in order to evaluate creditworthiness and potentially expand access to credit for consumers with limited credit history.

The initial application from San Carlos, Calif.-based Upstart can be found here.