First CFPB No-Action-Letter Issued to Online Lending Platform

On September 14, 2017, the Consumer Financial Protection Bureau (CFPB) announced its first No-Action Letter (NAL) had been issued.  The NAL was issued to online lending platform, Upstart Network, Inc. (Upstart).

A NAL advises its recipient that the CFPB has no present intention of initiating an enforcement or supervisory action for the specific product or service in question. In many cases, particularly for fintech companies, technological developments in consumer credit products and services create uncertainty about how current statutes and regulations may apply. Fintech companies are particularly concerned with the potential privacy, data security, and fair lending risks related to implementing advanced technology. Recognizing these challenges, the CFPB started its NAL Policy (the Policy) in early 2016 to help reduce regulatory uncertainty for entities offering or developing consumer-friendly innovative fintech solutions that promise substantial consumer benefit. Under the Policy, an entity may apply to the CFPB for a NAL related to a particular product or service. It is important to note, pursuant to the Policy, that while a NAL signals that the CFPB has no present intention to recommend initiation of enforcement or supervisory action, a NAL is subject to modification or revocation at any time.

Based on Equal Credit Opportunity Act (ECOA) concerns, Upstart applied for a NAL in connection with its proprietary underwriting (UW) methodology for unsecured non-revolving credit. According to Upstart’s NAL application, the methodology combines alternative data, including educational information (e.g., degree obtained and school attended) as well as occupational and employment information to more accurately predict the creditworthiness of individuals with little or no credit history. Although the company lists its many efforts to comply with ECOA, the “uncertainty surrounding the sufficiency of its efforts to ensure compliance has made it difficult to raise additional capital” or expand its products.

Upstart’s application echoes a common industry challenge: Alternative data-based analytics and technologies pose ECOA risks that, despite best efforts to mitigate, industry participants often cannot predict. ECOA prohibits credit providers from discriminating on a prohibited basis, such as sex, age, race, religion, and national origin. Creditors relying on information from advanced data analytics, even without specifically targeting individuals on a prohibited basis, could generate statistical disparities for protected groups.  Upstart illustrates this possibility briefly in its application to the CFPB. Specifically, because its methodology benefits credit-thin individuals, it “may not be as useful to older borrowers” with longer credit histories.” While Upstart may not be intentionally approving a higher ratio of young versus older applicants, using alternative data may result in a similar outcome. This scenario is just one of many that could arise when relying on alternative data. The alternative, however, is that, absent methodologies that may (directly or indirectly) favor traditionally underserved individuals, entire segments of the population are left without viable credit options. This may be the promise of “substantial consumer benefit” the NAL Policy was developed to facilitate.

The CFPB and industry both appreciate this need for expanded access to credit.  Traditional UW methodologies have been criticized for excluding credit-thin individuals who tend to be disproportionately black, Hispanic, low-income or younger adults.  Accordingly, use of alternative data could provide a tool for identifying creditworthy individuals who lack credit history. This NAL also is consistent with the CFPB’s February 2017 request for feedback about the use of alternative data and modeling techniques in the credit process. In its request, the CFPB noted that there are an estimated 45 million Americans without mainstream access to credit. The CFPB expressed interest in gaining an empirical understanding of the risks and benefits associated with alternative data and modeling techniques.  Under the NAL, Upstart agreed to provide the CFPB with lending information and compliance data related to the UW methodology.

Although the NAL is not guidance, nor does it endorse the use of alternative data use, it signifies the CFPB’s intent to facilitate innovative ideas among fintech participants where a significant consumer benefit is present. This step falls in line with the CFPB’s Project Catalyst which facilitates the NAL program and was designed to encourage fintech developments that benefit consumers.  We hope this is not the last NAL issued by the CFPB and, as it develops a deeper understanding of fintech products, we also hope it will provide guidance on the regulatory implications of employing emerging technologies.

Share Back to main blog
Loading data