On September 14, 2017, the Consumer Financial Protection Bureau ("CFPB") issued its first ever no-action letter since adopting a no-action letter policy in February 2016 to facilitate "the development of innovative financial products" in the face of regulatory uncertainty. The CFPB staff's guidance concerns an online lending platform's non-traditional, automated underwriting methodology. While the no-action letter itself is limited in scope, it nevertheless underscores the CFPB's desire to facilitate the development of alternative lending products by granting no-action relief.
The request was made by Upstart Network, Inc. ("Upstart"), which manages an online lending platform that uses an automated underwriting model. Upstart's model considers non-traditional underwriting criteria, in addition to traditional ones, to offer certain borrowers better rates than they would otherwise qualify for. According to its request for a no-action letter, Upstart considers an applicant's educational information and employment history in developing a statistical model for "financial capacity and personal propensity to repay." This allows Upstart to offer better loans to those with limited credit history, such as young applicants or recent immigrants. Upstart requested a no-action letter with respect to potential violations of the Equal Credit Opportunity Act ("ECOA") and Regulation B because of uncertainty over how the regulations might apply in the event the automated underwriting model leads to a disparate impact.
In response, the CFPB indicated that it has "no present intention to recommend initiation of an enforcement or supervisory action against Upstart." The no-action relief is limited to potential ECOA and Regulation B violations and expires in three years. Moreover, the CFPB reserved its right to revoke or modify the letter at any time, with certain procedural protections afforded Upstart, such as notice and opportunity to respond.
Under the terms of the letter, Upstart will share its underwriting and loan data with the CFPB. In its press release for the letter, the CFPB indicated that it was exploring ways to use alternative data to improve lending decisions and looking into the use of emerging technologies for underwriting.
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