CFPB ends no-action letter with fintech lender Upstart Network

CFPB Director Rohit Chopra terminated the no action letter for Upstart Network, a fintech, after getting rid of the bureau's sandbox program.
Sarah Silbiger/Bloomberg News

The Consumer Financial Protection Bureau and the online lender Upstart Network have mutually terminated a “no action letter” that was the first agreement of its kind to give a fintech immunity from regulatory actions. 

CFPB Director Rohit Chopra said Wednesday that the bureau sought “immediate termination” of the no-action letter after Upstart asked for changes to both the terms of its agreement and its artificial intelligence-based underwriting model.

“Upstart has effectively requested to terminate the" no- action letter, Chopra said in a press release.

Upstart, of San Mateo, California, said it exited the agreement after the CFPB scrapped its fintech sandbox program last month.  

“Our request was motivated by a need to keep our risk models accurate and up-to-date during a period of significant economic change,” Nat Hoopes, Upstart’s vice president and head of public policy and regulatory affairs, said in a blog post

Upstart notified the CFPB in April that it intended to add a significant number of new variables to its underwriting and pricing model due to volatility in the credit markets. The bureau said that it needed more time to review and evaluate the changes, prompting Upstart to request that the no-action letter be modified to expire at the end of May, effectively ending the agreement. 

Hoopes said Upstart’s decision came after the CFPB created a new Office of Competition and Innovation that planned to “de-emphasize regulatory arrangements with individual companies, including the no-action letter program.” 

As part of the changes to its innovation office, the CFPB said it will no longer process applications for no-action letters designed to allow companies to develop products without fear of supervisory action. Instead, the office will focus on promoting competition, hosting events and making it easier for consumers to switch financial providers. 

Five years ago, the CFPB created a lot of buzz in the fintech community when it issued its first no-action letter in 2017 as part of a program to foster innovation. Upstart’s no-action letter was renewed in 2020 under former CFPB Director Kathy Kraninger, a Trump appointee, but Upstart was required to notify the CFPB of any significant changes to its artificial intelligence model.

In the two-page termination order, Chopra said the CFPB needed more time to monitor and review the changes that Upstart had made to its AI model. The bureau did not want to appear to be endorsing Upstart’s products, Chopra said, without determining first if its models run afoul of fair-lending laws, including the Equal Credit Opportunity Act.

“The CFPB has not endorsed Upstart’s model, and has not performed the analysis necessary to conclude whether Upstart’s model does or does not violate the ECOA,”  Chopra wrote. “In light of the risk" that the no- action letter "is misconstrued as an endorsement, the CFPB would need to perform more rigorous monitoring and assessment of Upstart’s model and any changes to the model.”

Chopra also has repeatedly admonished companies about the potential misuse of artificial intelligence in lending decisions, which likely played a role in the mutual termination of the agreement.

Last year, Upstart’s bank partners originated 1.3 million loans, totaling $11.8 billion, the CFPB said.

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