WASHINGTON — The Consumer Financial Protection Bureau on Thursday announced that it had sent its first no-action letter, inaugurating a policy to give companies an official green light to experiment with new financial products without regulatory fallout.
The no-action letter was delivered to Upstart Network, a San Carlos, Calif.-based online lending platform for consumers that uses alternative data to determine creditworthiness and loan pricing. The letter — part of the bureau's Project Catalyst program — enables Upstart Network to operate without concern that its practices will trigger a supervisory or enforcement action.
"Staff has no present intention to recommend initiation of an enforcement or supervisory action against Upstart with regard to application of the Equal Credit Opportunity Act ... to Upstart’s automated model for underwriting applicants for unsecured non-revolving credit," Christopher M. D'Angelo, a CFPB official, wrote in the letter dated Thursday to Thomas P. Brown, an attorney at Paul Hastings.
As a condition of the CFPB letter, the company will have to report lending and compliance information to the agency on a regular basis. This will include information on the company’s loan applications, its decision-making process, and its strategy for mitigating risk and for using its model to expand access to credit.
This is intended to “mitigate risk to consumers and aid the Bureau’s understanding of the real-world impact of alternative data on lending decision-making,” the agency said in a press release.
Upstart Network's no-action letter will expire in three years, although the company can seek a renewal. The company was already operating its alternative data-based decision-making process before applying for the no-action letter earlier this year. But the agency’s backing will provide it with an important cachet, CEO Dave Girouard said.
“It provides some level of confidence that what we are doing is within the law,” Girouard said in an interview with American Banker. “That's valuable to us, but also to companies that invest in our loans or to financial institutions that might want to use our technology.”
Fintech observers noted, however, that the CFPB’s decision to attach the no-action letter with reporting requirements could make it less of an attractive bargain for other firms that might seek to be part of the program.
“It's restrictive in the sense that it imposes a quid pro quo on the company seeking relief,” said Brian Knight, a senior research fellow at the Mercatus Center.
Upstart Network has already established processes for collecting the types of data points requested by the CFPB, Girouard said.
“We’ve built a system to help us supervise our own lending process,” he said. “We think this is very fundamental to make sure it stays within the law at all times.”
The no-action letter policy was first proposed by the CFPB in 2014, as part of the innovation-friendly “Project Catalyst” initiative. It was finalized only last year.
In this instance, the CFPB ruling clears Upstart’s lending decision making model, which is based on traditional data points like credit score and income, but also on alternative information like education and employment history. But the clearance does not extend to other companies using similar modeling techniques, the CFPB warned.
“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 agency said in the press release.
While the announcement indicates the bureau's willingness to be flexible with newer companies developing products with unclear regulatory implications, it is also another step by the CFPB in investigating the use of alternative data in underwriting credit.
In February, the agency issued a request for public feedback about the use of alternative credit data, which is touted by emerging online lenders as a resource that could make credit cheaper and more available to the underbanked. Alternative data could include things such as bill payments for mobile phones and rent, and electronic bank account transactions.
