On September 14, 2017, the Consumer Financial Protection Bureau (the “CFPB”) issued its first no-action letter (the “No-Action Letter”) concerning the operations of Upstart Network, Inc. (“Upstart”), a FinTech lender that utilizes alternative data in assessing the creditworthiness of prospective customers. While Upstart’s No-Action Letter has narrow applicability, it may serve as a tool for other FinTech lenders in implementing innovative products and services and establishing relationships with banks.
The financial services industry is changing. With innovative technology and business models, FinTech companies have brought an interesting and complex issue center stage. Namely, how will the CFPB seek to regulate these FinTech companies and their innovative operations within the context of rigid consumer financial protection laws. Although the answer is not yet clear, it appears that the CFPB is trying to better understand how FinTech companies operate.
In October 2016, the CFPB issued its final No-Action Letter Policy (the “NAL Policy”). The NAL Policy permits institutions to submit a request to the CFPB to issue a statement that the CFPB has no present intention to recommend initiation of an enforcement or supervisory action against the applicant with respect to a particular product or service’s compliance with specifically identified regulatory requirements. For example, an applicant may seek to obtain assurance from the CFPB that the applicant’s form disclosure otherwise complies with the Truth in Lending Act and Regulation Z.
Summary of Upstart’s Request for a No-Action Letter
Upstart provides an online lending platform (sometimes referred to as a “marketplace”) that enables people with limited credit or work history, among others, to obtain credit and/or obtain credit on better terms. Upstart’s lending platform, launched in 2014, allows customers to apply for loans on more favorable terms.
Upstart has partnered with Cross River Bank (“Cross River”), a New Jersey chartered nonmember bank, to provide a consumer-facing website through which eligible borrowers can obtain loans originated by Cross River. Upstart’s platform is accessible via Cross River’s website, and when a prospective borrower applies for a loan from Cross River through Upstart’s platform, Cross River relies on Upstart’s underwriting methodology to decide whether to offer a loan and, if so, on what terms. Accredited investors and certain institutions then have the opportunity to invest in those loans.
In a bid to head off the storm of prospective regulatory scrutiny, Upstart filed a Request for a No-Action Letter pursuant to the NAL Policy earlier this year (the “Request”). The Request specifically sought confirmation that the CFPB had no intent to take any supervisory or enforcement actions under the Equal Credit Opportunity Act (i.e., fair lending) pertaining to Upstart’s underwriting methodology.
In the Request, Upstart described its underwriting model as having the ability to identify differences in risk between “thin file” applicants or those applicants with limited credit and work histories. By identifying differences in risk, Upstart and Cross River may expand credit access and offer better loan terms to promising individuals with limited credit histories. According to Upstart, its underwriting technology uses traditional underwriting methodologies in combination with other variables that are correlated with financial capacity and “repayment propensity.” Upstart states that its model understands and quantifies risk associated with all borrowers—both those with credit histories and those without credit histories. As a result, the Upstart loan program is able to offer credit to segments of the population with limited credit or work histories at more favorable rates. In other words, it appears Upstart is underwriting consumer loans without reliance upon traditional criteria, such as credit scores and length of employment history.
What Does Upstart’s No-Action Letter Say?
On September 14, 2017, in response to Upstart’s Request, the CFPB issued a No-Action Letter providing for the following:
- The CFPB “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 (“ECOA”) and its implementing regulation, Regulation B.”
- The No-Action Letter is only applicable to Upstart’s automated model for underwriting applicants for unsecured non-revolving credit, as described in Upstart’s original Request.
- The No-Action Letter will expire three (3) years after its issuance, at which time Upstart may seek to renew the No-Action Letter.
- The No-Action Letter is not an interpretation, waiver, safe harbor or the like, nor is it binding on the CFPB.
- The CFPB staff is not necessarily in agreement with any legal or policy analysis, any interpretation of data or any other matter set forth in Upstart’s Request.
- The No-Action Letter is subject to modification or revocation at any time at the discretion of the CFPB staff for any reason, including where the CFPB’s staff determines that such modification or revocation is appropriate to protect consumers or is otherwise in the public interest.
What Are the Benefits and Risks in Obtaining a No-Action Letter?
On one hand, a no-action letter may be particularly useful for a FinTech company, utilizing innovative technology and operations, to obtain guidance concerning the permissibility of its business model under specific regulatory constructs. A no-action letter may also be useful for a FinTech company seeking to establish joint ventures with banks. For example, a no-action letter from the CFPB issued to a FinTech lender may help assuage certain concerns that a bank may have regarding a Fintech lender’s compliance with applicable lending laws.
On the other hand, a CFPB-issued No-Action Letter has narrow applicability as it is only applicable to the requesting applicant, a specific regulatory issue and the facts and circumstances identified by the applicant in its request submitted to the CFPB. Should a fact or circumstance fail to be conveyed accurately, or should a fact or circumstance change, the No-Action Letter may be rendered useless. In addition, pursuant to its NAL Policy, the CFPB has made it clear that it will not issue a no-action letter in which the applicant requests no-action treatment for matters that might be deemed unfair, deceptive, or abusive acts or practices (“UDAAP”). It is important to note that the CFPB has actively pursued, as its favored method of enforcement, UDAAP actions. This is the case even when other methods of enforcement are available to the CFPB. The refusal of the CFPB to include a safe harbor from a UDAAP action significantly diminishes the utility of pursuing a no-action letter.
To view the full text of the CFPB’s No-Action Letter issued to Upstart, click here.
To view the full text of Upstart’s No-Action Letter Application, click here.
To view the full text of the CFPB’s No-Action Letter Policy, click here.
To view the full text of the CFPB’s Request for Information concerning the impact of alternative data on consumers’ access to credit, click here.