The Consumer Financial Protection Bureau (the “CFPB” or the “Bureau”) recently announced the issuance of its first no-action letter (“NAL”) to Upstart Network, Inc. (“Upstart”), a San Carlos, California-based online lending platform that uses alternative data to model consumer credit decisioning and pricing. The letter signifies that the CFPB has no present intention to recommend an enforcement or supervisory action against Upstart for violation of the Equal Credit Opportunity Act. As stated in the Bureau’s press release announcing this action, the NAL comes as the Bureau “continues to explore the use of alternative data to help make credit more accessible and affordable for consumers who are credit invisible or lack sufficient credit history.” In addition, the NAL is issued in the midst of heightened regulatory interest in and scrutiny of alternative credit data and modeling techniques. The Bureau issued two related requests for information, one in November 2016 on data aggregation services and the other in February 2017 on the use of alternative data, modeling techniques, and machine learning techniques in consumer lending. The NAL tends to suggest that companies may have some flexibility in the use of alternative underwriting modeling to offer consumer credit; however, as noted below, the practical utility of such NALs may be limited.

THE REQUEST AND THE NAL -

As explained in the company’s Request for a No-Action Letter (“Request”), Upstart provides a platform for borrowers to obtain unsecured, fixed-rate personal loans. Upstart explains that its credit underwriting model for these loans has the ability to underwrite risk for “thin file” applicants. In addition to traditional credit information, the company uses non-traditional criteria such as an applicant’s school, area of study, academic performance, and employment history to make underwriting and pricing decisions. These techniques allow the company to identify credit-worthy individuals who have short or limited credit histories. Upstart’s lending platform was launched in 2014. According to the company’s submission, Upstart has enabled its bank partner to offer more favorable interest rates to borrowers with limited credit or work history than would be the case without consideration of these factors.