The Consumer Financial Protection Bureau (“CFPB”) has issued its first No-Action Letter (“No-Action Letter” or “Letter”) in response to a request from Upstart Network, Inc. (“Upstart”). The No-Action Letter means that CFPB staff currently has no intention of recommending enforcement or supervisory action against Upstart. This decision is limited to the application of the Equal Credit Opportunity Act (“ECOA”) and its implementing regulation, Regulation B, to Upstart’s automated model for underwriting applicants for unsecured, non-revolving credit (“automated model”).
Upstart is an online lending platform that, working with a bank partner, uses alternative data to facilitate credit and pricing decisions for consumers with limited credit or work history. In addition to relying on traditional credit information, Upstart uses non-traditional sources of information to evaluate a consumer’s creditworthiness. For instance, Upstart might look at an applicant’s educational information, such as school attended and degree obtained, and the applicant’s employment to determine financial capacity and ability to repay. Upstart submitted a Request for No-Action Letter (“Request”) in relation to its automated model to the CFPB pursuant to the agency’s no-action letter policy.
According to the CFPB, the no-action letter policy is intended to facilitate consumer-friendly innovations where regulatory uncertainty may exist for certain emerging products or services. In practice, however, the process has presented significant challenges for companies that might seek to benefit from it. As we’ve previously discussed, applicants are required to divulge a great deal of information to the agency in the application process, can be required to commit to continue providing such information (as Upstart is, including notifying the Bureau before new variables are considered in its underwriting model), and receive only limited protections – a No-Action Letter does not bind either other regulatory agencies or parties in private litigation (and expressly provides that it “is not intended to be honored or deferred to in any way by any court or any other government agency”). The CFPB has also indicted that very few such letters will be forthcoming. And, indeed, this is the first such letter to be issued since the agency implemented the program over a year-and-a-half ago.
According to the No-Action Letter, the CFPB based its decision to grant the Request on Upstart’s statements and commitments set forth in its Request, its confidential Model Risk Management & Compliance Plan (“Compliance Plan”), and Appendix A attached to the No-Action Letter. As it represented in its Request, Upstart committed itself to continuing to share with the CFPB fair lending and access-to-credit test results, as well as other information upon request. The Letter will expire in three years, and Upstart has the ability to seek renewal.
Of note, the CFPB emphasized several limitations associated with the Letter in Appendix A. For instance, the Letter does not mean that the CFPB will not evaluate Upstart’s compliance with the terms of the Letter nor that the CFPB will refrain from conducting supervisory activities or enforcement investigations into other matters. The No-Action Letter is limited to Upstart’s automated model, based on the facts stated and represented in the Request and Compliance Plan. Further, the CFPB explained that the Letter is not an interpretation, a waiver, a safe harbor, or at all binding on the CFPB. In fact, the Letter can be modified or revoked by the CFPB at any time for any reason, including Upstart’s failure to satisfy conditions specified in the Letter and other documents, if the product is altered, or “in the public interest.” If the Letter becomes inapplicable, then the CFPB may initiate retrospective enforcement or supervisory action if appropriate. Thus, the terms of the Letter exemplify the limited protections companies receive from the policy.
For now, it seems too early to glean what this decision means for the future of the no-action letter process and alternative credit products. This Letter could represent the CFPB’s willingness to grant requests for products designed to expand access to credit for certain consumers, a stated goal of the CFPB. Indeed, CFPB Director Richard Cordray signaled nearly a year ago that the CFPB welcomed applications for no-action letters for alternative underwriting. The decision also could be read narrowly to apply only to the unique set of circumstances or to require substantial concessions to be made by the company. How the CFPB implements and follows through on the No-Action Letter may well inform the nature of protections offered by such a letter, and either encourage or discourage other companies to follow in Upstart’s footsteps. We will be following the implications of this decision closely.