The Consumer Financial Protection Bureau has issued it’s first-ever no-action letter to a company that uses alternative data in making credit and pricing decisions. The company agreed to a number of conditions designed to mitigate risks to consumers. This action 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.
Under the letter, the company, Upstart Network, Inc., must regularly report lending and compliance information to the CFPB to aid the CFPB’s understanding of the real-world impact of alternative data on lending decision-making. The no-action letter signifies that the Bureau currently has no intent to initiate supervisory or enforcement actions against Upstart.
Upstart is based in San Carlos, Calif., and provides an online lending platform for consumers to apply for personal loans, including credit card refinancing, student loans, and debt consolidation. The company evaluates consumer loan applications using traditional factors such as credit score and income, as well as incorporating non-traditional sources of information such as education and employment history.
The no-action letter applies to Upstart’s model for underwriting and pricing applicants as described in the company’s application materials. The no-action letter is specific to the facts and circumstances of Upstart and does not serve as an endorsement of the use of any particular variables or modeling techniques in credit underwriting.
Sharing of information. Under the terms of the letter, Upstart will share certain information with the CFPB regarding the loan applications it receives, how it decides which loans to approve, and how it will mitigate risk to consumers, as well as information on how its model expands access to credit for traditionally underserved populations. According to the CFPB, this information will further its understanding of how these types of practices impact access to credit generally and for traditionally underserved populations, as well as the application of compliance management systems for these emerging practices.
Alternative data. The CFPB is currently exploring ways that alternative data may be used to improve how companies make lending decisions. In February, the CFPB launched an inquiry into the use of alternative data sources in order to evaluate creditworthiness and potentially expand access to credit for consumers with limited credit history. The Bureau provides examples of alternative data, including: bill payments for mobile phones and rent; electronic transactions such as deposits and withdrawals; and other information that may be less closely tied to a person’s financial conduct. This inquiry also looked at the use of emerging technologies for underwriting, such as the expanded use of machine learning to potentially identify new insights and improve decisions in the credit process.
No-Action letter policy. The goal of the CFPB’s no-action letter program is to facilitate consumer-friendly innovations where regulatory uncertainty may exist for certain emerging products or services. Under the policy, companies can apply for a statement from Bureau staff on an innovative product or service that offers the potential for significant consumer benefit where there is substantial uncertainty about whether or how specific provisions of law would be applied. The CFPB’s Project Catalyst, an initiative designed to encourage consumer-friendly developments in the consumer financial marketplace, facilitates the no-action letter program as part of its work to support marketplace innovation.
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