United States: A First Time for Everything—CFPB Issues Its First No-Action Letter

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"),1 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.

The CFPB initiated its NAL program in February 2016 with the intent to promote "innovative financial products or services that promise substantial consumer benefit where there is substantial uncertainty whether or how specific provisions of statutes implemented or regulations issued by the Bureau would be applied."2

The Bureau previously has shown concern that the use of some non-traditional factors could have a disparate impact due to their correlation with race, ethnicity, and/or gender. The agency's first use of its NAL authority nevertheless addresses alternative credit decisioning and pricing models identified in the Bureau's request for information on the impact of alternative data on credit access for consumers who are so-called credit invisible.3 In this case, Upstart provided the CFPB with confidential credit criteria, credit modeling factors, and objective data showing that thin file applicants are underserved by credit-score-based decisioning. Upstart also demonstrated that against a test model its credit model resulted in comparatively favorable loan pricing and presumably more affordable and beneficial credit being made available to its credit-challenged applicants.

Under the terms of the NAL, the CFPB reserves the right to conduct supervisory activities or engage in an enforcement investigation to enforce Upstart's compliance with the NAL. The letter is valid for three years from the date of issuance. For the letter to remain in effect, Upstart must regularly report lending and compliance information to the CFPB to aid in the agency's understanding of the impact of using alternative data on protected populations.

TAKE HOME LESSONS

For alternative credit providers, particularly those using online product delivery (FinTech), who want to understand the precedential value of the NAL, we believe the following observations are pertinent:

  • The overall utilization by consumer financial services providers of the CFPB's NAL process remains unclear. On the surface, the agency's NAL process, in the 18 months since it was announced, has resulted in only one final action. On the other hand, it is not known just how many other NAL requests are in process at the Bureau. By the same token, it is not known how many financial services providers have considered this path and elected not to embark on it.
  • Upstart's efforts, in particular its Request, may well serve as a template for other financial parties to follow in the CFPB's NAL process, particularly as to credit modeling. Observers of the Bureau's NAL Policy of February 2016 noted that the Bureau requires detailed explanations of business processes of submitters, some of which could be quite proprietary. However, the company, in preparing and submitting its request, evidently believed the risks associated with this level of disclosure were outweighed by the benefit of obtaining the NAL.
  • Upstart is to conduct fair lending testing and is obligated to provide to the Bureau, upon request, information including "the data underlying [its] test results."4 To the extent the Bureau will be monitoring borrower-level performance of Upstart loans, it is conceivable that the CFPB could raise questions later about the effectiveness of Upstart's modeling of alternative credit criteria in serving borrowers' interests. That is, the CFPB's interest may well go beyond fair lending testing outcomes.
  • The NAL in this case did not define "alternative [credit] criteria," and it appears that the criteria utilized by Upstart, other than "traditional" criteria, were quite limited.5 Also, the CFPB constrained the NAL to the  automated underwriting model described in the Request, stating that the NAL does not apply to any other products or services or underwriting models or the application of other laws and regulations to Upstart. Should Upstart wish to adjust its NAL-disclosed credit model to add other alternative credit criteria, presumably it would need to consult with the Bureau in advance to preserve the efficacy of the NAL.
  • The NAL is for Upstart's benefit only and does not pertain to anyone other than Upstart.

Footnotes

1 Upstart's submission was "by the book" for CFPB NALs. That is, the company responded to the questions posed by the Bureau in its previous NAL guidance.

2 See Bureau of Consumer Financial Protection Policy on No-Action Letters, 81 Fed. Reg. 8,686 (Feb. 22, 2016).  

3 See Bureau of Consumer Financial Protection "Request for Information Regarding Use of Alternative Data and Modeling Techniques in the Credit Process," 82 Fed. Reg. 11,183 (Feb. 21, 2017).

4 The Request stated, "Upstart commits to sharing the results of its fair lending and access-to-credit test results with the Bureau." The Request also stated, "On a routine basis, Upstart will compare applicant outcomes from its underwriting model against outcomes that would result under a model without non-traditional variables. This will include an analysis of any different outcomes for specific applicant groups, including groups defined by race/ethnicity, sex, age, income, credit history, educational background, and other non-credit based variables."

5 In this regard, it is helpful to refer to the CFPB's February 2017 http://files.consumerfinance.gov/f/documents/20170214_cfpb_Alt-Data-RFI.pdf request for information, wherein the agency posited that that "alternative data" is any data that are not "traditional" and "alternative modeling techniques" are modeling techniques that are not "traditional" modeling techniques. In describing the latter, the CFPB stated that such techniques include but are not limited to "decision trees, random forests, artificial neural networks, k-nearest neighbor, genetic programming, 'boosting' algorithms, etc." Here the Bureau stated, "We use 'alternative' in a descriptive rather than normative sense and recognize that there may not be an easily definable line between traditional and alternative modeling techniques."

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Angela Kleine
Sarah Nicole Davis
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.