The CFPB issued a no-action letter to Upstart Network, Inc., stating the agency would not take supervisory or enforcement action against the firm in connection with its automated, AI-driven credit underwriting model for violations of Section 701(a) of the Equal Credit Opportunity Act ("ECOA") and Section 1002.4(a) and (b) of Regulation B.
According to Upstart's application for no-action relief, the online lending platform employs an automated underwriting model that uses artificial intelligence ("AI") and alternative data designed to more accurately assess an applicant's credit risk profile than traditional models. Through AI techniques and "robust" use of data (the model incorporates over 800 variables and is trained by more than 9 million repayment events), Upstart's automated model is responsible for assigning the maximum amount an applicant can borrow and the appropriate interest rate on the loan. Upstart said that, because its model is "more predictive" of credit performance than traditional models, its lending partners can offer credit to applicants with limited credit or work history at lower interest rates. Upstart also said it has found that for historically underserved demographics, its model provides higher approval rates and lower interest rates than those of traditional models.
Upstart sought a no-action letter from the CFPB to address uncertainty regarding application of ECOA and Regulation B to models like its own that use AI and alternative variables in making credit decisions. In particular, Upstart said there is a lack of certainty regarding "the sufficiency" of the analysis required to confirm that its use of AI and facially-neutral alternative variables do not have an unjustified disparate impact on applicants and borrowers.
As a condition of this relief, the CFPB will require Upstart to implement the Model Risk Assessment Plan (or "MRAP"), which includes:
- testing the model on a periodic basis for adverse impact and predictive accuracy by group;
- researching less discriminatory alternative models that "meet legitimate business needs"; and
- determining how Upstart's model compares to other credit models through access-to-credit testing.
The no-action letter is set to expire after 36 months.
See previous Cabinet coverage of Upstart's 2017 no-action letter concerning the application of the ECOA and Regulation B, and Cadwalader analysis of Upstart's model.
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