The CFPB issued an order last week terminating the no-action letter issued to Upstart Network, Inc. on November 30, 2020 for a 36-month term (NAL).  The NAL was essentially a renewal of the no-action letter issued to Upstart in September 2017, which was the first no-action letter issued by the CFPB.

The NAL was issued in connection with Upstart’s automated model for making underwriting and pricing decisions on applications by consumers for unsecured, closed-end loans.  The model uses artificial intelligence techniques and alternative data.  The NAL provided that while it remained in effect, the Bureau would not make supervisory findings or bring a supervisory or enforcement action against Upstart under (1) the ECOA or Regulation B for discriminating against an applicant on a prohibited basis or for discouraging an applicant on a prohibited basis, or (2) the Bureau’s UDAAP authority.  The NAL included a requirement for Upstart to notify the Bureau of any significant changes to Upstart’s model before implementation.

The CFPB’s termination order recites that in April 2022, pursuant to the NAL, Upstart notified the CFPB that it intended to add a significant number of new variables to its underwriting and pricing model.  After the CFPB requested additional time to review the changes to Upstart’s model, Upstart submitted an application to modify the NAL to shorten its term to 18 months (with an expiration date of May 30, 2022) so that, in response to market changes, it would be able to make the changes promptly.  The order treats Upstart’s application to modify the NAL “to shorten the term to expire immediately” as a request to terminate the NAL. 

In addition to terminating the NAL, the CFPB expressly addresses “the risk that the public could misconstrue the NAL to suggest that the CFPB concluded Upstart’s model complies with the ECOA.”  The Bureau states that it “has not endorsed Upstart’s model, and has not performed the analysis necessary to conclude whether Upstart’s model does or does not violate the ECOA.”  To explain its request for additional time to review Upstart’s changes to its model, the CFPB also states that because of the risk that the NAL could be misconstrued as an endorsement, “the CFPB would need to perform more rigorous monitoring and assessment of Upstart’s model and any changes to the model in order to responsibly sustain the NAL, which would take more time and resources.”  The Bureau comments that “Upstart has correctly identified that this review would prevent them from making quick business decisions with regard to its model.”

Last month, the CFPB announced that as part of a new approach to innovation in consumer finance, it was replacing its Office of Innovation and Operation Catalyst with a new office, the Office of Competition and Innovation.  We subsequently learned from the CFPB’s press office that despite calling its No-Action Letter and Compliance Assistance Sandbox programs ineffective in its announcement, the CFPB has not rescinded those programs and is still taking new applications and processing previously submitted applications.