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Supporting consumer-friendly innovation: Announcing our first no-action letter

As part of the Bureau’s job to make consumer financial markets work for consumers and responsible businesses, we have long worked to support consumer-friendly developments in the consumer financial marketplace. This work has included encouraging ways to extend affordable, responsible lending to more people, while at the same time ensuring companies play by the rules so that consumers are treated fairly and protected.  

Today, our first-ever no-action letter is being issued to Upstart, a company that uses non-traditional or alternative data and modeling techniques in lending decision-making. Underwriting models that use innovative underwriting techniques may enable people with limited credit history, among others, to obtain credit or obtain credit on better terms. Under the terms of our no-action letter, Upstart has agreed to a number of conditions designed to mitigate risk to consumers. We hope this will create an important opportunity to further our own understanding of the use of alternative data and modeling techniques in lending decision-making, how such variables and modeling techniques impact consumer access to credit, and how entities can establish strong compliance management systems for these emerging practices.

Our no-action letter signifies that Bureau staff have no present intent to recommend initiation of supervisory or enforcement action against Upstart with respect to the Equal Credit Opportunity Act. The letter applies to Upstart’s model for underwriting and pricing applicants as described in the company’s application materials . This 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. We encourage other innovators who believe they have a product or service that meet the criteria laid out in our public no-action letter policy to consider our no-action letter process.

As a condition of the no-action letter, Upstart will regularly report lending and compliance information to the CFPB to mitigate risk to consumers and aid the Bureau’s understanding of the real-world impact of alternative data and modeling techniques on lending decision-making. Several months ago we 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. Alternative data could include things such as 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 explored 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. 

We have heard from many companies that share our goal of increasing responsible and fair access to credit. We recognize that for all market participants this is an emerging and rapidly changing area. Participants have a range of new and evolving practices and ways of leveraging technology to inform decisions in the credit process, and the market will continue to evolve. We are committed to continuing ongoing dialogue with all companies in this area and welcome innovators to engage with us through our Project Catalyst initiative

As part of our broader work, we will continue looking closely into the promises and pitfalls of using alternative data to evaluate creditworthiness and the steps participants in this market can take to harness the benefits while managing the risks. We want to foster a marketplace where emerging consumer financial products or services that are safe and beneficial to consumers can be developed. 

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