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CFPB announces first no-action letter to Upstart Network to gain input on alternative credit

Industry looks to better serve credit invisible

The Consumer Financial Protection Bureau announced a first-of-its-kind no-action letter issued to Upstart Network, a company that uses alternative data in making credit and pricing decisions, in order gain more information on alternative credit.

The bureau created the no-action letter program to encourage consumer-friendly innovations where regulatory uncertainty may exist for certain emerging products or services.

The idea is to assure companies that the CFPB, the watchdog for the consumer finance industry, will not take action against them as they look to launch new products and ideas in finance.

Under the policy, the CFPB explained that 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 how specific provisions of law would be applied. 

The CFPB’s approval of Upstart Network’s no-action letter application, found here, lets the company know that CFPB staff has “no present intention to recommend initiation of an enforcement or supervisory action with respect to the specific matter.”

Under the requirements of Upstart Network’s no-action letter, the company must 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 on lending decision-making.

The letter falls in line with the bureau’s announcement back in February of this year that it wanted to learn more about “credit invisible” borrowers.

The CFPB said at the time that it is seeking public feedback on the benefits and risks of tapping alternative data sources, such as bills for mobile phones and rent payments, to make lending decisions about consumers who lack credit history.

“We want to learn more about whether this kind of alternative data could open up greater access to credit for many Americans who are currently stranded outside the mainstream credit system,” CFPB Director Richard Cordray said back in February. “We also want to understand how market participants are, or could be, mitigating certain risks to consumers that may arise from these innovations.”

Based in San Carlos, Calif., Upstart Network provides an online lending platform for consumers to apply for personal loans, including credit card refinancing, student loans, and debt consolidation.

Compared to traditional credit models that look at credit score and income, Upstart also incorporates non-traditional sources of information such as education and employment history to evaluate consumer loan applications.

While Upstart Network does not operate in the mortgage industry, the CFPB’s decision still reinforces the growing mindset in the mortgage industry to look for alternative credit options.

As recent as this past August, a bipartisan group reintroduced a bill in the House of Representatives that would allow Fannie Mae and Freddie Mac to consider alternative credit-scoring models beyond the FICO credit score the government-sponsored enterprises currently use.

With moves to help the credit invisible coming from all sides, the industry should expect to see changes in this area soon.

And if there are other companies that want to do something similar, Upstart Network isn’t the only company that can apply for a no-action letter. The CFPB’s Project Catalyst is an initiative designed to encourage consumer-friendly developments in the consumer financial marketplace, which also facilitates the no-action letter program as part of its work to support marketplace innovation.

All the details on the initiative can be found here

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