Today, the Consumer Finance Protection Bureau (CFPB) announced a no-action letter to Upstart, an online consumer lender. A no-action letter essentially allows a company that is regulated by a government entity, in this case the CFPB, to operate under certain circumstances as proposed by the company without enforcement or supervisory action. For the CFPB the goal is to explore consumer-friendly innovations for emerging products or services. The announcement today by the CFPB is significant as it is the first no-action letter of its kind. The CFPB previously sought public feedback on the benefits and risks of using unconventional data to extend credit earlier this year.
When we talk about underwriting with alternative data we often talk about companies that operate outside of the US. Since many countries lack the protections similar to what we have in the US, it opens up the possibilities of using alternative data for many different things, including making credit decisions. Some examples include social data and mobile phone data. Two great examples of this include Tala and Lenddo which have both been featured on the Lend Academy podcast.
Upstart was founded by ex-Googlers and many of the employees hail from Google. They have differentiated themselves, leaning on their learnings at Google to use alternative data, machine learning and artificial intelligence to make better credit decisions. Some of the data points they have used historically has been using information around a borrower’s education. According to the CFPB’s news release:
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 looked at 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.
According to the news release, Upstart will report lending and compliance information to the CFPB to mitigate risk to consumers and aid in the Bureau’s understanding of the real-world impact of alternative data on lending decision-making. The CFPB is interested in learning how using alternative data can help extend credit to more borrowers at affordable rates. The no-action letter relates to enforcement of the Equal Credit Opportunity Act and Regulation B.