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In its first ever no-action letter, the Consumer Financial Protection Bureau ("CFPB") granted relief to an online lending platform from certain supervisory and enforcement actions with respect to the Equal Credit Opportunity Act (as implemented by Regulation B).
The relief was granted in response to a request from Upstart, a Silicon Valley company that uses alternative data as part of an automated underwriting model to evaluate applications for unsecured credit. According to Upstart, this underwriting process opens the door for applicants with limited credit or work history to qualify for more favorable loans than they otherwise would be able to access through traditional underwriting models.
As part of its model, Upstart uses non-traditional indicators to evaluate applicants, such as educational history, current or pending employment and whether or not the applicant has a valid email address. Under Regulation B, creditors cannot discriminate against applicants based on "race, religion, sex, age, color, national origin, marital status, receipt of public assistance, and exercise of certain legal rights." Upstart explained that while it believes its underwriting methodology has not produced a disparate impact on protected classes, the "expected evolution" and "potential changes to the applicant pool" for the lending platform lead to substantial uncertainty concerning the appropriate remedy to any potential discrimination that might arise. Upstart pledged that it will continue to maintain a comprehensive program to ensure continued compliance with Regulation B.
The CFPB clarified that its no-action relief 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." In addition, as a condition to the relief granted, Upstart will be required to regularly report lending and compliance information to the CFPB. The no-action relief is valid for three years, and Upstart is permitted to seek renewal.
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