The Consumer Financial Protection Bureau (“CFPB”) recently issued its first letter pursuant to a no-action letter policy launched in February 2016. The CFPB developed the policy to encourage innovation in the fintech marketplace by creating a testing ground for new technologies and consumer lending methods, particularly where the applicability or impact of existing regulations is uncertain. To take advantage of the policy, a company must submit an application describing the product, method, or service at issue and identify the specific rules and regulations for which the company seeks guidance. If the application is approved, a no-action letter is issued indicating that the CFPB “has no present intention to recommend initiation of an enforcement or supervisory action” against the applicant with respect to the specific product, method, or service and regulatory concerns covered by the company’s application.
The CFPB’s first no-action letter was issued on September 14, 2017, to Upstart Network, Inc. (“Upstart”), a marketplace lender that, in addition to traditional data such as FICO scores, uses alternative sources, such as a borrower’s education and employment background, to underwrite unsecured consumer loans. Upstart described this method in its application, stating that it “uses advanced modeling to improve underwriting accuracy and outcomes.” While the CFPB and other regulators have encouraged the development of consumer lending technologies, they have also warned that new underwriting technologies and models “carry the risk of disparate impact in credit outcomes and the potential for fair lending violations,” particularly where new modes have not been tested in unfavorable credit conditions. Because of this uncertainty, and because Upstart believes its underwriting model will provide improved credit access to underserved borrowers, Upstart requested and received a no-action letter specifically with respect to its efforts to comply with the Equal Credit Opportunity Act (“ECOA”) and the ECOA’s implementing Regulation B. Upstart also committed to sharing its testing results and underlying data with the CFPB if its request was granted.
While issuance of the CFPB’s first no-action letter may justify some cautious optimism that it will take concrete steps to foster lending innovation, marketplace lenders should be mindful of the limits of no-action letters. Indeed, the letter demonstrates that the CFPB will not be providing any hall passes for fintech companies. Upstart’s no-action letter, for example, only states that the CFPB has no present intention to recommend enforcement or supervisory action, indicating the CFPB recognizes that it may still seek penalties and fines in the future. Further, the letter is expressly limited to matters described in Upstart’s application—that is, its automated underwriting model for unsecured credit based on alternative data, and only as applied to ECOA and Regulation B. Accordingly, the CFPB could still initiate supervisory or enforcement action on a variety of other matters related or unrelated to Upstart’s underwriting model and lending activities. The no-action letter is also conditioned on Upstart’s fulfillment of its commitment to share its test results and underlying data with the CFPB. Finally, and perhaps most importantly, the no-action letter can be revoked or modified for any reason at the sole discretion of CFPB staff.
We will continue to monitor the CFPB’s issuance of no-action letters for further guidance.