Upstart’s Request to End Regulatory Immunity Raises Question on CFPB’s Tool

The Consumer Financial Protection Bureau (CFPB) on Wednesday (June 8) issued an order to terminate Upstart Network from its list of approved “no action letters” (NALs). Surprisingly, the request to terminate the NAL didn’t come from the regulator but from the company, and it may raise questions about the requirements imposed by the agency to benefit from NALs.

The CFPB granted Upstart an NAL in 2017, followed by a second one in 2020, the first of its kind since the government watchdog created the NAL program to encourage innovations.

The NALs provided a special regulatory treatment to Upstart by immunizing the lender from being charged with fair lending law violations with respect to its underwriting algorithm, while the NAL remained in force. In the original letter, the CFPB said the staff has “no intention to recommend initiation of an enforcement or supervisory action against Upstart with regard to application of the Equal Credit Opportunity Act (ECOA)2 and its implementing regulation, Regulation B,3.”

NALs are a great tool for companies that wish to implement new products or services and don’t want to have unexpected regulatory issues. Yet, as the bureau said in the NAL granted to Upstart, the issuance of a letter doesn’t mean that the agency endorses the company’s product, just that the agency doesn’t intend to open any proceeding against the company for the product covered by the letter.

For the regulator to be sure that Upstart’s product didn’t pose any risk for consumers, the terms of the 2020 NAL required Upstart to notify the CFPB of significant changes to its “artificial intelligence” model prior to their implementation. This led to regular communication between the company and the regulator and to getting the necessary approvals for all the changes suggested by the company before launching them on the market. This process may have become a burden for the company, which is citing this issue as one reason to request the termination of the NAL.

According to a press release issued by the CFPB on Wednesday, Upstart notified the CFPB on April 13 that it intended to add a significant number of new variables to its underwriting and pricing model. The CFPB communicated the company that it needed time to review and evaluate the implications of the changes to Upstart’s model. In response, the company requested the termination of the NAL to “be able to make changes to its model without need for CFPB review and approval.”

The termination of the NAL, effective immediately, doesn’t necessarily mean that the company will be now subject to any investigation or that the latest changes suggested by Upstart may violate fair lending laws. The letter also provides protection retroactively, so the agency cannot bring any action for any conduct covered by the NAL in the past. Yet, it is noticeable that a company decides to voluntarily lose regulatory immunity by requesting the termination of a NAL just to be able to implement business changes in a timely manner. The CFPB has approved six NALs, according to its website, to companies such as JP Morgan Chase, Bank Policy Institute and Bank of America, but this example may raise questions about the pros and cons of this enforcement tool. While this tool may foster innovation in a secure regulatory environment, as the agency argues, a too burdensome reporting requirement may just have the opposite effect, as Upstart indicated.

FinCEN Plans to Issue NALs

While the CFPB may rethink how to best use NALs to protect consumers and encourage companies to innovate, another federal agency, the Financial Crimes Enforcement Network (FinCEN) on Friday (June 3) issued an Advance Notice of Proposed Rulemaking (ANPRM) relating to the implementation of a no-action letter process at the agency.

FinCEN believes that a NAL would complement its other tools to provide regulatory guidance. “A no-action letter process has the potential to spur innovation and enhance overall effectiveness of the AML/CFT framework and the implementation of financial institutions’ compliance programs,” said FinCEN Acting Director Himamauli Das.

Yet, in the proposed rulemaking, FinCEN poses a wide range of questions about the efficacy of a no-action letter to make sure that its scope and content are fit for purpose.

Read more: FinCEN Proposes Rulemaking to Add No-Action Letter Enforcement Tool