Compliance Blog

Last week, the CFPB announced the issuance of a no-action letter to Upstart Network, Inc., its first under the Bureau's Project Catalyst initiative.  The initiative, which launched in 2012, is intended to encourage consumer-friendly innovation in the financial marketplace. To do this, Project Catalyst is tasked with engaging with the innovator community, participating in initiatives that inform its policy work, and monitoring emerging trends in order to remain forward-looking. 

CFPB's Policy Statement on No-Action Letters

Under the Project Catalyst initiative, the CFPB in 2016 finalized a policy statement on no-action letters to reduce potential regulatory uncertainty and enhance compliance in specific circumstances where "a product holds the promise for significant consumer benefit and where there may be uncertainty around how the product fits within an existing regulatory scheme."  For example, the CFPB said the formal no-action policy could be appropriate for new products being developed by innovators in financial technology (fintech) or other startups that involve ground-breaking technology that did not exist, and thus wasn't contemplated, when existing regulations were first adopted.

The Bureau issued the policy statement on no-action letters under its authority in §1021 of the Dodd-Frank Act, which empowers the CFPB to exercise its authorities for the purpose of ensuring that markets for consumer financial products and services operate transparently and efficiently to facilitate access and innovation.  See, 12 U.S.C. 5512(b)(1). 

The no-action policy was designed to foster innovation by enhancing compliance with existing federal consumer financial law and regulation.  Essentially, the policy allows a fintech or other financial startup to seek a statement, or a "no-action letter," from the CFPB advising it that the Bureau has no present intention to recommend an enforcement or supervisory action against the entity for its new product or innovation.  Thus, fintechs concerned about running afoul of federal regulation can have the reassurance of knowing that they can bring a new product or service to market without worrying about whether the CFPB will be coming after them for a regulatory violation. 

Critics of the policy pointed out that a no-action letter would, in practice, offer little reassurance to innovators.  This is because the CFPB's no-action letters are merely a public declaration that the Bureau does not, at present, intend to pursue an enforcement action against a specific financial product or new innovation.  But, no-action letters are fact-specific, revocable at any time, and do not foreclose private enforcement or enforcement by any other regulator (such as NCUA).  In short, no-action letters are non-binding, non-enforceable, non-transferrable, and offer only limited protection to financial innovators.  The policy's clear shortcomings led some members of Congress to declare the no-action policy, and Project Catalyst as a whole, a "flop" (even after the CFPB released its optimistic Project Catalyst Innovation Highlights Report in October 2016).

Yet lo and behold, more than a year and a half after the CFPB announced its no-action policy, the Bureau has finally issued its first no-action letter under the Project Catalyst initiative.

Upstart Network, Inc. No-Action Letter

According to the CFPB's press release, Upstart Network, Inc. is a California-based online lending platform that evaluates consumer applications for personal loans like student loans, credit card refinancing, and debt consolidation, using traditional underwriting factors (e.g., credit score and income), as well as non-traditional information or alternative data (e.g., education and employment history). 

The brief no-action letter simply indicates that CFPB staff has "no present intent to recommend initiation of supervisory or enforcement action against Upstart with respect to the Equal Credit Opportunity Act" for Upstart's model for underwriting and pricing applicants.  Importantly, the letter clearly states that it is fact-specific and does not serve as a general endorsement of the use of any particular underwriting variables or modeling.  Also, the no-action letter is only temporary; it must be renewed after three years.  Keep in mind that the CFPB will likely be under different leadership by that time, which means there is the potential that, in just a few short years, Upstart could very well find itself in regulatory hot water after investing in technology and developing a platform that has been in the market only three years.  Very little reassurance, indeed…

As a condition to the no-action letter, Upstart has agreed to share information with the CFPB; the Bureau is hoping to learn more about alternative data sources to help "credit invisible" consumers, or those with a lack of credit history, gain greater access to credit.

I will be curious to see if, after a slow start, more financial innovators will participate in the CFPB's Project Catalyst initiative, and whether the CFPB will be issuing more no-action letters in the near-term.  The new administration has been vocal in its support for market innovation and economic growth and it will be interesting to see whether the issuance of its first no-action letter signals a shift in how the Bureau is doing things under this administration.  Stay tuned.