UPST No-Action Letter

I have been on this board about a year now and it has been transformational to my portfolio. Thank You All!! with special thanks to Saul and GauchoRico. I do not post often but hope to grow my confidence and knowledge to contribute more over time. I have built up a substantial stake in UPST which has driven me to do more research, specifically on my top two concerns/risks: Customer Concentration and Regulatory Compliance. Customer concentration is something I must live with in the short run, but I believe it will work itself out over time with continued high growth. I concentrated on Compliance. I worked at a large insurance company for 15 years and understand its importance and potential impact if a finding goes against you.

Reading UPST 2020 Form 10-K Annual report I see:

Regulatory Compliance
We have demonstrated to the CFPB (Consumer Financial Protection Bureau) that our platform does not introduce unlawful bias to the credit decision, and we have developed sophisticated reporting procedures to ensure future versions of the model remain fair.

In September 2017, we received the CFPB’s first no-action letter. The CFPB issues no-action letters to reduce potential regulatory uncertainty for innovative products that may offer significant consumer benefit. On November 30, 2020, at the expiration of our first no-action letter, we received a new no-action letter from the CFPB, which expires on November 30, 2023. At this time, we do not know of any other lending platforms that have received similar no-action letters for fair lending from the CFPB.

The No-Action was a great relief to me and extends to the end of 2023! However, I really did not know what it meant. I wanted to learn more about CFPB, no-action letters, and determine if it is as important and rare as indicated by Upstart? I found an informative discussion (see link below). This was an interesting, albeit dry, read as it described the pro’s and Cons of the changes that were proposed for the latest “Final” version. I only focused only the area of interest to me and pulled out some key points noted below:…

No Action Letters explained:

Purpose of CFPB:

Congress gave the Bureau supervisory and enforcement authority to protect consumers from unfair, deceptive, and abusive acts and practices, as well as other violations of Federal consumer financial law.13……

A primary means of facilitating innovation is removing barriers to innovation. This can be accomplished in a variety of ways. As noted, Congress expressly identified one of these: reducing unwarranted regulatory burdens. Another consists in reducing uncertainty regarding the meaning or application of statutory and regulatory provisions. Faced with such regulatory uncertainty, some companies may hesitate to develop and offer potentially beneficial products and services, not wishing to run the risk of supervisory findings, enforcement actions, or private lawsuits. Reducing this uncertainty may encourage these companies to offer these products and thereby benefit consumers……

In the preamble of the 2016 Policy, the Bureau anticipated that No-Action Letters would be provided rarely and on the basis of exceptional circumstances and estimated that the Bureau would on average receive one to three actionable applications per year. This estimate was based on the features built into the 2016 Policy; i.e., the 2016 Policy was designed to result in no more than three No-Action Letters per year. The Bureau issued only one No-Action Letter under the 2016 Policy in the nearly three- year period between its issuance and publication of the proposed Policy in December 2018.……

Bureau’s assessment on the core application elements(for a no action letter): the potential benefits of the product or service, its potential consumer risks, and the need for a No-Action Letter…

As the Bureau noted in the proposal, other Federal agencies with no-action letter programs have terminated no-action letters very rarely. The Bureau anticipates that revocations would be equally rare under the Policy…

the Bureau maintains the right to obtain information relating to the consumer financial product or service subject to a No-Action Letter under its applicable supervision and enforcement authorities…. Although the Bureau maintains the right to obtain information about the product or service subject to a No-Action Letter using its supervisory authority, it does not follow that the Bureau intends to routinely do so.

Although there are many more compliance and regulations that affect a financial company, this gives me much more confidence about regulatory uncertainties and specifically litigation for unfair lending/credit practices. This really does appear to be a fairly rare and exceptional achievement I imagine future Bank customers will feel that same. I do not work for bank, so welcome other’s perspective.


Forgive my ignorance, but for the life of me I couldn’t glean from your excerpt what an NAL actually offered to the recipient. Here’s what I would add:

NALs provide increased regulatory certainty that the Bureau will not bring a supervisory or enforcement action against a company for providing a product or service under certain facts and circumstances.

So it’s like temporary regulatory immunity for the good of innovation.



In an earlier post, I posted a podcast with the CEO, and he talked about this. Some of the points were it is not a ‘get out of regulation free’ card – they are actually working hand-in-hand with the regulators, and helping the regulators define the must have for AI technologies from a lot of different standpoints – including making sure that there are way to measure, for instance, whether the algorithms are discriminatory. This is huge. Another point was that given the way that large banks operate within many regulatory schemes, it is almost impossible for them to ‘de-risk’ new technology approaches internally.


The models are NOT “bias proof”. Further more the “biases change” as new data feeds in. I deal with this with our hiring and performance decisions models.
The folks evaluating our models have very little idea as to how my models work and if they have biases and if we should let it go to production or not.

Slight diversion: This problem is not a “upstart specific” issue. It is “machine learning” as a discipline is struggling with. Example Google has ethics committee to make sure data scientists / ml engineers don’t run amuck.

Understandably, the regulators are struggling to understand this and how to evaluate this rapidly evolving field.
As long as Upstarts makes their models, features, weights and performance reports available to regulators and is transparent - it is in good shape.
Seems like Upstart management is doing exactly this and proactively engaging with regulators which is terrific.



To add to your points:

Upstart has received unfair attention from the Student Borrower Protection Center (SBPC) in February of last year with claims of discriminatory lending.

What happened was the SBPC analyst submitted fabricated applications from twenty-six hypothetical consumers over a 2.5 month period to request a loan rate from Upstart, then selected the 3 results that best suited their discrimination claim (see…).

Shortly after the SBPC study was released, Democratic members of the Senate
Committee on Banking, Housing, and Urban Affairs sent letters to Upstart and other lenders and
service providers utilizing education-related data for lending purposes. The letters expressed
concern about the use of non-individualized education factors, which they noted the CFPB, the
FDIC, and the New York Attorney General’s Office had all found could, in at least some
circumstances, result in ECOA violations.

So, even though Upstart has already shown that their AI/ML underwriting models has actually increased credit availability to minorities and disadvantaged applicants vs traditional modeling, it was still the target of a partisan organization and members of Congress with political aims.

Nevertheless, Upstart obtained a renewal of the No Action Letter from the CFPB in September of that year. The CFPB clearly did not believe actual data supported the false SBPC claims.

Upstart’s management has continued to remain transparent and proactive; to appease the SBPC and prevent other organizations making further baseless claims of discriminatory lending, Upstart entered into an agreement in December last year with the NAACP Legal Defense Fund (LDF) and SBPC, overseen by Relman Colfax law firm.

Their initial report was April 2021. I will be following subsequent quarterly reports.