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:
https://files.consumerfinance.gov/f/documents/cfpb_final-pol…
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.