New From the CFPB: No-Action Letter, Online Aggregator Targeted

Financial Services Law

In the latest Consumer Financial Protection Bureau news, the Bureau issued its first no-action letter (of any kind), and did so to an online lending platform. It also took action against an online lead aggregator.

What happened

Upstart, a California-based online lending platform that received the CFPB’s first no-action letter, uses traditional factors (such as credit score and income) for lending decisions but also relies on alternative data, such as education (including school attended and degree obtained) and employment history, to make credit and pricing decisions.

Noting that its lending platform has been operational since 2014, the lender requested a no-action letter from the CFPB citing “the uncertainty surrounding the sufficiency of its efforts to ensure compliance,” adding that “the company [is] wary of engaging in more extensive marketing efforts and expanding its product offerings” as a result.

The lender also told the Bureau that it offers “substantial” benefits to consumers by “expanding credit access and providing better loan terms to traditionally underserved borrowers,” promising to share the results of any fair-lending and access-to-credit testing with the CFPB.

The CFPB granted the request for a no-action letter with a life span of three years, with the ability to seek renewal.

“The CFPB’s no-action letter signifies that Bureau staff has no present intent to recommend initiation of supervisory or enforcement action against [the lender] with respect to the Equal Credit Opportunity Act,” the agency explained. “The letter applies to [the lender’s] model for underwriting and pricing applicants as described in the company’s application materials. The no-action letter is specific to the facts and circumstances of the particular company and does not serve as an endorsement of the use of any particular variables or modeling techniques.”

Unlike traditional no-action letters—for example, those issued by the staff of the Securities and Exchange Commission—the CFPB’s no-action letter is not to be relied on by any platform other than Upstart and, as noted above, has a three-year expiration provision.

In addition to the data on expanding access to credit, Upstart will provide the Bureau with information about the loan applications it receives, how it decides which loans to approve and how it will mitigate risk to consumers.

“The CFPB expects that this information will further its understanding of how these types of practices impact access to credit generally and for traditionally underserved populations, as well as the application of compliance management systems for these emerging practices,” the Bureau said.

In other CFPB news, the agency published a proposed consent order against an online lead aggregator that allegedly steered consumers toward loans that were not legal in their home states. Consumers who applied for loans through the lead aggregator’s network had no control over which lenders received their applications, the Bureau said, as the aggregator transmitted consumers’ information to various online lenders for their evaluation.

The California-based company had knowledge of the consumer’s state of residence for each loan but “regularly sold Leads for consumers located in states where the resulting loan was void or the lender had no legal right to collect the principal, interest, or fees from the consumer based on state-licensing requirements or interest-rate limits,” according to the proposed consent order.

By selling loan applications to lenders in a manner that prevented consumers from understanding the risks, costs or conditions of the loans they were offered, the aggregator engaged in an abusive practice in violation of the Dodd-Frank Wall Street Reform and Consumer Protection Act’s prohibition on unfair, deceptive, or abusive acts or practices, the CFPB claimed.

The proposed consent order requires the company to undertake “reasonable efforts” to ensure that the loan applications it sells do not result in consumer loans that are void under the laws of the consumer’s state of residence (including verification of the required licenses for purchasers) and pay a $100,000 civil money penalty.

In a separate proposed consent order that would resolve a pending lawsuit alleging illegal conduct at his prior company, the aggregator’s president and primary owner faces similar requirements (such as ensuring that the loan applications he sells do not result in void loans), a $250,000 civil money penalty, and an obligation to ensure that lead generators are not soliciting or receiving loan applications through any means that uses “misleading, inaccurate, or false statements.”

To read the no-action letter application, click here.

To read the no-action letter, click here.

To read the proposed consent order, click here.

To read the proposed consent order for the company’s owner, click here.

Why it matters

The no-action letter was the Bureau’s first since announcing Project Catalyst last year, a program aimed at encouraging “consumer-friendly innovations” where regulatory uncertainty may exist for emerging products or services. While some in the industry hoped that the CFPB would provide more details about the scope of permitted activity in the no-action letter, the Bureau limited its application to only the applicant and was careful to reserve the ability to conduct supervisory activities or engage in an enforcement action against the lender. It remains a tactically risky move to voluntarily provide data to the CFPB on a regular basis, but it was likely necessary to convince the Bureau that Upstart would be in compliance with the Equal Credit Opportunity Act—in particular, that when applying the “effects test” of ECOA to lending decisions, lending to a preselected group of educated professionals does not result in discriminatory practices since presumably this is a group that allows for equal racial, ethnic, religious and gender membership. As for the online lead aggregator, the action serves as a reminder that the online lending industry remains a subject of CFPB scrutiny.



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