Alternative lender Upstart receives subpoena from Securities and Exchange Commission for fintech disclosures related to use of artificial intelligence models and lendingthe fintech said in its quarterly report on Tuesday.
The San Mateo, California-based company announced on November 17, 2023 that it had received the subpoena. Regulators requested various documents and information. “While we are cooperating with the SEC, we cannot predict the outcome of this matter,” Upstart said in the filing.
Upstart noted in its quarterly earnings report that the percentage of fully automated loans in the first quarter of 2024 increased to 90% from 84% in the same period in 2023.
“For Upstart and our lending partners, this means a significant increase in the processing and completion of loan applications,” Upstart CEO Dave Girouard said Tuesday during a conference call to discuss quarterly results, as reported by Bloomberg. It means there is no human involvement.”
In an email response to Banking Dive, Upstart said it has nothing to add beyond what is included in the 10-Q.
The SEC is one of several regulators scrutinizing financial institutions’ use of AI, including for fraud prevention, credit underwriting, and personalizing customer service.
Last September, the Consumer Financial Protection Bureau released guidance on denying credit to lenders that use AI to make lending decisions. The Federal Trade Commission is investigating partnerships and investments made by tech giants Microsoft, Alphabet and Amazon with AI startups OpenAI and Anthropic, Bloomberg reports.
The SEC subpoenaed Upstart approximately 17 months after the CFPB terminated Upstart’s no-action letter in June 2022. Fintech companies had asked the CFPB to end the no-action letter, saying they wanted to make urgent changes such as adding variables to underwriting and pricing. Models — those that can impede an agency’s lengthy review process.
Upstart uses AI and alternative credit data, such as a borrower’s education and employment history, as part of its formula to determine creditworthiness, and received a three-year no-action letter from the Consumer Financial Protection Bureau in 2017 It was the first company to do so.
While sharing data with the CFPB in 2019, Upstart said that during the first two years of the no-action letter period, 27% more loans were approved thanks to the alternative data model, and annual percentage rates were 16% lower on average.
In July 2022, Upstart acknowledged in a press release that the loan market was “capital constrained” due to a lack of demand from loan buyers. In addition, tough macroeconomic conditions continue to plague the fintech industry, with the company laying off 365 people, or about 20% of its workforce, in February last year. This followed layoffs in November 2022, when Upstart cut 140 employees.
