Upstart has reportedly received a subpoena from the US Securities and Exchange Commission (SEC) pertaining to the Fintech company’s disclosures as they relate to use of its AI algorithms/models and loans. This, according to Upstart’s quarterly filing released this past Tuesday.
The California-headquartered alternative lender stated that it received the subpoena on November 17, 2023. The SEC has reportedly requested several documents and pertinent details.
Upstart stated:
“We are cooperating with the SEC and are unable to predict the outcome of this matter.”
In its quarterly earnings report, Upstart revealed that during Q1 2024, its percentage of loans fully automated surged to 90%—up considerably from 84% in the same period last year.
Upstart Chief Executive Officer Dave Girouard stated this past Tuesday during a call to talk about quarterly results:
“For Upstart and our lending partners, it means there’s no human in the loop whatsoever to process and complete the loan application.”
Upstart also mentioned that it does not have much to add beyond what is stated in the 10-Q. This, according to an update shared by Banking Dive.
The SEC is one of several regulators that’s been quite critical of financial service providers’ utilization of AI. Artificial intellience is now increasingly being leveraged for fraud prevention, credit underwriting as well as enhancement of the customer experience.
The Consumer Financial Protection Bureau (CFPB) released guidelines this past September regarding credit denials for lenders who leverage AI to make more informed/accurate lending decisions.
At present, the Federal Trade Commission (FTC) is carrying out a probe into the partnerships and sizable investments technology firms like Microsoft, Alphabet and Amazon have made into AI companies such as OpenAI and Anthropic. This, according to a report from Bloomberg.
The SEC subpoenaed Upstart around 17 months following when CFPB terminated Upstart’s no-action letter back in June of 2022.
The company had asked the CFPB to end its no-action letter since it was looking to perform time-sensitive updates such as adding variables to its underwriting as well as pricing model — which is a move that may potentially affect the regulator’s extensive review.
Upstart, which leverages AI and alternative credit information like a borrower’s level of education and career/job profile as part of its method to figure out creditworthiness, became the first firm to acquire a 3-year no-action letter from the CFPB back in 2017.
While providing key data to the CFPB back in 2019, Upstart claimed that its alternative data algorithms assisted it with approving 27% more loan applications, with a yearly percentage rate averaging about 16% lower. This was during the initial 2 years of its no-action letter issuance period.
Upstart confirmed back in 2022 in an official announcement that its loan marketplace was funding “constrained” due to a lack of adequate demand from loan purchasers.
In addition, a difficult macroeconomic environment continued to negatively impact the company, which resulted in it laying off around 20% of its employees (365 workers) this past February. That came after November 2022 staff cuts, when Upstart fired 140 employees.
