Alternative lender Upstart has received a subpoena from the Securities and Exchange Commission regarding the fintech’s disclosures related to use of its artificial intelligence models and loans, the fintech revealed in its quarterly filing Tuesday.
The San Mateo, California-based company said it received the subpoena Nov. 17, 2023; the regulator has asked for various documents and information. “We are cooperating with the SEC and are unable to predict the outcome of this matter,” Upstart said in the filing.
In its quarterly earnings report, Upstart noted that during the first quarter of 2024, its percentage of loans fully automated increased to 90% — up from 84% in the same period of 2023.
“For Upstart and our lending partners, it means there’s no human in the loop whatsoever to process and complete the loan application,” Upstart CEO Dave Girouard said Tuesday during a call to discuss quarterly results, Bloomberg reported.
Upstart said it has nothing to add beyond what is included in the 10-Q in an email response to Banking Dive.
The SEC is one of multiple regulatory authorities scrutinizing financial institutions’ use of AI, including fraud prevention, credit underwriting and personalization of customer services.
The Consumer Financial Protection Bureau issued guidance last September on credit denials for lenders who use AI to make lending decisions. The Federal Trade Commission is investigating the partnerships and investments tech giants Microsoft, Alphabet and Amazon have with AI startups OpenAI and Anthropic, Bloomberg has reported.
The SEC subpoenaed Upstart about 17 months after the CFPB terminated Upstart’s no-action letter in June 2022. The fintech had urged the CFPB to terminate its no-action letter because it wanted to make time-sensitive changes like adding variables to its underwriting and pricing model — something that would interfere with the agency’s lengthy review process.
Upstart, which uses AI and alternative credit data such as a borrower’s education and job history as part of its formula to determine creditworthiness, became the first company to obtain a three-year no-action letter from the Consumer Financial Protection Bureau in 2017.
While sharing data with the CFPB in 2019, Upstart said its alternative data model helped it approve 27% more loans, with an annual percentage rate averaging 16% lower, during the first two years of its no-action letter period.
In July 2022, Upstart acknowledged in a press release that its loan marketplace had become “funding constrained” over a lack of demand from loan buyers. Additionally, challenging macroeconomic conditions continued to plague the fintech, which led to it laying off roughly 20% of its workforce, or 365 employees, last February. That followed November 2022 job cuts, when Upstart culled 140 employees.
