Fintech
Fintech Upstart says it has received a subpoena from the SEC over the AI model and lending
(Bloomberg) — Financial technology lender Upstart Holdings Inc. has been subpoenaed by Wall Street’s top regulator over disclosures, including its artificial intelligence and lending models, the company said Wednesday.
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Upstart, which uses artificial intelligence for underwriting, said it is cooperating with the Securities and Exchange Commission after receiving the subpoena on Nov. 17. The company “is unable to predict the outcome of this matter,” Upstart said in a securities filing.
A spokeswoman said the company had no further comment.
The SEC is one of multiple agencies monitoring companies’ use of artificial intelligence, having proposed restrictions last year. Other financial regulators have been looking into artificial intelligence in underwriting because potential bias or otherwise incorrect criteria could lead to negative outcomes, while agencies including the Federal Trade Commission are looking into non-financial companies, Bloomberg previously reported.
Upstart’s disclosure was part of its quarterly earnings report, which showed that 90% of its unsecured loans were fully automated.
“For Upstart and our lending partners, it means there is no human in the loop to process and complete your loan application,” Upstart CEO Dave Girouard said on a call to discuss the findings Tuesday, when he posted the results for the first time.
The company’s shares fell 5.6% on Wednesday following its report, which included a revenue forecast that missed analysts’ expectations.
Founded in 2012, Upstart is one of several consumer-facing startups that have blossomed during the pandemic, luring borrowers with the promise of quick personal loan approvals using artificial intelligence. The sector has struggled more recently due to high interest rates and traditional banks pulling back from purchasing their loans amid an industry-wide crisis.
Last year, Upstart reached a deal to sell up to $4 billion in consumer installment loans to Castlelake LP, Bloomberg reported. It also sold a $300 million loan portfolio to Ares Management Corp. as private lenders scooped up consumer debt. Upstart has already regularly tapped asset-backed securities markets, bundling its loans into bonds of different risks and sizes. It last sold this type of debt in October, issuing just under $200 million in securities, according to data compiled by Bloomberg.
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The situation has improved recently, as banks, credit unions and investors have faced less stress, Girouard said on the call. Upstart expects a return to positive earnings before interest, taxes, depreciation and amortization – a measure of profitability – by the end of the year.
–With assistance from Bre Bradham.
(Adds stock price movement in seventh paragraph.)
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