Fintech Upstart Says It Received SEC Subpoena on AI Model, Loans
(Bloomberg) — Financial technology lender Upstart Holdings Inc. has been subpoenaed by Wall Street’s main regulator about disclosures, including its artificial intelligence models and loans, the company said Wednesday.
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Upstart, which uses AI for underwriting, said it is cooperating with the Securities and Exchange Commission after having received the subpoena on Nov. 17. The company is “unable to predict the outcome of this matter,” Upstart said in a securities filing.
A spokesperson said the company didn’t have any further comment.
The SEC is one of multiple agencies scrutinizing companies’ use of AI, having proposed restrictions last year. Other financial regulators have been examining AI in underwriting because potential biases or otherwise faulty criteria could lead to bad 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’s no human in the loop whatsoever to process and complete the loan application,” Upstart CEO Dave Girouard during a call to discuss results on Tuesday, when it first released results.
The company’s shares fell 5.6% on Wednesday following its report, which included a revenue forecast that missed analyst expectations.
Founded in 2012, Upstart is one of several consumer-facing startups that blossomed during the pandemic, drawing in borrowers with promises of quick personal loan approvals using AI. The sector has struggled more recently because of high interest rates as well as traditional banks pulling back from buying their loans due to a sector-wide crisis.
Last year, Upstart struck an agreement to sell up to $4 billion of consumer installment loans to Castlelake LP, Bloomberg reported. It also sold a $300 million portfolio of loans to Ares Management Corp., as private credit firms scooped up consumer debt. Upstart has also tapped the asset-backed securities markets regularly before, bundling its loans into bonds of varying risk and size. It last sold this kind of debt in October, issuing just under $200 million of securities, according to data compiled by Bloomberg.
The situation has improved recently, as banks, credit unions and investors have been facing less stress, Girouard said on the call. Upstart expects a return to positive earnings before interest, taxes, depreciation and amortization — a measure of profitability — later this year.
–With assistance from Bre Bradham.
(Adds stock price movement in 7th paragraph.)
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