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Upstart Subpoenaed by SEC, Shares Dip 5.6% on AI Concerns

Upstart receives SEC subpoena over AI lending practices amid regulatory scrutiny, shares fall 5.6% post-earnings report.

By Barry Stearns

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5/8, 17:45 EDT
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Key Takeaway

  • Upstart Holdings Inc. received an SEC subpoena regarding its AI loan underwriting disclosures, amid growing regulatory scrutiny on AI use.
  • Shares fell 5.6% post-earnings report, reflecting investor concerns over regulatory impacts and a disappointing revenue forecast.
  • Despite pandemic-driven growth, Upstart faces challenges from high interest rates and banks' hesitance to buy loans, impacting its financial strategies.

Regulatory Scrutiny

Upstart Holdings Inc., a financial technology lender known for its use of artificial intelligence (AI) in underwriting loans, disclosed in a recent securities filing that it has received a subpoena from the Securities and Exchange Commission (SEC). The subpoena, issued on November 17, concerns the company's disclosures related to its AI models and loan processes. Upstart has stated its cooperation with the SEC but expressed uncertainty regarding the outcome of this matter. This development comes amid broader regulatory interest in the use of AI by companies, with the SEC and other financial regulators examining AI in underwriting for potential biases or faulty criteria that could lead to adverse outcomes. The Federal Trade Commission is also investigating non-financial companies' use of AI.

Earnings Report and Market Reaction

In its quarterly earnings report, Upstart revealed that 90% of its unsecured loans were fully automated, emphasizing the absence of human intervention in the loan application process. CEO Dave Girouard highlighted this automation as a significant advantage for Upstart and its lending partners. However, the company's shares fell 5.6% following the earnings report, which included a revenue forecast falling short of analyst expectations. This market reaction reflects investor concerns over the regulatory scrutiny and the potential impact on Upstart's future performance.

Pandemic Growth and Recent Challenges

Founded in 2012, Upstart experienced significant growth during the pandemic, attracting borrowers with the promise of quick personal loan approvals through its AI technology. However, the sector has faced challenges recently due to high interest rates and traditional banks' reluctance to purchase loans from fintech companies amid a sector-wide crisis. Despite these hurdles, Upstart has engaged in significant transactions to manage its loan portfolio, including agreements to sell up to $4 billion of consumer installment loans to Castlelake LP and a $300 million portfolio to Ares Management Corp. The company has also utilized the asset-backed securities markets to bundle its loans into bonds, with its last issuance occurring in October.

Management Quotes

  • Dave Girouard, CEO of Upstart:

    "For Upstart and our lending partners, it means there’s no human in the loop whatsoever to process and complete the loan application."