Upstart’s Top Lawyer Embraces Fintech’s Legal Gray Areas

By Chris Bruce

Alison Nicoll, in-house lawyer for alternative-data lender Upstart Network Inc., is right at home with the dizzying legal and regulatory uncertainties that keep financial technology companies and their investors up at night.

Upstart’s general counsel recently guided Upstart to a first-of-its-kind no-action letter from the Consumer Financial Protection Bureau (CFPB). The Sept. 14 letter gives the company qualified but important flexibility to keep using cutting-edge underwriting techniques that rely on artificial intelligence and machine learning to widen access to credit for consumers, including applicants who may not have traditional credit histories.

Nicoll, who’s no newcomer to fintech, says she’s used to fast-moving companies, new technologies and lots of ambiguity. That’s a plus for someone whose days are full of legal gray areas and a rocket-like pace at one of the most-watched fintech companies.

“It’s a very challenging area for a lawyer,” Nicoll told Bloomberg Law. “You have to be able to move fast and deal with ambiguity if you want to work in fintech.”

Breaking New Ground

San Carlos, Calif.-based Upstart, which got its start in 2012, says its underwriting model can approve more loans with fewer defaults, using alternative data such as educational and employment information and programming that improves the underwriting model as it’s used.

Although that opens the door to expanded credit access, it also means Upstart might run afoul of fair lending laws such as the 1974 Equal Credit Opportunity Act (ECOA) if its lending has the effect of leaving out would-be borrowers in protected classes.

Fair lending compliance has been a major question mark for fintech companies and their investors, which is why the CFPB’s September no-action letter is such a big deal. Upstart will feed lending and compliance data to the CFPB, which will help the agency better understand alternative data and how it’s used in credit and pricing decisions. Upstart predicts that within a decade almost all lending will be based on artificial intelligence and machine learning.

“As machine learning becomes a part of the underwriting process, regulators have to figure out how to test for fair lending impact,” Nicoll said. “So to the extent that the CFPB wants to learn how to examine machine-learning credit models, our no-action letter process is possibly helping them with that. There’s certainly quite a lot of learning as the models evolve.”

No Free Pass

In its request for a no-action letter, Upstart said regulatory uncertainty about its lending program made it harder to raise capital and slowed marketing and product development.

Although the CFPB’s no-action letter eases that problem, it’s not a free pass. The CFPB said it has “no present intention” to recommend ECOA enforcement action against Upstart based on its underwriting model. The no-action letter, which expires in three years, can be rescinded by the agency at any time.According to Nicoll, Upstart’s relationship with the CFPB has been a good one. She said the CFPB understands that Upstart’s methods can mean more access to credit for consumers, a top agency priority.

“That is at the core of what Upstart aims to do, and it’s important to the CFPB as well,” Nicoll told Bloomberg Law. “To encourage responsible innovation, my sense is that they’re inclined to take a fairly cooperative stance rather than jumping into an enforcement posture.”

So far, reaction to the no-action letter has been positive, she said. Although the letter is specific to Upstart, she said, it’s a signal that other fintech companies may also be able to engage with the CFPB on legal questions in a fruitful way. “It’s quite encouraging,” Nicoll said.

From Human Rights to Fintech

Nicoll, who got her start as a human rights lawyer, quickly changed her focus to financial services and fintech law. “Operating in gray areas — where there’s a lot of regulation and emerging technology — is really interesting to me,” she said. “I enjoy that challenge.”

Nicoll arrived at Upstart with a roster of experience in financial services and corporate law. She earned an advanced degree from Columbia Law School, and then spent 1997 to 2000 at Davis Polk & Wardwell in New York, focusing on mergers and acquisitions, capital markets, and credit transactions.

In 2000, she moved to Brobeck, Phleger & Harrison, then the premier law firm for dot.com companies. In 2003, the year Brobeck liquidated, she became general counsel for Clarity Payment Solutions, a prepaid payments processor that was acquired by TSYS (NYSE: TSS) in 2004.

Nicoll went on to PayPal, where she served as associate general counsel and managed its legal team in North America before joining Upstart in 2012.

Upstart co-founder Dave Girouard said hiring Nicoll early on might be the best decision his team ever made. “Most attorneys would run from the chaos that’s inherent in the birth of a startup, but Alison’s brains, judgment, and tranquil disposition have been critical to getting Upstart in the strong position we find ourselves in today,” Girouard said.

To contact the reporter on this story: Chris Bruce in Washington at cbruce@bna.com

To contact the editor responsible for this story: Michael Ferullo at MFerullo@bna.com

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