From Polls to Partnerships: Election Season and the NCUA’s Role in Modern Lending

0:02 You are listening to Leaders in Lending from Upstart, a podcast dedicated to helping consumer lenders grow their programs and improve their product offerings. Each week, here decision makers in the finance industry offer insights into the future of the lending industry, best practices around digital transformation, and more. Let's get into the show. Welcome to another episode of Leaders in Lending. I'm your host, Matt Snow this week joined by Nat Hoops upstarts very own head of public policy and regulatory affairs. Natt Welcome, Thanks Matt. It's good to be back on the pod. Yeah, return guests, but first time I get the pleasure of chatting with you in this format. So I've been looking forward to this.

0:44 Yeah, it's going to be It's a good month. I guess we're almost in November, a big, big election in Washington and around the country, so good time to talk politics and policy. Yeah, And I was wondering Mat, like, this close to an election a few weeks away, do you see increased activity? Are people distracted or you know, what's what's it like in Washington right now? What are people thinking about? Yeah, ironically, it's kind of a time when Washington slows down, and all of the operatives and all of the energy is in Pennsylvania or or Arizona, or Georgia or North Carolina. And so it's definitely a time when a lot of people are anxiously looking at the polls. They're looking at the weather forecast for election day. They're really trying to kind of get a sense of you know, who's going to come out. And I think the campaigns tend to focus on their core you're turning out their core voters.

1:40 And it's really a time when policy takes a back seat. So where I spend the vast majority of my time, which is you know, regulatory work and and the the evolving policy landscape for for upstart in the financial technology industry really isn't the folks, is during an election season. Yeah, a lot of variables that go into the outcomes of an election. Maybe there's an AI model out there being worked on to get more precise on what's really going to happen. I can guarantee that AI is involved in the election, hopefully not in ways that we don't want, So we'll see. Yeah, exactly. Well, Hey, you mentioned you were in Phoenix recently meeting with a bunch of examiners from the nc UA.

2:26 What was that like? What's it like when a bunch of examiners get together and invite someone from a fintech in there to speak with them. Sure, well, you know, we've just seen such tremendous growth of credit unions, right so of our you know, one hundred plus institutions, more than half our credit unions. It's a segment that has historically done a lot, you know, of what they would call signature loans, but unsecured personal loans are core product in Upstarts product suite, and so that means we have a lot of experience of working with credit unions, but we're also growing very quickly. And so the regional examiners, the examiners that are on the ground, they may be going through the first cycle where they're working with a credit union who signed up with upstarted.

3:10 So there can just be. A lot of questions about AI, about unsecured personal lending, about the current macro environment, you name it. And so it was really good to just get in front of the audience where they could all ask any question they wanted, try to demystify some of the partnership, try to give them an understanding of how what we do is both similar to what has been done before if you think about credit scoring and all the machine learning that's always gone into an AI that's gone into the you know, the development of traditional credit scores, and then kind of taking it to the next level in developing this full turnkey solution so that credit unions can can really find customers, help help them price customers, help them add that extra layer of a tool to be more accurate in in how how they do what they do, and then also servicing the customers. And so I think just giving the examine our audience, from our perspective what a partnership looks like, you know how how the how the partnership is overseen by credit unions, that that was just a really good opportunity.

4:18 And the session went I think I want to say it probably went a half an hour over just with the numbers of you know, really good back and forth and dialogue that we had. Yeah, that's great that there was so much engagement. Do you think they even understand or grasp like the need for outside partnership with fintech companies like Upstart, Like do they understand the premise of why maybe some of these smaller institutions can't even do this themselves. I do think that there's an education that needs to be done about the long term viability of their customer base wanting anything other than a deposit accountan we know deposits are pretty sticky. You know, if you have been with the credit union for a long time, you may not be planning to leave on a deposit basis. But just doing the education that people are really searching for credit, not with their primary institution, but they're out there at the comparison sites. They're trying to get the best possible rate, just the way we would buy you know, an airline ticket or anything else. Like, we're going to be out there trying to find the best option, and that means you know, finding the Internet, and so in doing that, you know, really explaining to them the whole order of operations of how somebody comes upstart dot com, how they get matched with the credit union in their region, you know why. You know, if the customer isn't walking in with a bunch of paperwork under their arm physically, it doesn't mean that the credit union can't have a viable lending program. But they're really going to need a partner, So we did spend a lot of time on that.

5:43 I think I think the examiners, you know, they can be suspicious, that they can be skeptical. I think it's their job to be skeptical. There have been a lot of you know, snake oil salesman through the year saying this is going to be transformative, this is going to be the greatest thing, and then and then it doesn't always turn out, And so you have to kind of be willing to meet that skepticism head on and then show why, you know, we're the kind of company, as a public company that's really built to last and it's going to be here for Credit Unised for a really long time. Yeah. You know, the one thing that's helped me put some of that into context that is a memory that not only are they a regulator, they're the ensure, right, so they have a bit of a right and a reason to be skeptical. It's part of their job right to make sure that these credit unions are operating safely and soundly to protect their their customer's deposits.

6:32 That's that they're not that's absolutely right. They're an insure and and there's a certain amount of you know, truth to the possibility that even if something is only a you know, reputational harm to the bank or the credit union like that, that that could. Then trigger sort of more problems. Right. So, they they tend to be very interested in understanding at the front end of a partnership, you know, when something is launching, because they know they may not be back for another eighteen months or two years, and so you know, they want to make sure that it's you know, as they like to say, if something's right at the beginning, it can be right in the middle, and then it can be right at the end. So I think I think we did a pretty good job of walking them through the full life cycle and showing them how the credit the credit union is really in charge of the size, the cadence of the partnership, the diligence process, the on going you know, the ongoing monitoring, the performance monitoring, the fair lending monitoring. And I think that really got them more certainly more comfortable than they were walking in. I think that you know, they they there were concerns not with Upstart, but just in general with financial technology companies, you know, maybe sort of trying to jump in and take advantage of small credit unions. And by the end, I think that they saw that upstarts on that list of companies, it's going to be around for credit unions for a long time.

7:59 Yeah, you made a good point about them, you know, in their field, exams being every twelve to eighteen months, and the rate of pain, pace of change in technology now seems to be exponentially growing, you know, whether that's the availability of cloud computing, the different you know, algorithms and techniques you can use at that space, the number of third parties that are coming into play. So I would imagine they would want to be keeping up to date and learning as much as they could in between those exams and staying in sync with those things. Did you find there were any specific areas they were really you know, seeking more information on, or you found gaps and that they were trying to rectify.

8:41 No, I think you know they were interested in, you know, when in the process, you know, they can get a better understanding of the upstart model. We talked a lot about what's appropriate to ask, you know, a credit union executive who may not be an AI machine learning expert with a computer science degree, versus where it's fair for you know, upstart to answer a straightforward question that might be posed in writing. And so we've sort of talked a little bit about that and how to have the exam process feel fair to somebody who isn't steeped in it the way. Our team is. And then we also spend a lot of time on open banking. Interestingly, because I think there's a lot of skepticism initially in this idea of like, well, would why would Congress in the DoD Frank Act, which you know I worked on back in twenty ten, you know, why would we want to empower and say that the customer owns their own data, And then you walk through just the importance of being able to shop around for the best possible product and relating it to our own lives of how we do that all the time, and that that applies in banking as well, and then making it come for all circle and say, well, but now credit unions can actually take advantage of that too with partnerships like I'll start, like you know it's it's the credit union upstart partnership.

9:55 If it's enabling somebody to refinance their credit card that might be with one of the biggest banks in the country, and then all of a sudden, that's now become a credit union customer that could be become a member, right, that's going to be you know potentially like you know, a depositor with that credit union, or get other services from that credit union. We talked a little bit about that cross selling, and so I brought up an example where you know, a credit union that worked with Upstart was able to cross sell you know, something like ten percent of their customers into other products and so forth, or their member their new members through through through the Upstart partnership into into you. Know, other products. And so I think it just positioning everything as on the long term side of the health. Of the credit union, which is ultimately what they care about. Right. They are just like you said, they are the insurer.

10:37 They want these institutions to survive, thrive. They're not so much interested whether they grow quickly, but they at least don't want them to wither and fail. And so I think that that was probably a really healthy kind of I think a little bit of an AHA moment of like open banking is meaning that our credit unions have a chance to compete for customers that they probably never had a shot at before. Yeah, that's interesting. I wasn't expecting you to bring up open banking. Maybe. Spoiler alert, there's a mutual friend of ours who's been on the podcast before as well. We've been having some conversations about this offline and are planning maybe a future conversation. So I might have to get some more talking points from you, some more insight in your perspective on that, because I think that the interesting correlation you mentioned like it's probably going to open up the opportunity for more partnership opportunities for credit unions. I would imagine in a world where data is more portable, our customers have more choice.

11:32 Yeah, I think so one hundred percent. And I think the challenge for the smaller institutions, which we've seen across a lot of products, you know, small dollar product being you know a recent most recently there's you know, some studies of how many of the very large five or six banks of the country have built pretty viable you know, small dollar products for loans under a thousand dollars. But it's it's a difficult product, difficult customer to underwrite on, you know, in you know, online interface, people want their money quickly. You know, how are you going to compete in an area like that if you don't have a partnership. And so I think that there's a you know, there's a host of ways in which these credit unions can use the right type of partners to get them, you know, the type of members that they want to find in their regions and offer them a viable you know, such as the product.

12:25 As you know, it's like the user experience is everything. I mean, if if it's going to take days and days to get through the process, they're going to just they're going to just drop out of the of the application and go go find somebody else who can get it done for them in an efficient manner. Yeah. Absolutely, I think we don't talk about that enough. You know. Obviously a lot of attention rightfully, so it goes to the underwriting, the verification, all the data and insights that drive that, but you know, the user experience has to be seamless and continually evolving as well. So definitely a huge benefit to partnerships there. Yeah, and we. Talked a lot with the examiners you know at nc u A about the fair lending testing as well, how to keep how to keep a rigorous set of tests on the upstart you know models, you know, doing some education on the upstart is just one piece of the decision.

13:17 So so the person's you know, credit criteria as determined by other companies that are not upstart, Fyco being a great example, their their credit score, things like their debt to income ratio. Things that that tend to create like who is actually going to be even eligible can drive a lot of who gets declined, approved, et cetera. And then upstart is sort of this this piece that comes in afterwards. And so once they understood that, there's a very big difference between using AI and all the alternative data as this really helpful additional layer as opposed to, oh, no, you're just turning over your entire underwriting to some black box that's not you Like, that's a different story. And so I think people also, just examiners don't always appreciate that when they come into the first time to examine a credit union that is signed up with a financial technology provider, they think, oh, like, now this is out of their control and like showing no, no, this is within their control. And not only that, but it's really these other tools that are what is driving the vast majority of who gets credit and who doesn't, and then the upstart that's helping them really get a more refined look at those who would qualify within their desired region or other eligibility requirements.

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15:16 Thanks, and now back to the show. Did you find other than fairness? Were there other things they really leaned into and kind of that compare contrast, Like you mentioned, there's a lot of things that happen in the process that are the same as they've always been. You know, we just maybe newer techniques, faster, more more data points. Like as they went through that exercise of trying to think about, you know, how is this similar or dissimilar from what they're used to? Were there other things that they tended to investigate harder. I think that they just they had some prior assumptions. That where we had a really robust discussion. I mean, there was one comment in one of the earlier forums, not the main forum, where you know, why would you need The question was posed by an example, why would you need a lot of data points for a for a seven hundred fifty dollars loan? Right? And so I had to say, like, no, no, that's exactly where you probably need the.

16:12 Most data points, do you know what I mean? In a certain sense that like it seems like a low stakes, but if you're trying to scale a program and you're going to have a whole lot of them. You know, people who are you know, at at at a point in their life where they need to borrow five hundred bucks or seven hundred fifty bucks or a thousand bucks from a financial services provider, they can't come up with that kind of money on their own. You really want to understand, you know, details about their you know, for instance, like it might be their cash flow in a writing speaking of open banking and through plaid, or you know, details about their their paycheck history to really understand that they're going to be able to repay that loan, because it's not as though you're lending into some cushion where you know, there's enormous there's enormous wealth there and you're sort of saying, well, you know that we know that this person is you know, both wealthy and has this huge high income. Like many times these you know, these smaller dollar loans, like you need more data. And so there again, we had a lot of a lot of these I think, really interesting prior assumptions that had to kind of be like addressed in a really direct way.

17:25 And that doesn't mean it was uncomfortable. It's just it's a really important sort of evolution and conversation that we're having. Yeah, and I wondered that, like, how I don't regulators examiners think about that trade off of data versus human interaction, the cost, the ability to probe those decisions, you know, one by one or at scale, you know, the cost of those like did you guys get into those, whether it's you know, in terms of making the underwriting decision, reviewing fairness, like just the difference like you were saying with especially with a small dollar loan, every time you have to involve a human in any of that really makes that kind of a loan or a decision much more expensive. So you're you're not as able to expend extend credit to as many customers as you might like.

18:11 Yeah, we talked a lot about that. We talked about the value in automation and again in the value also in scale from a you know, even from a performance standpoint, the importance of diversification, and I think that, uh, you know again, in some ways we're fortunate with the n c U A and credit unions because they have offered this product area a long time. As you know, there's like the pal loan program in credit unions for small dollar loans. They've won't long offered you know, signature loans and so, you know, as opposed to some in the banking greune that mostly do commercial lending and might just be for the first time dipping their toe into consumer you know, uh, closed in installment like loans. That this is an area that is sort of bread and butter for a long time for credit unions, I think, and so that gives there is a little bit more expertise. I think one of the things that was probably compelling to hear were just the anecdotal examples where I could say that those that have kept a.

19:12 Traditional program running alongside upstart have. Reported uniformly that that the AI version has outperformed right or that products where they've made this conversion to AI, or if they went with a prior vendor that wasn't using as much data or AI in a similar product like that, that that the AI version may not have been perfect, credit performance may not be perfect, you know, do the macro or whatever, but that it outperformed what they had been doing or what they were doing side by side with a different program. And so I think that was I think helpful for people to understand that, you know, there's a context to what they have to view if they if they go into a credit union, you know, they they need to understand like, hey, why don't I take a look at whether or not you know, a traditional portfolio is a scalable is it actually going to become anything five years from now that can produce you know, some some sort of healthy you know income, you know for the credit union or so that's one question.

20:12 And and then also is it is it actually performing in a decent way from a credit performance stample. Yeah, that's a good point. That's one thing that typically helps skepticism, I think is data and experience. So we're starting to get more and more proof points out there, and good point about the side by side comparison as well, So hopefully that helps you. And there's data on that, as you know, Matt, we talked about the data from d v O one a little bit, so we were able to kind of share some data on upstarts performance and you know, while acknowledging that that every credit union, based on their region, may have, you know, variations are based on their. Hard credit criteria. That doesn't have to do with upstart, like they could have different different outcomes and experiences. But but the you know, the bottom line, if you look in the aggregate at the performance and the risk adjusted returns and so forth of the upstart portfolio, you know it's been quite strong through the cycle. And so we spend a little bit of time on the macro cycle and sort of the importance of allowing credit unions the opportunity to see programs perform on all sides of the cycle, right, and and the way that we encourage you know, institutions. Obviously we want them to do as much as we they can with us, but we're not pressuring them to do so this is their program. They can decide to scale it up and scale it down at whatever times. You know, we have our own macro tools. We talked a little bit about you MI and so forth, and so how how does the macro index help inform the way people can be thinking about about their their risk appetite at

21:44 any given time. But you know, just as we you know, invest in the. Stock market, you dollar cost average, it's it's not always good to be stopping and starting. In general, it's better to see things through the cycle. And so we talked a little bit about about that and how ultimately, you know, being as inclusive as possible and seeing through the cycle is how we think people will probably do the best. Yeah, I totally agree. That's typically when people need it the most. Right access to these types of credit products as well, yeap, you know, with the credit unions, a lot of them being a regionally focused or bound within certain states or field and membership. Did you guys discuss or what's your point of view on some of the state regulation that's happening out there, or do you see like how out of things modulate between states versus a national federal level and thinking about lending from that lens.

22:33 Yeah, I mean, like, and this is an interesting dynamic because we know in DC there's this big, you know, long term battle. Between banks and credit unions. And most recently you probably saw the CEO of the American Bankers Association, Rob Nichols, wrote to the head of the NCUA, Todd Harburn's, you know about acquisitions and the transparency because there's now so many credit unions buying small community banks, and you know, that's just the latest iteration of this. There there is a fight when I was on the hill about business lending, how much business what percentage of the balance sheet credit unions could use for commercial lending, which kind of impedes in their turf and and then of course the tax status of credit unions, and so there is this long term battle that's always gone on and and questions about the the the the the overall role of credit unions in their communities and for specific communities as opposed to broadly broader uh, you know, serving broader constituencies. We have a lot of national credit us.

23:34 I I just made the point of diversification that credit unions in general will do better if they're able to draw you know, members from as broad an area as they possibly can, and then they'll do better if they can you know, have you know, non concentrated portfolios again broadly speaking, as much as they can. So those that are in certain states and operating within those state guidelines and and are are you know going to. Stay there for a variety of reasons, that can be fine. And then those that are national there's going to be you know, kind of a constant, I believe push towards the national model because of the Internet, right, I mean this is just if you know, if you can find new members, if you can find you know, new members through you know, a credit channel, and then somebody signs up for a deposit account, like you're going to want to do that if you can. And so I think it's going to become a long term sort of trend that you're going to see of more and more of you know, credit unions that are sophisticated enough to handle it or going to want to be able to have as wide a footprint as they possibly can.

24:41 Yeah. That leads me to think of another topic I've been debating with a few people. I don't if I'll have enough time in this episode to get into it, but like the idea of a primary financial institution, like does that exist anymore? What you know, the role of these institutions, whether the banks or credit unions or community banks, you know, do they serve a customer or is there specialization and other products? And you know, no one really owns a customer, but you're you're kind of fighting for that next product. Yeah. Well, if I mean think, I think from a regulatory standpoint, you know, you want you want the credit union to be able to offer the types of products and experiences that can keep it healthy over the long haul. And if it can't do that, then it's gonna wither and you're gonna see, you know, the consolidation.

25:31 And and all the challenges around that. You know. So I think that there is interest in a lot of this innovation from that standpoint, It's just that there's also that healthy skepticism of is this innovation serving the credit union and the consumer? Right? And so if you can show that it does both, and I think, you know, we have a lot of great data and studies to show that that Upstart, you know, is one of those companies that does both, but you. I think you need to be able to be prayer to show that, you know. Moving back, I think we're at an interesting moment in Washington, not only because of the election, right where we're at a moment where you know, we're going to have a new administration either way, which doesn't happen very often. Right, We're not you know, Joe Biden is not going to be president in January, so like that's a new administration.

26:22 Is that that's a that's a big deal. So we're gonna have a new a new administration either way to spend time with talking about about financial technology, about AI and underwriting, about partnerships between supervised institutions and institutions that are regulated but aren't directly supervised in the same way. And and we're doing that against the backdrop where as we mentioned, they are all of these compelling reasons why, especially for any institution but the very biggest of the of the you know, the largest institution of the country that build a lot of amazing products in house for all, but that you know, handful of companies.

27:04 Partnerships are going to be the way of various kinds of way that that a lot of things move forward. And yet you have, uh, you know, there's. Negative there's been negative headlines, not in the lending area so much, but on you know, things like synapse bankruptcy and others. Right now, there's a request for information from the federal regulators about third party risk management at partnerships. We at Upstart will be responding to that. American Fintic Council will be responding to that. And so you know, we're also making the point all of these forums, whether it's the NCAA Examiner's Forum or when we meet with the OCC or the fd i C or the ten of these conferences, we're spending a lot of time talking about the value. And then we also have to bring the examples where the rovert meet throat of where we think a regulation or implementation or regulation or supervisory question or expectation may be so onerous that it is going to disrupt a partnership, right, And so so that's not where anybody wants to be. You know, nobody wants to be complaining, but you have to be willing to advocate on behalf of partnerships that have the chance to really move the whole financial system forward in a productive way, both for the institutions for the consumer.

28:17 Yeah, totally agree. And I wonder not how did you leave Phoenix in that meeting with the examiners. Do you feel like they were bullish on the idea of partnerships and you know, companies being able to help credit unions in that sustainability like you mentioned, I think they were bullish. I think that they though want to think about how to how to tease out whether an institution like up Start with a lot of resources, is the partner and able you know, thousands of employees able to able to support a partnership in a viable long term way, versus a vendor that might come with a lot of promises and not the ability to like really deliver, right. And so I think they are going to be continuing to bring scrutiny, but I think it's going to be with more knowledge of Upstart, more and more understanding of how the partnership works, and more understanding of the whole reason why.

29:13 I think I mentioned just in the context of open banking, like why why even why you know, why did you take their call? Like why are you spending time? Why are you thinking about it? And understanding the many problems that we're solving for a smaller institution, from finding the member, helping do it with the underwriting, helping with the pricing, helping with the servicing, help you know, supporting fair lending, testing, uh, all of that rigor, and ultimately you know, keeping the viability and health of the institutions that side of the balance sheet, you know, not the deposit so much, but the credit side of the balance that you know that in a in a in a good posture. So that that I think was the time well spent. Let alone, a lot of the time spent on third party risk management and don more of the in the weeds regulatory conversation.

30:04 Yeah, totally. Well that it's always great catching up. I'm always impressed to you. You have to know so much about so many different things and how upstart operates in the space and the regulations that impact it. I wonder like, is there a source of information you can share with us, like that helps you keep up to date, whether it's you know, the points of view of some of these agencies, the news, the feelings of politicians. Like again, like so many variables can go into impacting how these things turn out, Like how do you ye're a source? I think it's interesting. I think it's interesting. I get that question a lot when I when I speak, Where do you get your news? How do you how do you keep on top of all of it? I think a lot of it is accumulated, and I think, you know, LinkedIn is a great example, you know, when you've developed a career's worth of relationships and then you're able to follow your network and curate your network.

30:55 Based on what your you know, interests are for upstart, and then you're able of the track a lot of what's keeping your network either up at night or what they're spending that their time on. That can be an incredible source of news. So rather than what some editor it's almost like the ultimate crowdsourcing of of information, right, rather than what some editor at the New York Times or the Wall Street Journal, or the Financial Times or or Fintech Daily decided they thought was important you know, you read all those but then you also have you know, what those who are in the supervised community, like, you know your potential partners, like what they're posting about AI. You have the advocates, what. They're posting, the you know, the civil rights community, and you're able to kind of track, you know, in a real time what is bubbling and try to see a little bit around the corner of what's coming in a way that that wasn't probably possible before that platform. So I do think that that's that's an incredibly powerful one for the type of tracking that you're that you're talking about.

31:56 Yeah, that's a good, good point. Yeah, LinkedIn with all its worth, and like self appointed gurus like you filter through that to your network of people and see what they care about and where they're finding information that's true. I mean, I just I just block the gurus like I It's it's like people that I know that are you know, they were just at Treasury or they were just at one of these regulatory bodies, and then they're posting something about something that they were wrestling with. Like that's where the magic is that people that are who are who are really employed in the in the workforce in the field that you're in and and really understanding what they're tracking. I think is is powerful. So thanks for the conversation, Matt. It's great and I think we'll be back at it maybe later this fall with a with the new sets, but it's fun to talk a little bit about the NCUA and the event in Phoenix.

32:43 Definitely thanks again for joining that. I'll start partners with banks and credit unions to grow households and expand consumer lending through its leading AI lending platform. I'll start powered banks and credit unions leverage AI to offer higher approval rates and experience lower loss rates, while simultaneule delivering the exceptional digital first lending experience that consumers demand. Whether you're looking to grow and enhance your existing personal and auto lending programs or you're just getting started, Upstart can help. Upstart offers an end to end solution that can help you find more credit worthy borrowers within your risk profile. With all digital underwriting, verification, loan closing, and servicing, It's all possible with Upstart in your corner. Learn more about finding new borrowers, enhancing your credit decisioning process, and growing your business by visiting upstart dot com slash lenders.

33:34 That's upstart dot com slash lenders.