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What changed in Upstart Holdings, Inc.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Upstart Holdings, Inc.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+844 added−838 removedSource: 10-K (2024-02-15) vs 10-K (2023-02-16)

Top changes in Upstart Holdings, Inc.'s 2023 10-K

844 paragraphs added · 838 removed · 623 edited across 8 sections

Item 1. Business

Business — how the company describes what it does

114 edited+35 added−51 removed76 unchanged
Biggest changeIn order to do this, we provide a wide variety of options for lenders to define and control their lending program. • Upstart Referral Network —Once we aggregate consumer demand on our website, we pass those customers to our lending partners. • Branded product —Lending partners can serve customers with a branded Upstart application on their own website or mobile application. • Configurations —Because our lending partners have complete authority and control over their lending programs, our lending partners predetermine many aspects of their loan offering, including interest rate and loan size ranges, maximum target loss rate, minimum credit score, maximum debt-to-income ratio, target returns for various risk profiles, fee structures and disclosures. • Servicing —While most lending partners choose to have us service their loans (through a branded servicing portal), each has the option of directly servicing loans itself.
Biggest changeBecause our lending partners have complete authority and control over their lending programs, they predetermine many aspects of their loan offering, including interest rate and loan size ranges, target returns for various risk profiles, minimum credit score, maximum debt-to-income ratio, fee structures and disclosures. • Servicing —While most lending partners and institutional investors choose to have us service their loans (through a branded servicing portal), each has the option of directly servicing loans itself.
We have also made significant investments in Upstart Auto Retail, a front-end software-as-a-service application that modernizes the auto sales process for both the consumer and the dealer. Similar to Upstart.com, we expect Upstart Auto Retail to become an important aggregator of demand.
We have also made significant investments in Upstart Auto Retail, a front-end software-as-a-service application that modernizes the auto sales process for both the consumer and the dealer. Similar to Upstart.com, we expect Upstart Auto Retail to become an important aggregator of consumer demand.
The Dodd-Frank Act is extensive and significant legislation that includes consumer protection provisions. Among other things, the Dodd-Frank Act created the CFPB, which commenced operations in July 2011 and has significant authority to implement and enforce federal consumer financial laws, such as the TILA and the ECOA.
The Dodd-Frank Act is extensive and significant legislation that includes consumer protection provisions. Among other things, the Dodd-Frank Act created the CFPB, which commenced operations in July 2011 and has significant authority to implement and enforce federal consumer financial laws, such as TILA and ECOA.
We have implemented an AML program designed to prevent our platform from being used to facilitate money laundering, terrorist financing, and other illicit activity. Our AML program is designed to prevent our platform from being used to facilitate business in countries, or with persons or entities, included on designated lists promulgated by the U.S.
We have implemented an BSA/AML program, or AML program, designed to prevent our platform from being used to facilitate money laundering, terrorist financing, and other illicit activity. Our AML program is designed to prevent our platform from being used to facilitate business in countries, or with persons or entities, included on designated lists promulgated by the U.S.
We believe we have structured our organization such that we are in compliance with Regulation RR and will continue to conduct our business in a manner that allows us to remain in compliance with this regulation. Compliance We review our policies and procedures to ensure compliance with applicable regulatory laws and regulations applicable to us and our lending partners.
We believe we have structured our organization such that we are in compliance with Regulation RR and will continue to conduct our business in a manner that allows us to remain in compliance with this regulation. Compliance We review our policies and procedures to ensure compliance with laws and regulations applicable to us and our lending partners.
The FDCPA limits certain communications with third parties, imposes notice and debt validation requirements, and prohibits threatening, harassing or abusive conduct in the course of debt collection. While the FDCPA primarily applies to third-party debt collectors, debt collection laws of certain states impose similar requirements more broadly on creditors who collect their own debts.
The FDCPA limits certain communications with third parties, imposes notice and debt validation requirements, and prohibits threatening, harassing or abusive conduct in the course of debt collection. While the FDCPA primarily applies to third-party debt collectors, debt collection laws of certain states impose similar requirements more broadly on creditors who collect their own debts and loan servicers of debt.
CAN-SPAM also requires the need to provide a functioning mechanism that allows the recipient to opt-out of receiving future commercial e-mail messages from the sender of such messages. Upstart’s email communications with all consumers are formulated to comply with the CAN-SPAM Act.
CAN-SPAM also requires the need to provide a functioning mechanism that allows the recipient to opt-out of receiving future commercial e-mail messages from the sender of such messages. Our email communications with all consumers are formulated to comply with the CAN-SPAM Act.
Federal Securities Regulations Securities Act Upstart and certain of our subsidiaries have relied on Section 4(a)(2) of the Securities Act for placement of asset-backed securities directly to investors or to investment bank initial purchasers, which have relied on Rule 22 Table of Contents 144A and Regulation S exemptions from registration to place such asset-backed securities to qualified institutional buyers and non-U.S. investors, respectively.
Federal Securities Regulations Securities Act Upstart and certain of our subsidiaries have relied on Section 4(a)(2) of the Securities Act for placement of asset-backed securities directly to investors or to investment bank initial purchasers, which have relied on Rule 144A and Regulation S exemptions from registration to place such asset-backed securities to qualified institutional buyers and non-U.S. investors, respectively.
Servicemembers Civil Relief Act Under the Servicemembers Civil Relief Act, or SCRA, there are limits on interest rates chargeable to military personnel and civil judicial proceedings against them, and there are limitations on our ability to collect on a loan to servicemembers on active duty originated prior to the servicemember entering active duty status and, in certain cases, for a period of time thereafter.
Servicemembers Civil Relief Act Under the Servicemembers Civil Relief Act, or SCRA, and similar state laws, there are limits on interest rates chargeable to military personnel and civil judicial proceedings against them, and there are limitations on our ability to collect on a loan to servicemembers on active duty originated prior to the servicemember entering active duty status and, in certain cases, for a period of time thereafter.
Inspired by our company mission, we also provide important traditional financial benefits like a 401(k) match (where we match 401(k) contributions up to a set dollar amount, ensuring equal access to these benefits dollars regardless of salary level), a generous Employee Stock Purchase Plan, and access to a financial planning and money management platform.
Inspired by our company mission, we also provide important traditional financial benefits like a 401(k) match (where we match 401(k) contributions up to a set dollar amount, ensuring 24 Table of Contents equal access to these benefits dollars regardless of salary level), a generous Employee Stock Purchase Plan, and access to a financial planning and money management platform.
We expect that regulatory examinations by both federal and state agencies will continue, and there can be no assurance that the results of such examinations will not have a material adverse effect on us. Below, we summarize several of the material federal lending, servicing and related laws applicable to our business.
We expect that regulatory examinations by both federal and state agencies will continue, and there can be no assurance that the results of such examinations will not have a material adverse effect on us. 15 Table of Contents Below, we summarize several of the material federal lending, servicing and related laws applicable to our business.
For our asset-backed securitization transactions, we engage with investment banks to structure investments under which we and/or certain of the purchasers of whole loans or pass-through certificates described in the preceding paragraphs sell pools of whole loans to a bankruptcy-remote securitization special purpose entity.
For our asset-backed securitizations, we engage with investment banks to structure transactions under which we and/or certain of the purchasers of whole loans or pass-through certificates described in the preceding paragraphs sell pools of whole loans to a bankruptcy-remote special purpose entity.
Our primary development platforms are Ruby on Rails and Python, 12 Table of Contents but our Kubernetes-based compute environment gives us the flexibility to run heterogeneous workloads with minimal operational overhead. We deploy new software regularly without platform downtime, allowing borrowers and lenders to immediately benefit from the latest updates to our platform.
Our primary development platforms are Ruby on Rails and Python, but our Kubernetes-based compute environment gives us the flexibility to run heterogeneous workloads with minimal operational overhead. We deploy new software regularly without platform downtime, allowing borrowers and lenders to immediately benefit from the latest updates to our platform.
In addition to the CFPB, the Federal Trade Commission has jurisdiction to investigate aspects of our business, including with respect to marketing practices. Other state and federal agencies, including prudential bank regulators and state attorneys 16 Table of Contents general have the ability to regulate aspects of our business.
In addition to the CFPB, the Federal Trade Commission has jurisdiction to investigate aspects of our business, including with respect to marketing practices. Other state and federal agencies, including prudential bank regulators and state attorneys general have the ability to regulate aspects of our business.
Privacy and Data Security Laws The federal Gramm-Leach-Bliley Act, or GLBA, includes limitations on financial institutions’ disclosure of nonpublic personal information about a consumer to nonaffiliated third parties, in certain circumstances requires financial institutions to limit the use and further disclosure of nonpublic personal information by nonaffiliated third parties to whom they disclose such information and requires financial institutions to disclose certain privacy policies and practices with respect to information sharing with affiliated and nonaffiliated entities as well as to safeguard personal customer information.
Privacy and Data Security Laws The federal Gramm-Leach-Bliley Act, or GLBA, includes limitations on financial institutions’ disclosure of nonpublic personal information about a consumer to non-affiliated third parties, in certain circumstances requires financial institutions to limit the use and further disclosure of nonpublic personal information by non-affiliated third parties to whom they disclose such information and requires financial institutions to disclose certain privacy policies 17 Table of Contents and practices with respect to information sharing with affiliated and non-affiliated entities as well as to safeguard personal customer information.
Robust Reporting and Integration Capabilities Our reporting APIs provide institutional investors and lending partners the ability to access data through a programmatic interface. Our integration capabilities with lending partners include an ability to pre-fill applicant information via API and provide loan details in real-time to facilitate a seamless process from application to origination.
Robust Reporting and Integration Capabilities Our reporting application programming interfaces (“APIs”) provide institutional investors and lending partners the ability to access data through a programmatic interface. Our integration capabilities with lending partners include an ability to pre-fill applicant information via API and provide loan details in real-time to facilitate a seamless process from application to origination.
As part of the services we provide, we require the borrower to send us a written request and a copy of the borrower’s mobilization orders to obtain an 20 Table of Contents interest rate reduction on a loan due to military service.
As part of the services we provide, we require the borrower to send us a written request and a copy of the borrower’s mobilization orders to obtain an interest rate reduction on a loan due to military service.
Federal Marketing Regulations The Telephone Consumer Protection Act, or TCPA, generally prohibits robocalls, including those calls made using an auto-dialer or prerecorded or artificial voice calls made to a wireless telephone without the prior express consent of the called party (or prior express written consent, if messages constitute telemarketing).
Federal Marketing Regulations The Telephone Consumer Protection Act, or TCPA, and similar state laws, generally prohibits robocalls, including those calls made using an auto-dialer or prerecorded or artificial voice calls made to a wireless telephone without the prior express consent of the called party (or prior express written consent, if messages constitute telemarketing).
However, to ensure we continue to build relationships and capture the 24 Table of Contents magic of those innovative, in-person “aha” moments, we also provide travel and onsite budgets to ensure teams can come together regularly.
However, to ensure we continue to build relationships and capture the magic of those innovative, in-person “aha” moments, we also provide travel and onsite budgets to ensure teams can come together regularly.
Our website address is www.upstart.com. The content of our websites and information that can be accessed through our websites is not incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only.
The content of our websites and information that can be accessed through our websites is not incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only.
While compliance with such requirements is at times complicated by our novel business model, we believe we are, at a minimum, in substantial compliance with these rules and regulations. We are currently, and expect in the future, to be regulated by the CFPB.
While compliance with such requirements is at times complicated by our novel business model, we believe we are, at a minimum, in substantial compliance with these rules and regulations. We are currently, and expect in the future, to be subject to laws and regulations administered by the CFPB.
Consumers on our platform are generally offered unsecured personal and secured auto loans ranging from $200 to $100,000 in size, at APRs typically ranging from approximately 6.7% to 35.99%, with terms typically ranging from three to seven years, with a monthly repayment schedule and no prepayment penalty.
Consumers on our platform are generally offered unsecured personal and secured auto loans ranging from $1,000 to $100,000 in size, at APRs typically ranging from approximately 7.8% to 35.99%, with terms typically ranging from three months to seven years, with a monthly repayment schedule and no prepayment penalty.
We believe we compete favorably based on the following competitive factors: • Constantly improving AI models; • Compelling loan offers to consumers that improve regularly; • Automated and user-friendly loan application process; • Consistent and predictable loan performance; • Cloud-native, multi-tenant architecture; • Combination of technology and customer acquisition for lending partners; • Robust and diverse loan funding programs; and • Brand recognition and trust.
We believe we compete favorably based on the following competitive factors: • Constantly improving AI models; • Compelling loan offers to consumers that improve regularly; • Automated and user-friendly loan application process; • Cloud-native, multi-tenant architecture; • Combination of technology and customer acquisition for lending partners; • Robust and diverse lending marketplace; and • Brand recognition and trust.
In addition, the CFPB prohibits unfair, deceptive or abusive acts or practices, or UDAAPs in debt collection, including first-party debt collection. We use our internal collection team and professional third-party debt collection agents to collect delinquent accounts.
In addition, the CFPB prohibits unfair, deceptive or abusive acts or practices, or UDAAPs, in debt collection, including first-party debt collection. We use our internal collection team, except for the HELOC product, and professional third-party debt collection agents to collect delinquent accounts.
As of December 31, 2022, we had two patents issued and one patent application in the United States related to our proprietary risk model and data engineering. We may file additional patent applications or pursue additional patent protection in the future to the extent we believe it will be beneficial.
As of December 31, 2023, we had two patents issued and three patent applications in the United States related to our proprietary risk model and data engineering. We may file additional patent applications or pursue additional patent protection in the future to the extent we believe it will be beneficial.
Because AI is a new and disruptive technology, and lending is a traditionally conservative industry, we have brought our technology to market in a way that allows us to grow rapidly and improve on our AI models, while allowing lenders to take a prudent and responsible approach to assessing and adopting our platform.
Because AI is a new and disruptive technology, and lending is a traditionally conservative industry, we have brought our technology to the market in a way that allows us to grow responsibly and improve our AI models, while allowing lenders to take a prudent approach to assessing and adopting our platform.
Notwithstanding our belief that our models and our lending partners’ lending facilitated by our models comply with ECOA, the reports from Relman and consumer advocacy groups and associated legislative and/or regulatory inquiries could create negative publicity and increase the risk of private litigation or government enforcement.
Notwithstanding our belief that our models and our lending partners’ lending facilitated by our models comply with ECOA, the reports from Relman and consumer advocacy groups and associated legislative and/or regulatory inquiries could create negative publicity and increase the risk of private litigation or government enforcement. For more information, see Item 1A.
The CCPA, which went into effect in 2020, requires, among other things, that covered companies provide disclosures to California consumers and afford such consumers rights with respect to how covered companies process their personal information. Other states have enacted similar laws.
The CCPA, which went into effect in 2020, requires, among other things, that covered companies provide disclosures to California consumers and afford such consumers rights with respect to how covered companies process their personal information. Other states have enacted similar laws, but many have GLBA exemptions that apply to us.
Our Technology Infrastructure Our cloud-based software platform incorporates modern technologies and software development approaches to allow for rapid development of new features. Cloud-Native Technologies We run our technology platform as containerized services on the AWS cloud. Our architecture is designed for high availability and horizontal scalability.
Our Technology Infrastructure Our cloud-based software platform incorporates modern technologies and software development approaches to allow for rapid development of new features. 12 Table of Contents Cloud-Native Technologies We run our technology platform as containerized services on the Amazon Web Services cloud. Our architecture is designed for high availability and horizontal scalability.
State Disclosure and Lending Practice Requirements The loans originated on our platform by our lending partners may be subject to state laws and regulations that impose requirements related to loan disclosures and terms, credit discrimination, credit reporting, debt collection, and unfair or deceptive business practices. Our ongoing compliance program seeks to comply with these requirements.
State Disclosure and Lending Practice Requirements The loans originated on our platform by our lending partners may be subject to state laws and regulations that impose requirements related to loan disclosures and terms, credit discrimination, credit reporting, debt collection, and unfair or deceptive business practices.
The CFPB is authorized to prevent “unfair, deceptive or abusive acts or practices” through its regulatory, supervisory and enforcement authority. The CFPB also engages in consumer financial education, requests data and promotes the availability of financial services to underserved customers and communities. The CFPB has regulatory and enforcement powers over most providers of consumer financial products and services, including us.
The CFPB is authorized to prevent “unfair, deceptive or abusive acts or practices” through its regulatory, supervisory and enforcement authority. The CFPB also engages in consumer financial education, requests data and promotes the availability of financial services to underserved customers and communities.
Results from the internal study as of December 31, 2021 showed that our AI model approves 43.4% more borrowers and yields 43.2% lower average APR for approved loans. • Superior digital experience —Whether consumers apply for a loan through Upstart.com or directly through a lending partner’s website, the application experience is streamlined into a single application process and the loan offers provided are firm.
Results from the study showed that our AI model approves 44% more borrowers and yields 36% lower average APR for approved loans. • Superior digital experience —Whether consumers apply for a loan through Upstart.com or directly through a lending partner’s website, the application experience is streamlined into a single application process and the loan offers provided are firm.
We believe we have conducted, and we intend to continue to conduct, our business in a manner that does not result in Upstart being characterized as a broker-dealer, based on guidance published by the SEC and its staff.
The SEC heavily regulates the manner in which broker-dealers are permitted to conduct their business activities. We believe we have conducted, and we intend to continue to conduct, our business in a manner that does not result in Upstart being characterized as a broker-dealer, based on guidance published by the SEC and its staff.
Regulation B, which implements ECOA, restricts creditors from requesting certain types of information from loan applicants or engaging in certain loan-related practices, and from using advertising or making statements that would discourage on a prohibited basis a reasonable person from making or pursuing an application.
Regulation B, which implements ECOA, prohibits discrimination based on age, gender, ethnicity, nationality, or marital status, and restricts creditors from requesting certain types of information from loan applicants or engaging in certain loan-related practices, and from using advertising or making statements that would discourage on a prohibited basis a reasonable person from making or pursuing an application.
We believe that our business consists of providing a platform for consumer lending for which investment adviser registration and regulation does not apply under applicable federal or state law, and do not believe that we or any of our subsidiaries are required to register as an investment adviser with either the SEC or any of the various states.
We believe that our business consists of providing a platform for consumer lending for which investment adviser registration and regulation does not apply under applicable federal or state law, and do not believe that we or any of our subsidiaries are required to register as an investment adviser with either the SEC or any of the various states. 22 Table of Contents Broker-Dealer Regulations under the Exchange Act We are not currently registered with the SEC as a broker-dealer under the Exchange Act or any comparable state law.
Recruiting We attract and recruit diverse, exceptionally talented, highly educated, experienced and motivated employees. We have an extremely rigorous recruiting and employee candidate screening process. For example, our machine learning team, responsible for the development and constant improvement of our AI models, is unlike any other that we are aware of in the consumer lending space.
We have an extremely rigorous recruiting and employee candidate screening process. For example, our machine learning team, responsible for the development and constant improvement of our AI models, is unlike any other that we are aware of in the consumer lending space.
As a usage-based platform, we target positive unit economics on each transaction, leading to a cash efficient business model that enables both high growth rates and profitability. Our AI Lending Models Our AI models are central to our value proposition and unique position in the industry.
As a usage-based platform, we target positive unit economics on each transaction, leading to a cash efficient business model with high margins. We believe these are the key components to achieve both high growth rates and profitability over time. Our AI Lending Models Our AI models are central to our value proposition and unique position in the industry.
While we constantly experiment to expand and optimize our acquisition strategies, our largest channels include: 13 Table of Contents • Marketing affiliates —A variety of online media partners, such as loan aggregators, send us traffic on a cost per origination basis.
Our customer acquisition channels combine a mix of online and offline, as well as paid and unpaid, channels. While we constantly experiment to expand and optimize our acquisition strategies, our largest channels include: • Marketing affiliates —A variety of online media partners, such as loan aggregators, send us traffic on a cost per origination basis.
The currently active AI models within the Upstart platform—shared by and available to all Upstart’s lending partners—include: • Fee optimization —optimizes assignment of origination fees; • Income fraud —quantifies potential misrepresentation of borrower income; • Acquisition targeting —identifies consumers likely to qualify for and have need for a loan; • Loan stacking —identifies consumers likely to take out multiple loans in a short period of time; • Prepayment prediction —quantifies the likelihood that a consumer will make payments on a loan earlier than originally scheduled; • Identity fraud —quantifies the risk that an applicant is misrepresenting their identity; and • Time-delimited default prediction —quantifies the likelihood of default for each period of the loan term.
The currently active AI models within the Upstart platform—shared by and available to all Upstart’s lending partners—include: • Acquisition targeting —identifies consumers likely to qualify for and have need for a loan; • Loan stacking —identifies consumers likely to take out multiple loans in a short period of time; • Time-delimited prepayment prediction —quantifies the likelihood that a consumer will fully prepay a loan earlier than originally scheduled; • Income fraud —quantifies the risk of potential misrepresentation of borrower income; • Identity fraud —quantifies the risk that an applicant is misrepresenting their identity; • Time-delimited default prediction —quantifies the likelihood of default for each period of the loan term; and • Servicing —identifies borrowers to prioritize for servicing outreach, allowing for customized intervention and improved servicing efficiency.
The SCRA allows military members to suspend or postpone certain civil obligations so that the military member can devote his or her full attention to military duties. The SCRA requires us to adjust the interest rate of borrowers who qualify for and request relief.
The ability to repossess a vehicle is also limited 19 Table of Contents under the SCRA. The SCRA allows military members to suspend or postpone certain civil obligations so that the military member can devote his or her full attention to military duties. The SCRA requires us to adjust the interest rate of borrowers who qualify for and request relief.
In addition, the FTC Telemarketing Sales Rule implements the FTC’s Do-Not-Call Registry and imposes numerous other requirements and limitations in connection with telemarketing. Upstart’s policies address the requirements of the TCPA as well as FTC Telemarketing Sales Rule and other laws limiting telephone outreach.
In addition, the FTC Telemarketing Sales Rule implements the FTC’s Do-Not-Call Registry and imposes numerous other requirements and limitations in connection with telemarketing. Our policies address the requirements of TCPA as well as FTC Telemarketing Sales Rule and other laws limiting telephone outreach. Furthermore, Upstart does not engage in certain activities covered by TCPA.
To that end, we have a small number of applications submitted and pending to obtain additional licenses, particularly with respect to obtaining additional authorization to engage in student loan servicing and collection activities. We are also typically required to complete an annual report (or its equivalent) to each state’s regulator.
To that end, we have a small number of applications submitted and pending to obtain additional licenses, particularly with respect to obtaining additional authorization to engage in home lending and the purchase of retail installment contracts. We are also typically required to complete an annual report (or its equivalent) to each state’s regulator.
State Licensing/Registration We hold licenses, registrations, and similar filings so that we can conduct business, including providing referral services and origination assistance to lenders on our platform and servicing and collecting loans, in all states and the District of Columbia where our activities require such licensure, registration or filing.
Our ongoing compliance program seeks to comply with these requirements. 21 Table of Contents State Licensing/Registration We hold licenses, registrations, and similar filings so that we can conduct business, including providing referral services and origination assistance to lenders on our platform and servicing and collecting loans, and purchasing retail installment contracts, in all states and the District of Columbia where our activities require such licensure, registration or filing.
We collect and use a wide variety of information to help ensure the integrity of our 18 Table of Contents services and to provide features and functionality to our customers.
We collect and use a wide variety of information to help ensure the integrity of our services and to provide features and functionality to borrowers on our platform.
Consumers We have built a mobile-responsive web application at Upstart.com, where consumers can quickly and easily inquire about a rate, evaluate and choose a loan offer, provide necessary information for verification and review required disclosures before final acceptance of the loan. A virtually identical experience is also offered as a branded product on lending partners’ websites.
Consumers can quickly and easily inquire about a rate, evaluate and choose a loan offer, provide necessary information for verification and review required disclosures before final acceptance of the loan. A similar experience is also offered as a branded product on lending partners’ websites.
Over the last three years, we have invested heavily in growing our employee resource groups, and currently have nine employee led organizations designed to support employees in communities that matter to them.
Upstart employees are also passionate about building an environment that works for all. Over the last three years, we have invested heavily in growing our employee resource groups, and currently have nine employee led organizations designed to support employees in communities that matter to them.
Corporate Information Upstart Network, Inc. was incorporated in Delaware in 2012. Pursuant to a restructuring, Upstart Holdings, Inc. was incorporated in December 2013 and became the holding company of Upstart Network, Inc. Our principal executive offices are located at 2950 S. Delaware Street, Suite 300, San Mateo, California 94403, and our telephone number is (650) 204-1000.
Pursuant to a restructuring, Upstart Holdings, Inc. was incorporated in December 2013 and became the holding company of Upstart Network, Inc. Our principal executive offices are located at 2950 S. Delaware Street, Suite 410, San Mateo, California 94403, and our telephone number is (833) 212-2461. Our website address is www.upstart.com.
We also seek to comply with TILA’s disclosure requirements related to credit advertising and, to the extent that we hold or service loans, TILA’s requirements related to treatment of credit balances for closed-end loans. We also can facilitate the origination of a limited number of credit card accounts through our platform.
We also seek to comply with TILA’s disclosure requirements related to credit advertising and, to the extent that we hold or service loans, TILA’s requirements related to treatment of credit balances for closed-end loans.
There have also been recent judicial decisions that could affect the collectability of loans sold by our lending partners after origination and the exposure of loan purchasers to potential fines or other penalties for usury violations. See the section titled “ Risk Factors ” for more information about recent case law developments.
There have also been recent judicial decisions and enacted legislation that could affect the collectability of loans sold by our lending partners after origination and the exposure of loan purchasers to potential fines or other penalties for usury violations. See Item 1A.
For borrowers who miss payments, we focus on early intervention and attempt to reach them via emails, calls, texts, and mail to help bring their account current or offer hardship options in accordance with our servicing policies. Borrowers on our platform are supported via a combination of internal payments specialists and third-party service providers.
For borrowers who miss payments, we focus on early intervention and attempt to reach them via emails, calls, texts, and mail to help bring their account current or offer hardship options in accordance with the creditor’s servicing policies.
These rules apply to loans facilitated through our platform, and we assist with compliance as part of the services we provide to our lending partners.
These rules apply to loans facilitated through our platform as well as to retail installment contracts purchased by Upstart from automotive dealerships, and we assist with compliance as part of the services we provide to our lending partners.
We may be subject to third party claims from time to time with respect to our intellectual property. 23 Table of Contents Additionally, we rely upon unpatented trade secrets and confidential know-how and continuing technological innovation to develop and maintain our competitive position.
We may be subject to third party claims from time to time with respect to our intellectual property. Additionally, we rely upon unpatented trade secrets and confidential know-how and continuing technological innovation to develop and maintain our competitive position. We also enter into confidentiality and intellectual property rights agreements with our employees, consultants, contractors and business partners.
Furthermore, Upstart does not engage in certain activities covered by the TCPA, such as using an automated dialer. The Federal Controlling the Assault of Non-Solicited Pornography and Marketing, or CAN-SPAM, Act makes it unlawful to send certain electronic mail messages that contain false or deceptive information and provide other protections for email users.
The Federal Controlling the Assault of Non-Solicited Pornography and Marketing, or CAN-SPAM, Act makes it unlawful to send certain electronic mail messages that contain false or deceptive information and provide other protections for email users.
On behalf of our lending partners, we provide prospective borrowers who apply for a loan through our platform but are denied credit with an adverse action notice in compliance with applicable requirements. On December 1, 2020, in connection with the inquiries from a consumer advocacy group and five members of the U.S.
On behalf of our lending partners, we provide prospective borrowers who apply for a loan through our platform but are denied credit with an adverse action notice in compliance with applicable requirements.
With respect to new borrowers, we apply the customer identification and verification program rules and screen names against the list of specially designated nationals maintained by the U.S. Department of the Treasury and OFAC pursuant to the USA PATRIOT Act amendments to the Bank Secrecy Act and its implementing regulation.
With respect to new borrowers, we apply the customer identification and verification program rules and screen names against the list of specially designated nationals maintained by the U.S.
Modeling Techniques Growth in training data has enabled the development of increasingly sophisticated modeling techniques. For example, while earlier versions of our AI models were centered on logistic regression, our more recent models incorporate stochastic gradient boosting. We expect that our data science investments and continued growth of training data will unlock even more powerful techniques over time.
For example, while earlier versions of our models were centered on logistic regression and Monte Carlo simulations, our more recent models incorporate neural networks, Bayesian hyperparameter optimization, and gradient boosting. We expect that our data science investments and continued growth of training data will unlock even more powerful techniques over time.
We brought together a remarkable diversity of thinkers to build Upstart. Our co-founders and the members of our management team come from diverse backgrounds with varying ethnicities, education backgrounds, genders and ages. This diversity of thought ensures we tackle problems from all angles and arrive at the best solution for all stakeholders.
Our co-founders and the members of our management team come from diverse backgrounds with varying ethnicities, education backgrounds, genders and ages. This diversity of thought ensures we tackle problems from all angles and arrive at the best solution for all stakeholders. Recruiting We attract and recruit diverse, exceptionally talented, highly educated, experienced and motivated employees.
From our compensation practices to how we think about talent management and team development to the perks and benefits we invest in, we take a diversity, equity, and inclusion lens to each decision we make and every strategy we build. Upstart employees are also passionate about building an environment that works for all.
Equity and inclusion underpin everything we do in the people programs we build. From our compensation practices to how we think about talent management and team development to the perks and benefits we invest in, we take a diversity, equity, and inclusion lens to each decision we make and every strategy we build.
“Risk Factors ” of this Annual Report on Form 10-K. Electronic Fund Transfer Act and NACHA Rules 19 Table of Contents The federal Electronic Fund Transfer Act, or EFTA, provides guidelines and restrictions on the electronic transfer of funds from consumers’ bank accounts.
Electronic Fund Transfer Act and NACHA Rules The federal Electronic Fund Transfer Act, or EFTA, provides guidelines and restrictions on the electronic transfer of funds from consumers’ bank accounts.
It is not an accident that we have received best place to work awards in both our San Mateo and Columbus locations. In spite of the challenges we encountered in 2022 - from the macro-economic environment to the ongoing pandemic - our employee engagement remains higher than our technology peers and retention of our top talent is strong.
It is not an accident that we have received best place to work awards in both our San Mateo and Columbus locations. In spite of the macro-economic challenges we encountered in 2023 - our employee engagement and retention of our top talent are both strong. We brought together a remarkable diversity of thinkers to build Upstart.
The majority of the members of this team have doctorate degrees in statistics, mathematics, computer science, economics or physics and many have extensive past experience in quantitative finance. Inclusion Inclusion is not a standalone strategy at Upstart, it is central to our talent advantage and therefore it underpins everything we do in the people programs we build.
The majority of the members of this team have doctorate degrees in statistics, mathematics, computer science, economics or physics and many have extensive past experience in quantitative finance. Culture The Upstart culture is central to our talent advantage and we have carefully and thoughtfully built it as we have grown.
ECOA also requires creditors to provide applicants with timely notices of adverse action taken on credit applications, including disclosing to applicants who have been declined their rights and the reason for their having been declined.
We abide by policies and procedures implemented by our lending partners to comply with ECOA’s provisions prohibiting discouragement and discrimination. ECOA also requires creditors to provide applicants with timely notices of adverse action taken on credit applications, including disclosing to applicants who have been declined their rights and the reason for the denial.
We have also implemented an identity theft prevention program, as required by FCRA and its implementing regulations. Fair Debt Collection Practices Act The federal Fair Debt Collection Practices Act, or FDCPA, and Regulation F that implements FDCPA, provides guidelines and limitations on the conduct of certain debt collectors in connection with the collection of consumer debts.
Fair Debt Collection Practices Act The federal Fair Debt Collection Practices Act, or FDCPA, and Regulation F that implements FDCPA, provides guidelines and limitations on the conduct of certain debt collectors in connection with the collection of consumer debts.
Based on publicly available actions, the FTC’s primary focus has been with respect to financial technology company marketing and disclosure practices. We maintain policies and procedures that require our marketing and loan application and servicing operations comply with UDAP standards. For more information regarding the FTC’s enforcement actions, see Item 1A.
Based on publicly available actions, the FTC’s primary focus has been with respect to financial technology company marketing and disclosure practices as it relates to lending products, and on junk fees 18 Table of Contents as it relates to automotive dealerships. We maintain policies and procedures that require our marketing and loan application and servicing operations comply with UDAP standards.
ESIGN and UETA require businesses that want to use electronic records or signatures in consumer transactions and provide disclosures to consumers (otherwise required to be “in writing” in electronic form), to obtain the consumer’s consent to receive information electronically.
ESIGN and UETA require businesses that want to use electronic records or signatures in consumer transactions to get affirmative consent from consumers to receive or sign electronically any documents otherwise required by law to be “in writing”.
With respect to our securitization trusts, we have a national bank that serves as our owner trustee and is itself exempt from licensure. Although we are not aware of a state taking the position that the trust itself needs licensure, it is possible that a state or states could take such position in the future.
Although we are not aware of a state taking the position that the trust itself needs licensure, it is possible that a state or states could take such position in the future.
For phone support, we partner with external call center vendors and have a team of dedicated Upstart agents with specialized training. 15 Table of Contents Servicing Operations Upstart-powered loans are serviced via our homegrown platform.
Most prospective borrowers and applicants interact with Upstart via our online platform and help center, but we also make agent-based support readily available to all borrowers. For phone support, we partner with external call center vendors and have a team of dedicated Upstart agents with specialized training. Servicing Operations Upstart-powered loans are serviced via our homegrown platform.
We leverage the power of AI to more accurately quantify the true risk of a loan. Our AI models have been continuously upgraded, trained and refined for more than nine years. We have discrete AI models that target fee optimization, income and identity fraud, acquisition targeting, loan stacking, prepayment prediction, and time-delimited default prediction.
Our AI models have been continuously upgraded, trained and refined for more than ten years. We apply AI models to income and identity fraud, acquisition targeting, loan stacking, time-delimited default and prepayment prediction, and servicing.
Federal Trade Commission Act Under Section 5 of the Federal Trade Commission Act, we and our lending partners are prohibited from engaging in unfair and deceptive acts and practices, or UDAP. For nonbank financial institutions, the FTC is the primary regulator enforcing this prohibition, and in recent years the FTC has been focused on practices of financial technology companies.
For nonbank financial institutions, the Federal Trade Commission, or the FTC, is the primary regulator enforcing this prohibition, and in recent years the FTC has been focused on practices of financial technology companies. The FTC is also the primary federal regulator for automotive dealerships.
We also enter into confidentiality and intellectual property rights agreements with our employees, consultants, contractors and business partners. Under such agreements, our employees, consultants and contractors are subject to invention assignment provisions designed to protect our proprietary information and ensure our ownership in intellectual property developed pursuant to such agreements.
Under such agreements, our employees, consultants and contractors are subject to invention assignment provisions designed to protect our proprietary information and ensure our ownership in intellectual property developed pursuant to such agreements. For additional information about our intellectual property and associated risks, see Item 1A.
See the section titled “ Risk Factors—Risks Related to Our Business and Industry ” for more information. Fair Credit Reporting Act The federal Fair Credit Reporting Act, or FCRA, as amended by the Fair and Accurate Credit Transactions Act, and administered by the CFPB, promotes the accuracy, fairness, and privacy of information in the files of consumer reporting agencies.
“ Risk Factors ” of this Annual Report on Form 10-K. Fair Credit Reporting Act The federal Fair Credit Reporting Act, or FCRA, as amended by the Fair and Accurate Credit Transactions Act, implemented by Regulation V, and administered by the CFPB, promotes the accuracy, fairness, and privacy of information in the files of consumer reporting agencies.
Whole loans purchased after origination may later be included in our asset-backed securitization transactions whereby interests in these Upstart-powered loans are sold to other institutional investors.
Some institutional investors may prefer pass-through certificates, which may be more liquid and require less operational complexity, while other institutional investors may prefer whole loan purchases, which are generally more cost effective. Whole loans purchased after origination may later be included in our asset-backed securitization transactions whereby interests in these Upstart-powered loans are sold to other institutional investors.
Through all of history, affordable credit has been central to unlocking mobility and opportunity. The FICO score was invented in 1989 and remains the standard for determining who is approved for credit and at what interest rate.
Throughout history, affordable credit has been central to unlocking mobility and opportunity. The FICO score was invented in 1989 and remains the standard for determining who is approved for credit and at what interest rate. While FICO is rarely the only input in a lending decision, most lenders use simple rules-based systems that consider only a limited number of variables.
Our operations and compliance teams each also perform vendor onsite audits annually. Competition Consumer lending is a vast and competitive market, and we compete in varying degrees with all other sources of unsecured consumer credit, including banks, non-bank lenders (including retail-based lenders) and other financial technology lending platforms.
Competition Consumer lending is a vast and competitive market, and we compete in varying degrees with all other sources of unsecured consumer credit, including banks, non-bank lenders (including retail-based lenders) and other financial technology lending platforms. Because personal loans often serve as a replacement for credit cards, we also compete with the convenience and ubiquity that credit cards represent.
For additional information about our intellectual property and associated risks, see the section titled “ Risk Factors—Risks Related to Our Business and Industry. ” Culture and Workforce We have built a very special company culture at Upstart. Building the best place for top talent to do great work has been a priority for us from day one.
“ Risk Factors ” of this Annual Report on Form 10-K. 23 Table of Contents Culture and Workforce We have built a very special company culture at Upstart. Building the best place for top talent to do great work has been a priority for us from day one.
This includes our African American Employee Network, Catalyst (for our LGBTQ2IA+ community), LatinX, TAU (for Asian American Upstarters), and most recently, a Veterans ERG, along with more than 20 clubs and special interest groups.
This includes our African American Employee Network, Catalyst (for our LGBTQ2IA+ community), Unidos, APU (for Asian American Upstarters), and most recently, a Veterans ERG, along with more than 20 clubs and special interest groups. Digital First Approach A few years ago, we shifted our talent location strategy to one that focused on “digital” work first.
For more details regarding the variables, training data, and algorithms in our models, please see “ Business—Evolution of Upstart’s AI Models .” Despite their sophistication, our AI models are delivered to lending partners in the form of a simple cloud application that shields borrowers from the underlying complexity.
Despite their sophistication, our AI models are delivered to lending partners in the form of a simple cloud application that shields borrowers from the underlying complexity. Additionally, our platform allows lending partners to tailor lending applications based on their policies and business needs.
Institutional investors may also purchase interests in loans originated via Upstart’s platform in the form of pass-through certificates rather than whole loans. We have pass-through certificate programs sponsored by certain financial institutions under which institutional investors can purchase securities collateralized by Upstart-powered loans from an issuer trust.
We have pass-through certificate programs sponsored by certain financial institutions under which institutional investors can purchase securities collateralized by Upstart-powered loans from an issuer trust. While there are minimal differences between whole loan sales and sales of pass-through certificates from Upstart’s perspective, both programs are offered to provide flexibility to institutional investors in our marketplace.
Our servicing platform manages all communication with borrowers, credit reporting agencies, and when necessary, collections agencies. • Access to capital markets —We have built a broad network of institutional investors who provide loan funding to lending partners through purchases of whole loans, pass-through certificates and asset-backed securitizations.
We continue to invest in expansion of our product offerings and launched a new HELOC product in 2023. • Access to capital markets —We have built a broad network of institutional investors who provide loan funding through purchases of whole loans, pass-through certificates and asset-backed securitizations.
While FICO is rarely the only input in a lending decision, most lenders use simple rules-based systems that consider only a limited number of variables. Unfortunately, because these legacy credit systems fail to accurately identify and quantify risk, millions of creditworthy individuals are left out of the system, and millions more pay too much to borrow money.
Unfortunately, because these legacy credit systems fail to accurately identify and quantify risk, millions of creditworthy individuals are left out of the system, and millions more pay too much to borrow money. Upstart AI remakes the lending process. We leverage AI to more accurately quantify the true risk of a loan.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeSUMMARY OF RISK FACTORS The material risks that may affect our business, financial condition or results of operations include, but are not limited to, those relating to the following: • We experienced rapid growth in the past and have a relatively limited operating history, which may result in increased risks, uncertainties, expenses and difficulties, and makes it difficult to evaluate our future prospects. • Our revenue growth rate and financial performance in prior years may not be indicative of future performance. • Our business has been and may continue to be adversely affected by economic conditions and other factors that we cannot control. • If we are unable to maintain diverse and robust loan funding programs with institutional investors, our growth prospects, business, financial condition and results of operations could be adversely affected. • If our existing lending partners cease or limit operations with us or if we are unable to attract and onboard new lending partners, our business, financial condition and results of operations will be adversely affected. • We have incurred net losses, and we may not be able to achieve profitability in the future. • Our quarterly results are likely to fluctuate and as a result may adversely affect the trading price of our common stock. • If we are unable to continue to improve our AI models or if our AI models contain errors or are otherwise ineffective, our growth prospects, business, financial condition and results of operations would be adversely affected. • Our AI models have not yet been extensively tested during down-cycle economic conditions.
Biggest changeSUMMARY OF RISK FACTORS The material risks that may affect our business, financial condition or results of operations include, but are not limited to, those relating to the following: • Our business has been and will continue to be adversely affected by economic conditions and other factors that we cannot control, including the recent bank failures and resulting disruption in the banking sector. • If we are unable to maintain diverse and resilient loan funding to our marketplace from institutional investors, our growth prospects, business, financial condition and results of operations could be adversely affected. • If we are unable to continue to improve our AI models or if our AI models contain errors or are otherwise ineffective, our growth prospects, business, financial condition and results of operations would be adversely affected. • If our AI models do not accurately reflect the impact of economic conditions on borrowers’ credit risk in a timely manner, the performance of Upstart-powered loans may be worse than anticipated and our AI models may be perceived as ineffective. • If our existing lending partners cease or limit their participation in our marketplace or if we are unable to attract new lending partners to our marketplace, our business, financial condition and results of operations will be adversely affected. • We have a relatively limited operating history, which may result in increased risks, uncertainties, expenses and difficulties, and makes it difficult to evaluate our future prospects. • If we are unable to manage the risks associated with the Upstart Macro Index (UMI), which is at an early research and development stage with an unproven track record, our credibility, reputation, business, financial condition and results of operations could be adversely affected. • We have incurred net losses, and we may not be able to achieve profitability in the future. • If we are unable to manage risks associated with the loans on our balance sheet, our business, financial condition and results of operations may be adversely affected. • Our revenue growth rate and financial performance in the past may not be indicative of future performance. • Our quarterly results are likely to fluctuate and as a result may adversely affect the trading price of our common stock. • Our loan funding arrangements with institutional investors, securitizations and warehouse credit facilities expose us to certain risks, and if we fail to successfully manage such risks, it may result in the reduced supply of loan funding capital or require us to seek more costly or less efficient financing for our marketplace. • Our top three lending partners account for a significant portion of loan originations on our marketplace and our revenue. 26 Table of Contents • Our reputation and brand are important to our success, and if we are unable to continue developing our reputation and brand, our ability to retain existing and attract new lending partners, our ability to attract borrowers to our marketplace, our ability to maintain diverse and resilient loan funding and our ability to maintain and improve our relationship with regulators of our industry could be adversely affected. • Our business is subject to a wide range of laws and regulations, many of which are evolving, and failure or perceived failure to comply with such laws and regulations could harm our business, financial condition and results of operations. • If we are unable to manage the risks related to our loan servicing and collections obligations, our business, financial condition and results of operations could be adversely affected. • Substantially all of our revenue is derived from a single loan product, and we are thus particularly susceptible to fluctuations in the unsecured personal loan market.
In our agreements with lending partners, we make certain representations and warranties and covenants concerning our compliance with specific policies of a lending partner, our compliance with certain procedures and guidelines related to laws and regulations applicable to our lending partners, as well as the services to be provided by us.
In our agreements with lending partners, we make certain representations and warranties and covenants concerning our compliance with specific policies of a lending partner, certain procedures and guidelines related to laws and regulations applicable to our lending partners, as well as the services to be provided by us.
It is also possible that such investment of resources may need to be delayed or deferred, as was the case with respect to our small business loan product when we decided to suspend its development in January 2023 due to the adverse macroeconomic conditions affecting our business at that time.
It is also possible that such investment of resources may need to be delayed or deferred, as was the case with respect to the small business loan product when we decided to suspend its development in January 2023 due to the adverse macroeconomic conditions affecting our business at that time.
Privacy requirements under the GLBA are enforced by the CFPB, as well as the Federal Trade Commission, or FTC, and under Section 5 of the Federal Trade Commission Act, we and our lending partners are prohibited from engaging in unfair and deceptive acts and practices, or UDAP.
Privacy requirements under the GLBA are enforced by the CFPB, as well as the FTC, and under Section 5 of the Federal Trade Commission Act, we and our lending partners are prohibited from engaging in unfair and deceptive acts and practices, or UDAP.
In particular, certain laws, regulations and rules we or our lending partners are subject to include: • state lending laws and regulations that require certain parties to hold licenses or other government approvals or filings in connection with specified activities, and impose requirements related to loan disclosures and terms, fees and interest rates, credit discrimination, credit reporting, servicemember relief, debt collection, repossession, unfair or deceptive business practices and consumer protection, as well as other state laws relating to privacy, information security, conduct in connection with data breaches and money transmission; 65 Table of Contents • the Truth-in-Lending Act and Regulation Z promulgated thereunder, and similar state laws, which require certain disclosures to borrowers regarding the terms and conditions of their loans and credit transactions, require creditors to comply with certain lending practice restrictions, limit the ability of a creditor to impose certain loan terms and impose disclosure requirements in connection with credit card origination; • the Equal Credit Opportunity Act and Regulation B promulgated thereunder, and similar state fair lending laws, which prohibit creditors from discouraging or discriminating against credit applicants on a prohibited basis, including race, color, sex, age, religion, national origin, marital status, the fact that all or part of the applicant’s income derives from any public assistance program or the fact that the applicant has in good faith exercised any right under the federal Consumer Credit Protection Act; • the Fair Credit Reporting Act and Regulation V promulgated thereunder, imposes certain obligations on users of consumer reports and those that furnish information to consumer reporting agencies, including obligations relating to obtaining consumer reports, marketing using consumer reports, taking adverse action on the basis of information from consumer reports, addressing risks of identity theft and fraud and protecting the privacy and security of consumer reports and consumer report information; • Section 5 of the Federal Trade Commission Act, which prohibits unfair and deceptive acts or practices in or affecting commerce, and Section 1031 of the Dodd-Frank Act, which prohibits unfair, deceptive or abusive acts or practices in connection with any consumer financial product or service, and analogous state laws prohibiting unfair, deceptive or abusive acts or practices; • the Credit Practices Rule which (i) prohibits lenders from using certain contract provisions that the Federal Trade Commission has found to be unfair to consumers; (ii) requires lenders to advise consumers who co-sign obligations about their potential liability if the primary obligor fails to pay; and (iii) prohibits certain late charges; • the Fair Debt Collection Practices Act, Regulation F, and similar state debt collection laws, which provide guidelines and limitations on the conduct of third-party debt collectors (and some limitation on creditors collecting their own debts) in connection with the collection of consumer debts; • the Gramm-Leach-Bliley Act and Regulation P promulgated thereunder, which includes limitations on financial institutions’ disclosure of nonpublic personal information about a consumer to nonaffiliated third parties, in certain circumstances requires financial institutions to limit the use and further disclosure of nonpublic personal information by nonaffiliated third parties to whom they disclose such information and requires financial institutions to disclose certain privacy notices and practices with respect to information sharing with affiliated and unaffiliated entities as well as to safeguard personal borrower information, and other state privacy laws and regulations; • the Bankruptcy Code, which limits the extent to which creditors may seek to enforce debts against parties who have filed for bankruptcy protection; • the Servicemembers Civil Relief Act, which allows military members to suspend or postpone certain civil obligations, requires creditors to reduce the interest rate to 6% on loans to military members under certain circumstances, and imposes restrictions on enforcement of loans to servicemembers, so that the military member can devote his or her full attention to military duties; • the Military Lending Act, which requires those who lend to “covered borrowers”, including members of the military and their dependents, to only offer Military APRs (a specific measure of all-in-cost-of-credit) under 36%, prohibits arbitration clauses in loan agreements, and prohibits certain other loan agreement terms and lending practices in connection with loans to military servicemembers, among other requirements, and for which violations may result in penalties including voiding of the loan agreement; • the Electronic Fund Transfer Act and Regulation E promulgated thereunder, which provide guidelines and restrictions on the electronic transfer of funds from consumers’ bank accounts, including a prohibition on a creditor requiring a consumer to repay a credit agreement in preauthorized (recurring) electronic fund transfers and disclosure and authorization requirements in connection with such transfers; • the Telephone Consumer Protection Act and the regulations promulgated thereunder, which impose various consumer consent requirements and other restrictions in connection with telemarketing activity and other 66 Table of Contents communication with consumers by phone, fax or text message, and which provide guidelines designed to safeguard consumer privacy in connection with such communications; • the Federal Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 and the Telemarketing Sales Rule and analogous state laws, which impose various restrictions on marketing conducted use of email, telephone, fax or text message; • the Electronic Signatures in Global and National Commerce Act and similar state laws, particularly the Uniform Electronic Transactions Act, which authorize the creation of legally binding and enforceable agreements utilizing electronic records and signatures and which require creditors and loan servicers to obtain a consumer’s consent to electronically receive disclosures required under federal and state laws and regulations; • the Right to Financial Privacy Act and similar state laws enacted to provide the financial records of financial institution customers a reasonable amount of privacy from government scrutiny; • the Bank Secrecy Act and the USA PATRIOT Act, which relate to compliance with anti-money laundering, borrower due diligence and record-keeping policies and procedures; • the regulations promulgated by the Office of Foreign Assets Control under the U.S.
In particular, certain laws, regulations and rules we or our lending partners are subject to include: • state lending laws and regulations that require certain parties to hold licenses or other government approvals or filings in connection with specified activities, and impose requirements related to loan disclosures and terms, fees and interest rates, credit discrimination, credit reporting, servicemember relief, debt collection, repossession, unfair or deceptive business practices and consumer protection, as well as other state laws relating to privacy, information security, conduct in connection with data breaches and money transmission; • the Truth-in-Lending Act and Regulation Z promulgated thereunder, and similar state laws, which require certain disclosures to borrowers regarding the terms and conditions of their loans and credit transactions, require creditors to comply with certain lending practice restrictions, limit the ability of a creditor to impose certain loan terms and impose disclosure requirements in connection with credit card origination; • the Equal Credit Opportunity Act and Regulation B promulgated thereunder, and similar state fair lending laws, which prohibit creditors from discouraging or discriminating against credit applicants on a prohibited basis, including race, color, sex, age, religion, national origin, marital status, the fact that all or part of the applicant’s income derives from any public assistance program or the fact that the applicant has in good faith exercised any right under the federal Consumer Credit Protection Act; • the Fair Credit Reporting Act and Regulation V promulgated thereunder, imposes certain obligations on users of consumer reports and those that furnish information to consumer reporting agencies, including obligations relating to obtaining consumer reports, marketing using consumer reports, taking adverse action on the basis of information from consumer reports, addressing risks of identity theft and fraud and protecting the privacy and security of consumer reports and consumer report information; • Section 5 of the Federal Trade Commission Act, which prohibits unfair and deceptive acts or practices in or affecting commerce, and Section 1031 of the Dodd-Frank Act, which prohibits unfair, deceptive or abusive acts or practices in connection with any consumer financial product or service, and analogous state laws prohibiting unfair, deceptive or abusive acts or practices; • the Credit Practices Rule which (i) prohibits lenders from using certain contract provisions that the Federal Trade Commission has found to be unfair to consumers; (ii) requires lenders to advise consumers who co-sign obligations about their potential liability if the primary obligor fails to pay; and (iii) prohibits certain late charges; • the Fair Debt Collection Practices Act, Regulation F, and similar state debt collection laws, which provide guidelines and limitations on the conduct of third-party debt collectors (and some limitation on creditors collecting their own debts) in connection with the collection of consumer debts; • the Gramm-Leach-Bliley Act, or GLBA, and Regulation P promulgated thereunder, which includes limitations on financial institutions’ disclosure of nonpublic personal information about a consumer to nonaffiliated third parties, in certain circumstances requires financial institutions to limit the use and further disclosure of nonpublic personal information by nonaffiliated third parties to whom they disclose such information and requires financial institutions to disclose certain privacy notices and practices with respect 66 Table of Contents to information sharing with affiliated and unaffiliated entities as well as to safeguard personal borrower information, and other state privacy laws and regulations; • the Bankruptcy Code, which limits the extent to which creditors may seek to enforce debts against parties who have filed for bankruptcy protection; • the Servicemembers Civil Relief Act, which allows military members to suspend or postpone certain civil obligations, requires creditors to reduce the interest rate to 6% on loans to military members under certain circumstances, and imposes restrictions on enforcement of loans to servicemembers, so that the military member can devote his or her full attention to military duties; • the Military Lending Act, which requires those who lend to “covered borrowers”, including members of the military and their dependents, to only offer Military APRs (a specific measure of all-in-cost-of-credit) under 36%, prohibits arbitration clauses in loan agreements, and prohibits certain other loan agreement terms and lending practices in connection with loans to military servicemembers, among other requirements, and for which violations may result in penalties including voiding of the loan agreement; • the Electronic Fund Transfer Act and Regulation E promulgated thereunder, which provide guidelines and restrictions on the electronic transfer of funds from consumers’ bank accounts, including a prohibition on a creditor requiring a consumer to repay a credit agreement in preauthorized (recurring) electronic fund transfers and disclosure and authorization requirements in connection with such transfers; • the Telephone Consumer Protection Act and the regulations promulgated thereunder, which impose various consumer consent requirements and other restrictions in connection with telemarketing activity and other communication with consumers by phone, fax or text message, and which provide guidelines designed to safeguard consumer privacy in connection with such communications; • the Federal Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 and the Telemarketing Sales Rule and analogous state laws, which impose various restrictions on marketing conducted use of email, telephone, fax or text message; • the Electronic Signatures in Global and National Commerce Act and similar state laws, particularly the Uniform Electronic Transactions Act, which authorize the creation of legally binding and enforceable agreements utilizing electronic records and signatures and which require creditors and loan servicers to obtain a consumer’s consent to electronically receive disclosures required under federal and state laws and regulations; • the Right to Financial Privacy Act and similar state laws enacted to provide the financial records of financial institution customers a reasonable amount of privacy from government scrutiny; • the Bank Secrecy Act and the USA PATRIOT Act, which relate to compliance with anti-money laundering, borrower due diligence and record-keeping policies and procedures; • the regulations promulgated by the Office of Foreign Assets Control under the U.S.
The risks we face in connection with acquisitions include: • diversion of management time and focus from operating our business to addressing acquisition integration challenges; 49 Table of Contents • utilization of our financial resources for acquisitions or investments that may fail to realize the anticipated benefits; • inability of the acquired technologies, products or businesses to achieve expected levels of revenue, profitability, productivity or other benefits; • coordination of technology, product development and sales and marketing functions and integration of administrative systems; • transition of the acquired company’s borrowers to our systems; • retention of employees from the acquired company; • regulatory risks, including maintaining good standing with existing regulatory bodies or receiving any necessary approvals, as well as being subject to new regulators with oversight over an acquired business; • attracting financing; • cultural challenges associated with integrating employees from the acquired company into our organization; • the need to implement or improve controls, procedures and policies at a business that prior to the acquisition may have lacked effective controls, procedures and policies; • potential write-offs of loans or intangibles or other assets acquired in such transactions that may have an adverse effect on our results of operations in a given period; • liability for activities of the acquired company before the acquisition, including patent and trademark infringement claims, violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities; • assumption of contractual obligations that contain terms that are not beneficial to us, require us to license or waive intellectual property or increase our risk for liability; and • litigation, claims or other liabilities in connection with the acquired company.
The risks we face in connection with acquisitions include: • diversion of management time and focus from operating our business to addressing acquisition integration challenges; • utilization of our financial resources for acquisitions or investments that may fail to realize the anticipated benefits; • inability of the acquired technologies, products or businesses to achieve expected levels of revenue, profitability, productivity or other benefits; • coordination of technology, product development and sales and marketing functions and integration of administrative systems; 52 Table of Contents • transition of the acquired company’s borrowers to our systems; • retention of employees from the acquired company; • regulatory risks, including maintaining good standing with existing regulatory bodies or receiving any necessary approvals, as well as being subject to new regulators with oversight over an acquired business; • attracting financing; • cultural challenges associated with integrating employees from the acquired company into our organization; • the need to implement or improve controls, procedures and policies at a business that prior to the acquisition may have lacked effective controls, procedures and policies; • potential write-offs of loans or intangibles or other assets acquired in such transactions that may have an adverse effect on our results of operations in a given period; • liability for activities of the acquired company before the acquisition, including patent and trademark infringement claims, violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities; • assumption of contractual obligations that contain terms that are not beneficial to us, require us to license or waive intellectual property or increase our risk for liability; and • litigation, claims or other liabilities in connection with the acquired company.
Additionally, effective October 2021, Maine updated its Consumer Credit Code to include a statutory “true lender” test, providing that an entity is a “lender” subject to certain requirements of the Consumer Credit Code if the person, among other things: (i) has the predominant economic interest in a loan; (ii) brokers, arranges, or facilitates a loan and has the right to purchase the loan; or (iii) based on the totality of the circumstances, appears to be the lender, and the transaction is structured to evade certain statutory requirements.
Effective October 2021, Maine updated its Consumer Credit Code to include a statutory “true lender” test, providing that an entity is a “lender” subject to certain requirements of the Consumer Credit Code if the person, among other things: (i) has the predominant economic interest in a loan; (ii) brokers, arranges, or facilitates a loan and has the right to purchase the loan; or (iii) based on the totality of the circumstances, appears to be the lender, and the transaction is structured to evade certain statutory requirements.
We expect that the requirements of these rules and regulations will continue to increase our legal, accounting, and financial compliance costs, make some activities more difficult, time-consuming, and costly, and place significant strain on our personnel, systems, and resources. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting.
We expect that the requirements of these rules and regulations will continue to increase our legal, accounting, and financial compliance costs, make some activities more difficult, time-consuming, and costly, and place significant strain on our personnel, systems, and resources. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal controls over financial reporting.
Like other financial services firms, we have been and continue to be the subject of actual or attempted unauthorized access, mishandling or misuse of information, computer viruses or malware, and cyber-attacks that could obtain confidential information, destroy data, disrupt or degrade service, sabotage systems or cause other damage, distributed denial of service attacks, data breaches and other infiltration, exfiltration or other similar events.
Like other financial and technology services firms, we have been and continue to be the subject of actual or attempted unauthorized access, mishandling or misuse of information, computer viruses or malware, and cyber-attacks that could obtain confidential information, destroy data, disrupt or degrade service, sabotage systems or cause other damage, distributed denial of service attacks, data breaches and other infiltration, exfiltration or other similar events.
Under our warehouse facility for auto loans (the “UAWT Warehouse Credit Facility”), we may borrow up to $200.0 million until June 14, 2024, and any outstanding principal, together with any accrued and unpaid interest, are due and payable by the warehouse trust special purpose entity twelve months after the determined amortization date.
Under our warehouse facility for auto loans (the “UAWT Warehouse Credit Facility”), we may borrow up to $200 million until June 14, 2024, and any outstanding principal, together with any accrued and unpaid interest, are due and payable by the warehouse trust special purpose entity twelve months after the determined amortization date.
However, such applications of our AI models may prove to be less predictive than we expect, or than they have been in the past, for a variety of reasons, including inaccurate assumptions or other errors made in constructing such models, incorrect interpretations of the results of such models and failure to timely update model assumptions and parameters.
However, such applications of our AI models may prove to be less predictive than we expect, or than they have been in the past, for a variety of reasons, including inaccurate assumptions or other errors made in constructing such models, incorrect interpretations of the results of such models and failure to update model assumptions and parameters in a timely manner.
The market for unsecured personal loans has grown rapidly in recent years, and it is unclear to what extent such market will continue to grow, if at all. A wide variety of factors could impact the market for unsecured personal loans, including macroeconomic conditions, competition, regulatory developments and other developments in the credit market.
While the market for unsecured personal loans has grown rapidly in recent years, it is unclear to what extent such market will continue to grow, if at all. A wide variety of factors could impact the market for unsecured personal loans, including macroeconomic conditions, competition, regulatory developments and other developments in the credit market.
Furthermore, we have reduced our workforce in November 2022 and January 2023 and may further reduce our workforce in the future to lower our operating costs and streamline operations. These reductions in force may adversely affect employee morale, our culture and our ability to attract and retain personnel who are critical to our business.
Furthermore, we have reduced our workforce in November 2022 and January 2023 and may further reduce our workforce in the future to lower our operating costs and streamline operations. These reductions in our workforce may adversely affect employee morale, our culture and our ability to attract and retain personnel who are critical to our business.
A similar complaint against online lender Opportunity Financial, LLC was filed in early 2021, alleging that it rather than a bank originated these loans and the loans were therefore in violation of Washington, DC usury laws. The parties settled this case in November 2021.
A similar complaint against an online lender, Opportunity Financial, LLC, was filed in early 2021, alleging that it rather than a bank originated these loans and the loans were therefore in violation of Washington, DC usury laws. The parties settled this case in November 2021.
Aspects of the CCPA and its interpretation remain unclear. In addition, California voters approved Proposition 24 in the November 2020 election to create the California Privacy Rights Act, or CPRA, which amends and purports to strengthen the CCPA and created a state agency, the California Privacy Protection Agency or CPPA, to enforce privacy laws.
Aspects of the CCPA and its interpretation remain unclear. In addition, California voters approved Proposition 24 in the November 2020 election to create the California Privacy Rights Act, or CPRA, which amends and purports to strengthen the CCPA and created a state agency, the California Privacy Protection Agency, to enforce privacy laws.
If a court, or a state or federal enforcement agency, were to deem Upstart, rather than our lending partners, the “true lender” for loans originated on our platform, and if for this reason (or any other reason) the loans were deemed subject to and in violation of certain state consumer finance laws, we could be subject to fines, damages, injunctive relief (including required modification or discontinuation of our business in certain areas) and other penalties or consequences, and the loans could be rendered void or unenforceable in whole or in part, any of which could have a material adverse effect on our business (directly, or as a result of adverse impact on our relationships with our lending partners, institutional investors or other commercial counterparties).
If a court, or a state or federal enforcement agency, were to deem Upstart, rather than our lending partners, the “true lender” for loans originated on our marketplace, and if for this reason (or any other reason) the loans were deemed subject to and in violation of certain state consumer finance laws, we could be subject to fines, damages, injunctive relief (including required modification or discontinuation of our business in certain areas) and other penalties or consequences, and the loans could be rendered void or unenforceable in whole or in part, any of which could have a material adverse effect on our business (directly, or as a result of adverse impact on our relationships with our lending partners, institutional investors or other commercial counterparties).
If we do not compete effectively in our target markets, our business, results of operations and financial condition could be harmed. The consumer lending market is highly competitive and increasingly dynamic as emerging technologies continue to enter into the marketplace.
If we do not compete effectively in our target markets, our business, results of operations and financial condition could be harmed. The consumer lending market is highly competitive and increasingly dynamic as emerging technologies continue to enter the marketplace.
In addition, any security compromise in our industry, whether actual or perceived, or information technology system disruptions, whether from attacks on our technology environment or from computer malware, natural disasters, terrorism, war and telecommunication and electrical failures, could interrupt our business or operations, harm our reputation, erode borrower confidence, negatively affect our ability to attract new borrowers, or subject us to third-party lawsuits, regulatory fines or other action or liability, which could adversely affect our business and results of operations.
In addition, any security compromise in our industry, whether actual or perceived, or information technology system disruptions, whether from attacks on our technology environment or from computer malware, natural disasters, terrorism, war, geopolitical conflicts, or telecommunication or electrical failures, could interrupt our business or operations, harm our reputation, erode borrower confidence, negatively affect our ability to attract new borrowers, or subject us to third-party lawsuits, regulatory fines or other action or liability, which could adversely affect our business and results of operations.
If we or one of our lending partners were found to be in violation of applicable state licensing requirements by a court or a state, federal, or local enforcement agency, we could be subject to fines, damages, injunctive relief (including required modification or discontinuation of our business in certain areas), criminal penalties and other penalties or consequences, and the loans originated by our lending partners on our platform could be rendered void or unenforceable in whole or in part, any of which could have a material adverse effect on our business.
If we or one of our lending partners were found to be in violation of applicable state licensing requirements by a court or a state, federal, or local enforcement agency, we could be subject to fines, damages, injunctive relief (including required modification or discontinuation of our business in certain areas), criminal penalties and other penalties or consequences, and the loans originated by our lending partners on our marketplace could be rendered void or unenforceable in whole or in part, any of which could have a material adverse effect on our business.
If we or the collection agents are unable to maintain a high quality of service, or fulfill the servicing obligations at all due to resource constraints, it could result in increased delinquencies and charge-offs on the loans, which could decrease fees payable to us, cause our lending partners to decrease the volume of Upstart-powered loans kept on their balance sheets, erode trust in our lending marketplace or increase the costs of our loan funding programs.
If we or the collection agents are unable to maintain a high quality of service, or fulfill the servicing obligations at all due to resource constraints, it could result in increased delinquencies and charge-offs on the loans, which could decrease fees payable to us, cause our lending partners to decrease the volume of Upstart-powered loans kept on their balance sheets, erode trust in our lending marketplace or increase the costs of loan funding for our marketplace.
For example, both the FTC and CFPB have relied on UDAP/UDAAP principles to increase enforcement of “dark patterns”, the definition of which varies but has been defined as “design features used to deceive, steer, or manipulate users into behavior that is profitable for an online service, but often harmful to users or contrary to their intent.” At the state level, the California Consumer Privacy Act, or the CCPA, which went into effect on January 1, 2020, requires, among other things, that covered companies provide disclosures to California residents and afford such persons new abilities to opt-out of certain sales or retention of their personal information by us.
For example, both the FTC and CFPB have relied on UDAP/UDAAP principles to increase enforcement of “dark patterns”, the definition of which varies but has been defined as “design features used to deceive, steer, or manipulate users into behavior that is profitable for an online service, but often harmful to users or contrary to their intent.” 71 Table of Contents At the state level, the California Consumer Privacy Act, or the CCPA, which went into effect on January 1, 2020, requires, among other things, that covered companies provide disclosures to California residents and afford such persons new abilities to opt-out of certain sales or retention of their personal information by us.
Because the loans facilitated by our platform are originated by our lending partners, many state consumer financial regulatory requirements, including usury restrictions (other than the restrictions of the state in which a lending partner originating a particular loan is located) and many licensing requirements and substantive requirements under state consumer credit laws, are treated as inapplicable based on principles of federal preemption or express exemptions provided in relevant state laws for certain types of financial institutions or loans they originate.
Because the loans facilitated by our marketplace are originated by our lending partners, many state consumer financial regulatory requirements, including usury restrictions (other than the restrictions of the state in which a lending partner originating a particular loan is located) and many licensing requirements and substantive requirements under state consumer credit laws, are treated as inapplicable based on principles of federal preemption or express exemptions provided in relevant state laws for certain types of financial institutions or loans they originate.
We have, from time to time in the normal course of our business, received, and may in the future receive or be subject to, inquiries or investigations by state and federal regulatory agencies and bodies such as the CFPB, FTC, state Attorneys General, the SEC, state financial regulatory agencies and other state or federal agencies or bodies regarding the Upstart platform, including the marketing of loans for lenders, underwriting and pricing of consumer loans for our lending partners, our fair lending compliance program and licensing and registration requirements.
We have, from time to time in the normal course of our business, received, and may in the future receive or be subject to, inquiries or investigations by state and federal regulatory agencies and bodies such as the CFPB, the FTC, state Attorneys General, the SEC, state financial regulatory agencies and other state or federal agencies or bodies regarding the Upstart marketplace, including the marketing of loans for lenders, underwriting and pricing of consumer loans for our lending partners, our fair lending compliance program and licensing and registration requirements.
Our overall operating efficiency and margins further depend in large part on our ability to maintain a high degree of automation in our loan application process and achieve incremental improvements in the degree of automation.
Our overall operating efficiency and margins further depend in part on our ability to maintain a high degree of automation in our loan application process and achieve incremental improvements in the degree of automation.
If we were subject to such litigation or enforcement, then any unfavorable results of pending or future legal proceedings may result in contractual damages, usury related claims, fines, penalties, injunctions, the unenforceability, rescission or other impairment of loans originated on our platform or other censure that could have an adverse effect on our business, results of operations and financial condition.
If we were subject to such litigation or enforcement, then any unfavorable results of pending or future legal proceedings may result in contractual damages, usury related claims, fines, penalties, injunctions, the unenforceability, rescission or other impairment of loans originated on our marketplace or other censure that could have an adverse effect on our business, results of operations and financial condition.
Any event that leads to unauthorized access, use or disclosure of personal information or other sensitive information that we or our vendors maintain, including our own proprietary business information and sensitive information such as personal information regarding borrowers, loan applicants or employees, could disrupt our business, harm our reputation, compel us to comply with applicable federal and/or state breach notification laws and foreign law equivalents, subject us to time consuming, distracting and expensive litigation, regulatory investigation and oversight, mandatory corrective action, require us to verify the correctness of database contents, or otherwise subject us to liability under laws, regulations and contractual obligations, including those that protect the privacy and security of personal information.
Any event that leads to unauthorized access, use or disclosure of personal information or other sensitive information that we or our vendors maintain, including our own proprietary business information and sensitive information such as personal information regarding borrowers, loan applicants or employees, could disrupt our business, harm our reputation, compel us to comply with applicable federal and/or state breach notification laws and foreign law equivalents, subject us to time consuming, distracting and expensive litigation, regulatory investigation and oversight, mandatory corrective action, require us to verify the correctness of data, or otherwise subject us to liability under laws, regulations and contractual obligations, including those that protect the privacy and security of personal information.
When establishing the interest rates and structures (and the amounts and structures of certain fees constituting interest under federal banking law, such as origination fees, late fees and non-sufficient funds fees) that are charged to borrowers on loans originated on our platform, our lending partners rely on certain authority under federal law to export the interest rate requirements of the state where each lending partner is located to borrowers in all other states.
When establishing the interest rates and structures (and the amounts and structures of certain fees constituting interest under federal banking law, such as origination fees, late fees and non-sufficient funds fees) that are charged to borrowers on loans originated on our marketplace, our lending partners rely on certain authority under federal law to export the interest rate requirements of the state where each lending partner is located to borrowers in all other states.
In particular, lending programs that involve originations by a bank in reliance on origination-related services being provided by non-bank lending platforms and/or program managers are subject to potential litigation and government enforcement claims based on “rent-a-charter” or “true lender” theories, particularly where such programs involve the subsequent sale of such loans or interests therein through the lending marketplace.
In particular, lending programs that involve originations by a bank in reliance on origination-related services being provided by non-bank lending platforms and/or program managers are subject to potential litigation and government enforcement claims based on “rent-a-bank” or “true lender” theories, particularly where such programs involve the subsequent sale of such loans or interests therein through the lending marketplace.
Our workforce is currently distributed across the U.S., and we expect this distribution to continue. We have a limited history of operating with a Digital First workforce.
Our workforce is currently distributed across the U.S., and we expect this to continue. We have a limited history of operating with a Digital First workforce.
In the event of a system outage or other event resulting in data loss or corruption, our ability to process loan applications, service loans or otherwise facilitate loans on our platform would be adversely affected. We also rely on facilities, components, and services supplied by third parties, including data center facilities, cloud storage services and national consumer reporting agencies.
In the event of a system outage or other event resulting in data loss or corruption, our ability to process loan applications, service loans or otherwise facilitate loans on our marketplace would be adversely affected. We also rely on facilities, components, and services supplied by third parties, including data center facilities, cloud storage services and national consumer reporting agencies.
If we are unable to comply with such laws and regulations, we could lose one or more of our licenses or authorizations, become subject to greater scrutiny by regulatory agencies or become subject to sanctions or litigation, which may have an adverse effect on our ability to perform our servicing obligations or make our platform available to borrowers in particular states.
If we are unable to comply with such laws and regulations, we could lose one or more of our licenses or authorizations, become subject to greater scrutiny by regulatory agencies or become subject to sanctions or litigation, which may have an adverse effect on our ability to perform our servicing obligations or make our marketplace available to borrowers in particular states.
If such third-party collection agencies do not perform as expected under our agreements with them or if we or these collection agents act unprofessionally and otherwise harm the user experience for borrowers of Upstart-powered loans, our brand and reputation could be harmed and our ability to attract potential borrowers to our platform could be negatively impacted.
If such third-party collection agencies do not perform as expected under our agreements with them or if we or these collection agents act unprofessionally and otherwise harm the user experience for borrowers of Upstart-powered loans, our brand and reputation could be harmed and our ability to attract potential borrowers to our marketplace could be negatively impacted.
We do not believe that we or our affiliates are required to register as an investment adviser with either the SEC or any of the various states, because our business consists of providing a platform for consumer lending and loan financing for which investment adviser registration and regulation does not apply under applicable federal or state law.
We do not believe that we or our affiliates are required to register as an investment adviser with either the SEC or any of the various states, because our business consists of providing a marketplace for consumer lending and loan financing for which investment adviser registration and regulation does not apply under applicable federal or state law.
Although we have committed resources to enhancing our compliance programs, future actions by the CFPB (or other regulators) against us, our lending partners or our competitors could discourage the use of our services or those of our lending partners, which could result in reputational harm, a loss of lending partners, borrowers or institutional investors in our loan funding programs, or discourage the use of our or their services and adversely affect our business.
Although we have committed resources to enhancing our compliance programs, future actions by the CFPB (or other regulators) against us, our lending partners or our competitors could discourage the use of our services or those of our lending partners, which could result in reputational harm, a loss of lending partners, borrowers or institutional investors, or discourage the use of our or their services and adversely affect our business.
Our inability to compete effectively could result in reduced loan volumes, reduced average size of loans facilitated on our platform, reduced fees, increased marketing and borrower acquisition costs or the failure of the Upstart platform to achieve or maintain more widespread market acceptance, any of which could have an adverse effect on our business and results of operations.
Our inability to compete effectively could result in reduced loan volumes, reduced average size of loans facilitated on our marketplace, reduced fees, increased marketing and borrower acquisition costs or the failure of the Upstart marketplace to achieve or maintain more widespread market acceptance, any of which could have an adverse effect on our business and results of operations.
We base our estimates and assumptions on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities, and equity, and the amount of revenue and expenses that are not readily apparent from other sources.
We base our estimates and assumptions on historical experience and on various other data points that we believe to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities, and equity, and the amount of revenue and expenses that are not readily apparent from other sources.
In addition, a number of participants in the consumer financial services industry have been the subject of putative class action lawsuits, state attorney general actions and other state regulatory actions, federal regulatory enforcement actions, including actions relating to alleged unfair, deceptive or abusive acts or practices, violations of state licensing and lending laws, including state usury and disclosure laws, actions alleging discrimination on the 64 Table of Contents basis of race, ethnicity, gender or other prohibited bases, and allegations of noncompliance with various state and federal laws and regulations relating to originating, servicing, and collecting consumer finance loans and other consumer financial services and products.
In addition, a number of participants in the consumer financial services industry have been the subject of putative class action lawsuits, state attorney general actions and other state regulatory actions, federal regulatory enforcement actions, including actions relating to alleged unfair, deceptive or abusive acts or practices, violations of state licensing and lending laws, including state usury and disclosure laws, actions alleging discrimination on the basis of race, ethnicity, gender or other prohibited bases, and allegations of noncompliance with various state and federal laws and regulations relating to originating, servicing, and collecting consumer finance loans and other consumer financial services and products.
Additionally, if such repossession vendors do not perform consistent with agreements entered into with us, or if vendors act unprofessionally or otherwise harm the user experience for borrowers of Upstart-powered loans, our brand and reputation could be harmed and our ability to attract potential borrowers to our platform could be negatively impacted.
Additionally, if such repossession vendors do not perform consistent with agreements entered into with us, or if vendors act unprofessionally or otherwise harm the user experience for borrowers of Upstart-powered loans, our brand and reputation could be harmed and our ability to attract potential borrowers to our marketplace could be negatively impacted.
These regulators may augment requirements that apply to loans facilitated by our platform, or impose new programs and restrictions, and could otherwise revise or create new regulatory requirements that apply to us (or our lending partners), impacting our business, operations, and profitability. Certain state laws generally regulate interest rates and other charges and require certain disclosures.
These regulators may augment requirements that apply to loans facilitated by our marketplace, or impose new programs and restrictions, and could otherwise revise or create new regulatory requirements that apply to us (or our lending partners), impacting our business, operations, and profitability. Certain state laws generally regulate interest rates and other charges and require certain disclosures.
The ability to collect on the loans is dependent on the borrower’s continuing financial stability, and consequently, collections can be adversely affected by a number of factors, including, but not limited to, unemployment, divorce, death, illness, bankruptcy or the economic or social factors beyond a borrower’s personal circumstances.
The ability to collect on the loans is largely dependent on the borrower’s continuing financial stability, and consequently, collections can be adversely affected by a number of factors, including, but not limited to, unemployment, divorce, death, illness, bankruptcy or the economic or social factors beyond personal circumstances of a borrower.
As a result of these and other factors, the ultimate amount of tax obligations owed may differ from the amounts recorded in our financial statements and any such difference may adversely impact our results of operations in future periods in which we change our estimates of our tax obligations or in which the ultimate tax outcome is determined.
As a result of these and other factors, the ultimate amount of tax obligations owed may differ from the amounts recorded in our financial statements and any such difference may adversely impact our results of operations in future years in which we change our estimates of our tax obligations or in which the ultimate tax outcome is determined.
If there are changes in the laws or in the interpretation or enforcement of existing laws affecting consumer loans similar to those offered on our platform, or our marketing and servicing of such loans, or if we become subject to such lawsuits, our business, financial condition and results of operations would be adversely affected.
If there are changes in the laws or in the interpretation or enforcement of existing laws affecting consumer loans similar to those offered on our marketplace, or our marketing and servicing of such loans, or if we become subject to such lawsuits, our business, financial condition and results of operations would be adversely affected.
Any of the foregoing could negatively impact the accuracy of our pricing decisions, the degree of automation in our loan application process and the volume of loans facilitated on our platform. Third-party data sources on which we rely include the consumer reporting agencies regulated by the CFPB and other alternative data sources.
Any of the foregoing could negatively impact the accuracy of our pricing decisions, the degree of automation in our loan application process and the volume of loans facilitated on our marketplace. Third-party data sources on which we rely include the consumer reporting agencies regulated by the CFPB and other alternative data sources.
Many privacy and data security laws, such as the CCPA, apply to biometric data. However, some states have passed or are considering legislation that are biometric specific. For instance, in Illinois, the Biometric Information Privacy Act (“BIPA”) specifically governs the collection, possession, and disclosure of biometric information or biometric identifiers.
Many privacy and data security laws, such as the CCPA, apply to biometric data. However, some states have passed or are considering legislation that are biometric specific. For instance, in Illinois, the Biometric Information Privacy Act, or BIPA, specifically governs the collection, possession, and disclosure of biometric information or biometric identifiers.
Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015), cert. denied, 136 S.Ct. 2505 (June 27, 2016), for example, the United States Court of Appeals for the Second Circuit held that the non-bank purchaser of 60 Table of Contents defaulted credit card debt could not rely on preemption standards under the National Bank Act applicable to the originator of such debt in defense of usury claims.
Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015), cert. denied, 136 S.Ct. 2505 (June 27, 2016), for example, the United States Court of Appeals for the Second Circuit held that the non-bank purchaser of defaulted credit card debt could not rely on preemption standards under the National Bank Act applicable to the originator of such debt in defense of usury claims.
In addition, borrowers may not view Upstart-powered loans, which were originated through an online lending platform, as having the same significance as other credit obligations arising under more traditional circumstances, such as loans from banks or other commercial financial institutions.
In addition, borrowers may not view Upstart-powered loans, which were originated through an online lending marketplace, as having the same significance as other credit obligations arising under more traditional circumstances, such as loans from banks or other commercial financial institutions.
Were such repercussions to apply to us, we may suffer direct monetary loss or may be a less attractive candidate for lending partners, securitization trustees or institutional investors to enter into or renew relationships; and were such repercussions to apply to our lending partners or institutional investors, such parties could be discouraged from using our platform.
Were such repercussions to apply to us, we may suffer direct monetary loss or may be a less attractive candidate for lending partners, securitization trustees or institutional investors to enter into or renew relationships; and were such repercussions to apply to our lending partners or institutional investors, such parties could be discouraged from using our marketplace.
Generally, this litigation arises from the dissatisfaction of a consumer with the products or services offered on our platform; some of this litigation, however, has arisen from other matters, including claims of violation of laws related to credit reporting, collections and do-not-call.
Generally, this litigation arises from the dissatisfaction of a consumer with the products or services offered on our marketplace; some of this litigation, however, has arisen from other matters, including claims of violation of laws related to credit reporting, collections and do-not-call.
Moreover, we will be required to pay the Notes in cash at their maturity unless earlier converted, redeemed or repurchased. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of the Notes surrendered therefor or pay cash for Notes being converted or at their maturity.
Moreover, we will be required to pay the Notes in cash at their maturity unless earlier converted, redeemed or repurchased. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of the Notes or pay cash for Notes being converted or at their maturity.
If we are unable to realize the expected operational efficiencies or cost savings from the reductions in force, or if we experience significant adverse consequences as a result, our business, financial conditions and results of operations may be adversely affected.
If we are unable to realize the expected operational efficiencies or cost savings from the reductions in our workforce, or if we experience significant adverse consequences as a result, our business, financial conditions and results of operations may be adversely affected.
We may continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new loan products, enhance our AI models, improve our operating infrastructure, acquire complementary businesses and technologies, or make strategic investments.
We may continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new loan products, enhance our AI models, supplement loan funding, improve our operating infrastructure, acquire complementary businesses and technologies, or make strategic investments.
We face competition in areas such as compliance capabilities, commercial financing terms and costs of capital, interest rates and fees (and other financing terms) available to consumers from our lending partners, approval rates, model efficiency, speed and simplicity of loan origination, ease-of-use, marketing expertise, service levels, products and services, technological capabilities and integration, borrower experience, brand and reputation, and terms available to our loan funding institutional investor base.
We face competition in areas such as compliance capabilities, commercial financing terms and costs of capital, interest rates and fees (and other financing terms) available to consumers from our lending partners, approval rates, model efficiency, speed and simplicity of loan origination, ease-of-use, marketing expertise, service levels, products and services, technological capabilities and integration, borrower experience, brand and reputation, 44 Table of Contents and terms available to our loan funding institutional investor base.
We are, and may in the future become, subject to litigation, claims, examinations, investigations, legal and administrative cases and proceedings, whether civil or criminal, or lawsuits by governmental agencies or private parties, which may affect our results of operations.
We are, and may in the future become, subject to litigation, claims, examinations, investigations, enforcement actions, legal and administrative cases and proceedings, whether civil or criminal, or lawsuits by governmental agencies or private parties, which may affect our results of operations.
The complaint sought a judgment declaring the receivables unenforceable, monetary damages and other legal and equitable remedies, such as disgorgement of all sums paid in excess of the usury limit. Cohen was a materially similar claim against a separate national bank.
The complaint sought a judgment declaring the receivables unenforceable, monetary damages and other legal and equitable remedies, such as disgorgement of all sums paid in excess of the usury limit. Cohen was a materially similar claim against another national bank.
Moreover, the FTC recently issued a staff report on digital “dark patterns,” sophisticated design practices that can trick or manipulate consumers into buying products or services or giving up their private information, that, 70 Table of Contents among other things, highlighted marketing and disclosure practices by some financial technology companies that the FTC claimed were deceptive because of their use of dark patterns.
Moreover, the FTC recently issued a staff report on digital “dark patterns,” sophisticated design practices that can trick or manipulate consumers into buying products or services or giving up their private information, that, among other things, highlighted marketing and disclosure practices by some financial technology companies that the FTC claimed were deceptive because of their use of dark patterns.
We may face claims from third parties claiming ownership of, or demanding the release or license of, such modifications or derivative works (which could include our proprietary source code or AI models) or otherwise seeking to enforce the terms of the applicable open source license.
We may face claims from third parties demanding the release or license of, such modifications or derivative works (which could include our proprietary source code or AI models) or otherwise seeking to enforce the terms of the applicable open source license.
If we fail to effectively follow such procedures we may, among other things, be limited in our ability to secure the collateral associated with loans issued through our auto lending marketplace. If we are found to be operating without having obtained necessary state or local licenses, our business, financial condition and results of operations could be adversely affected.
If we fail to effectively follow such procedures we may, among other things, be limited in our ability to secure the collateral associated with loans issued through our auto lending marketplace. 68 Table of Contents If we are found to be operating without having obtained necessary state or local licenses, our business, financial condition and results of operations could be adversely affected.
For a large portion of borrowers’ data used in our AI lending platform, we obtain borrowers’ data from national consumer reporting agencies, such as TransUnion, and rely on their services in order to process loan applications.
For a large portion of borrowers’ data used in our AI lending marketplace, we obtain borrowers’ data from national consumer reporting agencies, such as TransUnion, and rely on their services in order to process loan applications.
No assurance is given that our programs and controls will be effective to ensure 74 Table of Contents compliance with all applicable anti-money laundering and anti-terrorism financing and anti-corruption laws and regulations, and our failure to comply with these laws and regulations could subject us to significant sanctions, fines, penalties, contractual liability to our lending partners or institutional investors, and reputational harm, all of which could harm our business.
No assurance is given that our programs and controls will be effective to ensure compliance with all applicable anti-money laundering and anti-terrorism financing and anti-corruption laws and regulations, and our failure to comply with these laws and regulations could subject us to significant sanctions, fines, penalties, contractual liability to our lending partners or institutional investors, and reputational harm, all of which could harm our business.
For example, in April 2020, we were made aware of a software error which allowed access to certain consumers’ accounts through the Upstart website without providing such consumers’ passwords. As a result, certain of such consumers’ personal information, such as their name, address and job information (but not full social security information), could be accessed by a third party.
For example, in April 2020, we were made aware of a software error which allowed access to certain consumers’ accounts through the Upstart website without providing such consumers’ passwords. As a result, certain of such consumers’ personal information, such as their name, address and job information (but not full social security information), could have been accessed by a third party.
We must comply with regulatory regimes or facilitate compliance with regulatory regimes on behalf of our lending partners that are independently subject to federal and/or state oversight by bank regulators, including those applicable to our referral and marketing services, consumer credit transactions, loan servicing and collection activities and the purchase and sale of whole loans and other related transactions.
We must comply with regulatory regimes or facilitate compliance with regulatory regimes on behalf of our lending partners that are independently subject to federal and/or state oversight by bank regulators, including those applicable to our referral and marketing services, consumer credit transactions, loan servicing and collection 65 Table of Contents activities and the purchase and sale of whole loans and other related transactions.
To fund the tax withholding and remittance obligations arising in connection with the vesting of RSUs, we use the “sell-to-cover” method, under which shares with a market value equivalent to the tax withholding obligation are sold by a broker on behalf of the holder of the RSUs upon vesting to cover the tax withholding liability and the cash proceeds from such sales will be remitted by us to the taxing authorities.
To fund the tax withholding and remittance obligations arising in connection with the vesting of RSUs, we use the “sell-to-cover” method, under which shares with a market value equivalent to the tax withholding obligation are sold by a broker on behalf of the holder of the RSUs upon vesting to cover the tax withholding liability and the cash proceeds from such sales are subsequently remitted by us to the taxing authorities.
We, through our warehouse trust special purpose entities, have entered into warehouse credit facilities to partially finance the purchase of loans from certain lending partners that originate loans through our platform, which credit facilities are secured by the purchased loans.
We, through our warehouse trust special purpose entities, have entered into warehouse credit facilities to partially finance the purchase of loans from certain lending partners that originate loans through our marketplace, which credit facilities are secured by the purchased loans.
Our business involves developing and operating an online lending marketplace that provides our lending partners with access to technology, including proprietary AI models, and related services, so lending partners can assess the credit risk of potential borrowers and offer loans online, and our revenue derives primarily from fees based on the platform and referral services provided to our lending partners and loan servicing.
Our business involves developing and operating an online lending marketplace that provides our lending partners 72 Table of Contents with access to technology, including proprietary AI models, and related services, so lending partners can assess the credit risk of potential borrowers and offer loans online, and our revenue derives primarily from fees based on the platform and referral services provided to our lending partners and loan servicing.
We may also have difficulty with securing adequate funding for any such new loan products and services, and if we are unable to do so, our ability to develop and grow these new offerings and services will be impaired.
We may also have difficulty with securing adequate loan funding for new loan products and services, and if we are unable to do so, our ability to develop and grow these new offerings and services will be impaired.
Any significant disruption in our AI lending platform could prevent us from processing loan applicants and servicing loans, reduce the effectiveness of our AI models and result in a loss of lending partners or borrowers.
Any significant disruption in our AI lending platform could prevent us from processing loan applicants and servicing loans, reduce the effectiveness of our AI models and result in a loss of lending partners, institutional investors, applicants or borrowers.
Any of the foregoing could result in sub-optimally and inefficiently priced loans, incorrect approvals or denials of loans, or higher than expected loan losses, which in turn could adversely affect our ability to attract new borrowers and partners to our marketplace or increase the number of Upstart-powered loans and adversely affect our business, financial condition and results of operations.
Any of the foregoing could result in sub-optimally and inefficiently priced loans, incorrect approvals or denials of loans, or higher than expected loan losses, which in turn could adversely affect our ability to attract new borrowers, lending partners and institutional investors to our marketplace or increase the number of Upstart-powered loans and adversely affect our business, financial condition and results of operations.
In June 2021, a putative class action lawsuit was filed against the online lender Marlette Funding LLC in the Court of Common Pleas of Allegheny County, Pennsylvania, alleging that the company, doing business as Best Egg, was the true lender of usurious loans, with a rate of interest far in excess of the 6% rate permitted to be charged in Pennsylvania by unlicensed non-banks, originated through a partnership with CRB (Case No. 21-CV-985).
In June 2021, a putative class action lawsuit was filed against the online lender Marlette Funding LLC in the Court of Common Pleas of Allegheny County, Pennsylvania, alleging that the company, doing business as Best Egg, was the true lender of usurious loans, with a rate of interest far in excess of the 6% rate permitted to be charged in Pennsylvania by unlicensed non-banks, originated through a partnership with Cross River Bank (Case No. 21-CV-985).
Moreover, as noted above, the OCC has also indicated that it intends to use its supervisory authority to review bank third-party relationships with financial technology companies including a review of third-party business practices that could pose a risk of potential consumer harm that could impact the safety and soundness of the banks subject to agency supervision.
Moreover, the OCC has also indicated that it intends to use its supervisory authority to review bank third-party relationships with financial technology companies including a review of third-party business practices that could pose a risk of potential consumer harm that could impact the safety and soundness of the banks subject to agency supervision.
Fraud is prevalent in the financial services industry and is likely to increase as perpetrators become more sophisticated. We are subject to the risk of fraudulent activity associated with borrowers and third parties handling borrower information and in limited situations cover certain fraud losses of our lending partners and institutional investors in our loan funding programs.
Fraud is prevalent in the financial services industry and is likely to increase as perpetrators become more sophisticated. We are subject to the risk of fraudulent activity associated with borrowers and third parties handling borrower information and, in limited situations, we cover certain fraud losses of our lending partners and institutional investors.
Furthermore, updates made to our software to remediate any errors discovered may prove to be ineffective, resulting in repeated issues and further harm to our business. 56 Table of Contents Some aspects of our business processes include open source software, and any failure to comply with the terms of one or more of these open source licenses could negatively affect our business.
Furthermore, updates made to our software to remediate any errors discovered may prove to be ineffective, resulting in repeated issues and further harm to our business. Some aspects of our business processes include open source software, and any failure to comply with the terms of one or more of these open source licenses could negatively affect our business.
Our involvement in any such matters, whether tangential or otherwise and even if the matters are ultimately determined in our favor, could also cause significant harm to our reputation, lead to additional investigations and enforcement actions from other agencies or litigants, and further divert management attention and resources from the operation of our business.
Our involvement in any such matters, whether tangential or otherwise and even if the matters are ultimately determined 70 Table of Contents in our favor, could also cause significant harm to our reputation, lead to additional investigations and enforcement actions from other agencies or litigants, and further divert management attention and resources from the operation of our business.
Any failure by us to prepare for and to comply with the reporting and record-keeping obligations could result in penalties and other sanctions, and could adversely affect our financial condition and results of operations. 78 Table of Contents We have faced, and may face in the future, various indirect tax audits in various U.S. jurisdictions.
Any failure by us to prepare for and to comply with the reporting and record-keeping obligations could result in penalties and other sanctions, and could adversely affect our financial condition and results of operations. We have faced, and may face in the future, various indirect tax audits in various U.S. jurisdictions.
If we fail to successfully build trust in our AI lending marketplace and the performance and predictability of Upstart-powered loans, we may lose existing lending partners and institutional investors in our loan funding programs to our competitors or be unable to attract new lending partners and institutional investors in our loan funding programs, which in turn would harm our business, results of operations and financial condition.
If we fail to successfully build trust in our AI lending marketplace and the performance and predictability of Upstart-powered loans, we may lose existing lending partners and institutional investors to our competitors or be unable to attract new lending partners and institutional investors, which in turn would harm our business, results of operations and financial condition.
Any errors, bugs or defects discovered in the software on which we rely could result in harm to our reputation, loss of consumers or lending partners, increased regulatory scrutiny, fines or penalties, loss of revenue or liability for damages, any of which could adversely affect our business, financial condition and results of operations.
Any errors, bugs or defects discovered in the software on which we rely could result in harm to our reputation, loss of consumers or lending partners, increased regulatory 57 Table of Contents scrutiny, fines or penalties, loss of revenue or liability for damages, any of which could adversely affect our business, financial condition and results of operations.
The CFPB is also authorized to prevent “unfair, deceptive or abusive acts or practices” through its rulemaking, supervisory and enforcement authority. To assist in its enforcement, the CFPB maintains an online complaint system that allows consumers to log complaints with respect to various consumer finance products, including our loan products.
The CFPB is also authorized to prevent “unfair, deceptive or abusive acts or practices” through its rulemaking, supervisory and enforcement authority. To assist in its enforcement, the CFPB maintains an online complaint system that allows consumers to log complaints with respect to various consumer finance products, including the loan products offered on our marketplace.
We promptly deployed an update to our software to address such vulnerability and are conducting an internal investigation. We are not aware of any information being compromised as a result of this error.
We promptly deployed an update to our software to address such vulnerability and conducted an internal investigation. We are not aware of any information being compromised as a result of this error.
Negative public perception, actions by advocacy groups or legislative and regulatory interest groups could lead to lobbying for and enactment of more restrictive laws and regulations that impact the use of AI technology in general, AI technology as applied to lending operations generally or as used in our applications more 42 Table of Contents specifically.
Negative public perception, actions by advocacy groups or legislative and regulatory interest groups could lead to lobbying for and enactment of more restrictive laws and regulations that impact the use of AI technology in general, AI technology as applied to lending operations generally or as used in our applications more specifically.
If any of our third-party vendors terminates its relationship with us or refuses to renew its agreement with us on commercially reasonable terms, we would need to find an alternate provider, and may not be able to secure similar terms or replace such providers in an acceptable timeframe.
If any of our third-party vendors terminates its relationship with us or refuses to renew its agreement with us on commercially reasonable terms, we would need to find an alternate provider, and may not be able to secure similar terms or replace such providers in an acceptable time frame.
It is possible that new laws and regulations will be adopted in the United States, or existing laws and regulations may be interpreted in new ways, that would affect the operation of our platform and the way in which we use artificial intelligence and machine learning technology, including with respect to fair lending laws.
Therefore, it is possible that new laws and regulations will be adopted in the United States, or existing laws and regulations may be interpreted in new ways, that would affect the operation of our marketplace and the way in which we use artificial intelligence and machine learning technology, including with respect to fair lending laws.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeWe intend to procure additional space in the future as we add employees and expand geographically. We believe our facilities are adequate and suitable for our current needs and that, should it be needed, suitable additional or alternative space will be available to accommodate our operations.
Biggest changeWe believe our facilities are adequate and suitable for our current needs and that, should it be needed, suitable additional or alternative space will be available to accommodate our operations.
In addition to our headquarters, we lease 233,573 square feet of office space for origination and servicing operations in Columbus, Ohio expiring in August 2032 and we lease 12,493 square feet of office space in Austin, Texas expiring in February 2028. We lease all of our facilities and do not own any real property.
In addition to our headquarters, we lease 146,024 square feet of office space for origination and servicing operations in Columbus, Ohio expiring in August 2029 and we lease 12,493 square feet of office space in Austin, Texas expiring in February 2028. We lease all of our facilities and do not own any real property.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeITEM 3. LEGAL PROCEEDINGS For a description of our material pending legal proceedings, please see “ Note 11. Commitments and Contingencies ” in Part II, Item 8 of this Annual Report on Form 10-K and “ Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K incorporated herein by reference. ITEM 4.
Biggest changeITEM 3. LEGAL PROCEEDINGS For a description of our material pending legal proceedings, please see “ Note 13. Commitments and Contingencies ” in Part II, Item 8 of this Annual Report on Form 10-K and “ Risk Factors ” in Part I, Item 1A of this Annual Report on Form 10-K incorporated herein by reference. ITEM 4.
MINE SAFETY DISCLOSURES Not applicable. 85 Table of Contents PART II
MINE SAFETY DISCLOSURES Not applicable. 86 Table of Contents PART II

Item 4. Mine Safety Disclosures

Mine Safety Disclosures — required of mining issuers

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Biggest changeItem 4. Mine Safety Disclosures 85 PART II. Item 5. Unregistered Sales of Equity Securities and Use of Proceeds 86 Item 6. [RESERVED] 87 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 88 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 106 Item 8. Financial Statements and Supplementary Data 108
Biggest changeItem 4. Mine Safety Disclosures 86 PART II. Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 87 Item 6. [RESERVED] 88 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 89 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 108 Item 8.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeThis performance graph shall not be deemed “soliciting material” or to be “filed” with the SEC for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Upstart Holdings, Inc. under the Securities Act of 1933, as amended, or the Exchange Act.
Biggest changeThe returns shown are based on historical results and are not intended to suggest future performance. 87 Table of Contents This performance graph shall not be deemed “soliciting material” or to be “filed” with the SEC for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any filing of Upstart Holdings, Inc. under the Securities Act of 1933, as amended, or the Exchange Act.
An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock and in each index on December 16, 2020, the date our common stock began trading on the Nasdaq Global Select Market, and its relative performance is tracked through December 31, 2022.
An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock and in each index on December 16, 2020, the date our common stock began trading on the Nasdaq Global Select Market, and its relative performance is tracked through December 31, 2023.
Securities Authorized for Issuance under Equity Compensation Plans 86 Table of Contents The information required by this item with respect to our equity compensation plans is incorporated by reference to our Proxy Statement for the 2023 Meeting of Stockholders to be filed with the SEC within 120 days of the year ended December 31, 2022.
Securities Authorized for Issuance under Equity Compensation Plans The information required by this item with respect to our equity compensation plans is incorporated by reference to our Proxy Statement for the 2024 Meeting of Stockholders to be filed with the SEC within 120 days of the year ended December 31, 2023.
Holders of Record As of February 8, 2023, we had 159 holders of record of our common stock.
Holders of Record As of February 8, 2024, we had 160 holders of record of our common stock.
Removed
Unregistered Sales of Equity Securities The following table presents information with respect to the Company’s repurchases of common stock under our share repurchase program, on a trade date basis, during the three months ended December 31, 2022: Period Total Number of Shares Purchased (1) Average Price Paid per Share (2) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in thousands, except per share amounts) October 1, 2022 through October 31, 2022 — $ — $ — 249,930 November 1, 2022 through November 30, 2022 1,449 $ 19.20 1,449 222,117 December 1, 2022 through December 31, 2022 — $ — — 222,117 Total 1,449 1,449 $ 222,117 _________ 1.
Added
Unregistered Sales of Equity Securities There were no repurchases of the Company’s common stock during the three months ended December 31, 2023. Issuer Purchases of Equity Securities None.
Removed
In February 2022, the board of directors authorized the Company to purchase up to $400.0 million of common stock of the Company. The repurchases may be executed from time to time through open market purchases, in privately negotiated transactions or by other means, including through the use of trading plans intended to qualify under Rule 10b5-1.
Removed
The repurchase program does not obligate the Company to acquire any particular amount of common stock, has no expiration date, and may be modified, suspended or terminated at any time at the Company’s discretion. See “ Note 9. Stockholders' Equity ” for details related to the repurchase program. 2.
Removed
Average price paid per share includes commission costs associated with the repurchases. Issuer Purchases of Equity Securities None.
Removed
The returns shown are based on historical results and are not intended to suggest future performance.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeManagement’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted) The following table summarizes our historical consolidated statements of operations data: Year Ended December 31, 2020 2021 2022 Revenue: Revenue from fees, net $ 228,600 $ 801,275 $ 907,272 Interest income and fair value adjustments, net: Interest income 26,408 20,634 105,580 Interest expense (8,026) (3,274) (10,843) Fair value and other adjustments (13,566) 29,954 (159,565) Interest income and fair value adjustments, net 4,816 47,314 (64,828) Total revenue 233,416 848,589 842,444 Operating expenses (1) : Sales and marketing 99,659 333,453 345,776 Customer operations 37,581 117,579 187,994 Engineering and product development 38,802 133,999 237,247 General, administrative, and other 45,609 122,677 185,290 Total operating expenses 221,651 707,708 956,307 Income (loss) from operations 11,765 140,881 (113,863) Other income (expense), net 5,549 (5,174) 9,473 Expense on warrants and convertible notes, net (11,364) (1,976) (4,684) Net income (loss) before income taxes 5,950 133,731 (109,074) (Benefit) provision for income taxes 371 (1,712) (409) Net income (loss) before attribution to noncontrolling interests 5,579 135,443 (108,665) Net loss attributable to noncontrolling interests (404) — — Net income (loss) attributable to Upstart Holdings, Inc. common stockholders $ 5,983 $ 135,443 $ (108,665) ________ (1) Includes stock-based compensation expense as follows: Year Ended December 31, 2020 2021 2022 Sales and marketing $ 1,562 $ 6,059 $ 11,354 Customer operations 898 6,251 9,355 Engineering and product development 4,844 39,191 72,169 General, administrative, and other 4,209 21,685 33,067 Total stock-based compensation $ 11,513 $ 73,186 $ 125,945 Revenue Revenue from Fees, Net The following table sets forth our revenue from fees, net in the years presented: 96 Table of Contents Upstart Holdings, Inc.
Biggest changeResults of Operations The following table summarizes our historical consolidated statements of operations and comprehensive income (loss): Year Ended December 31, 2021 2022 2023 Revenue: Revenue from fees, net $ 801,275 $ 907,272 $ 560,431 Interest income, interest expense, and fair value adjustments, net: Interest income 20,634 105,580 168,996 Interest expense (3,274) (10,843) (34,894) Fair value and other adjustments 29,954 (159,565) (180,971) Interest income, expense, and fair value adjustments, net 47,314 (64,828) (46,869) Total revenue 848,589 842,444 513,562 Operating expenses (1) : Sales and marketing 333,453 345,776 127,143 Customer operations 117,579 187,994 150,418 Engineering and product development 133,999 237,247 280,138 General, administrative, and other 122,677 185,290 212,388 Total operating expenses 707,708 956,307 770,087 Income (loss) from operations 140,881 (113,863) (256,525) Other income (expense), net (5,174) 9,473 21,206 Expense on convertible notes (1,976) (4,684) (4,706) Net income (loss) before income taxes 133,731 (109,074) (240,025) (Benefit) provision for income taxes (1,712) (409) 107 Net income (loss) $ 135,443 $ (108,665) $ (240,132) ________ (1) Includes stock-based compensation expense as follows: 98 Table of Contents Upstart Holdings, Inc.
Interest Income and Fair Value Adjustments, Net Interest income and fair value adjustments, net is comprised of interest income, interest expense and net changes in the fair value of financial instruments held on our consolidated balance sheets as part of our ongoing operating activities, excluding loan servicing assets and liabilities.
Interest Income, Interest Expense, and Fair Value Adjustments, Net Interest income, interest expense, and fair value adjustments, net is comprised of interest income, interest expense and net changes in the fair value of financial instruments held on our consolidated balance sheets as part of our ongoing operating activities, excluding loan servicing assets and liabilities.
These models benefit over time from a flywheel effect that is characteristic of machine learning systems: accumulation of repayment data leads to improved accuracy of risk and fraud predictions, which results in higher approval rates and lower interest rates, leading to increased volume, and consequently greater accumulation of repayment data.
These models benefit over time from a flywheel effect that is characteristic of machine learning systems: accumulation of repayment data leads to improved accuracy of risk and fraud predictions, which generally results in higher approval rates and lower interest rates, leading to increased volume, and consequently greater accumulation of repayment data.
We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure and to view Contribution Profit, Contribution Margin, Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income, and Adjusted Net Income Per Share in conjunction with their respective related GAAP financial measures.
We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure and to view Contribution Profit, Contribution Margin, Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income (Loss), and Adjusted Net Income (Loss) Per Share in conjunction with their respective related GAAP financial measures.
Further, in order to address recent funding constraints for our personal loans, Upstart has utilized its balance sheet to support short-term funding requirements of loans that would otherwise be purchased and held by institutional investors or securitized.
In order to address recent funding constraints for our personal loans, Upstart has utilized its balance sheet to support short-term funding requirements of loans that would otherwise be purchased and held by institutional investors or securitized.
We are presenting these non-GAAP financial measures because we believe they provide an additional tool for investors to use in comparing our core financial performance over multiple periods with the performance of other companies.
We are presenting these non-GAAP financial measures because we believe they provide an additional tool for investors to use in comparing our core financial performance over multiple years with the performance of other companies.
Adjusted Net Income Per Share is calculated by dividing Adjusted Net Income Per Share by the weighted-average common shares outstanding.
Adjusted Net Income (Loss) Per Share is calculated by dividing Adjusted Net Income (Loss) Per Share by the weighted-average common shares outstanding.
While we believe that our cash on hand and our cash flow from operations will be sufficient to meet our liquidity needs for at least the next 12 months, our future capital requirements will depend on multiple factors, including our revenue growth, working capital requirements, volume of loan purchases for product development purposes or during market downturns, and our capital expenditures.
While we believe that our cash on hand will be sufficient to meet our liquidity needs for at least the next 12 months, our future capital requirements will depend on multiple factors, including our revenue growth, working capital requirements, volume of loan purchases for product development purposes or during market downturns, and our capital expenditures.
In response to this challenging macroeconomic environment where many lenders and credit investors have significantly reduced or paused investments in Upstart-powered loans, we announced reductions in force in November 2022 and January 2023 that resulted in the termination of approximately 7% and 20% of our workforce, respectively.
In response to this challenging macroeconomic environment where many lenders and credit investors have significantly reduced or paused investments in Upstart-powered loans, we announced reductions in workforce in November 2022 (“November 2022 Plan”) and January 2023 (“January 2023 Plan”) that resulted in the termination of approximately 7% and 20% of our workforce, respectively.
We expect that our sales and marketing expenses will generally increase in absolute dollars and may fluctuate as a percentage of our total revenue from period to period as we hire additional sales and marketing personnel, increase our marketing activities and build greater brand awareness.
We expect that our sales and marketing expenses will generally fluctuate as a percentage of our total revenue from period to period and may increase as we hire additional sales and marketing personnel, increase our marketing activities and build greater brand awareness.
Upstart pays these lending partners a one-time loan premium fee upon completion of the minimum holding periods. Upstart also pays lending partners monthly loan trailing fees based on the amount and timing of principal and interest payments made by borrowers of the underlying loans. See “ Note 2.
Upstart pays these lending partners a one-time loan premium fee upon completion of the minimum holding periods. Upstart also pays lending partners monthly loan trailing fees based on the amount and timing of principal and interest payments made by borrowers of the underlying loans.
(2) Borrower verification and servicing costs were $31.8 million, $95.8 million and $157.8 million for the year ended December 31, 2020, 2021 and 2022, respectively. Borrower verification and servicing costs consist of payroll and other personnel-related expenses for personnel engaged in loan onboarding, verification and servicing, as well as servicing system costs.
(2) Borrower verification and servicing costs were $95.8 million, $157.8 million, and $116.6 million for the year ended December 31, 2021, 2022 and 2023, respectively. Borrower verification and servicing costs consist of payroll and other personnel-related expenses for personnel engaged in loan onboarding, verification and servicing, as well as servicing system costs.
Federal Reserve has raised, and may continue to raise, interest rates, leading to more expensive loan offers across borrower categories. At the same time, macroeconomic uncertainty had generally made institutional investors more cautious and caused them to reduce the amount of capital available to fund Upstart-powered loans.
In response to inflationary pressure, the U.S. Federal Reserve has raised, and may continue to raise, interest rates, leading to more expensive loan offers across borrower categories. At the same time, macroeconomic uncertainty had generally made institutional investors more cautious and caused them to reduce the amount of capital available to fund Upstart-powered loans.
Servicing fees are recorded net of any gains, losses or changes to fair value recognized in the underlying servicing rights and obligations, which are carried as assets and liabilities on our consolidated balance sheets. Upstart currently acts as loan-servicer for substantially all outstanding loans facilitated through the Upstart marketplace.
Servicing fees are recorded net of any gains, losses or changes to fair value recognized in the underlying servicing rights and obligations, which are carried as assets and liabilities on our consolidated balance sheets. Upstart currently acts as loan servicer for substantially all outstanding loans facilitated 96 Table of Contents Upstart Holdings, Inc.
These costs are recognized in the period incurred. We expect that our customer operations expenses will increase in absolute dollars and may fluctuate as a percentage of our total revenue over time, as we expand our portfolio.
These costs are recognized in the period incurred. We expect that our customer operations expenses will generally fluctuate as a percentage of our total revenue from period to period, and may increase in absolute dollars as we expand our portfolio.
Composition of Retained Loan Portfolio As of December 31, 2022, we held $1,010.4 million of loans on our consolidated balance sheet. $492.1 million of these loans were originated for research and development purposes, primarily in support of our auto lending products and expansion of our unsecured personal loan product to new categories of borrowers.
Composition of Balance Sheet Loan Portfolio As of December 31, 2023, we held $1,156.4 million of loans on our consolidated balance sheet. $411.1 million of these loans were originated for research and development purposes, primarily in support of our auto lending products and expansion of our unsecured personal loan product to new categories of borrowers.
We expect to increase the size of our general and administrative function to support the further growth of our business. As a result, we expect that our general, administrative and other expenses will increase in absolute dollars but may fluctuate as a percentage of our total revenue from period to period.
We expect to increase the size of our general and administrative function to support the further growth of our business. As a result, we expect that our general, administrative and other expenses will increase in absolute dollars but may fluctuate as a percentage of our total revenue from period to period. 97 Table of Contents Upstart Holdings, Inc.
Interest income and fair value adjustments, net also includes income from our capital market programs and realized gain (loss) on the sale of loans. Interest income and fair value adjustments, net can fluctuate based on the fair value of financial instruments held on our consolidated balance sheets.
Interest income, interest expense, and fair value adjustments, net also includes realized gain (loss) on the sale of loans. Interest income, interest expense, and fair value adjustments, net can fluctuate based on the fair value of financial instruments held on our consolidated balance sheets.
We expect that our engineering and product development expenses will increase in absolute dollars and may increase as a percentage of our total revenue over time, as we expand our engineering and product development team to continue to improve our AI models and develop new products and product enhancements.
We expect that our engineering and product development expenses will generally fluctuate as a percentage of our total revenue from period to period, and may increase in absolute dollars as we expand our engineering and product development team to continue to improve our AI models and develop new products and product enhancements.
The following table presents a reconciliation of income (loss) from operations to Contribution Profit and Contribution Margin. We define Operating Margin as our income (loss) from operations divided by revenue from fees, net. 99 Table of Contents Upstart Holdings, Inc.
The following table presents a reconciliation of income (loss) from operations to Contribution Profit and Contribution Margin. We define Operating Margin as our income (loss) from operations divided by revenue from fees, net.
See the section titled “ Management’s Discussion and Analysis of Financial Condition and Results of Operations—Reconciliation of Non-GAAP Financial Measures ” for a reconciliation of net income (loss) attributable to Upstart Holdings, Inc. common stockholders to Adjusted Net Income and Adjusted Net Income per Share.
See the section titled “ Management’s Discussion and Analysis of Financial Condition and Results of Operations—Reconciliation of Non-GAAP Financial Measures ” for a reconciliation of net income (loss) to Adjusted Net Income (Loss) and Adjusted Net Income (Loss) per Share.
Our ability to continue to improve our Conversion Rate depends in part on our ability to continue to improve our AI models and Percentage of Loans Fully Automated and the mix of marketing channels in any given period. Percentage of Loans Fully Automated 92 Table of Contents Upstart Holdings, Inc.
Our ability to continue to improve our Conversion Rate depends in part on our ability to continue to improve our AI models and Percentage of Loans Fully Automated and the mix of marketing channels in any given period.
We also held $518.3 million of core personal loans which would otherwise be immediately purchased by institutional investors. We will continue to utilize our capital to support research and development activities and, at times, as a funding source for core personal loans during periods of marketplace funding constraints.
We also held $566.2 million of core personal loans which would otherwise be immediately purchased by institutional investors and $179.1 million of core personal loans held by the consolidated securitization. We will continue to utilize our capital to support research and development activities and, at times, as a funding source for core personal loans during periods of marketplace funding constraints.
Our main uses of cash in our operating activities include payments to marketing partners, vendor payments, payroll and other personnel-related expenses, payments for facilities, and other general business expenditures. 103 Table of Contents Upstart Holdings, Inc.
Our main uses of cash in our operating activities include payments to marketing partners, vendor payments, payroll and other personnel-related expenses, payments for facilities, and other general business expenditures.
Revenue ” to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for more information about loan premium fees and trailing fees.
Revenue ” to our consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for more information.
To address these limitations, we provide a reconciliation of Contribution Profit, Contribution Margin, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted Net Income and Adjusted Net Income Per Share to income (loss) from operations and net income (loss) attributable to Upstart Holdings, Inc. common stockholders, respectively.
To address these limitations, we provide a reconciliation of Contribution Profit, Contribution Margin, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted Net Income (Loss) and Adjusted Net Income (Loss) Per Share to loss from operations and net income (loss), respectively.
We believe Adjusted Net Income and Adjusted Net Income Per Share are useful measures for investors in evaluating our ability to generate earnings, more readily compare between past and future periods, and provide comparability of our performance with the performance of other companies. 101 Table of Contents Upstart Holdings, Inc.
We believe Adjusted Net Income (Loss) and Adjusted Net Income (Loss) Per Share are useful measures for investors in evaluating our ability to generate earnings, more readily compare between past and future years, and provide comparability of our performance with the performance of other companies.
Borrower acquisition costs consist of our sales and marketing expenses adjusted to exclude costs not directly attributable to attracting a new borrower, such as payroll-related expenses for our business development and marketing teams, as well as other operational, brand awareness and marketing activities.
Borrower acquisition costs consist of our sales and marketing expenses adjusted to exclude costs not directly attributable to attracting a new borrower, such as payroll-related expenses for our business development and marketing teams, as well as other operational, brand awareness and marketing activities. These costs do not include reorganization expenses associated with the January 2023 Plan.
While the credit performance of Upstart-powered loans can be impacted by a variety of macroeconomic and other factors, we consider credit performance to be one of the most important measures of the effectiveness of our AI models. We focus on credit performance compared to the expectations set by us at the time of origination.
Credit Performance While the credit performance of Upstart-powered loans can be impacted by a variety of macroeconomic and other factors, we consider credit performance to be one of the most important measures of the effectiveness of our AI models.
See the section titled “ Management’s Discussion and Analysis of Financial Condition and Results of Operations—Reconciliation of Non-GAAP Financial Measures ” for a reconciliation of net income (loss) attributable to Upstart Holdings, Inc. common stockholders to Adjusted EBITDA and Adjusted EBITDA Margin. 93 Table of Contents Upstart Holdings, Inc.
See the section titled “ Management’s Discussion and Analysis of Financial Condition and Results of Operations—Reconciliation of Non-GAAP Financial Measures ” for a reconciliation of net income (loss) to Adjusted EBITDA and Adjusted EBITDA Margin.
This amount has historically been a small percentage of our total revenue, and we do not manage our business with a focus on growing this component of revenue. Sales and Marketing 94 Table of Contents Upstart Holdings, Inc.
This amount has historically been a small percentage of our total revenue, and we do not manage our business with a focus on growing this component of revenue.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted) Reconciliation of Non-GAAP Financial Measures To supplement our consolidated financial statements prepared and presented in accordance with GAAP, we use the non-GAAP financial measures of Contribution Profit, Contribution Margin, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted Net Income and Adjusted Net Income Per Share to provide investors with additional information about our financial performance and to enhance the overall understanding of our past performance and future prospects.
Reconciliation of Non-GAAP Financial Measures To supplement our consolidated financial statements prepared and presented in accordance with GAAP, we use the non-GAAP financial measures of Contribution Profit, Contribution Margin, Adjusted EBITDA, Adjusted EBITDA Margin, and Adjusted Net Income (Loss) and Adjusted Net Income (Loss) Per Share to provide investors with additional information about our financial performance and to enhance the overall understanding of our past performance and future prospects.
It excludes payroll and personnel-related expenses and stock-based compensation for certain members of our customer operations team whose work is not directly attributable to onboarding and servicing loans.
It excludes payroll and personnel-related expenses and stock-based compensation for certain members of our customer operations team whose work is not directly attributable to onboarding and servicing loans. These costs do not include reorganization expenses associated with the January 2023 Plan.
Because of these limitations, Adjusted EBITDA and Adjusted EBITDA Margin should be considered along with other operating and financial performance measures presented in accordance with GAAP. The following table provides a reconciliation of net income (loss) attributable to Upstart Holdings, Inc. common stockholders and net income (loss) attributable to Upstart Holdings, Inc. common stockholders margin to Adjusted EBITDA Margin.
Because of these limitations, Adjusted EBITDA and Adjusted EBITDA Margin should be considered along with other operating and financial performance measures presented in accordance with GAAP. The following table provides a reconciliation of net income (loss) and Net Income (Loss) Margin to Adjusted EBITDA Margin. We define Net Income (Loss) Margin as net income (loss) divided by total revenue.
Adjusted EBITDA and Adjusted EBITDA Margin We calculate Adjusted EBITDA as net income (loss) attributable to Upstart Holdings, Inc. common stockholders adjusted to exclude stock-based compensation expense and certain payroll tax expenses, depreciation and amortization, expense on convertible notes, provision for income taxes and acquisition-related costs. We calculate Adjusted EBITDA Margin as Adjusted EBITDA divided by total revenue.
Adjusted EBITDA and Adjusted EBITDA Margin We calculate Adjusted EBITDA as net income (loss) adjusted to exclude stock-based compensation expense and certain payroll tax expenses, depreciation and amortization, expense on convertible notes, net gain on a lease modification, provision for income taxes, and reorganization expenses. We calculate Adjusted EBITDA Margin as Adjusted EBITDA divided by total revenue.
The following table provides a calculation of Contribution Profit and Contribution Margin: Year Ended December 31, 2020 2021 2022 Revenue from fees, net 228,600 801,275 907,272 Borrower acquisition costs (1) (91,700) (307,613) (302,713) Borrower verification and servicing costs (2) (31,812) (95,782) (155,988) Total direct expenses (123,512) (403,395) (458,701) Contribution Profit $ 105,088 $ 397,880 $ 448,571 Contribution Margin 46 % 50 % 49 % _______ (1) Borrower acquisition costs consist of our sales and marketing expenses adjusted to exclude costs not directly attributable to attracting a new borrower, such as payroll-related expenses for our business development and marketing teams, as well as other operational, brand awareness and marketing activities.
The following table provides a calculation of Contribution Profit and Contribution Margin: Year Ended December 31, 2021 2022 2023 Revenue from fees, net $ 801,275 $ 907,272 $ 560,431 Borrower acquisition costs (1) (307,613) (302,713) (90,517) Borrower verification and servicing costs (2) (95,782) (157,808) (116,620) Total direct expenses (403,395) (460,521) (207,137) Contribution Profit $ 397,880 $ 446,751 $ 353,294 Contribution Margin 50 % 49 % 63 % _______ (1) Borrower acquisition costs consist of our sales and marketing expenses adjusted to exclude costs not directly attributable to attracting a new borrower, such as payroll-related expenses for our business development and marketing teams, as well as other operational, brand awareness and marketing activities.
See the section titled “ Management’s Discussion and Analysis of Financial Condition and Results of Operations—Reconciliation of Non-GAAP Financial Measures ” for a reconciliation of income from operations to Contribution Profit.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted) See the section titled “ Management’s Discussion and Analysis of Financial Condition and Results of Operations—Reconciliation of Non-GAAP Financial Measures ” for a reconciliation of income from operations to Contribution Profit.
New lending partners also represent additional acquisition channels through which we can reach and source prospective new borrowers, as these lending partners develop and implement their own digital and in-branch campaigns to drive traffic from their existing customer base to our platform.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted) New lending partners also represent additional acquisition channels through which we can reach and source prospective new borrowers, as these lending partners develop and implement their own digital and in-branch campaigns to drive traffic from their existing customer base to our platform.
See the section titled “ Management’s Discussion and Analysis of Financial Condition and Results of Operations—Reconciliation of Non-GAAP Financial Measures ” for further information. Transaction Volume We define Transaction Volume, Dollars as the total principal of loans transacted on our platform between a borrower and the originating lending partner during the period presented.
(2) Represents a non-GAAP financial measure. See the section titled “ Management’s Discussion and Analysis of Financial Condition and Results of Operations—Reconciliation of Non-GAAP Financial Measures ” for further information. Transaction Volume We define Transaction Volume, Dollars as the total principal of loan originations facilitated on our marketplace during the years presented.
Goodwill and Intangible Assets ” in Part II, Item 8 of this Annual Report on Form 10-K.
Fair Value Measurement ” in Part II, Item 8 of this Annual Report on Form 10-K.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted) Sales and marketing expenses primarily consist of costs incurred across various advertising channels, including expenses for partnerships with third parties providing borrower referrals, direct mail and digital advertising campaigns, as well as other expenses associated with building overall brand awareness and experiential marketing costs.
Sales and Marketing Sales and marketing expenses primarily consist of costs incurred across various advertising channels, including expenses for partnerships with third parties providing borrower referrals, direct mail and digital advertising campaigns, as well as other expenses associated with building overall brand awareness and experiential marketing costs.
Should the pace of these improvements slow down or cease, or should we discover forms of model upgrades which improve accuracy at the expense of volume, our growth rates could be adversely affected. Impact of Macroeconomic Environment 89 Table of Contents Upstart Holdings, Inc.
Should the pace of these improvements slow down or cease, or should we discover forms of model upgrades which improve accuracy at the expense of volume, our growth rates could be adversely affected. Impact of Macroeconomic Environment In an economic downturn, we believe consumer lending will generally contract.
Product Expansion and Innovation We believe that significant growth opportunities exist to apply our evolving AI technology to additional segments of credit, and we continue to invest in research and development of our products. In the second quarter of 2022, we introduced a new offering of personal loans for borrowers interested in small dollar loans.
Product Expansion and Innovation We believe that significant growth opportunities exist to apply our evolving AI technology to additional segments of credit, and we continue to invest in research and development of our products.
Our cash requirements related to these lease agreements are $120.3 million, of which $15.1 million is expected to be paid within the next 12 months. See “ Note 10. Leases ” in Part II, Item 8 of this Form 10-K for further details on our operating lease obligations.
Borrowings ” in Part II, Item 8 of this Form 10-K for further details on our warehouse credit facilities. We lease office facilities under operating lease agreements which expire between 2027 and 2029. Our cash requirements related to these lease agreements are $70.8 million, of which $15.0 million is expected to be paid within the next 12 months.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted) • Adjusted EBITDA and Adjusted EBITDA Margin do not reflect: (1) changes in, or cash requirements for, our working capital needs; (2) interest expense, or the cash requirements necessary to service interest or principal payments on our debt, which reduces cash available to us; or (3) tax payments that may represent a reduction in cash available to us; and • the expenses and other items that we exclude in our calculation of Adjusted EBITDA and Adjusted EBITDA Margin may differ from the expenses and other items, if any, that other companies may exclude from Adjusted EBITDA and Adjusted EBITDA Margin when they report their operating results.
The amount of employer payroll tax-related expense on employee stock transactions is dependent on our stock price and other factors that are beyond our control and do not correlate to the operation of the business; • Adjusted EBITDA and Adjusted EBITDA Margin do not reflect: (1) changes in, or cash requirements for, our working capital needs; (2) interest expense, or the cash requirements necessary to service interest or principal payments on our debt, which reduces cash available to us; or (3) tax payments that may represent a reduction in cash available to us; and • the expenses and other items that we exclude in our calculation of Adjusted EBITDA and Adjusted EBITDA Margin may differ from the expenses and other items, if any, that other companies may exclude from Adjusted EBITDA and Adjusted EBITDA Margin when they report their operating results.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted) Year Ended December 31, 2020 2021 2022 Net income (loss) attributable to Upstart Holdings, Inc. common stockholders $ 5,983 $ 135,443 $ (108,665) Adjusted to exclude the following: Stock-based compensation and certain payroll tax expenses (1) 11,513 87,461 128,038 Acquisition-related costs — 1,237 — Adjusted Net Income $ 17,496 $ 224,141 $ 19,373 Net income (loss) per share: Basic $ — $ 1.73 $ (1.31) Diluted $ — $ 1.43 $ (1.31) Adjusted Net Income per Share: Basic $ 1.00 $ 2.87 $ 0.23 Diluted $ 0.23 $ 2.37 $ 0.21 Weighted-average common shares outstanding: Basic 17,513,670 78,106,359 82,771,268 Diluted 76,098,275 94,772,641 92,023,924 _________ (1) Payroll tax expenses includes the amount of employer payroll tax-related expense on employee stock transactions, as the amount is dependent on our stock price and other factors that are beyond our control and do not correlate to the operation of our business.
Year Ended December 31, 2021 2022 2023 Net income (loss) $ 135,443 $ (108,665) $ (240,132) Adjusted to exclude the following: Stock-based compensation and certain payroll tax expenses (1) 87,461 128,038 178,400 Reorganization expenses — — 15,536 Net gain on lease modification — — (737) Acquisition-related costs 1,237 — — Adjusted Net Income (Loss) $ 224,141 $ 19,373 $ (46,933) Net income (loss) per share: Basic $ 1.73 $ (1.31) $ (2.87) Diluted $ 1.43 $ (1.31) $ (2.87) Adjusted Net Income (Loss) per Share: Basic $ 2.87 $ 0.23 $ (0.56) Diluted $ 2.37 $ 0.21 $ (0.56) Weighted-average common shares outstanding: Basic 78,106,359 82,771,268 83,765,896 Diluted 94,772,641 92,023,924 83,765,896 _________ (1) Payroll tax expenses include the amount of employer payroll tax-related expense on employee stock transactions, as the amount is dependent on our stock price and other factors that are beyond our control and do not correlate to the operation of our business.
Borrower payment collections for loans that are more than 30 days past due or charged off are generally outsourced to third-party collection agencies. Upstart charges lending partners and institutional investors for collection agency fees related to their outstanding loan portfolio. Upstart also receives certain ancillary fees on a per transaction basis inclusive of late payment fees and ACH fail fees.
Upstart charges lending partners and institutional investors for collection agency fees related to their outstanding loan portfolio. Upstart also receives certain ancillary fees on a per transaction basis inclusive of late payment fees and ACH fail fees.
We believe AI lending will become increasingly critical as this industry continues to undergo a broad digital transformation. Our strategy is to partner with banks, providing them with access to an AI lending marketplace that they can configure as they originate consumer loans under their own brand, according to their own business and regulatory requirements.
Our strategy is to partner with banks and credit unions and provide them with access to an AI lending marketplace that they can configure as they originate consumer loans under their own brand, according to their own business and regulatory requirements.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted) Year Ended December 31, 2020 2021 2022 Revenue from fees, net $ 228,600 $ 801,275 $ 907,272 Income (loss) from operations 11,765 140,881 (113,863) Operating Margin 5 % 18 % (13) % Sales and marketing, net of borrower acquisition costs (1) $ 7,959 $ 25,840 $ 43,063 Customer operations, net of borrower verification and servicing costs (2) 5,769 21,797 30,186 Engineering and product development 38,802 133,999 237,247 General, administrative, and other 45,609 122,677 185,290 Interest income and fair value adjustments, net (4,816) (47,314) 64,828 Contribution Profit $ 105,088 $ 397,880 $ 446,751 Contribution Margin 46 % 50 % 49 % _________ (1) Borrower acquisition costs were $91.7 million, $307.6 million and $302.7 million for the year ended December 31, 2020, 2021 and 2022 respectively.
Year Ended December 31, 2021 2022 2023 Revenue from fees, net $ 801,275 $ 907,272 $ 560,431 Income (loss) from operations 140,881 (113,863) (256,525) Operating Margin 18 % (13) % (46) % Sales and marketing, net of borrower acquisition costs (1) $ 25,840 $ 43,063 $ 36,626 Customer operations, net of borrower verification and servicing costs (2) 21,797 30,186 33,798 Engineering and product development 133,999 237,247 280,138 General, administrative, and other 122,677 185,290 212,388 Interest income, interest expense, and fair value adjustments, net (47,314) 64,828 46,869 Contribution Profit $ 397,880 $ 446,751 $ 353,294 Contribution Margin 50 % 49 % 63 % _________ (1) Borrower acquisition costs were $307.6 million, $302.7 million, and $90.5 million for the year ended December 31, 2021, 2022 and 2023, respectively.
Adjusted EBITDA and Adjusted EBITDA Margin We believe that Adjusted EBITDA and Adjusted EBITDA Margin are useful for investors to use in comparing our financial performance with the performance of other companies for the following reasons: • Adjusted EBITDA and Adjusted EBITDA Margin are widely used by investors and securities analysts to measure a company’s operating performance without regard to items such as depreciation, and interest expense, that can vary substantially from company to company depending upon their financing and capital structures, and the method by which assets were acquired; and • Adjusted EBITDA and Adjusted EBITDA Margin eliminate the impact of certain items such as stock-based compensation expense and certain payroll tax expense, warrant expense and acquisition-related costs that may obscure trends in the underlying performance of our business; and • Adjusted EBITDA and Adjusted EBITDA Margin provide consistency and comparability with our past financial performance, and facilitate comparisons with other companies, many of which use similar non-GAAP financial measures to supplement their GAAP results.
Adjusted EBITDA and Adjusted EBITDA Margin We believe that Adjusted EBITDA and Adjusted EBITDA Margin are useful for investors to use in comparing our financial performance with the performance of other companies for the following reasons: • Adjusted EBITDA and Adjusted EBITDA Margin are widely used by investors and securities analysts to measure a company’s operating performance without regard to items such as depreciation, and interest expense, that can vary substantially from company to company depending upon their financing and capital structures, and the method by which assets were acquired; and 103 Table of Contents Upstart Holdings, Inc.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted) A driver of our Contribution Margin and operating efficiency is the Percentage of Loans Fully Automated, which is defined as the total number of loans in a given period originated end-to-end (from initial rate request to final funding) with no human involvement divided by the Transaction Volume, Number of Loans in the same period.
Percentage of Loans Fully Automated A driver of our Contribution Margin and operating efficiency is the Percentage of Loans Fully Automated, which is defined as the total number of loans in a given period originated end-to-end (from initial rate request to final funding for personal loans and small dollar loans and from initial rate request to signing of the loan agreement for auto loans) with no human involvement required divided by the Transaction Volume, Number of Loans in the same period.
However, the expansion of our loan offerings may cause it to fluctuate from period to period depending on the loan offering mix and other external factors. Contribution Profit and Contribution Margin To derive Contribution Profit, we subtract from revenue from fees, net from our borrower acquisition costs as well as our borrower verification and servicing costs.
However, the expansion of our loan offerings may cause it to fluctuate from period to period depending on the loan offering mix and other external factors.
Commitments and Contingencies ” in Part II, Item 8 of this Form 10-K for further details on our loan purchase obligations.
As of December 31, 2023, the total loan purchase commitment was $36.6 million. See “ Note 13. Commitments and Contingencies ” in Part II, Item 8 of this Annual Report on Form 10-K for further details on our loan purchase obligations.
The cash flows in the valuation model represent the difference between the servicing fees charged to institutional investors and an estimated market servicing fee. Since servicing fees are generally based on the monthly unpaid principal balance of the underlying loans, the expected cash flows in the model incorporate estimated credit risk and expected prepayments on the loans.
Since servicing fees are generally based on the monthly unpaid principal balance of the underlying loans, the expected cash flows in the model incorporate estimated credit risk and expected prepayments on the loans. For further information on fair value measurement refer to “ Note 6.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted) Upstart’s revenues are primarily earned in exchange for the use of our platform and for borrower referral services provided to our lending partners through our lending marketplace.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted) loan originations by our lending partners using our platform and referral services result in a referral of a borrower obtaining a loan from our lending partners.
Fees for these services can be either fixed or based on a variable price per unit, depending on the contractual arrangement. Platform services result in loan originations by our lending partners using our platform and referral services result in a referral of a borrower obtaining a loan from our lending partners.
Fees for these services can be either fixed or based on a variable price per unit, depending on the contractual arrangement. Platform services result in 89 Table of Contents Upstart Holdings, Inc.
Primary inputs that require significant judgment include discount rates, credit risk rates and expected prepayment rates. These inputs are based on historical performance of loans facilitated through our platform, as well as the consideration of market participant requirements. We have also elected the fair value option for servicing assets and liabilities.
These inputs are based on historical performance of loans facilitated through our platform, as well as the consideration of market participant requirements. We have also elected the fair value option for servicing assets and liabilities. We record servicing assets and liabilities at estimated fair value when we transfer loans which qualify as sales under Topic 860, Transfers and Servicing .
As a second order effect, the impact of these improvements on our conversion funnel also allows us to unlock new marketing channels over time that have previously been unprofitable.
As a second order effect, the impact of these improvements on our conversion funnel also allows us to unlock new marketing channels over time that have previously been unprofitable. We believe that ongoing improvements to our technology in this manner will allow us to further expand access and lower rates for creditworthy borrowers, which will continue to fuel our growth.
Engineering and Product Development Year Ended December 31, 2021 to 2022 2021 2022 % change Engineering and product development $ 133,999 $ 237,247 77% Engineering and product development expenses increased by $103.2 million, or 77%, for the year ended December 31, 2022, compared to the prior year.
Engineering and Product Development Year Ended December 31, Change 2022 2023 $ % Engineering and product development $ 237,247 $ 280,138 $ 42,891 18 % % of revenue 28 % 55 % Engineering and product development expenses increased by $42.9 million, or 18%, for the year ended December 31, 2023, compared to the prior year.
General, Administrative, and Other Year Ended December 31, 2021 to 2022 2021 2022 % change General, administrative, and other $ 122,677 $ 185,290 51% General, administrative, and other expenses increased by $62.6 million, or 51%, for the year ended December 31, 2022, compared to the prior year.
General, Administrative, and Other Year Ended December 31, Change 2022 2023 $ % General, administrative, and other $ 185,290 $ 212,388 $ 27,098 15 % % of revenue 22 % 41 % General, administrative, and other expenses increased by $27.1 million, or 15%, for the year ended December 31, 2023, compared to the prior year.
The increase was primarily due to and increase of $7.2 million in dividend income as yields on sweep investments have increased due to rising interest rates. Also, in 2021, we voluntary repaid $5.2 million of proceeds received from the Paycheck Protection Program received in 2020.
The increase was primarily due to an increase of $11.7 million in dividend income as yields on sweep investments have increased due to rising interest rates.
We provide additional information regarding transactions with unconsolidated VIEs in “ Note 3. Variable Interest Entities ” in Part II, Item 8 of this Annual Report on Form 10-K.
If we are the retaining sponsor of a securitization transaction, we are required by law to retain at least 5% of the credit risk of the securities issued in these securitizations. We provide additional information regarding transactions with unconsolidated VIEs in “ Note 3. Variable Interest Entities ” in Part II, Item 8 of this Annual Report on Form 10-K.
Traditional lenders, such as banks, tend to enjoy among the most efficient sources of funding due to their expansive base of deposits. As they adopt our technology and fund a growing proportion of our marketplace transactions, offers made to borrowers will typically improve, generally leading to higher conversion rates and faster growth for our platform.
As they adopt our technology and fund a growing proportion of our marketplace transactions, offers made to borrowers will typically improve, generally leading to higher conversion rates and faster growth for our platform. 92 Table of Contents Upstart Holdings, Inc.
During the year ended December 31, 2022 other income (expense), net primarily consists of dividend income earned on our unrestricted cash balances.
In the year ended December 31, 2022 and 2023, other income (expense), net primarily consists of dividend income earned by the Company on its unrestricted cash balances. Expense on Convertible Notes Expense on convertible notes is comprised of coupon interest expense and amortization of the debt discount on our convertible notes.
Year Ended December 31, 2020 2021 2022 Total revenue $ 233,416 $ 848,589 $ 842,444 Net income (loss) attributable to Upstart Holdings, Inc. common stockholders 5,983 135,443 (108,665) Net Income (Loss) Margin 3 % 16 % (13) % Adjusted to exclude the following: Stock-based compensation and certain payroll tax expenses (1) $ 11,513 $ 87,461 $ 128,038 Depreciation and amortization 2,278 7,541 13,513 Expense on warrants and convertible notes, net 11,364 1,976 4,684 (Benefit) provision for income taxes 371 (1,712) (409) Acquisition-related costs — 1,237 — Adjusted EBITDA $ 31,509 $ 231,946 $ 37,161 Adjusted EBITDA Margin 13 % 27 % 4 % _________ (1) Payroll tax expenses include the employer payroll tax-related expense on employee stock transactions, as the amount is dependent on our stock price and other factors that are beyond our control and do not correlate to the operation of our business.
Year Ended December 31, 2021 2022 2023 Total revenue $ 848,589 $ 842,444 $ 513,562 Net income (loss) 135,443 (108,665) (240,132) Net Income (Loss) Margin 16 % (13) % (47) % Adjusted to exclude the following: Stock-based compensation and certain payroll tax expenses (1) $ 87,461 $ 128,038 $ 178,400 Depreciation and amortization 7,541 13,513 24,903 Reorganization expenses — — 15,536 Expense on convertible notes 1,976 4,684 4,706 Net gain on lease modification — — (737) (Benefit) provision for income taxes (1,712) (409) 107 Acquisition-related costs 1,237 — — Adjusted EBITDA $ 231,946 $ 37,161 $ (17,217) Adjusted EBITDA Margin 27 % 4 % (3) % _________ 104 Table of Contents Upstart Holdings, Inc.
The net proceeds from the sale of the Notes were $645.5 million after deducting debt issuance costs. As of December 31, 2022, our primary source of liquidity was cash of $422.4 million. We also held $5.0 million of investments in certificates of deposit with maturities greater than three months as of December 31, 2022.
Liquidity and Capital Resources Sources and Uses of Cash As of December 31, 2023, our primary source of liquidity was cash of $368.4 million. We also held $5.0 million of investments in certificates of deposit with maturities greater than three months as of December 31, 2023.
The increase was primarily due to a $12.2 million increase in payroll and other personnel-related expenses driven by increased headcount. As a percentage of total revenue, sales and marketing expenses increased from 39% to 41%.
The decrease was primarily due to a $35.6 million decrease in payroll and other personnel-related expenses due to a decrease in headcount and Transaction Volume. As a percentage of total revenue, customer operations expenses increased from 22% to 29%.
Net Cash from Financing Activities Net cash provided by financing activities was $130.0 million for the year ended December 31, 2022 as a result of $688.8 million proceeds from borrowings, partially offset by $400.9 million in payments on borrowings and $177.9 million in repurchases of common stock.
Net Cash from Financing Activities Net cash provided by financing activities was $214.3 million for the year ended December 31, 2023 as a result of $626.9 million proceeds from borrowings, $165.3 million proceeds from the issuance of securitization notes, $8.4 million in proceeds from issuance of common stock under ESPP, and $12.9 million proceeds from exercise of stock options, partially offset by $575.9 million repayments of borrowings and $23.3 million in principal payments made on securitization notes.
Increases in Transaction Volume are dependent on our loan funding programs having sufficient access to capital. Decreases in the availability of funding due to factors such as volatility in the capital markets and macroeconomic conditions will generally cause a decline in Transaction Volume.
Decreases in the availability of funding due to factors such as volatility in the capital markets and macroeconomic conditions will generally cause a decline in Transaction Volume. Transaction Volume is driven by improvements in our AI models and technology, including our ability to streamline and automate the loan application and origination process.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted) In an economic downturn, we believe consumer lending will generally contract.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted) business and in evaluating and understanding our operating results and ability to scale.
Operating Expenses Sales and Marketing Year Ended December 31, 2021 to 2022 2021 2022 % change Sales and marketing $ 333,453 $ 345,776 4% Sales and marketing expenses increased by $12.3 million, or 4%, in the year ended December 31, 2022 compared to the prior year.
Operating Expenses Sales and Marketing Year Ended December 31, Change 2022 2023 $ % Sales and marketing $ 345,776 $ 127,143 $ (218,633) (63) % % of revenue 41 % 25 % Sales and marketing expenses decreased by $218.6 million, or 63%, in the year ended December 31, 2023 compared to the prior year.
The decrease was driven by a $189.5 million decrease in fair value adjustments, net partially offset by a $84.9 million increase in interest income due to an increase in unpaid principal balance of loans held on the consolidated balance sheets.
The increase was primarily driven by a $63.4 million increase in interest income, including a $19.7 million increase in interest income recognized by consolidated securitization entities, due to an increase in unpaid principal balance of loans held on the consolidated balance sheets.
Net Cash from Investing Activities Net cash used in investing activities was $114.1 million for the year ended December 31, 2022 as a result of $149.3 million purchases of loans held-for-investment and $14.1 million in capitalized software, partially offset by $43.3 million in principal payments received for loans held-for-investment, and $14.3 million in proceeds from sale of loans held-for-investment.
Net Cash from Investing Activities Net cash used in investing activities was $118.5 million for the year ended December 31, 2023 as a result of $157.2 million purchases and originations of loans held-for-investment, $56.9 million acquisition of beneficial interest assets, $10.6 million of capitalized software costs, partially offset by $102.4 million in principal payments received for loans held-for-investment and $4.3 million of principal payments received for notes receivable and repayments of residual certificates.
We use a discounted cash flow model to estimate the fair value of these financial instruments based on the present value of estimated future cash flows. This model uses both observable and unobservable inputs and reflects our best estimates of the assumptions a market participant would use to calculate fair value.
We believe the estimate of fair value of these financial instruments requires significant judgment. We use a discounted cash flow model to estimate the fair value of these financial instruments based on the present value of estimated future cash flows.
These steps were designed to reduce operating costs, streamline operations and return Upstart to profitability. We have completed the November 2022 reduction in workforce and expect to substantially complete the January 2023 reduction in workforce by March 31, 2023.
These steps were designed to reduce operating costs, streamline operations and return Upstart to profitability in the future. As of December 31, 2023, we have completed both the November 2022 Plan and January 2023 Plan. Refer to “ Note 16. Reorganization Expenses ” for more information.
To calculate Contribution Margin we divide Contribution Profit by revenue from fees, net.
Contribution Profit and Contribution Margin To derive Contribution Profit, we subtract from revenue from fees, net our borrower acquisition costs as well as our borrower verification and servicing costs. To calculate Contribution Margin we divide Contribution Profit by revenue from fees, net.
Cash Flows The following table summarizes our cash flows during the years indicated: Year Ended December 31, 2021 2022 Net cash provided by (used in) operating activities $ 168,353 $ (674,681) Net cash used in investing activities (143,877) (114,125) Net cash provided by financing activities 855,432 130,032 Net increase (decrease) in cash and restricted cash $ 879,908 $ (658,774) Net Cash from Operating Activities Our main sources of cash provided by operating activities are our revenue from fees earned under contracts with lending partners and institutional investors and interest income we receive for loans held on our balance sheet.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted) Year Ended December 31, 2022 2023 Net cash used in operating activities $ (674,681) $ (160,493) Net cash used in investing activities (114,125) (118,455) Net cash provided by financing activities 130,032 214,268 Change in cash and restricted cash $ (658,774) $ (64,680) Net Cash from Operating Activities Our main sources of cash provided by operating activities are our revenue from fees earned under contracts with lending partners and institutional investors and interest income we receive for loans held on our balance sheet.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Tabular Amounts in Thousands, Except Share and Per Share Data and Ratios, or as Noted) Year Ended December 31, 2020 2021 2022 Transaction Volume, Dollars $ 3,444,854 $ 11,751,762 $ 11,204,274 Transaction Volume, Number of Loans 300,379 1,314,591 1,129,672 Conversion Rate 15.2% 23.7% 14.1% Percentage of Loans Fully Automated 70% 69% 75% Contribution Profit (1) $ 105,088 $ 397,880 $ 448,571 Contribution Margin (1) 46% 50% 49% Adjusted EBITDA (1) $ 31,509 $ 231,946 $ 37,161 Adjusted EBITDA Margin (1) 13% 27% 4% Adjusted Net Income (1) $ 17,496 $ 224,141 $ 19,373 Adjusted Net Income Per Share: Basic (1) $ 1.00 $ 2.87 $ 0.23 Diluted (1) $ 0.23 $ 2.37 $ 0.21 _______ (1) Represents a non-GAAP financial measure.
The following presents our key operating and financial metrics: Year Ended December 31, 2021 2022 2023 Transaction Volume, Dollars $ 11,751,762 $ 11,204,274 $ 4,645,669 Transaction Volume, Number of Loans (1) 1,314,591 1,129,672 437,659 Conversion Rate 23.7% 14.1% 9.7% Percentage of Loans Fully Automated 69% 75% 87% Contribution Profit (2) $ 397,880 $ 446,751 $ 353,294 Contribution Margin (2) 50% 49% 63% Adjusted EBITDA (2) $ 231,946 $ 37,161 $ (17,217) Adjusted EBITDA Margin (2) 27% 4% (3)% Adjusted Net Income (Loss) (2) $ 224,141 $ 19,373 $ (46,933) Adjusted Net Income (Loss) Per Share: Basic (2) $ 2.87 $ 0.23 $ (0.56) Diluted (2) $ 2.37 $ 0.21 $ (0.56) _______ (1) Transaction Volume, Number of Loans is shown in ones for the years presented.
(2) Borrower verification and servicing costs consist of payroll and other personnel-related expenses for personnel engaged in loan onboarding, verification and servicing, as well as servicing system costs. It excludes payroll and personnel-related expenses and stock-based compensation for certain members of our customer operations team whose work is not directly attributable to onboarding and servicing loans.
It excludes payroll and personnel-related expenses and stock-based compensation for certain members of our customer operations team whose work is not directly attributable to onboarding and servicing loans. These costs do not include reorganization expenses associated with the January 2023 Plan. 95 Table of Contents Upstart Holdings, Inc.
R&D Loans are not yet part of our established capital markets programs or other loan funding programs with institutional investors. The remainder of loans on our balance sheet represent core personal loans which Upstart would sell to institutional investors.
R&D Loans are primarily our auto refinance and auto retail loan products, personal loan products issued to new categories of borrowers, and other new loan products. R&D Loans are not yet part of our established capital markets programs or other loan funding programs with institutional investors.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Biggest changeDiscount Rate Risk Discount rate sensitivity refers to the risk of loss to future earnings, values or future cash flows that may result from changes in market discount rates. As of December 31, 2021 and 2022, we were exposed to market discount rate risk on $252.5 million and $1,010.4 million, respectively, of loans held on our consolidated balance sheets.
Biggest changeAs of December 31, 2022 and 2023, we were exposed to market discount rate risk on $1,010.4 million and $977.3 million, respectively, of loans held on our consolidated balance sheets, excluding loans held in consolidated securitization.
Higher interest rates also correspond with higher payment obligations for borrowers, which may reduce the ability of individual borrowers to remain current on their obligations, leading to increased delinquencies, defaults, customer bankruptcies and charge- 106 Table of Contents Upstart Holdings, Inc. offs, and decreasing recoveries, all of which could have a material adverse effect on our business.
Higher interest rates also correspond with higher payment obligations for borrowers, which may reduce the ability of individual borrowers to remain current on their obligations, leading to increased delinquencies, defaults, customer bankruptcies and charge-offs, and decreasing recoveries, all of which could have a material adverse effect on our business.
Adjustments and impairments are recorded in other expense on the consolidated statements of operations and comprehensive income (loss) upon recognition of such adjustments or impairments. As of December 31, 2021 and 2022, the carrying value of our non-marketable equity securities, which do not have readily determinable fair values, totaled $40.0 million and $41.3 million, respectively. 107
Adjustments and impairments are recorded in other expense on the consolidated statements of operations and comprehensive income (loss) upon recognition of such adjustments or impairments. As of December 31, 2022 and 2023, the carrying value of our non-marketable equity securities, which do not have readily determinable fair values, totaled $41.3 million. 111
We are exposed to market risk directly through loans and securities held on our consolidated balance sheets, access to the securitization markets, institutional investor demand for loans facilitated through our marketplace, and availability of funding under our current credit facilities and term loans.
We are exposed to market risk directly through loans and securities held on our consolidated balance sheets, access to the securitization markets, institutional 108 Table of Contents Upstart Holdings, Inc. investor demand for loans facilitated through our marketplace, and availability of funding under our current credit facilities and term loans.
A hypothetical 100 basis point and 200 basis point increase in the discount rate would result in a $3.4 million and $6.7 million decrease, respectively, in the fair value of loans held on our consolidated balance sheet as of December 31, 2021 and a $12.0 million and $23.7 million decrease, respectively, as of December 31, 2022.
A hypothetical 100 basis point and 200 basis point increase in the discount rate would result in a $12.0 million and $23.7 million decrease, respectively, in the fair value of loans held on our consolidated balance sheet as of December 31, 2022 and a $11.7 million and $23.1 million decrease, respectively, as of December 31, 2023.
As of December 31, 2021, a hypothetical 10% and 20% increase in credit risk would result in a $4.0 million and $7.9 million decrease, and as of December 31, 2022, a hypothetical 10% and 20% increase in credit risk would result in a $11.9 million and $23.9 million decrease in the fair value of loans held on our consolidated balance sheets, respectively.
As of December 31, 2022, a hypothetical 10% and 20% increase in credit risk would result in a $11.9 million and $23.9 million decrease, and as of December 31, 2023, a hypothetical 10% and 20% increase in credit risk would result in a $12.5 million and $25.0 million decrease in the fair value of loans held on our consolidated balance sheets, respectively.
The performance of certain financial instruments, including loans, securitization notes and residual certificates, on our consolidated balance sheets are dependent on the credit performance of loans facilitated by us.
The performance of certain financial instruments, including loans, beneficial interests, securitization notes and residual certificates, and payable to securitization note holders on our consolidated balance sheets are dependent on the credit performance of loans facilitated by us.
As of December 31, 2021 and 2022, we were exposed to credit risk on $252.5 million and $1,010.4 million, respectively, of loans held on our consolidated balance sheet. These loans bear fixed interest rates and are carried on our consolidated balance sheets at fair value.
As of December 31, 2022 and 2023, we were exposed to credit risk on $1,010.4 million and $977.3 million, respectively, of loans held on our consolidated balance sheet excluding loans held in consolidated securitization. Loans bear fixed interest rates and are carried on our consolidated balance sheets at fair value.
The fair values of these loans, securitization notes, and residual certificates are estimated based on a discounted cash flow model which involves the use of significant unobservable inputs and assumptions. These instruments are sensitive to changes in credit risk.
The fair values of these loans, beneficial interests, securitization notes and residual certificates, and payable to securitization note holders are estimated based on a discounted cash flow model which involves the use of significant unobservable inputs and assumptions. These instruments are sensitive to changes in credit risk. 109 Table of Contents Upstart Holdings, Inc.
As of December 31, 2021 and 2022, we are exposed to credit risk of $1,191.2 million and $532.5 million, respectively, related to cash and restricted cash held in business checking accounts and interest-bearing deposit accounts at various financial institutions in the United States.
As of December 31, 2022 and 2023, we held $532.5 million and $467.8 million, respectively, related to cash and restricted cash in business checking accounts and interest-bearing deposit accounts at various financial institutions in the United States.
As of December 31, 2021 and 2022, we were exposed to interest rate risk on $48.0 million and $336.5 million, respectively, under our warehouse credit facilities, which bear floating interest rates. Changes in interest rates may impact our cost of borrowing. From time to time, we enter into interest rate hedges in connection with our warehouse credit facilities.
As of December 31, 2022 and 2023, we were exposed to interest rate risk on $336.5 million and $387.4 million, respectively, under our warehouse credit facilities, which bear floating interest rates. Changes in interest rates may impact our cost of borrowing.
Our non-marketable equity investments are in equity securities of privately-held companies without readily determinable fair values. We elected to account for each such investment using the measurement alternative which is cost less impairment, if any, and adjusted for changes resulting from observable price changes in orderly transactions for an identical or similar investment in the same issuer.
We elected to account for each such investment using the measurement alternative which is cost less impairment, if any, and adjusted for changes resulting from observable price changes in orderly transactions for an identical or similar investment in the same issuer.
The discount rates for loans retained on our balance sheet may change due to changes in expected loan performance or changes in the expected returns of similar financial instruments available in the market. Any gains and losses from discount rate changes are recorded in earnings.
The changes in the discount rates for loans held on our balance sheet reflect the expected returns of similar financial instruments available in the market and can be caused by changes in the market interest rates, expected loan performance, and other factors. Any gains and losses from discount rate changes are recorded in earnings.
Our inability or failure to manage market risks could harm our business, financial condition or results of operations. Equity Investment Risk Our non-marketable equity securities are subject to a wide variety of market-related risks that could substantially reduce or increase the carrying value of our investments.
Equity Investment Risk Our non-marketable equity securities are subject to a wide variety of market-related risks that could substantially reduce or increase the carrying value of our investments. Our non-marketable equity investments are in equity securities of privately-held companies without readily determinable fair values.
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Our inability or failure to manage market risks could harm our business, financial condition or results of operations. Discount Rate Risk Discount rate sensitivity refers to the risk of loss to future earnings, values or future cash flows that may result from changes in market discount rates.
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Loans held in the consolidated securitization are included in loans, at fair value on the consolidated balance sheets.
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The fair value of these loans is determined by the sum of the fair value of the related securitization notes and residual certificates issued as part of the consolidated securitization, and uses the same projected net cash flows as the underlying collateral loan pool.
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As the Company retained all residual certificates issued by the consolidated securitization, their value is eliminated as part of the consolidation process.
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A hypothetical 100 basis point and 200 basis point increase in the discount rate would result in a $2.4 million and $4.8 million decrease, respectively, in the fair value of loans held in the consolidated securitization on the consolidated balance sheet as of December 31, 2023.
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As of December 31, 2023, we were also exposed to market discount rate risk on payable to securitization note holders of $141.4 million.
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A hypothetical 100 basis point and 200 basis point increase in the discount rate would result in a $1.9 million and $3.7 million decrease, respectively, in the fair value of payable to securitization note holders on the consolidated balance sheet as of December 31, 2023.
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As of December 31, 2023, we were also exposed to market discount rate risk on other financial instruments, including $41.0 million of beneficial interest assets. Beneficial interest assets are estimated at fair value using a discounted cash flow model which considers projected defaults, losses and recoveries to project future losses and net cash flows on the underlying loans.
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We use two different discount rates for expected cash flows associated with demonstrated to-date credit performance and those associated with future credit performance. Any gains and losses from discount rate changes are recorded in earnings.
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A hypothetical 100 basis point and 200 basis point increase in the discount rate would result in a $1.2 million and $2.4 million decrease, respectively, in the fair value of beneficial interest assets held on our consolidated balance sheet as of December 31, 2023.
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Loans held in the consolidated securitization are included in loans, at fair value on the consolidated balance sheets. The fair value of these loans is determined by the sum of the fair value of the related securitization notes and residual certificates issued by the consolidated entities, and uses the same projected net cash flows as the underlying collateral loan pool.
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As the Company retained all residual certificates issued by the consolidated securitization, the residual certificates value is eliminated as part of the consolidation process.
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A hypothetical 100 and 200 basis point increase in the credit risk would result in a $2.7 million and $5.2 million decrease, respectively, in the fair value of loans held in consolidated securitization on the consolidated balance sheet as of December 31, 2023.
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We are also exposed to credit risk on $41.0 million of beneficial interest assets and $4.2 million of beneficial interest liabilities held on the consolidated balance sheet as of December 31, 2023.
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A hypothetical 10% and 20% increase in credit risk spread would result in a $9.1 million and $16.7 million decrease, respectively, in the fair value of beneficial interest assets held on our consolidated balance sheet, and would result in a $5.6 million and $11.2 million increase in the fair value of beneficial interest liabilities on our consolidated balance sheet, respectively, as of December 31, 2023.
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Counterparty Risk We are subject to risk that arises from our derivative financial instruments, beneficial interests, warehouse facilities, and third-party custodians. These activities generally involve an exchange of obligations with unaffiliated lenders or other individuals or entities, referred to in such transactions as “counterparties”.
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If a counterparty were to default or otherwise fail to perform, we could potentially be exposed to loss if such counterparty were unable to meet its obligations to us.
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We manage this risk by selecting only counterparties that we believe to be financially strong, spreading the risk among multiple such counterparties, and placing contractual limits on the amount of dependence on any single counterparty.
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During the year ended December 31, 2023 we entered into interest 110 Table of Contents Upstart Holdings, Inc. rate cap agreements in connection with our warehouse credit facilities with an aggregate notional amount of $299.6 million.
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The interest rate caps provide protection to the credit facilities against exposure to changes in cash flows to the extent the 1-month SOFR exceeds the strike rate. The UAWT interest rate cap matures in April 2029 and the ULT interest rate cap matures June 2025. Refer to “Note 4. Derivative Financial Instruments” for further details.

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