Upstart re-aligns incentives with investors

“[David Girouard, Upstart CEO,] said that Upstart will be increasing their origination fees moderately to pay for these changes”[1] in an interview with Peter Renton at Lend Academy.

They are also giving their origination fee to lenders in the case of a default.

These are both interesting moves, signaling they have an investor demand problem – which is understandable, their credit underwriting is very new with originations starting in Q2 of this year. Given a year or two of solid underwriting history behind them it will be a completely different ball game.

The upping of origination fee (paid by borrowers) to remove the 1% servicing fee (paid by lenders) is a direct hit to borrowers. I’m not sure how this plays out as they start to really grow and start finding themselves in the enviable position of needed more borrowers. Lending Club and Prosper aren’t really targeting “thin file” borrowers, so upstart has room to breathe, but as soon as there is more competition in this space, they are going to need to get competitive on borrowers and squeeze their investors more.

I’m sure there are some other benefits to taking that 1% servicing fee up front rather than piecing it out over the three year period of the loan.