The alternative lender Upstart laid off 365 employees, roughly 20% of its workforce, on Tuesday, according to a Securities and Exchange Commission filing.
The company also plans to suspend the development of its small-business loan product "until macroeconomic conditions improve," it said.
Upstart expects to incur roughly $15 million in charges related to the cull, encompassing severance payouts, employee benefits and taxes — most of which will come in 2023’s first quarter, the company said.
Ultimately, however, the headcount reduction should save Upstart $57 million in operating expenses over the next year, and additional noncash savings of around $42 million in stock-based compensation through 2025, the company said.
Tuesday’s move marks Upstart’s second round of job cuts since November, when the company laid off 140 employees. However, the company’s current 1,500-employee headcount is the same as it was about a year ago, a spokesperson told American Banker.
"As difficult as this decision was, it was necessary to allow us to return to profitability while continuing to invest in our future growth," the spokesperson said. "We're extremely grateful for the many contributions of those leaving Upstart."
Upstart, which uses artificial intelligence and alternative credit data such as a borrower’s education and job history as part of its formula to determine creditworthiness, in 2017 became the first company to obtain a no-action letter from the CFPB.
The alternative data model the company developed helped it approve 27% more loans — with an annual percentage rate averaging 16% lower — during the first two years of its no-action letter period.
But the CFPB last May announced it would de-emphasize its no-action letter policy and product development sandbox, opting instead to establish an Office of Competition and Innovation that would hold “incubation events” such as sprints, hackathons, tabletop exercises and war games to troubleshoot barriers to innovation.
Soon after, Upstart asked the bureau to terminate its no-action letter because the company wanted to quickly add variables to its underwriting and pricing model. The time-sensitive request didn’t mesh with the CFPB’s lengthy review process.
By July, the company acknowledged in a press release that its loan marketplace had become "funding constrained" over a lack of demand from loan buyers.
A big question mark remains Upstart’s underwriting model, which “has yet to be battle-tested" in a lengthy recession, Wedbush Securities analyst David Chiaverini wrote in a note seen by American Banker.
"We fear that weakening delinquency and loss trends combined with macro- and geopolitical risks is leading to waning appetite from Upstart's credit buyers and the securitization market," Chiaverini wrote. "The biggest risk to Upstart, in our view, is its reliance on third-party funding, and this risk is exacerbated during recessions."