Upstart says its AI underwriting model over-reacted to macro signals, cutting approvals; investors sue

What happened?

Upstart describes itself as an AI lending marketplace whose models decide which applicants its bank and credit-union partners approve, and at what rate. On 4 November 2025 it reported third-quarter revenue of $277 million and cut its outlook: fourth-quarter revenue of about $288 million and full-year 2025 revenue of about $1.035 billion, including about $946 million of revenue from fees. CEO Dave Girouard said in the results release that "our AI platform is performing exactly as designed, rapidly adapting to evolving macro signals".[1]

On the earnings call that afternoon, chief technology officer Paul Gu said the model had sensed macroeconomic stress during the summer and tightened the credit box "while certain risk signals were elevated before recently normalizing", adding that this "partially reflects irreducible volatility in the outside world, but is also a function of our model design and sampling variance". American Banker reported that the conversion rate fell from 23.9% in the second quarter to 20.6%, even as loan applications reached their highest level in more than three years. Girouard acknowledged the model was "overreacting" and called it a "speed bump".[2]

Upstart's shares fell after the call. American Banker reported a 14.8% decline, with the stock opening at $39.38 on 5 November after a $46.24 close; the later class-action complaint says the shares fell $4.49, or 9.71%, to close at $41.75 that day. Analysts at Jefferies called the company's explanation "confusing", and a Citizens analyst said the bumps "raise questions regarding how differentiated [Upstart's] model is compared to other machine learning-based lenders."[2][3]

On 7 April 2026 an investor filed a proposed securities class action, Dunn v. Upstart Holdings, in the US District Court for the Northern District of California, against Upstart, Girouard, chief financial officer Sanjay Datta, Gu and Chantal Rapport. The complaint says Upstart launched the model, which it calls Model 22, in early May 2025 and raised its 2025 guidance in August "citing improvements in performance driven by Model 22". It alleges that the defendants failed to disclose that Model 22 "frequently overreacted to negative macroeconomic signals", so its accuracy and its effect on approvals were overstated. The proposed class covers buyers of Upstart securities from 14 May to 4 November 2025.[3][4][5]

When did it happen?

1. May 2025

   Upstart launches the iteration of its AI underwriting model that the later complaint calls Model 22.[3]

2. Aug 2025

   Upstart raises its 2025 outlook to about $1.055 billion of revenue, including about $990 million from fees; the complaint says it cited Model 22.[3][5]

3. Nov 4, 2025

   Upstart reports third-quarter results and cuts its outlook; on the call, executives say the model tightened credit in response to macro signals and was "overreacting".[1][2]

4. Nov 5, 2025

   Upstart shares fall; the complaint puts the drop at $4.49, or 9.71%, to a $41.75 close.[2][3]

5. Apr 7, 2026

   Dunn v. Upstart Holdings, a proposed securities class action, is filed in the Northern District of California.[3][4]

6. Jun 8, 2026

   Competing motions to be appointed lead plaintiff are filed.[4]

What was the impact?

• Customers: Fewer loan applicants were approved during the third quarter of 2025: the conversion rate fell from 23.9% to 20.6%, per American Banker. Upstart did not give a number of declined applicants.[1][2][3]
• Other: Upstart lowered its full-year 2025 revenue-from-fees outlook to about $946 million from about $990 million. Its shares fell 9.71% on 5 November 2025, according to the complaint (14.8% by American Banker's measure).[1][2][3]

Severity 3 of 5: Material harm: Upstart said its AI model tightened credit and cut approvals for a quarter, its conversion rate fell from 23.9% to 20.6% and it lowered its full-year fee-revenue outlook; a securities class action is pending, with no regulatory action.

How did Upstart respond?

Upstart presented the tightening as the model working as designed. In the results release Girouard said the platform was "performing exactly as designed, rapidly adapting to evolving macro signals"; on the call he said "having a model that overreacts is better than having ones that underreact because it did revert", and Gu said model design and sampling variance "continue to improve". On the lawsuit itself, no public statement was found as of 2026-10-21: we checked Upstart's first- and second-quarter 2026 10-Q filings, which do not mention the Dunn case, and the press coverage of the filing.[1][2]

What was the outcome, and did regulators act?

No regulator action has been reported. The Dunn case is pending before Judge James Donato in the Northern District of California. As of 21 October 2026 the docket shows lead-plaintiff motions filed in June 2026 and further filings through 15 October 2026, with no ruling on the merits.[4]

1. Upstart Announces Results for Third Quarter 2025 (Form 8-K, Exhibit 99.1) official
   Upstart Holdings (SEC EDGAR) · Nov 4, 2025
   ““Our AI platform is performing exactly as designed, rapidly adapting to evolving macro signals while delivering strong results.””
2. Upstart stock drops as AI model 'overreacts' to macro signals news
   American Banker · Nov 5, 2025
   “CEO Girouard acknowledged the model was "overreacting" and called the result a "speed bump."”
3. Dunn v. Upstart Holdings, Inc. — Class Action Complaint for Violations of the Federal Securities Laws court
   US District Court, N.D. California (complaint copy hosted by Bernstein Liebhard) · Apr 7, 2026
   “The same day, during a related earnings call, Defendants blamed Upstart’s disappointing results on Model 22, which they revealed had “overreact[ed]” to macroeconomic signals in the quarter, reducing borrower approvals and conversion rates.”
4. Dunn v. Upstart Holdings, Inc., 3:26-cv-02974 (N.D. Cal.) — docket court
   CourtListener · Oct 15, 2026
   “COMPLAINT against Sanjay Datta, Dave Girouard, Paul Gu, Chantal Rapport, Upstart Holdings, Inc. … Case filed under the Class Action Private Securities Litigation Reform Act.”
5. Upstart sued over AI model’s ‘overreaction’ news
   Banking Dive · Apr 10, 2026
   “At an earnings call later in the day, company executives said Model 22 “overreact[ed]” to macroeconomic signals in the quarter, reducing borrower approvals and conversion rates.”