Acing Regulatory Compliance With Automated Loan Decisioning

The growth and evolution of regulations are unavoidable aspects of the lending industry. It’s the result of contentious interactions among consumer activists, industry lobbyists, and federal and state administrations. Consider just a few of the existing federal regulations that govern your lending practices:

• Truth in Lending Act (TILA) 1968
• Equal Credit Opportunity Act (ECOA) 1974
• Fair Debt Collection Practices Act  (FDCPA) 1978
• Uniform Electronic Transactions Act (UETA) 1999
• Servicemembers Civil Relief Act (SCRA) 2003
• Fair and Accurate Credit Transactions Act (FACTA) 2003
• Dodd-Frank Wall Street Reform and Consumer Protection Act 2010

The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act established the Consumer Financial Protection Bureau (CFPB). The new administration will likely result in personnel changes in CFPB leadership. As a result, we expect the agency to adopt a more activist regulatory approach with a focus on enforcement and emphasis on fair lending.

In 2021, California launched its new Department of Financial Protection and Innovation (DFPI), the state’s version of the CFPB. Other states are likely to follow California’s lead. 

The Challenge: Compliance and Profitability

With the increasingly complex regulatory environment and unanticipated market conditions, how can lenders both achieve compliance and remain profitable? Modern loan and lease origination software that takes advantage of cloud, mobile, automation, configuration, and analytic capabilities makes it easier to manage the associated complexities. Together, these capabilities help automate loan and lease decisioning, bringing consistency to lending processes. 

Automated loan decisioning that uses configurable workflows and decision rules allows lenders to translate regulations into consistently repeatable steps, which ensures regulations are followed and lending efficiency is improved. This helps to make your organization both compliant and profitable.

How to Enable Automated Lease and Loan Decisioning

How can lenders employ modern loan and lease origination software to enable automated decisioning? It’s a three-step process involving your legal department, lending professionals knowledgeable about your lending cycle (applications, underwriting, funding, and servicing), and services that help you comply with relevant federal and state regulations.

1. Determine which regulations apply to your practices. Seek guidance from your legal team in interpreting and applying regulations, particularly if you have operations in multiple states. Evolving regulations may require a review of how you currently implement those regulations.

2. Translate regulations into workflows and decision rules. The majority of lending regulations are concerned with the equitable treatment of applicants and borrowers. Essentially, these regulations are directives that can be translated into workflows and decision rules that consistently execute the steps of your lending processes in compliance with relevant regulations. Workflows and decision rules eliminate the variability of decisions made by underwriters who may not consistently apply the regulations as a result of human error.

3. Integrate specialized compliance services. These companies closely monitor the ever-changing regulations and provide support services and software that can be easily integrated into your loan and lease processes. These services ensure calculations, fees, annual percentage rate maximums, and notifications are properly executed per federal and state guidelines.

Let’s take a closer look at each of these steps and their accompanying details. 

Determine Which Regulations Apply to Your Practices

This may be the most challenging part of the compliance puzzle. Interpreting complex federal and state lending regulations is difficult enough as is. However, success in the lending industry demands that you remain current. In addition to your legal group, government regulatory agencies and professional services resources are available to help you correctly navigate, interpret, and apply relevant lending regulations. 

Translate Regulations Into Workflows and Decision Rules

Modern loan and lease origination software provides out-of-the-box workflows to automate the major steps of the lending process—applications, underwriting, verifications, funding, and servicing. Automated workflows provide a framework for a consistent, data-driven process, and workflow steps are driven by decision rules that translate regulations into consistently executable actions. 

In a modern lending solution, configuration menus let knowledgeable lending professionals translate regulations into workflows and decision rules. They determine where business rules should be implemented, select data fields to be evaluated, and specify the action(s) to be taken, based on the outcome of the business rule. Configuration eliminates the need for programmers to code workflows and decision rules. The result is a faster implementation time and the ability to quickly make modifications as lending regulations change.  

A few examples help illustrate how automation using workflows and decision rules bring consistency to key phases of the lending cycle.

Loan or Lease Applications

• Guide applicants to accurately enter required information online using masking and data verification to avoid errors.
• Ensure a consistent set of data and supporting documentation is captured digitally for all applicants.
• Retain documentation as a digitized record automatically. 
• Confirm the application process is accurate and complete before moving to the underwriting step.

Underwriting

• Determine which bureaus will be pulled based on zip code. 
• Access alternative credit data sources if credit bureau data equals “no-hit.”
• Determine if applicants are active members of the military and if so, process the applications per the Servicemembers Civil Relief Act guidance for terms and interest rates.
• Decline applications and create adverse action notifications, select reasons for adverse actions, send to applicants, and retain a digital record. 
• Look up the maximum interest rate on state usury-limit tables when applicants’ FICO scores are less than 580. 

Verification

• Validate applicant identity, employment, and income with verification services to avoid fraud. 
• Verify proper data and documentation have been received in support of stipulations.
• Determine if or when individual stipulations can be waived. 

Funding

• Ensure contract contains no terms or payments in violation of Regulation-Z. 
• Verify relevant disclosure rules are reflected in the contract. 
• Confirm digital record of contract and any associated communications. 

Servicing

• If the days past due is more than 30 days and contact opt-in equals yes, then notify the borrower via email and retain a digital record of the notification. 
• If the loan is in default and the borrower is on active military duty, then initiate a court order. 
• If the days delinquent is more than 90, then verify the borrower’s contact hours and schedule a phone call. 

In addition to the versatility of creating and modifying workflows and decision rules to reflect regulatory requirements, configuration has two characteristics that further support regulatory compliance. First, only authorized personnel can implement changes to workflows and decision rules. This ensures knowledgeable users are making the modifications. Authorization also determines what types of modifications can be made and where within the lending cycle they can be made. Second, the system maintains a detailed record of when and where decision rules were implemented and by who to provide evidence of which rules were in effect at which time. In the event of an audit, you can present a definitive history of changes and modifications.

Integrate Specialized Compliance Services

The complexity of understanding and maintaining regulatory compliance can be simplified by taking advantage of services tailored to the compliance needs of the lending industry. Their services can be easily integrated into a lending system to support automated loan decisioning. These compliance services:

• Provide compliance training and assessment through policy management, forms, and employee guidelines, as well as monitor compliance activities. 
• Evaluate third-party risk management by collecting compliance documentation, analyzing vendor financial health, and monitoring cybersecurity strategies, as well as conducting risk assessments and due diligence. 
• Ensure you comply with state and federal interest rate regulations, validate the accuracy of loan or lease calculations within origin workflows, and ensure required disclosures and notifications are generated.

Integrated Analytics Monitor Regulatory Compliance

Automated loan decisioning generates volumes of insightful process data. Analytics applied to these data lets you monitor decisions to confirm they are made in accordance with regulations. Analytics can also uncover instances that may indicate non-compliance. Analytics give you the ability to continually assess the efficiency of your lending processes. Think of analytics as an essential tool in support of compliance and profitability. To eliminate the problems of integrating third-party analytics software, make sure your lending solution offers integrated analytic capabilities.

What Automated Loan Decisioning Can Do for Compliance

The challenge of complying with a wide and varying array of federal and state lending regulations can be simplified. Modern lending software allows knowledgeable, authorized business users to configure workflows and decision rules to meet relevant lending regulations without requiring expensive and time-consuming programming. Configuration menus enable automated loan or lease decisioning for consistent, compliant loan or lease processing, quick modifications in response to changing regulations, and an auditable history of system changes. Modern, cloud-based lending software solutions offering extensive automation are key to being compliant and profitable.