Acing Regulatory Compliance with Automated Loan Decisioning
Lending regulations are a permanent part of the industry. Their numbers grow, and existing ones evolve. It’s the result of contentious interaction among consumer activists, industry lobbyists, and politicians. 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
In 2018, Congress nullified the Consumer Financial Protection Bureau’s (CFPB) Indirect Auto Lending Guidance. In response, several states plan to pick up responsibility to enforce some form of the directive. As a lender, you’ll need to comply with one less federal regulation and potentially more state regulations. The long-term regulatory trend is toward complexity.
In this dynamic regulatory environment and an increasingly competitive lending environment, how can lenders both achieve compliance and remain profitable? Modern loan origination software that takes advantage of cloud, automation, configuration, and analytics capabilities provides the answer. Together, these capabilities enable automated loan decisioning, which bring consistency to lending processes. Automated loan decisioning lets you translate regulations into predictably repeatable automated steps by using workflow and decision rules. That consistency ensures regulations are followed and improves lending efficiency, making your organization both compliant and profitable.
How to Enable Automated Loan Decisioning
How can lenders employ modern loan origination software to enable automated loan decisioning? We consider this a three-step process which involves your legal department, employees who are well-versed in the key phases of your lending cycle (applications, underwriting, funding, and servicing), and complementary compliance services.
- Determine which regulations apply to your practices. Seek guidance from your legal team in interpreting and applying regulations, particularly when you have lending operations in multiple states, and are subject to varying state lending regulations.
- Translate regulations into workflows and decision rules. The majority of lending regulations are concerned with equitable treatment of applicants and borrowers. However, in some instances, such as the Servicemembers Civil Relief Act, special verification steps are required. But, in essence, regulations are sets of directives. They can be translated into workflows and decision rules that consistently execute the steps of your lending processes to comply with relevant regulations.
- Integrate specialized compliance services. These companies closely follow the ever-changing regulations and provide support services and complementary software to ensure calculations, fees, annual percentage rate maximums, and notifications are properly executed per federal and state guidelines.
Determine Which Regulations Apply To Your Practices
In some ways, this may be the most challenging part of the compliance puzzle. You’re all too familiar with the challenge of interpreting complex federal and state lending regulations. However, success in the lending industry demands that you remain current, anticipating and adapting to inevitable changes. In addition to your legal group, numerous banking, credit union, finco, government, and professional services resources are available to help navigate, correctly interpret, and apply lending regulations. We can recommend these reports that offer an overall perspective of the compliance climate:
- PWC | New Route Ahead: The Changing Dynamics of Auto Finance, Risk and Compliance Highlights 2017
- Deloitte | Indirect automotive finance: Current regulatory outlook and potential risks
You may also be interested in two webinars for additional recent perspective on the role of technology in compliance:
- Lending professionals discuss Consumer Finance Protection Bureau rules. The webinar highlights the importance of legal guidance on regulations and the value of technology to cost-effectively manage fast-moving compliance changes.
AFSA Business Partners | Bottom-Up Compliance Using Technology. Emphasizes that processes need to match regulatory policies, and the value of data quality in helping to consistently make decisions to maintain compliance.
Translate Regulations Into Workflows and Decision Rules
Modern loan 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 process driven by data—a guarantee that processes will be executed consistently. Workflow steps are driven by decision rules. Decision rules translate lending regulations into consistently executable actions.
Legacy lending systems require programmers to implement workflows and decision rules, typically involving significant amounts of time and money. In a modern lending solution, configuration capabilities let knowledgeable business users translate lending regulations into workflows and decision rules using configuration. Users determine where business rules are implemented, select data fields to be evaluated, and specify the actions to be taken, based on the outcome of the business rule.
Here are a few examples in the context of the various phases of the lending cycle that illustrate the concept of where and how rules are used to automate loan decisioning:
- Guide applicants to accurately enter required information online
- Ensure a consistent set of data and supporting documentation is captured for all applicants
- Verify applicant documentation is automatically retained as a digitized record
- Confirm the application process is accurate and complete before moving to the underwriting phase
- Determine which bureaus will be pulled, based on zip code
- If credit bureau data equals “no-hit”, then access alternative credit data sources
- Determine if the applicant is an active member of the military and if so, process the application per the Servicemembers Civil Relief Act guidance for terms and interest rate
- If an application is declined, create adverse action notification, select reason for adverse action, and send to applicant; retain digital record of notification
- If FICO score is less than 580 then lookup maximum interest rate on state-usury-limit-tables
- Verify proper data or documentation have been received in support of stipulations
- Determine if or when individual stipulations can be waived
- If driver’s license verification fails, then assign application to identity-fraud-review queue for investigation and reporting
- 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
- If days-past-due is more than 30 days and contact opt-in equals yes, then notify borrower via email and retain a digital record of notification
- If loan-is-in-default and borrower is active-military-duty then initiate court order
- If days delinquent more than 90 then verify borrower contact hours and schedule phone call
In addition to the versatility that configurable decision rules provide, 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 in the lending cycle they can be made. Second, the system maintains a record of who, when, and where decision rules were implemented 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 through the use of services tailored to the compliance needs of the lending industry. Their services can be directly integrated into a lending system to support automated loan decisioning. They can also provide software solutions to help manage company-wide compliance and risk management responsibilities. These services work together to help you:
- Ensure you comply with state and federal interest rate regulations, validate the accuracy of loan calculations within origin workflows, and ensure required disclosures and notifications are generated;
- Provide compliance training and assessment through policy management, forms, and employee guidelines, as well as monitoring compliance activities; and
- Evaluate third-party risk management by collecting compliance documentation, analyzing vendor financial health, monitoring cybersecurity strategy, and conducting risk assessments and due diligence.
Analytics Monitor Regulatory Compliance
Automated loan decisioning generates a lot of process data. Analytics applied to these data lets you monitor decisions to confirm they are consistently made in accordance with regulations. Analytics can also uncover instances that may indicate non-compliance. Analytics gives 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.
Benefits of Automated Loan Decisioning
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 enables automated loan decisioning for consistent, compliant loan processing, quick modification in response to changing regulations, and an auditable history of system changes. With automated loan decisioning you can be compliant and efficient.
defi SOLUTIONS’ lending software experts welcome the opportunity to discuss how you can configure automated decision rules to comply with federal and state lending regulations. Take the first step toward achieving and maintaining compliance by contacting our team today or registering for a demo of defi LOS.