Either you’re compliant or you’re not. In the long run, achieving compliance is the easier choice, but it does require accurate interpretation of regulations that govern lending practices, the right software tools, and on-time implementation.
There’s no denying that auto loan compliance has become a major concern for lenders. Consider the number of lending regulations you face today and their evolving nature. At the federal level, you have the Federal Trade Commission (FTC) and the Office of the Comptroller of the Currency. Although Congress invalidated the Indirect Auto Lending Guidance of the Consumer Financial Protection Bureau (CFPB), you can expect state attorneys general to become more active in enforcing directives. Virginia, Pennsylvania, and Maryland have already created some form of consumer financial protection unit, mini-CFPBs, if you will, to fill the gap.
To be compliant you have to know which of the many regulations affect your lending practice, then take steps to make sure they are properly implemented in your lending practice. Your legal team should take an active role in helping you interpret and apply the regulations. Among the auto loan compliance regulations that affect you are:
- Reg B of the Equal Credit Opportunity Act (ECOA): Prohibits applicant creditworthiness discrimination based on race, color, religion, national origin, sex, marital status, or age. Lenders are required to notify applicants regarding actions taken on their application and collect certain information for government monitoring.
- Truth in Lending Act (TILA): Lenders must disclose in writing details such as total cost of loan, interest rate, monthly payments, any late payment fees, and total time required for loan repayment.
- Risk-based Pricing Rule: Ensures consumers receive credit score information when applying for a loan. Lenders send a Credit Score Disclosure notice when the loan is approved. The notice explains why the borrower’s interest rate is more or less favorable compared to other borrowers.
- Unfair, Deceptive or Abusive Acts and Practices (UDAAP): Covers a wide range of activities. Unfair, if they may cause substantial or not reasonably avoidable injury. Deceptive, if a reasonable consumer would be misled. Abusive, if they materially interfere with the ability of a consumer to understand a term or condition of a financial product or service. As you might expect, there is a great deal of interpretation concerning this regulation.
- Servicemembers Civil Relief Act (SCRA): Protects active military from foreclosures or property seizures. Gives military members the option to terminate an existing vehicle lease if deployed for least 180 days, or service period is extended more than 180 days. Entitles servicemembers to interest rates of 6% or less on any vehicle loan.
With the number of regulations and the distinct possibility that these will change because of the ongoing industry lobbying and government review, how do lenders best meet the challenges of auto loan compliance?
Meeting the Challenges of Auto Loan Compliance
How do you translate the directives of relevant regulations into consistent, transparent lending processes? Use a modern auto lending system. Decision rules, automation, digital documents, and analytics are the key capabilities that help you achieve and maintain compliance as regulations change.
Translate Directives Into Action with Decision Rules
Compliance directives concerning the proper acquisition and evaluation of applicant attributes such as credit score, military status, employment, income, and contact information are reliably carried out when guided by decision rules. Manual underwriting, funding, or servicing steps may (or may not) be consistently performed by an agent. However, decision rules (as part of an automated workflow) consistently compare attributes against pre-defined criteria and determine actions based on the outcome. Whenever manual decisions are replaced by decision rules, you move a step closer to consistent, compliant processes.
Decision rules help lenders comply with regulations in three distinct ways. First, decision rules put specific directives into action:
- if active military = true, then structure loan according to SCRA guidelines
- If credit score is < 580, then access alternative credit data to evaluate creditworthiness
- If days-past-due > 30 and contact “opt-in” = yes, then notify borrower via email
Second, decision rules bring consistency to the process. Unlike manual steps in a process, decision rules will be always be evaluated and acted on. Third, unlike a step, task, or procedure in an operations manual or guidebook, decision rules provide solid evidence of the lender’s ability to comply. In the event of an audit, you can easily show where you have applied the rules and how they are executed. A modern auto lending system will also provide an auditable history of decision rules, including who implemented the rule and when. That’s especially helpful in proving compliance when modifications are made based on changing regulatory interpretations.
Automation for Compliance and Efficiency
While decision rules execute the specific actions required by compliance regulations, automation orchestrates the overall process. It ensures that required steps are taken in the proper sequence. Automation eliminates the variability and uncertainty of manual processes. It allows lenders to develop workflows tailored to the specific needs of the lender’s practice.
Based upon initial applicant attributes, automation assigns the application to the appropriate processing queue. Automation ensures near-immediate loan approvals for applicants with exceptional FICO scores and eliminates wasting time on applicants with very poor FICO scores.
Automation orchestrates calls to bureaus and returns credit data in a normalized format that is easily understood by the underwriter. Automated decision rules guarantee required verifications are made when determining creditworthiness. They also coordinate information contained in notifications and determine the correct communication channel(s) based on the applicant’s profile.
Like decision rules, automation shows the exact steps your lending processes take and the decisions that are made. The greater the degree of automation you incorporate into your lending practices, the easier it is to demonstrate compliance.
Digital Documents are Records of Compliance
Many lending regulations are focused on communications with applicants and borrowers. Historically, many lenders have retained paper lending documents and communications. The space needed for that and the challenge of finding specific documents quickly makes that less than ideal. A better method is digital management of documents and communications. The ability to capture and securely retain these in digital format eliminates storage costs and guarantees that documents will never be misplaced or lost. Credit score disclosures, adverse actions, delinquency notifications, or any other critical communications between lender and borrower are securely retained. From the compliance perspective, it’s easy to provide evidence that you have communicated as required by regulations.
Analytics for the Big Picture and the Little Details
A modern lending system will also gather process statistics and provide a rich set of tools to help you analyze your lending practices. You’ll be able to:
Report percentages of applicants by credit scores;
- Show how often you used alternative credit data to evaluate creditworthiness;
- Summarize the number of auto-declines and categorize them by adverse action reasons; and
- Access detailed information and history or any borrower when needed.
Analytics is a powerful tool to help demonstrate that your policies and processes comply with regulatory directives and are free from disparate impact.
As with all of the other capabilities that support compliance requirements, analytics also improves efficiency. Analytic tools enable you to explore data and reports in order to extract meaningful insights, which can be used to better understand and improve lending performance.
You Can Be Compliant and Efficient
By no means do we claim that decision rules, automation, and digital documents will meet every facet of your compliance needs. However, each capability adds consistency and transparency to your lending processes. You can show that you have implemented a specific directive via a decision rule that will always be evaluated as part of an automated underwriting process. Digital documents captured and retained securely provide irrefutable proof of required communications. Analytics enable you to report on any specific aspect of your lending processes and quantitatively demonstrate how you are meeting compliance requirements.
Auto loan compliance requires continuous efforts to monitor, interpret, and apply the relevant regulations to your specific lending processes. But compliance doesn’t have to be a burden. The capabilities provided by modern auto lending systems in support of compliance requirements also bring added efficiency to lending processes. An investment in compliance is an investment in efficiency.
The defi SOLUTIONS lending experts welcome the opportunity to discuss how we can help you meet the challenges of auto loan compliance. We’ve been exclusively focused on lending for 20 years. We understand every facet of your business. Our auto lending solution is developed for lenders, by lenders. Take the first step to improving your ability to keep up with compliance regulations, and improve lending efficiency by contacting our team today or registering for a demo.