How do you balance the demands of operating an efficient and profitable lending business while complying with increasing regulations? The Truth in Lending Act (TILA), Electronic Fund Transfer Act (EFTA), Fair Credit Reporting Act (FCRA), Gramm-Leach-Bliley Act (GLBA), Servicemembers Civil Relief Act, and Fair Debt Collection Practices Act (FDCPA) are the major federal regulations governing auto lending. Many states have additional regulations. And with Congress invalidating the CFPB’s Indirect Auto Lending Guidance, expect some states to assume responsibility for oversight in that area. A quick review of the CFPB Automobile Finance Examination Procedures will give you a sense what an auditor looks for when conducting an examination. The focus could be underwriting compliance or any other area of the lending cycle.
To achieve, maintain, and demonstrate underwriting compliance you need to monitor, properly interpret, and implement the relevant regulations. How do you accomplish this and still remain an efficient and profitable lender?
Technology: Essential for Underwriting Compliance
In any compliance matter, the burden of proof is on the lender. What is the best way to achieve, maintain, and demonstrate underwriting compliance? Based on more than 20 years of hands-on experience in the auto lending industry, we are convinced that technology is the answer.
Modern lending technology offers distinct advantages over any manual processes you may currently use to support underwriting compliance, by:
- Ensuring process and decision consistency, and preventing manual errors;
- Establishing processes that can easily be tracked, analyzed, and audited; and
- Automatically alerting to identify conditions that are out-of-compliance.
Modern lending technology allows you to build in compliance from the ground up. Configuration, workflows, and decision rules provide the foundation to implement (achieve) the required regulations. Configuration lets you to easily make modifications (maintain) in the event of regulatory changes. Analytics and reporting provide high-level, as well as detailed statistics, (demonstrate) regarding your underwriting processes. Here’s how a modern loan origination system uses the latest technology to achieve, maintain, and demonstrate underwriting compliance.
Achieve Underwriting Compliance
A modern loan origination system already provides support for several of the well-established regulations. There’s no need for you to start from scratch. The processes and rules to comply with Regulation-Z of the Truth in Lending Act (TILA) are already incorporated into the underwriting workflow. Regulation B of the Equal Credit Opportunity Act (ECOA) is similarly supported, including the ability to automate any adverse actions notices. Whenever a notice is generated, applicant information and reason(s) are automatically inserted into the notice. Depending on the applicant’s opt-in preferences, the notice can be printed and mailed, or emailed. The system automatically maintains an electronic record of all communications.
Configuration and Decision Rules
Configurable decision rules are powerful tools for helping lenders implement steps and verifications. They also help ensure compliance with varying state regulations such as usury and fee limits. Decision rules can easily be configured to test for these limits and alert when limits have been exceeded. Rules also ensure that decisions are consistently executed, not subject to the variability of manual processes. Decision rules enforce disclosure rules and eliminate any manual steps that could potentially result in disparate impact.
A modern loan origination system allows you to control who can configure the system. By assigning configuration roles and responsibilities to qualified individuals (no need to have technical or programming skills) you control who can implement system changes. The system maintains a record of configuration changes. It provides details regarding who implemented the changes, when changes were made, and the details of the workflow, decision rules, or any of the dozens of other system configurations made.
The volume and quality of consumer, financial, and industry data available today allows lenders to make better quality decisions, but only if these data are incorporated into the underwriting process. Data sources and services such as identity verification, alternative credit data, vehicle evaluation, and document services help lenders steer clear of risks which can jeopardize compliance. These sources and services empower lenders to:
- Avoid the increasing risk of identity fraud;
- Generate a detailed, accurate, and current applicant scorecard;
- Structure loan terms to reduce risk to both borrower and lenders; and
- Provide an auditable record of communications between borrower and lender.
When these data sources and services are pre-integrated in a loan origination system, lenders can easily configure the sources they need and automatically access applicant- or vehicle-specific data during the underwriting process. Lenders can then be far more confident in their ability to meet underwriting compliance requirements with consistent, data-driven decisions.
Maintain Underwriting Compliance
Many of the same features of a modern loan origination system that help you achieve compliance also help you maintain it. As regulations change, qualified, authorized individuals in your organization can easily configure menus, workflows, decision rules, and third-party data integrations to conform to these changes. You’ll also have the opportunity to test configuration changes to confirm they execute properly before implementing them in your production system. For example, do any decision rule changes regarding qualification attributes result in disparate impact?
If your lending operations are widely distributed, you know how challenging it is to keep up with changes in every state. To properly maintain compliance you need both technology—a modern loan origination system—and employees who are well-versed in the compliance policies. Partners like Compli help navigate regulatory complexities as well as offer solutions that complement the compliant underwriting processes you’ve implemented.
Demonstrate Underwriting Compliance
Configuration, workflows, decision rules, and integration with relevant data sources and services are technology tools that allow you to achieve and maintain underwriting compliance.
- Configuration ensures only qualified, authorized persons can implement changes
- Configuration maintains a history of all changes made, by whom and when
- Workflows ensure proper steps are consistently taken in accordance with regulations
- Decision rules remove the variability of manual steps and provide consistency in executing decisions across all applicants
- Automated capture of all documentation and communications between applicant and lender provides secure digital records
By replacing manual underwriting steps with consistently-executed workflows and decisions, you track and record processes, steps, data, decisions, and communications, all at the same time. These records provide irrefutable evidence of your efforts to comply with underwriting regulations.
These records, along with all of the applicant and loan data you acquire and generate during the underwriting process, provide a rich source of information that can be analyzed to provide further evidence that you complying with regulations.
Analytics can provide summary data regarding your underwriting processes. Analytics also allow you to dig deeply into details of a specific loan. Analytics can be applied to all aspects of underwriting to confirm that your processes and policies comply with regulations, and identify any instances or areas where you may be at risk. The wealth of underwriting process data combined with the power of analytics gives you the ability to convincingly demonstrate that your lending practice is compliant with current regulations.
Technology Enables Compliance and Efficiency
Complying with numerous and changing lending regulations demands significant and sustained efforts by lenders. However, the challenges of achieving, maintaining, and demonstrating compliance need not conflict with running your lending business efficiently and profitably. Configuration, workflows, decision rules, and alternative credit data integration help you stay compliant. They also improve process efficiency by eliminating manual steps.
There are long-term benefits as well. You can use analytics on data generated by the underwriting process to identify areas for continuous process improvement. A modern loan origination system helps you wrangle it all.
The lending experts at defi SOLUTIONS welcome the opportunity to discuss how we can help you achieve, maintain, and demonstrate underwriting compliance. With over 20 years of exclusive focus on lending, we understand the challenges of regulatory compliance. Our loan origination solution is developed for lenders, by lenders. Learn how you can comply with the complexity of regulations and stay profitable by contacting our team today or registering for a demo.