Auto lending regulations are the result of consumer advocates, industry lobbyists, and government officials proposing, negotiating, and compromising to bring about change that favors their constituents. They can be lengthy and complex. They almost always require legal guidance on proper interpretation and application. Despite all of that complexity, most of the federal, state, and local regulations can be boiled down to a set of auto loan decisioning rules intended to establish consistent credit policies and equitable treatment of borrowers.
In the past, much of the responsibility for adhering to regulations fell to underwriters or servicing agents. They had to understand the regulations (often simplified in an underwriting handbook), and know when and how to apply them when evaluating an applicant’s financial strength, or working with a delinquent or defaulting borrower. That approach did not guarantee consistent application of regulations. Seasoned underwriters knew what to do. New underwriters had a learning curve that virtually guaranteed inconsistent application of auto loan decisioning rules.
Legacy lending software vendors began to code these regulations into their system to help lenders comply with regulations. That was an improvement, but lenders were dependent on software vendors or implementation partners to code the regulations. With the increase in federal regulations and variance among state regulations, that just wasn’t a sustainable approach. Lenders couldn’t depend on the software vendor to cover all the regulatory bases, nor to code auto loan decisioning rules to meet lenders’ unique and varied requirements.
Configurable Auto Loan Decisioning Rules
Modern, cloud-based auto lending systems have overcome those limitations. Lenders no longer depend upon legacy software vendors or implementation partners to code regulations into their lending systems. Lenders can now translate the regulations that govern their business using configurable auto loan decisioning rules. This approach has six distinct advantages or benefits:
- Knowledgeable business users can develop and implement the decision rules—no technical or coding experience needed
- Assigned roles and responsibilities determine the authorized personnel who can implement decision rules, and where in the lending cycle the rules can be implemented
- Decisioning rules can be easily modified in response to changes in federal, state, and local regulations
- Maintaining a record of who, when, and where decision rules were implemented provides evidence of which rules were in effect at which time
- Lenders can consistently and accurately apply or enforce the regulations at the proper step of the lending process
- Underwriters and servicing agents are relieved from the tedium of having to remember when and where to apply the regulations—which is especially helpful for new underwriters and service agents
In a modern lending solution, configuration capabilities provide authorized business users with user-friendly menus to select data fields, determine how they will be evaluated, and specify the actions to be taken, based on the evaluation.
Transforming Regulations Into Auto Loan Decisioning Rules
Let’s look at some hypothetical examples of how auto loan decisioning rules could be applied during underwriting and servicing to help achieve compliance with federal regulations. The examples below are based on Servicemembers Civil Relief Act (SCRA), Fair Debt Collection Practices Act (FDCPA), and state usury and fee regulations.
If FICO < 580 then lookup maximum interest rate on state-interest-tables
If applicant is active military duty = true, then verify interest rate <= 6%
If reported income < 40,000 and renter = true then verify income with employer
If credit bureau data = no-hit, then access alternative credit data.
If decline = true, then indicate adverse action reason, create notification, send notification via email, retain digital copy of notification
If driver’s license verification = false, then assign to identity-fraud-review queue
If FICO >= 740 and decline = true, then assign to prime-exception-review queue
If days delinquent > 90 then, verify borrower contact hours and schedule phone call
If default = true and active military duty = true then, initiate court order
These are simple conceptual examples of how decisioning rules may be applied for underwriting and servicing. Configuration allows business users to create more sophisticated decisioning rules to comply with complex regulatory requirements. Lenders with multi-state operations will appreciate the ease of implementing decisioning rules to comply with varying state lending regulations, and the ability to modify them as regulations evolve.
Interested in learning how you can build-in compliance from the ground up? Watch the AFSA Business Partner Bottom Up Compliance Using Technology webinar.
Analytics to Monitor Compliance
In addition to decision rules, a modern lending system that provides analytics gives lenders an added level of confidence in helping to achieve compliance. Analytics allows lenders to monitor underwriting and servicing processes to both confirm that auto lending decisions are made in accordance with regulations, as well as look for exceptions that indicate non-compliance. Look for trends and any outliers within those trends that may merit a closer look. Track underwriters who are making exceptions. Is there a legitimate reason for the exceptions or do the exceptions equate to potential risk? In a modern lending system, nearly every aspect of a lender’s practice can be analyzed in great detail. Savvy lenders will recognize analytics as an essential tool to achieve and maintain compliance.
Consistent Decisions for Confident Compliance
Configuration is a powerful tool in support of regulatory compliance. It lets lenders establish and modify auto loan decisioning rules without the cost and delay of relying upon a software vendor or outside technical expertise. Configuration tools in the hands of knowledgeable business users let lenders address regulatory compliance requirements quickly and confidently. Analytics give lenders the tools to ensure they are maintaining compliance.
defi SOLUTIONS loan lending software experts welcome the opportunity to discuss how you can use decision rules to comply with with lending regulations. We are professional lending process problem solvers. Take the first step toward achieving compliance by contacting our team today or registering for a demo of defi LOS.
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