Risk is an inherent part of the auto lending industry. Initially, risk was almost exclusively associated with the criteria and policies used to evaluate applicants. How confident were you in determining the right balance of credit scores, interest rates, and loan terms to minimize risk and optimize profits? Decisioning is no longer the only major risk factor in auto lending. With greater government oversight in recent decades, regulatory compliance has become a major risk as well.
Auto lending risk assessment of your credit policies and lending practices will ensure they comply with the growing number of federal and state regulations. Variations in state regulations make it all the more challenging for auto lenders who operate nationally. Failure to comply can result in significant fines, sanctions, and damage to your institutional reputation. To be successful you have to minimize the risk associated with your organization’s lending decisions, and you need to ensure that those decisions comply with all applicable regulations—and maintain that compliance over time as new regulations are added.
Auto Lending Risk Assessment with a Modern LOS
The less-than-optimistic auto sales expectations for the remainder of 2018 bring added pressure on lenders to be efficient and profitable while maintaining compliance. Fortunately, modern lending solutions help do just that. They incorporate consumer data resources, automation, and analytics, and can make processes more efficient while mitigating risk factors associated with regulations. Specific technologies—data resources, automation, and analytics—employed in modern auto lending solutions help in the following ways:
- Take advantage of richer, more detailed, and more accurate consumer data to improve decision quality;
- Use automation and decision rules to translate regulations into consistently applied procedures; and
- Employ auto lending analytics to monitor compliance with lending regulations and identify any trends indicating potential areas of risk in advance.
Better Quality Data Helps Reduce Lending Decision Risk
Lending decisions for applicants with exceptional and poor FICO scores can be straightforward—auto approvals for the former and auto declines for the latter. For applicants in with fair to very good scores, lenders can reduce risk involved in lending decisions by combining traditional credit bureau data with alternative credit data. The combination of these data sources creates a more detailed, accurate, and current assessment of any applicant risk factors, using various sources of consumer data. With this information lenders can:
- Offer credit to an applicant whose FICO score alone indicates risk but is mitigated by more recent financial transactions such as rentals, cell phone, utility, or weekly income that indicate consistent or improving financial strength;
- Decline credit or offer appropriate terms to an applicant with a good to very good FICO score, but recent events such as frequent change of address or missed utility or cell phone payments indicate greater potential lending risk; and
- Offer credit to applicants with thin or no credit scores who nonetheless demonstrate creditworthiness via alternative credit data sources.
The wealth of consumer data generated via electronic transactions and the ability to securely capture, aggregate, and share it can reduce risk involved in lending decisions.
Automation and Decision Rules Translate Regulations Into Procedures
Process inconsistency from variations in manual lending processes or different user skill levels is virtually guaranteed to introduce risk. Automation and decision rules mitigate this problem by translating regulations into consistently-executed lending processes. With automation and decision rules lenders can:
- Ensure compliance with Regulation Z and Regulation B in all lending decisions;
- Verify active military status of applicants and extend credit in compliance with Servicemembers Civil Relief Act;
- Verify state usury laws regarding interest rates to make sure loan terms are within guidelines;
- Automatically create, send, and retain digital copies of notifications such as adverse actions;
- Determine qualifying criteria and underwriters authorized to grant exceptions or overrides; and
- Maintain auditable records of lending decisions and the criteria used to make those decisions.
Auto lenders need to assess current processes and identify manual tasks and decisions. Automation and business rules can bring consistency and transparency in decisions and processes to demonstrate compliant lending practices. In short: Proof.
Auto Loan Analytics Monitor Compliance With Lending Regulations
A modern lending solution that uses both the wealth of consumer data and automation creates an audit trail of data and decisions that can be mined for insight. Applying auto loan analytics to the data lets lenders monitor lending practices to ensure regulatory compliance, or give an early heads-up on potential risk. With auto loan analytics can lenders can:
- Identify and evaluate any exceptions regarding decision criteria, interest rates, or loan terms for disparate impact concerning regulations such as Truth in Lending Act, Equal Credit Opportunity Act (ECOA), or Servicemembers Civil Relief Act (SCRA).
- Determine if sources, dealers, or locations of loan applications show evidence of potential discriminatory practices.
- Confirm that contacts and communications regarding delinquencies and defaults are conducted in accord with Fair Debt Collection Practices Act and state regulations.
- Proactively identify potentially fraudulent dealer practices and remedy them to avoid fines and damage to reputation.
Auto loan analytics complement alternative credit data and automation. The combination lets you continually assess your lending processes, to confirm regulatory compliance or identify potential risks and mitigate them. Together, alternative credit data, automation, and auto loan analytics significantly reduce compliance risk factors, keeping your blind spots to a minimum. If you have a modern LOS, you’ll have what you need to conduct your auto lending risk assessment.
defi SOLUTIONS lending and analytics software experts welcome the opportunity to discuss how we can help you reduce risk associated with regulatory compliance. We are professional lending process problem solvers. Take the first step toward reducing the compliance risk by contacting our team today or registering for a demo of defi LOS and defi Analytics.
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