Maintaining regulatory compliance requires a focused and continued effort. Lenders need to understand frequently-changing federal and state regulations and translate them into compliant lending processes.
In two recent blogs—The Benefits Of Automation For Auto Loan Compliance and Acing Regulatory Compliance with Automated Loan Decisioning—we discussed the advantages of automation in establishing consistent processes that align with current lending regulations. Automation is the foundation for compliant lending practices. It provides a governance infrastructure that brings consistency to lending tasks, processes, and decisions.
Automation brings the benefit of generating volumes of detailed operational data that can be analyzed to monitor the consistency and efficiency of lending practices. Regular use of analytics can confirm that decisions and processes have consistently be executed according to applicable regulations. Analytics can also uncover instances where underwriters may have done an end-run around established processes (overrides, exceptions, variations) and made decisions that jeopardize auto lending compliance.
Auto Lending Compliance: Rules and Regulations
Rules and regulations governing auto lending are numerous and complex. Multiple government agencies are responsible enforcing these regulations, including the Consumer Financial Protection Board (CFPB), Federal Trade Commission (FTC), Comptroller of the Currency (OCC), and Federal Deposit Insurance Corporation (FDIC).
In the following sections, we highlight several federal regulations relevant to loan origination, show how automation can be applied to implement the regulation, and explain how analytics can be used to monitor and maintain auto lending compliance.
Equal Credit Opportunity Act (ECOA) Prohibits lenders from using legally-protected criteria such as race, religion, age, sex, and other applicant attributes to make lending decisions. Lenders must also inform applicants of credit decision within 30 days and provide an explanation for why credit was denied or credit terms were changed. Failure to comply can result in penalties, including maximum fines of $500,000.
Automation and decision rules used to implement a loan origination process can ensure that such criteria are not part of the decision process. Automation and decision rules provide irrefutable evidence regarding the attributes and credit policies that a lender uses (and does not use) in making loan decisions. Automation also records the attributes, tasks, decisions, and underwriters involved in the loan decision.
Value of analytics: Regularly-run analytical reports provide high-level summary information regarding lending decisions, and let you drill down into individual decisions for further investigation. Although the vast majority of lending decisions comply with regulations, analytics reports may uncover anomalies such as:
- A new underwriter declining an unusual number of sub-prime applications with inconsistent or questionable explanations for the declines;
- An unusual number of declines that appear to have a specific zip code or street addresses in common; or
- Approvals with rates, terms, or down payments that are noticeably higher than other loans with similar applicant attributes.
Truth in Lending Act (TILA) Requires lenders to provide a statement that clearly explains the terms of the loan. The statement must include amount financed, annual percentage rate, finance charges, number of payments, monthly payment, total of all payments, late fees, as well as options to prepay the loan without penalty.
Automation can ensure the statement is automatically created and populated with loan terms and sent to the applicant (printed and mailed, PDF’d and emailed, text reminder to check email or mailbox). Analytics provides an added level of oversight in this area and can help lenders confirm that:
- Statements were indeed created and sent to the applicant; and
- Terms and conditions specified in the statement were in concert with the lender’s credit policies, as well as federal and state regulations.
Value of analytics: Analytic reports can identify any terms that deviate from established credit policies. They may have been introduced as a result of exceptions or overrides on the part of an underwriter. The problems could be interest rates that exceed state usury laws, finance charges or dealer markups in violation of legal limits, or number of payments that exceed prescribed limits—perhaps done in an effort to book the loan and make the monthly payment more manageable.
Servicemembers Civil Relief Act (SCRA) Specifies that auto loan interest rates for active members of the military may not exceed six percent. Additionally, interest rates on auto loans initiated prior to the servicemember assuming active military status may need to be adjusted.
Value of analytics: Analytic reports make it easy to monitor SCRA compliance. Regular analysis of applicants can summarize the number of loans granted to military personnel and identify any loans that do not meet SCRA requirements.
Auto Lending Compliance is Easier With Analytics
The combination of loan volumes and the multitude of regulations that govern lending practices demands that lenders adopt automation and analytics to establish and maintain auto lending compliance. Automation enables lenders to translate rules and regulations into verifiable lending tasks, decisions, and processes. Analytics then allows lenders to easily monitor and report on nearly every aspect of the loan origination process. Analytics can measure as well as proactively identify and remedy decisions that potentially introduce risk into an auto lender’s practice.
defi SOLUTIONS lending automation and analytics software experts welcome the opportunity to discuss how you can achieve and maintain auto lending compliance. We are professional lending process problem solvers. Take the first step toward establishing compliant lending processes by contacting our team today or registering for a demo of defi LOS.
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