The demands necessary to run an efficient, profitable lending operation must be balanced against compliance with constantly changing regulations. These lending regulations are included in legislation like 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
- Fair Debt Collection Practices Act (FDCPA)
All this legislation also governs the auto lending industry. Many states have additional regulations, which the Consumer Financial Protection Bureau (CFPB) in 2022 is once again supporting after Congress invalidated their Indirect Auto Lending Guidance in 2018.
A quick review of the CFPB Automobile Finance Examination Procedures shows what auditors do when conducting an examination. The focus could be any part of the end-to-end lending cycle. To achieve, maintain, and demonstrate underwriting compliance, lenders need to appropriately monitor, interpret, and implement the relevant regulations. Lenders need to do all this while still maintaining the efficiency and profitability of their businesses.
Technology: Essential for Underwriting Compliance
For any matters regarding compliance, the burden of proof is on lenders. So, what is the best way to achieve, maintain, and demonstrate underwriting compliance for lenders? The solution is in technology. Modern lending software platforms offer distinct advantages over manual processes still being used to support underwriting compliance by:
- Ensuring consistency in both process and decision-making, along with preventing manual errors.
- Establishing processes that can easily be tracked, analyzed, and audited.
- Automatically alerting lenders to conditions that are non-compliant.
Modern lending software allows lenders to build in compliance from the ground up. It helps lenders configure their workflows and decision rules to provide a foundation for implementing the required regulations. The ability to customize these software tools makes it easier for lenders to modify them when regulations change. With sophisticated analytics and reporting capabilities, lenders now have access to the most accurate statistics on underwriting procedures. Here’s how a modern loan origination system (LOS) uses the latest technology to achieve, maintain, and demonstrate underwriting compliance.
Achieve Underwriting Compliance
A modern LOS already supports many well-established regulations so that lenders don’t need 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 action notices. Whenever a notice is generated, the applicant’s information and the purpose of the notice are automatically inserted into it. Then, depending on the applicant’s opt-in preferences, the notice can be printed and mailed or emailed. The system also automatically maintains an electronic record of all communications.
Configuration and Decision Rules
Configurable decision rules are powerful tools that let lenders implement steps and verifications. They also help ensure compliance with various state regulations, such as those concerning usury and fee limits. Decision rules can easily be configured to test these limits and programmed to alert lenders when they’ve been exceeded. Automated rules also ensure that decisions are executed consistently for every applicant. Decision rules enforce disclosure rules and eliminate manual steps that could potentially result in a different result.
A modern LOS additionally allows lenders to control who can configure the system. By assigning configuration roles and responsibilities to qualified individuals, lenders control who can implement system changes. There’s no need for these people to have technical or programming skills either. The system records these configuration changes and details who implemented changes and when these occurred, along with workflow details, decision rules, or other changes to system configurations.
The volume and quality of data available to today’s lenders allow them to make better quality decisions, though this data needs to be incorporated into the underwriting process to do so. Data sources and services such as identity verification, alternative credit data, vehicle valuations, and document services help lenders avoid risks that can jeopardize compliance. These sources and services empower lenders to:
- Avoid the risk of identity fraud.
- Generate a detailed, accurate, and current applicant scorecard.
- Structure loan terms to reduce risk to both borrower and lender.
- Keep an auditable record of all communications between the borrower and lender.
These data sources and services are pre-integrated into a LOS. Then, during the underwriting process, lenders can easily configure those data sources so that they can automatically access data specific to an applicant or particular vehicle. This gives lenders more confidence that they’re complying with underwriting requirements and making consistent, data-driven decisions.
Maintain Underwriting Compliance
Many of the same features of a modern LOS that help lenders comply with regulations also help in maintaining compliance. As regulations change, those authorized to do so can easily reconfigure menus, workflows, decision rules, and third-party data integrations when needed. Lenders then have the ability to test these configuration changes to ensure that they execute correctly before implementing them. This will ensure that no unforeseen impact occurs regarding qualification attributes.
For lenders with widely distributed operations, it’s important also to keep abreast of any changes in state regulations. To properly maintain compliance, lenders need both technology, like a modern LOS, and employees with ample knowledge of compliance policies. Partners like Compli help lenders navigate regulatory complexities, offering solutions that complement underwriting processes implemented by lenders to maintain compliance.
Demonstrate Underwriting Compliance
Configuration, workflows, decision rules, and integration with relevant data sources and services are all technological tools to allow lenders to achieve and maintain compliance when underwriting loans. A modern LOS also allows for:
- Configuration tools ensure only qualified and authorized personnel can implement changes.
- Configuration tools maintain a history of all changes made, including who made them and when.
- Workflow tools ensure proper steps are consistently taken to comply with regulations.
- Automated decision rules within a LOS maintain consistency in executing decisions for all applicants.
- Automatic capture of all documents and communications between applicant and lender helps keep important digital records secure.
By replacing manual underwriting steps with consistently executed workflows and decisions, lenders can track and record all processes, steps, data, decisions, and communications. These records provide irrefutable evidence of a lender’s efforts to comply with underwriting regulations. Along with all of the applicant and loan data acquired and generated during the underwriting process, these records provide a rich source of information that can then be analyzed to provide further evidence of regulatory compliance.
Analytics also provides a summary of data regarding underwriting processes. It allows lenders to dig deeply into the details of a specific loan. Using analytics, a lender’s processes and policies can be evaluated to ensure compliance with regulations. Analytics applications can identify any areas or instances that show undue risk. The wealth of data from the underwriting process can also be combined with analytics processes to convincingly demonstrate that lending practices comply 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 a lending business efficiently and profitably. Configuration, workflows, decision rules, and alternative credit data integration help lenders maintain compliance. These tools also improve process efficiency by eliminating many steps that were previously done manually.
There are long-term benefits as well. For example, lenders can use analytics on data generated via the underwriting process to identify areas in which they can improve their processes. A modern LOS helps lenders do that and more.
defi SOLUTIONS offers a total solution for a lender’s complete loan or lease lifecycle. Partnering with captives, banks, credit unions, and finance companies, defi’s market-leading solution helps lenders exceed borrower expectations. From digital engagement through the complete lending process, defi sets new standards for flexibility, configurability, and scalability in originations and servicing (by your experts or ours). defi SOLUTIONS has the backing of Warburg Pincus, Bain Capital Ventures, and Fiserv. For more information on underwriting compliance and how a modern LOS can help you achieve, maintain, and demonstrate it, please visit www.defisolutions.com.