Lenders are either compliant, or they’re not. Achieving compliance is a much easier option considering what happens to a non-compliant lender. Civil penalties for lenders failing to meet data privacy and security laws can range from five thousand to a million dollars daily. Yet it also requires an accurate interpretation of regulations that govern lending practices. Having the right software tools helps lenders implement new and old regulations judiciously.
Auto loan compliance has become a major concern for lenders. With the number of lending regulations and their evolving nature, it isn’t easy to keep up with all of them. At the federal level, there are the Federal Trade Commission (FTC) and the Office of the Comptroller of the Currency. Although Congress invalidated the Indirect Auto Lending Guidance of the Consumer Financial Protection Bureau (CFPB), state attorneys general are expected to become more active in enforcing directives. Virginia, Pennsylvania, and Maryland have already created some form of consumer financial protection unit that are essentially mini-CFPBs to fill this gap.
To be compliant, lenders need to know which of the many regulations affect their lending practice. They must then take steps to ensure they’re correctly implemented, while lenders’ legal teams should take an active role in interpreting and applying regulations. The auto loan compliance regulations that affect lenders include:
- Reg B of the Equal Credit Opportunity Act (ECOA): Prohibits applicant creditworthiness discrimination based on race, color, religion, national origin, sex, marital status, or age. Lenders are required to notify applicants regarding actions taken on their application and collect certain information for government monitoring.
- Truth in Lending Act (TILA): Lenders must disclose in writing details like the total cost of a loan, interest rate, monthly payments, any late payment fees, and total time required for full loan repayment.
- Risk-based Pricing Rule: This rule ensures consumers receive credit score information when applying for a loan. Lenders send a Credit Score Disclosure notice when a loan is approved. This notice then explains why a borrower’s interest rate is more or less favorable compared to other borrowers.
- Unfair, Deceptive or Abusive Acts and Practices (UDAAP): This covers a wide range of activities. “Unfair” refers to actions that may cause substantial injury that can’t be reasonably avoided. “Deceptive” refers to whether a reasonable consumer would be misled. “Abusive” refers to whether they materially interfere with a consumer’s ability to understand a term or condition of a financial product or service. This regulation is often interpreted very differently depending on the lender.
- Servicemembers Civil Relief Act (SCRA): This particular act protects active military members from foreclosures or property seizures. It allows military members to terminate an existing vehicle lease if deployed for at least 180 days or extend a service period if deployed for more than 180 days. This legislation also entitles servicemembers to interest rates of 6% or less on any vehicle loan.
With so many regulations and the constant changes they undergo due to the ongoing industry lobbying and government review, it’s difficult for lenders to meet the challenges of auto loan compliance.
Meeting the Challenges of Auto Loan Compliance
Translating directives from the relevant regulations into consistent, transparent lending processes requires a lender to have a modern auto lending system. Decision rules, automation, digital documents, and analytics are vital capabilities today’s lenders now need to achieve and maintain compliance with constantly changing regulations.
Translate Directives Into Action with Decision Rules
Compliance directives put in place concerning the proper acquisition and evaluation of applicant attributes like credit scores, military status, employment, income, and contact information is only reliably carried out when guided by decision rules. When done manually by an agent, underwriting, funding, or servicing steps aren’t always performed consistently. However, when utilizing decision rules as part of an automated workflow, attributes can be consistently compared against pre-defined criteria. This then determines what actions to take based on the outcome. Whenever automated decision rules replace manual decisions, the consistency of decisions increases, resulting in a lender’s processes becoming compliant.
Decision rules help lenders comply with regulations in three distinct ways. First, decision rules put specific directives into action:
- If active military = true, then structure the loan according to SCRA guidelines
- If credit score is < 580, then access alternative credit data to evaluate creditworthiness
- If days-past-due > 30 and contact “opt-in” = yes, then notify borrower via email
Second, decision rules bring consistency to the process. Unlike manual steps in a process, automated decision rules will always be evaluated and acted upon. Third, unlike a step, task, or procedure in a manual or guidebook, decision rules provide solid evidence that the lender complies with regulations. In the event of an audit, lenders can easily show where they’ve applied the rules and how they’ve been executed. A modern auto lending system also provides an auditable history of decision rules, including who implemented the rule and when. That’s especially helpful in proving compliance when modifications to regulations are made based on changing interpretations of them.
Automation for Compliance and Efficiency
While decision rules execute specific actions required by regulations, automation coordinates the overall process. Automation ensures that required steps are taken in the proper sequence. Automation eliminates the variability and uncertainty found in manual processes. Automation allows lenders to develop workflows tailored to their specific needs.
Automated features assign each application to the appropriate processing queue based on the initial applicant attributes. Automated procedures result in near real-time loan approvals for applicants with exceptional FICO scores while eliminating the need to waste time evaluating applicants with very poor FICO scores.
With automation, calls to bureaus are arranged, with credit data returned in a standardized format that an underwriter can easily understand. Automated decision rules guarantee that the requisite verifications are made when determining creditworthiness. They also coordinate information contained in notifications to determine the correct way to contact a specific applicant based on information in their profile.
In the same manner as decision rules are applied manually, automated procedures help lenders follow the exact steps to take for compliance purposes and the decisions that should be made. The greater the degree of automation lenders incorporate into their lending practices, the easier it is to demonstrate compliance.
Digital Documents are Records of Compliance
Many lending regulations focus on how lenders communicate with applicants and borrowers. In the past, many lenders retained paper copies of documents and communications, and some still do. However, this requires significant physical storage space, while it also makes finding specific documents quickly a difficult endeavor. Digital management of documents is a better method, allowing lenders to both eliminate storage costs while ensuring documents don’t get lost or misplaced. From a compliance perspective, capturing and securely retaining credit score disclosures, adverse actions, delinquency notifications, or any other critical communications between lenders and borrowers makes perfect sense. It constantly records communications as required by regulations, which can then be used as evidence of compliance should a lender be audited.
Analytics for the Big Picture and the Little Details
A modern lending system also gathers data that can be evaluated statistically with analytics software. This provides lenders with a set of tools that allow a careful analysis of a lender’s practices. With analytics, lenders can:
- Group and report proportions of applicants by credit scores.
- Show how often alternative credit data is used to evaluate creditworthiness.
- Summarize the number of auto-declines and categorize them by reasons why adverse action was taken.
- Access detailed information and history of any borrower whenever necessary.
Analytics is a powerful tool that helps demonstrate that policies and processes comply with regulatory directives while also showing that they’re free from disparate impact.
As with all other capabilities that support compliance requirements, analytics also improves efficiency. Analytics are tools that enable users to extract meaningful insights through reports that evaluate data gathered through the application process. In modern lending software, these insights help lenders better understand and improve their lending performance.
You Can Be Compliant and Efficient
Decision rules, automation, and digital documents won’t help lenders comply with every regulation. What these automated digital tools do, however, is add consistency and transparency to the lending process. Lenders can show they’ve implemented a specific directive via a decision rule, showing how all applicants will be evaluated under an automated underwriting process. Digital documents that are captured and retained securely also provide irrefutable proof of required communications. Analytics additionally allows lenders to report on any specific aspect within a lender’s loan processing, quantitatively demonstrating how compliance requirements are being met.
Auto loan compliance requires that lenders continually monitor, interpret, and apply the relevant regulations to specific lending processes. Compliance doesn’t have to be a burden, either. Modern auto lending systems offer capabilities that help lenders support compliance requirements while adding efficiency to lending processes. An investment in auto loan compliance is an investment in lending efficiency.
Getting Started
defi SOLUTIONS offers solutions 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, servicing, and managed servicing. defi SOLUTIONS has the backing of Warburg Pincus, Bain Capital Ventures, and Fiserv. For more information on auto loan compliance and how defi can help, please visit defisolutions.com.
