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The defi Team Automation, Compliance, defi INSIGHT

automation for auto loan compliance

Today’s robots and long-gone steam engines have something in common: Automation. The essence of automation is the replacement of a manual process, subject to variability in the time and quality of execution, with a consistently repeatable and predictable process managed by technology. The benefits are typically better quality, lower costs, and greater efficiency. Now, automation is bringing those benefits to auto loan compliance.

Automation for Efficiency and Auto Loan Compliance

While we may think of automation primarily impacting the physical world, it plays an increasingly transformational role in non-physical, high-volume processes such as auto loans. Lenders benefit from automation in three distinct ways. First, automation replaces manual processes with data-driven decision rules and workflows (consistent quality). Second, it converts paper into digital documents for secure and efficient handling (lower operational costs). Third, automation creates operational data that can be used to monitor lending process efficiency, which is critical to maintaining profitability in a competitive market.

But automation offers auto lenders more than efficiency. It can also help comply with numerous federal regulations such as Truth in Lending Act (TILA), Equal Credit Opportunity Act (ECOA), and Servicemembers Civil Relief Act (SCRA), as well as varying state regulations. With automation, efficiency and compliance need not be mutually exclusive. Modern loan origination software, employing the latest technology, delivers both automation for efficiency and automation for auto loan compliance.

Compliance: It’s Not Easy With Legacy Lending Systems  

Auto lending has become a more complex process as a result of compliance regulations. Legacy lending systems do not allow easy process modifications to accommodate new or changing regulations. Legacy systems typically require costly and timely programming to make changes. As a result, many steps in the lending process subject to regulations are carried out manually. Those steps are the responsibility of underwriting, funding, and servicing professionals who must learn and apply the regulations daily. These manual tasks, performed by different individuals, introduce variability in the process—exactly the thing you want to avoid when compliance is your goal.

Let’s explore a few examples that show how automation for auto loan compliance enhances decision quality, reduces operational costs, and improves efficiency.

Replace Manual Processes With Workflow and Decision Rules  

To replace manual lending processes, modern lending technology provides out-of-the-box workflows for key phases of the lending process—applications, underwriting, verifications, and funding. A software vendor exclusively focused on the lending industry understands the nuances of these lending processes and applies that experience when designing the best out-of-the-box workflows.

Workflows provide the framework to enable automation for auto loan compliance, but you’ll need to tailor those workflows to meet your specific lending needs. Decision rules give you the power to implement the steps, tasks, and activities that mirror compliance regulations. Those rules should be configurable by business users, without requiring programmers to make modifications. Decision rules allow you to transform regulatory details into automated actions. Automated rules consistently enforce regulatory requirements, such as:

  • Determining if an applicant is an active member of the military, then processing the application according to the Servicemembers Civil Relief Act guidelines;
  • Accessing external compliance services that monitor state and local lending regulations and allowing you to confidently calculate fees and interest rates accordingly;
  • Determining when and how you contact borrowers in default per the restrictions set forth in the Fair Debt Collection Practices Act;
  • Sending timely notifications, such as adverse actions, according to requirements specified by the Truth in Lending Act;
  • Establishing criteria (both conditions and authorized personnel) to allow exceptions or overrides; and
  • Automatically accessing third-party verification services to avoid the risk of identity fraud.

These are relatively simple examples showing how automated decision rules help you comply with regulatory requirements. But decision rules are flexible and powerful. Configurable decision rules can also be used to automate more complex processes subject to regulatory oversight such as ones that:

  • Require evaluation or verification of a minimum set of borrower attributes prior to progressing the application to the next phase of the lending cycle;
  • Ensure that tasks are executed in a prescribed sequence prior to issuing any adverse action notice; or
  • Verify that all stipulations have been met, and all required documents have been digitally captured and reviewed prior to loan approval.

The combination of workflows and decision rules transform regulatory requirements into automated, consistently-executed steps in your lending processes. Configurable decision rules deliver an added benefit. They support compliance requirements by maintaining an auditable record of when and by whom a decision rule was implemented, modified, or deleted. Only authorized business users are allowed to make configuration changes. Authorization gives you very fine control over who can make configuration changes, where in the lending process changes can be made, and what type of changes are permitted. In the event of an audit, you will have detailed, chronological evidence of which decision rules were (or are) in effect.

Interested in learning how automation and decision rules enable you to build-in compliance from the ground up?  Attend the AFSA Business Partner Bottom Up Compliance Using Technology webinar.

Digital Documents: Never Lost or Misplaced

A fully automated lending process is entirely digital. Paper documents are transformed into digital documents that are securely transmitted, stored, and accessed. Digital documents can reduce or eliminate the mailing and paper document storage costs, which can be significant for high-volume lenders. In digital form, documents cannot be lost or misplaced.

Advanced scanning technologies automatically extract and verify applicant information from paper documents and add that to the applicant record. If an underwriter needs to reference any document, it’s automatically linked to the applicant record and immediately available on their desktop. Digital documents enable faster, better-quality lending decisions.

During an audit, borrower communications may be subject to review. Automation that allowed you to capture and securely retain the documents also makes it possible to quickly and securely provide any of these documents as evidence of regulatory compliance.

Analytics: Evidence of Actions Taken and Decisions Made

Workflows and configurable decision rules translate regulatory directives into automated, consistently repeatable actions. Workflows and decision rules also create operational data that can be used to analyze lending processes in a nearly infinite variety of ways. You can analyze lending processes for efficiency, seeking answers to questions such as:

  • Are you achieving dealer response SLAs;
  • Are there any bottlenecks in the underwriting process; and
  • Which underwriters have been most/least productive this quarter?  

You can also analyze lending processes from a compliance perspective:

  • Did applicants receive required notifications within the required time limits;
  • Were any deals or declines “outliers” that could be interpreted as disparate action;
  • What was the distribution of adverse action reasons this quarter;
  • How many exceptions or overrides were made; and
  • Were any applicants with active-military status declined?

Lenders who establish a formal and consistent method of regularly applying analytics to their lending processes stand to gain improved efficiency, They’ll also be able to proactively identify process exceptions that may indicate potential non-compliance. Analytics gives you the power to survey your processes at a high level, as well as do a deep dive to investigate individual deals. A modern loan origination system that includes analytic tools gives you an added level of confidence in meeting compliance goals. Astute lenders will view analytics as an essential tool for monitoring compliance.

Automation: You Can’t Be Compliant Without It

Compliance with lending regulations demands sustained discipline. Regulations are numerous and guaranteed to change.  However, maintaining compliance doesn’t have to conflict with an efficient and profitable lending practice. The capabilities provided by a modern loan origination system enable efficient lending processes, and support compliance requirements.  

Automation enabled by workflow and business rules transform regulatory requirements into consistently-executed steps, tasks, and processes. Digital documents reduce operational costs and provide records of client communications. Analytics allow you to monitor your lending processes for both efficiency and compliance. In an increasingly-regulated industry and competitive environment, a modern loan origination system with flexible and powerful automation capabilities is the foundation for operational efficiency and regulatory compliance.

defi SOLUTIONS loan origination and analytics experts welcome the opportunity to show how automation improves operational efficiency and supports regulatory compliance. We have more than 20 years of exclusive focus on lending, and invite you to contact our team today or register for a demo of defi LOS and analytics.

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