HOW AN LOS LOCKS IN TILA COMPLIANCE

It should be easy to comply with the Truth In Lending Act (TILA), more commonly referred to as Regulation Z (or just Reg Z) in the auto lending industry. If your loan origination software uses automation, business rules, and digital documents to manage the process, we’d even say that achieving TILA compliance is a no-brainer. However, if there’s any doubt regarding your ability to consistently meet TILA compliance, read on.

A Truth In Lending Act (TILA) Refresher

TILA is a significant and needed regulation that promotes informed use of consumer credit. It requires lender to make formal disclosures about loan terms and costs to every borrower. TILA determines how dealers can advertise auto loans and leases. The intent is to avoid false or misleading claims meant to lure customers to a dealership. Under TILA guidelines, lenders must explain the terms of loans clearly, in a format easily understood by consumers. The loan information must be accurate. It must also specify whether certain terms are subject to any restrictions or qualifications.

The Penalties

Failure to comply with TILA can result in penalties. A borrower can file an individual civil lawsuit if a lender has violated TILA. If found guilty, a lender can be liable for actual damage and legal fees, a sum equal to twice the finance charge, and/or 25% of total monthly payments for a vehicle lease. A borrower has one year from the violation date to initiate an individual suit.

Alternatively, borrowers may pursue a class action lawsuit. Total recovery of the class cannot exceed $500,000 or 1% of a lender’s net worth. In a successful suit, attorneys fees and court costs could be paid by the lender. A one-year limitation from the violation date also holds for a class-action lawsuit.

There is some leniency. If the lender corrects the mistake within sixty days of violation discovery, there is no liability, unless the borrower has already initiated a lawsuit. Lenders always bear the burden of proving the violation was unintentional.

It would seem that TILA compliance is relatively easy. However, application volumes, variations in credit policies, underwriter experience, and the capability of your loan origination software factor into your ability to maintain compliance.   

Modern loan origination solutions offer capabilities that virtually guarantee your underwriting processes are TILA compliant: Decision rules, automation, and digital documents make it all possible.

Decision Rules Ensure You’re Compliant

TILA requires a lender to provide the borrower with an easily understood statement (printed or digital) that includes four key numbers that summarize loan terms and can be used for comparison with other loan offers:

• Annual Percentage Rate (APR): cost of credit expressed as a yearly rate in a percentage;
• Finance charges: total amount of interest and certain fees paid over the life of the loan, assuming timely payments;
• Amount financed: the amount being borrowed; and
• Total of payments: sum of all the payments made over the life of the loan, including principal and all finance charges.

The statement must also include number of payments, monthly payment, late fees, and option to prepay the loan without penalty.

Automation Means Accuracy, Built-In Compliance, and Proof

A modern loan origination system using decision rules automates the calculation of these numbers to avoid errors. Decision rules have three major benefits in helping to comply with TILA requirements.

• Consistency in calculation of all the numbers, based upon established credit policies. Manual processes that could potentially introduce errors are eliminated through automation.
• Many of these numbers are dependent upon compliance with other lending regulations such as state usury laws and Servicemembers Civil Relief Act. Lenders can use decision rules to verify applicant military status and access to compliance services to validate interest rates when structuring loans. Decision rules guarantee the loan terms you offer comply with the relevant regulations.
• Decision rules are configurable and the loan origination system maintains a record of all configuration changes. This gives lenders an auditable, defensible position in the event loan calculations are ever questioned.

If you’re concerned about consistency in meeting TILA compliance or accuracy of calculations based on other regulations governing lending terms, automation provided by decision rules can alleviate these concerns. You’ll also need to keep a record of TILA statements you’ve provided. Here too, a modern loan origination system provides the functionality to meet the need.

Digital Documents Confirm Communications and Retain Records

Through automation, a modern loan origination system takes the loan terms you’ve calculated and inserts all the required information into a standard TILA disclosure statement. Lenders then have the option to print or provide a digital statement to the applicant. A copy of the application is then securely retained as a digital record in the event there is any question about the statement.

Additionally, digital documents that incorporate e-signature capability can be used to confirm that the borrower has received and reviewed the TILA statement. Digital document capability gives lenders an added level of confidence in fulfilling TILA requirements.

Lock In TILA Compliance with Confidence

Automation, decision rules, access to compliance services, and digital documents give lenders confidence in meeting TILA requirements. A modern loan origination system with these capabilities ensures terms are properly calculated and presented, statements are received and reviewed, and digital documents are retained as records lenders. With a modern loan origination system, you can lock in TILA compliance in the most process-efficient and auditable manner.