Tension and uncertainty created by the CFPB’s 2013 Indirect Auto Lending Bulletin evaporated April 18, 2018, when the US Senate voted to overturn that guidance. The House of Representatives voted to nullify the guidance on May 8, 2018. Indirect lenders no longer need worry about liability for auto dealers’ fair lending violations. Although that relief is welcome, compliance with government directives always concerns indirect lenders.
Many national, state, and local regulations—Equal Credit Opportunity, Truth in Lending, Consumer Leasing, Dodd-Frank, and Servicemembers Civil Relief—already keep lenders busy. Changes to these regulations are inevitable, as are additional new requirements. Ongoing conflict between lobbyists and government committees virtually guarantees it.
With the pace and uncertainty of regulatory changes, how can lenders keep up with indirect auto lending compliance? Lenders should anticipate pending regulatory changes and be prepared to quickly modify business policies, processes, and procedures to stay current. However, anyone with legacy loan origination systems (LOS) well knows the difficulty and cost of making even small changes to accommodate regulatory shifts. Older systems can’t keep up. Modern LOS, however, help lenders deal with fast-moving compliance changes without costing a fortune. Technology provides the flexibility, configurability, and auditability that lenders require to keep up with indirect auto lending compliance regulations.
Flexibility in Accommodating Regulations
Changes in existing regulations and the reality of new regulations are facts of lending life. Lenders need the ability to implement changes quickly and cost-effectively. Lenders also need flexibility in the manner of implementation. They want to meet their compliance requirements, but each one might chart a different path to make that works best for them.
Think of the variations in handling adverse action letters. Some lenders send them to every applicant. Some send them at 10 days, just to be safe. Others send letters at 20 or 30 days, based upon their interpretation of the requirement. As for the letter itself, a generic template is acceptable, but a lender will likely want to use a variation. Some lenders send a generic letter first and include a note to contact them if the applicant wants additional information. Other lenders tailor the contents of the letter to the specific circumstances of the applicant.
A modern LOS helps lenders adapt to these types of compliance requirement changes. It also gives lenders flexibility in how to meet the requirement. Unlike legacy systems that require programming skills to make even minor modifications, modern LOS configuration tools and menus now let business users cost-effectively make changes to processes and procedures to comply with regulations. It’s cost-effective because business users have the deepest understanding of the processes involved and know the intent behind specific regulatory requirements. It’s good to stay true to both the intent and the letter of the law.
Configuration and Compliance
Configuration tools and menus for decision rules and data integration make it easier to implement processes required for regulatory compliance. They let authorized business users, not programmers, make necessary process changes. Configuration is the quickest way to implement a process based on current interpretation of the regulation and make modifications in the event of a new interpretation or guidance from the compliance team.
Configure Decision Rules
Rules bring accuracy and consistency to lending decisions. They replace manual underwriting decisions that vary depending on the person making the decisions. They also provide evidence that a formal, predictable, repeatable decision process is being used. Examples of decision rules that support compliance regulations might include:
- If an applicant is a service member then use interest rate guidelines determined by the Servicemembers Civil Relief Act
- Confirm that all documents for credit review and qualification have been submitted
- Ensure that only verifiable information is being used to assess creditworthiness
Although these examples are relatively simple, rules can be configured to support complex processes that evaluate many applicant characteristics as part of the decision-making process. Most lenders have dozens to hundreds of decision rules already incorporated, formally or informally, into their underwriting and funding practices. The ability to easily configure decision rules is a powerful way to achieve and maintain compliance with lending regulations.
Configure Data Integration
Lenders have access to an increasing number of data sources and services. These resources help lenders to more carefully qualify applicants or access regulatory data to assist in properly processing applications. The best LOS are already pre-integrated with these resources. This allows authorized business users to configure the specific data sources and individual data fields they need to access during underwriting and funding processes. These data sources can verify applicant information, provide data that creates a more detailed applicant profile or execute calculations that are compliant with the federal and state lending regulations. Specific examples of the value these integrated data sources and services provide are:
- Ensure loan documents are RegZ compliant and offer customized credit summary attributes
- Access alternative data sources to obtain a more accurate risk score for an applicant
- Validate loan disclosure items against state usury laws and federal TILA
- Use e-documents for delivery of adverse action letters
As requirements change, either as the result of new regulations or a lender’s need to access additional data sources or data fields, authorized users can make those modifications quickly and cost-effectively.
Prove Indirect Auto Lending Compliance in Audits
In addition to having mechanisms in place to ensure your processes comply with current lending regulations, you also need to proof of compliance to any regulatory body that may want to audit your operations. Well-designed LOS account for this by keeping a history of configuration changes you implement. Essentially, these are records showing which authorized user made which configuration changes and when. Good auditing capabilities support a formal change management process where only certain users are qualified to make configuration changes. When subject to an audit a lender will be able to confidently:
- Demonstrate which rules, policies, and procedures were in effect
- Prove that only authorized users configured the decision rules
- Show consistency and transparency in decisions and processes to demonstrate that lending practices are not discriminatory
Indirect lenders continue to be affected by rapidly changing regulations. Those lenders need the ability to quickly and cost-effectively make required changes to their lending policies, processes, and procedures. It takes too long to make those kinds of modifications with legacy loan origination systems. Lenders need a solution that is flexible enough to allow authorized users to make changes based on their understanding of specific compliance regulations. The solution should be configurable by business users to avoid the cost and delays typically associated with legacy systems. The auditing capabilities of the solution should provide a history of decisioning changes made to the system, to prove compliance if needed. Lenders who adopt modern loan origination solutions will be well prepared to keep up with changes in indirect auto lending compliance regulations.
The defi SOLUTIONS loan origination software experts would welcome the opportunity to discuss how we can help you establish, maintain, and demonstrate compliance with rapidly changing regulations. With more than 20 years of lending experience, our software is developed for lenders, by lenders. Take the first step to improving your ability to keep up with compliance regulations by contacting our team today or registering for a demonstration of defi LOS.