Lenders are tasked with navigating a whole list of federal, provincial and state regulations that impact automobile lending, data security and privacy, consumer rights — all of which effect the customer’s experience — and it’s difficult to remain compliant as different government agencies update statutes and requirements. For example, lenders must abide by mandates like the Truth in Lending Act (TILA); The Equal Credit Opportunity Act (ECOA); The Servicemembers Civil Relief Act (SCRA); and The Unfair, Deceptive or Abusive Acts and Practices (UDAAP) regulation; all of which have complex requirements to ensure fair lending practices for consumers. Penalties for violations can be severe and may sometimes extend to industry partners such as original equipment manufacturers (OEM).
Fines and other financial penalties are not the only consideration for seeking compliance. Lenders also need to protect their brands by satisfying their customers, fostering loyalty and generating positive word of mouth. This is a genuine concern since, according to the Consumer Financial Protection Bureau (CFPB), consumer grievances have spiked to unprecedented levels.
Reduced intervention, improved consistency
When we talk about compliance, the first thing that comes to mind for many of us is the impact of the California Privacy Act. This law allows residents to sue businesses if their personal information is compromised in a data breach, making it more imperative for lenders to protect their customers’ data through a secure and reliable system. The industry is now also facing changes related to the Current Expected Credit Losses (CECL) regulation, which requires lenders to meet new credit loss accounting standards.
Automated lending solutions can aid financial institutions in their efforts to remain compliant, allowing them to retool and customize elements of their systems to accommodate new legislative guidance, and to be agile enough to meet new regulatory needs fast. Automation can also help lenders meet evolving compliance needs through sophisticated analytic tools, which monitor a range of loan origination functions.
Data analytics reports can pinpoint anomalies that introduce risk, including instances where lending activities don’t adhere to regulations. For instance, the SCRA mandates a specific interest rate threshold for active-duty military personnel, capping it at 6%. Advanced data analytics can identify when such conditions exist, allowing lenders to adjust terms and satisfy the regulation.
In addition, document management tools assist lenders in creating digital storage archives, wherein contracts can serve as documents of record for compliance purposes. Functions like these can help lenders achieve compliance with far less intervention and greater consistency, even as regulations and borrowers’ circumstances evolve.
Effective lending software should accommodate variations of internal, state, provincial and federal compliance laws and regulations, or alternatively, these solutions should integrate with a capable compliance module. This technology should be dynamic enough to tackle fluctuating policies, set maximum state and usury interest rates, and calculate annual percentage rates (APRs). Internal compliance ensures that all businesses adhere to their company’s defined authorization levels, as well as shareholder lending policies.
Adapting to ever-changing policies
Policy changes will always be a reality for lenders, so an agile loan origination system (LOS) is key in remaining compliant. The Military Lending Act is a good example of a regulation that has changed repeatedly in a short time frame. Several years ago, MLA rules were updated — seemingly overnight — causing lenders and dealers to react with speed to avoid hefty penalties. Yet the Department of Defense went on to reverse the guidance it had enacted only a few years earlier. Lenders are often challenged to keep up with such reversals, which can affect the provision of GAP coverage, for example.
LOS and loan management system (LMS) platforms should be configurable to quickly adhere to evolving statutes. A good LOS should also keep lenders within regulatory guidelines without the need for significant human interaction. The LOS should enable lenders to set the maximum allowed state or usury interest rates, as well as MLA compliance to calculate maximum APRs. Lenders should look for an open API infrastructure with platforms such as RouteOne and Dealertrack, as this enables the easy integration of internal compliance controls.
Discerning between federal, state, and provincial compliance
One of the major challenges facing lenders is adherence to both local and federal regulations. Not only are both compliance mandates subject to ongoing re-evaluation by legislators but, more often than not, no two governing bodies are identical when it comes to lending regulations. To make matters cloudier, lenders often confuse local and federal statutes, opening themselves up to risk of penalty if they find themselves in violation.
“Over the years, dealer practices have melded [state and federal regulations] together,” said Jeff Buysse, vice president of compliance services at Carleton Inc., a consumer lending compliance software company based in South Bend, Ind. “Challenges arise when the two are blended and policies are made around them. The difficulty lies in communicating that they are in fact separate, and then implementing proper internal processes and controls to align with the law and regulation.”
For example, TILA is a federal statute. It differs from a state-level compliance regulation in that it’s primarily a disclosure law revolving around transparency of the annual percentage rate. It requires lenders to compute an accurate APR according to specific rules.
Automation supports the best intentions
There is an extraordinary volume of statutes and policies for lenders to keep track of and, if anything, the list keeps getting longer. Failure to comply with federal, state and provincial mandates is expensive, erodes confidence in the brand and disrupts customer relationships. Now more than ever, lenders are using automated tools embedded in the LOS to help satisfy this burden and preserve the bottom line.
Vlad Kovacevic is the founder and CTO of Inovatec Systems. Inovatec provides LOS, LMS and direct systems that seek to eliminate friction in the lending process and automate much of the manual work of originating and managing loans.