The current economic climate brings a new — and unwelcome — dimension to risk management and compliance. Lenders are challenged to understand guidelines regarding payment relief programs in the time of COVID-19.
Financiers must navigate these guidelines, ensure they are applied fairly and consistently, and adjust their systems to accommodate the changes. As such, lenders’ technology platforms must be adaptable to adjust for necessary changes.
The federal government as well as many states have issued guidance regarding loan deferral programs, and the program criteria can vary by state. For some, an indication of need communicated by phone or email is sufficient; for others, documented evidence of need — notice of reduction in hours, furlough, layoff or medical diagnosis — is required.
To keep up, it’s imperative that lenders consistently apply criteria. A system should have the capability to record the reason, apply the qualification criteria and initiate the process.
Borrowers must be informed of accommodation details — and communicate them. Reductions or deferrals of principal and interest are a given, but terms of other programs tied to the loan may vary. For example, credit insurance survives the life of the loan but extended warranties and service contracts expire at the end of the original contract. Further, actual means of communication regarding change of payment obligations differ by state.
Automation can help ensure the correct information is distributed, and analytics provide an added level of oversight and can help confirm that notifications were created and sent to the borrower, and that terms and conditions are in concert with federal and state regulations.
For many, the biggest challenge — and risk — involves modifying loan servicing systems to support new requirements. For example, if an account was delinquent prior to the accommodation, the account remains delinquent. But what if a borrower requests an accommodation and then misses a payment?
Making system changes to record requests for loan deferrals, capture and record required documentation, communicate changes in the payment obligation, and report account status to bureaus may not be trivial tasks. Additional modifications to servicing processes also must be addressed — such as automated collections that are temporarily suspended or in-process repossessions that are temporarily delayed.
The ease of making modifications to a servicing system likely correlates with the age of the system. Older systems will most likely require programming. Newer, modern systems can be easily modified via configuration menus.
Lenders who outsource loan servicing to a provider may have the easiest path to comply with these requirements. Established servicing providers have the systems and resources to quickly respond to industry and regulatory changes, even on a state-by-state basis.
COVID-19 has stressed every party involved in the lending cycle, and increased lending and operational risk. This won’t be the last time that lenders need to respond quickly to accommodate unexpected industry changes. Loan servicing system flexibility and agility have become a requirement for complying with changing regulations.
Shaimaa Elk serves as executive vice president, chief information officer and chief technology officer at defi SOLUTIONS, the technology partner of Auto Finance Excellence, a sister service of Auto Finance News.