Rules and regulations are an inherent part of lending. The more efficiently lenders comply, the smoother the lending process for all parties involved. Every lender knows the dozen or more federal and state regulations that govern their practice, but what’s the best approach to ensure compliance? How do you ensure employees understand and comply?
In working with lenders, we recommend manual processes be transformed into digital workflows whenever possible to achieve consistent, efficient lending processes. For regulations, use decision rules integrated into workflows. Decision rules can translate regulations into consistently executed tasks that evaluate applicant attributes and guide underwriting steps. A few examples illustrate this concept:
● When an applicant is on active military duty, ensure the interest rate offered complies with Servicemembers Civil Relief Act (SCRA) guidance.
● When FICO score is less than 580, ensure the interest rate complies with state usury limit tables.
● Ensure a loan contract contains no terms or payments that would violate Regulation-Z.
● When an account becomes delinquent (first missed payment), report the month and year in accordance with Fair Credit Reporting Act (FCRA).
● When an account goes delinquent more than 90 days, verify applicable borrower contact hours and channels per the guidelines of the Fair Debt Collection Practices Act (FDCPA).
Decision rules help minimize variability in the interpretations of regulations by underwriters and customer service agents, as well as the potential risk when regulations are ignored or misinterpreted.
Accommodate changing regulations
Occasionally, lenders need to make modifications or special accommodations regarding regulations. In certain circumstances, the SCRA provides additional benefits to military personnel responding to national emergencies. With the COVID-19 pandemic, lenders can expect requests for interest rate reductions from borrowers covered under the act. A quick modification of existing decision rules ensures new applicants covered by SCRA receive the interest rate appropriate to their level of deployment.
Decision rules provide evidence of compliance
Decision rules translate regulations into if/then constructs via intuitive menus. Lending professionals can easily select the appropriate data fields and apply the comparison criteria. Decision rules provide irrefutable evidence of a lender’s regulatory compliance.
Decision rules also provide two features that bring an added level of control. First, changes to decision rules can only be implemented and modified by authorized personnel, thereby ensuring that only knowledgeable lending professionals are making the changes. The level of authorization also determines the type of modifications that can be made, and where rules can be implemented in an underwriting workflow. Second, the system maintains a record of who and when decision rules were implemented. The records provide evidence of which rules were in effect when. If an audit is ever required, lenders can present a definitive history of rule implementations and modifications.
Decision rules are powerful as they greatly reduce the risk of depending on underwriters to understand and consistently apply regulations. Lenders focused on maintaining regulatory compliance, while striving for efficient underwriting processes, will recognize the value of using decision rules.
Shaimaa Elk serves as executive vice president, chief information officer and chief technology officers, and is responsible for all elements of product and technology development at defi SOLUTIONS, the technology partner of Auto Finance Excellence, a sister service of Auto Finance News.
Editors Note: This feature first appeared in the May issue of Auto Finance News, available now.
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