Many automotive lenders face challenges today associated with maintaining compliance in all facets of their business.Automotive loan compliance requires knowledge of federal regulations the govern applications, processes andpractices. While it can be assumed lenders strive to remain compliant to the rules and regulations that govern them,remaining compliant can become a struggle if regulations are interpreted incorrectly.
There’s no question that automotive loan compliance is top of mind for almost if not all lenders today. Nationallegislation regarding privacy and consumer financial information changes frequently. At the Federal level, automotivelenders are governed by the Federal Trade Commission (FTC) and the Office of the Comptroller of the Currency forbanking. What’s more, several states have introduced local legislation to govern automotive lenders and theirpractices. Specifically, Maryland, Pennsylvania and Virginia already have consumer financial protection units in place.In January 2020, both California and New York announced they were looking to follow suit.
In order to remain compliant, automotive lenders must understand which regulations affect them prior to taking thenecessary steps to implement precautionary measures. Legal counsel must actively play a role in the interpretation ofregulations as well. Among the many automotive loan compliance regulations that affect lenders, there are four thatstand out. The Equal Credit Opportunity Act (ECOA), the Servicemembers Civil Relief Act (SCRA), The Truth in LendingAct (TILA) and the Unfair, Deceptive or Abusive Acts and Practices (UDAAP).
A breakdown of each includes:
• The Equal Credit Opportunity Act (ECOA) prohibits applicant creditworthiness discrimination based on race, color,religion, gender, marital status or age. Lenders are required to notify applicants regarding any decisions made on theirapplication and collect information for government monitoring.
• The Servicemembers Civil Relief Act (SCRA) protects active military from foreclosures or property seizures. Militarymembers have the option to terminate an existing vehicle lease if they are deployed over 180 days and are furtherentitled to interest rates under 6 percent.
• The Truth in Lending Act (TILA) states that lenders must disclose details such as cost of loan, monthly payments andinterest rate in writing to the consumer.
• The Unfair, Deceptive or Abusive Acts and Practices (UDAAP) protects consumers from any situation where they maybe intentionally misled in a financial situation.
With so many regulations governing lenders and ongoing legislative changes, how can automotive lenders remaincompliant? The answer is found in automotive lending technology systems that are designed to give transparency,provide analytics tools, automate and store digital documents. All of which are pertinent to maintaining compliance asregulations quickly change.
Modern automotive lending technology systems have AI capabilities that allow for a deeper dive into patters ofbehavior that may identify an applicant as high risk. For example, if an applicant has a lower credit score, they maytraditionally be a risky decision to that lender. However, AI is allowing for lenders to identify which individuals within acredit score group may perform worse than others if the credit score is not the only factor. AI looks at a complex set ofdata and circumstances that can combine dozens of factors rather than just one factor such as credit score.
These AI systems can create a set of automated “rules” to follow that measures applicants based on specific criteria,allowing for a quicker non-biased decision on each applicant. This further helps the lender remain in compliance withthe above regulations such as ECOA and SCRA by removing the human element. For example, if an applicant has acredit score lower than 600, a rule can be written to evaluate their creditworthiness based on alternative credit dataand factors. If an applicant is active in the military, the loan can be structured around the SCRA regulations throughArtificial Intelligence systems. The rules in this case are more human driven than AI controlled, where the AI elementis beneficial for harder to spot circumstances that may be less obvious.
Furthermore, automotive lending technology can help lenders prove their compliance by recording decisions. If alender is to be audited, the lender can show how their applications and decisions are processed and executedinternally. While the system rules are designed to make decisions with specific outcomes in the lending process, theautomation factor executes the action of approval or denial on a loan. This ensures that there are no missed steps inthe application process, and essentially eliminates human error from manual processes. Using AI functions can createa more tailored outcome specific to the needs of that particular lender.
Not only can compliance be proven and maintained through automation, but credit decisions can be made almostimmediately. An applicant with a high credit score may be approved within seconds, eliminating the need for time-consuming review on an applicant who the lender is going to approve regardless.
In years past, lending regulations have been focused on direct communications between borrowers and applicants,many of which were completed through a paper trail. Today, digital management of documents and communicationseliminates the need for written documentation that can easily be misplaced or lost at any given time. Sensitive itemssuch as social security numbers, credit score disclosures and borrower decisions can be securely stored and accessed ifcompliance is questioned. From a compliance perspective, it becomes easier to prove that legislation has been followedas required.
Another benefit seen by incorporating automation into lending practices is the ability to leverage analytics. Analyticsonly further help demonstrate that a lenders processes and policies comply with regulatory laws as well as improveefficiency. Analytic tools make it easier to understand where processes are slower, giving lenders the opportunity toimprove in those areas.
While no automotive lending technology system will meet every facet of a lender’s needs, many can be integrated withsystems such as Salesforce, and all add consistency and compliance transparency throughout. All documentation,rules, and decisions will always be stored as part of an automated underwriting process and stored digitally. Auto loancompliance requires continuous monitorization and interpretation of regulations. The more automation that isincorporated into lending practices, the easier it is to demonstrate and remain in compliance.