Improving Compliance With Auto Loan Regulations

Many automotive lenders face challenges associated with maintaining compliance in all facets of their business. Automotive-loan compliance requires knowledge of federal regulations governing applications, processes and practices. While it can be assumed lenders strive to comply with 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. National legislation regarding privacy and consumer financial information changes frequently. At the federal level, automotive lenders are governed by the Federal Trade Commission and the Office of the Comptroller of the Currency for banking.

What’s more, several states have introduced local legislation to govern automotive lenders and their practices. Maryland, Pennsylvania and Virginia already have consumer financial protection units in place. In January, California and New York announced they were looking to follow suit.

To remain compliant, automotive lenders must understand which regulations affect them before implementing precautionary measures. Legal counsel must play an active role in interpreting regulations as well. Among the many automotive loan compliance regulations that affect lenders, four stand out: the Equal Credit Opportunity Act, Servicemembers Civil Relief Act, Truth in Lending Act and Unfair, Deceptive or Abusive Acts and Practices.

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 their application and collect information for government monitoring.

The Servicemembers Civil Relief Act (SCRA) protects active military from foreclosures or property seizures. Military members have the option to terminate an existing vehicle lease if they are deployed over 180 days and are further entitled to interest rates under 6%.

The Truth in Lending Act (TILA) states that lenders must disclose details such as cost of loan, monthly payments and interest rate in writing to the consumer.

The Unfair, Deceptive or Abusive Acts and Practices (UDAAP) protects consumers from any financial situation where they may be intentionally misled.

With so many regulations governing lenders and ongoing legislative changes, how can automotive lenders remain compliant? The answer is found in automotive lending technology systems that are designed to offer transparency, provide analytics tools and automate and store digital documents. All are pertinent to maintaining compliance as regulations quickly change.

Modern automotive lending technology systems have artificial-intelligence capabilities that allow for a deeper dive into patterns of behavior that may identify an applicant as high risk.

For example, an applicant with a low credit score traditionally may be a risky decision for the lender.  However, AI is allowing lenders to identify which individuals within a credit score group may perform worse than others if the credit score is not the only factor. AI looks at a complex set of data 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” that measure applicants based on specific criteria, allowing for a quicker, non-biased decision on each applicant. This further helps the lender remain in compliance with the above regulations such as ECOA and SCRA by removing the human element.

For example, if an applicant has a credit score lower than 600, a rule can be written to evaluate their creditworthiness based on alternative credit data and factors. If an applicant is active in the military, the loan can be structured around SCRA regulations through AI systems. The rules in this case are more human-driven than AI-controlled, where the AI element is beneficial for circumstances that may be less obvious.

Automotive lending technology also can help lenders prove their compliance by recording decisions.  If a lender is to be audited, the lender can show how their applications and decisions are processed and executed internally. While the system rules are designed to make decisions with specific outcomes in the lending process, the automation factor executes the action of loan approval or denial.

This ensures there are no missed steps in the application process and essentially eliminates human error from manual processes. Using AI functions can create a more tailored outcome specific to that lender’s needs.

Not only can compliance be proven and maintained through automation, but credit decisions also can be made almost immediately. An applicant with a high credit score may be approved within seconds, eliminating the need for time-consuming review of an applicant whom the lender is going to approve regardless.

In years past, lending regulations have relied on direct communications between borrowers and applicants, many of which were completed through a paper trail. Today, digital management of documents and communications eliminates the need for written documentation that can be misplaced or lost.

Sensitive items such as Social Security numbers, credit score disclosures and borrower decisions can be securely stored and accessed if compliance is questioned. From a compliance perspective, it becomes easier to prove the rules have been followed.

Vladimir Kovacevic

While no automotive lending technology system will meet every facet of a lender’s needs, many can be integrated with systems, 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 loan compliance requires continuous monitoring and interpretation of regulations. The more automation that is incorporated into lending practices, the easier it is to demonstrate and remain in compliance.

Vladimir Kovacevic (above) is the co-founder and managing partner of Inovatec, a provider of software designed for originating, processing and managing loans and leases across a spectrum of credit quality and asset types.