4 Compliance Issues We’re Hearing from Auto Lenders

In this ever-shifting environment, lenders face many challenges: decelerating global growth, high inflation, structural economic change, tighter central bank policies, and high cybersecurity risks. For some, these risks are causing decelerating loan growth and declining earnings. 

The continued success of regulators targeting operations will continue if organizations focus solely on manual solutions and controls. Several compensating controls, strategies, and approaches can and should be leveraged. Below are four tips to help you navigate these challenges.

How to ensure reporting and other capabilities are compliant with audit requirements

Informed provides output and documentation for your review, further streamlining the compliance and audit process. A lender can request a scorecard to see current compliance policies, address gaps, input remediation status or complementary control information. And, this data is easily reviewable and can be provided to an auditor. This reduces overhead, document requests, manpower, and time. In addition, the output is formatted for the target standard/audit.

Creating automated audit resources is critical to meeting audit requirements without impacting the “business as usual” flow. For example, a company that needs regular vulnerability scans can receive alerts if the activity isn’t performed. The analyst can launch the scan through the software, which parses the results. This updates the scorecard or database and integrates the results as tickets or suggested actions. Integrating these audit or compliance requirements in a systematic way into an organization’s roadmap ensures that compliance is driving end results vs checking the box for an audit.

What to expect in the coming year

As we enter Q1 2023 and beyond, successful organizations will understand and plan for increasing demands. Forward-looking teams will strengthen governance, train people, standardize processes and fully leverage technology. We’ve teamed up with with F&I Sentinel to ensure our clients are fully up to date with regulations.

Watch out for common pitfalls (i.e., lack of alignment, too much of a focus on wish lists, etc.) and be sure roadmaps address deeper concerns. Focus on getting more from your existing technologies. Reporting and remediation are ripe for enhancement. Teams should improve dashboards and analytics to align objectives and key results with the wider organization and align actions to findings. And leverage automation and orchestration to reduce the level of effort involved with those remediation actions and controls.

Expect an Increased Workload if you do not invest in Technology

Compliance functions remain under-staffed and the workload keeps increasing due to expanding regulations. Where possible, create capacity without growing headcount through training, standardization and automation. Analyze and optimize the current workload. Are there tasks the team is currently doing that they can delegate or stop? Improve standardization and knowledge-sharing through cross-training, retrospective meetings and knowledge base documentation. Invest in training and skills development to address any skills gaps.

Lenders face constantly changing regulations (like California Assembly Bill 2311 and Senate Bill 1311 regarding GAP insurance), that are difficult to monitor and require training and messaging. Below is an example of a “defect” affecting a regulation, that Informed catches instantly: “ GAP is effective on or before contract date.” 8% of the time this occurs it is the reason for contracts in transit for “Lender X.” Once identified, Informed automatically updates the dealer with the amended status.

Below is the manually generated response from Lender X. More regulations mean more time spent reviewing laws and regulations and risking auditable communication between lenders and analysts. Complex laws in a regulated environment require additional investment in technology allowing for more enhancements and rule reviews, as well as higher function reviews requiring cross-validation.

You can see in the chart below that the “GAP contract effective date” defect occurs 8% of the time. However, the most common defect for Lender X is “does the buyer order match the contract date?” occurring 26% of the time. Imagine loosing  26% of your deals due to an incorrect date. This happens every day across operations and costs the industry significant delays and costs. 

“No lender is immune — independent lenders, major banks and captive finance companies have encountered GAP-related legal issues. Recent actions include everything from multi-hundred-million-dollar class action and attorney general settlements involving violation of consumer protection laws to paying large funds into a trust to compensate Massachusetts consumers for interest on GAP refunds.” (Regulatory updates and considerations for GAP providers and creditors | Auto Finance News)

Common pitfalls to avoid

Focus on improving technology and improving people. People create processes, controls and automation. When investing in technology ensure your partners are knowledgeable in compliance and are an active partner in supporting internal or external audits. Trained employees are crucial to defending approaches in the loan origination process and understanding how the technology is implemented. 

Creating wish lists of technical features instead of an outcome, results and theme-based roadmaps is a pitfall that many lenders stumble into. Creating a vision you can’t execute or not executing quickly enough places a company in non-compliance, without a full understanding of the necessary coordination. A roadmap tells the story about how far a capability has come, where it is going and how progress is demonstrated. Yet there are common mistakes we see with roadmaps. These span from using them to list all features or tools, to avoiding addressing broader problems in favor of easier ones. Your roadmap should align with your peers and wider organization, making it strongly defensible.

As Featured in American Banker

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