Lending is a difficult business. And it’s hard enough dealing with the ordinary risks in consumer lending. But lenders also deal with an overwhelming, ever-changing body of regulation.
Fortunately, there are ways to mitigate the risk. One of the best is ensuring that data used in evaluating loans is complete and accurate. In that way you don’t get lost in a maze of complex, changing regulations.
Several lending Federal regulations affecting lenders are:
- The Equal Credit Opportunity Act (Regulation B) that makes sure applicants are not discriminated against in any aspect of a credit transaction.
- Electronic Fund Transfers (Regulation E) that protects consumers when they use electronic fund and remittance transfers.
- Fair Debt Collection Practices Act (Regulation F) that prescribes Federal rules governing the activities of debt collectors
- Fair Credit Reporting (Regulation V)
- Truth in Lending (Regulation Z)
- The Bank Secrecy Act
As if those were not enough, every state has unique regulations affecting consumer credit provision. And, those rules — federal and state — are subject to change. Staying current and compliant is an expensive and time-consuming activity. So what is the lender to do?
There are two key strategies to stay compliant. First is the strategy of “reactive compliance,” the lender defines policies, conducts business, and produces compliance reports. The reports are used as the foundation for correcting missteps and adjusting policies to resolve systemic errors.
Second is the strategy of “proactive compliance.” This strategy still requires the essential elements of policy definition, business operation, and reporting, but there’s a fundamental difference. The design of business processes builds in compliance. So lenders using Informed for Consumer (personal), Auto, Powersports and Student loans benefit from built-in compliance features.
What this means in laymen’s terms is that we’re thinking of compliance even when it is not top of mind. Informed ensures risk/security metrics are addressed, so clients can focus on product enhancements, market growth, digitization and automation.
And while building your own, in-house compliance function is expensive, failure to comply is far more expensive. Furthermore, these financial penalties are substantial. Last year, the CFPB levied fines of $19.2M on Hyundai Capital America for credit reporting errors. The risks of these types of penalties more than justify investing in compliance. And financial penalties are only the start of the expense.
Lenders need to think about other issues including:
- Reputational cost: Facts become known when lenders are penalized for non-compliance. And associated negative publicity drives business away.
- Operational cost: Amongst non-compliance penalties are a requirement for implementing stricter controls or submitting to more frequent audits/examinations.
- Revenue loss: Reduced productivity due to operational changes and decline in demand due to reputational damage both hurt revenue.
- Increasing audit scope: Cybersecurity-vulnerability scanning and risk assessments are costly to maintain. Management enforces access and information flow and protects it from non- security and other security functions.
The penalties for regulatory failings suggest the need for a “compliance business plan.” In 2012, a Center for Automatic Research study revealed that compliance costs comprised 21.7% of the average dealership’s 2012 before-tax profits. That’s nearly $2,400 per dealership employee! Of course, those numbers have increased substantially over the past ten years, but they provide a baseline for planning.
A complete Plan includes Several Elements
- An executive mandate for compliance strategy and policy
- An organization including a senior Compliance Officer and assigned responsibilities to other staff
- Defined and automated compliance procedures
- Regular and comprehensive training and education
- Internal monitoring and auditing
- Standards enforcement with well-publicized disciplinary guidelines
- Prompt corrective actions for detected problems
- Appropriate use of external support services
“Appropriate use of external support services” includes solutions from Informed and its partners. Among the processes Informed supports are:
- Compliance management
- Audit automation
- Regulatory currency
- Data quality assurance
Business models for Auto and other Consumer Lending are in transition. And on-site auto dealerships are being supplemented or even replaced by digital storefronts. Lenders are restructuring workflows and customer experiences. Externalizing compliance activities is one way to accelerate transitions and manage a significant business cost.
Lenders need a roadmap to automated compliance in the face of an ever-shifting regulatory environment. Automation is the key to cost management and profit protection. Lenders must build a roadmap to automated compliance in the ever-shifting regulatory environment because automation is key to cost management and profit protection.
Look for guidance on risk assessment, risk prioritization and controls. Assess the impacts as part of standard customer success implementations. Then, upper management and stakeholders will have a clear line of sight to the impacts of risks. Communicate the nature and value of those impacts against the business. Informed returns a consistent and growing ROI in all of our markets.
Adine Deford is the VP of Marketing at Informed.IQ. She has more than 25 years of technology marketing experience serving industry leaders, world class marketing agencies and technology start-ups.