Consumer lending compliance: Hot-button issues to monitor

Reg B, which implements one of two federal fair lending laws (the other is the Fair Housing Act), describes requirements for accepting credit applications. The ECOA and Reg B also prohibit discrimination in any aspect of a credit transaction, including an application for new or extended credit or the revocation, alteration, or collection of credit based on any of the following:

• Race, color, religion, national origin, sex or marital status, or age (assuming capacity to contract)
• Because part or all of the applicant’s income is derived from public assistance
• Because the applicant exercised any right under the Consumer Credit Protection Act in good faith.

In addition, Reg B bars creditors from making statements that would discourage credit applicants on any of the bases listed above. Such statements could be oral, written, via advertising, during prescreening, or other ways. Examiners, therefore, will routinely consider whether consumer lending underwriting and pricing guidelines, policies, and procedures comply with these requirements.

Numerous regulatory resources go into detail, including fair lending videos from the FDIC and examination procedures published on the Consumer Financial Protection Bureau’s website.

Incorporating Reg B requirements into a consumer lending solution means the online loan application will be compliant. In addition, the credit spreading, risk rating, pricing, and servicing will provide consistent application of your policies on a scalable, life-of-loan platform. This helps financial institutions make defensible decisions with speed.

Consumer lending compliance under Reg Z

Violations of TILA/Reg Z were among the most frequently cited violations in 2020, according to the FDIC’s March 2021 Consumer Compliance Supervisory Highlights. And given the heightened risk for potential consumer harm by violations of Reg Z, it is an area that generally represents a center of focus for consumer compliance examiners.
TILA and Reg Z provide a uniform system of disclosures for advertisements and the application process related to the cost of many types of consumer credit. These affect the type and timing of disclosures, and they can vary based on whether the credit is open-end or closed-end. The types of loans excluded from TILA and Reg Z include credit extended primarily for a business or for agricultural purposes and certain student loan programs.
Along with requirements to disclose the interest rate as an annual percentage rate (APR), TILA and Reg Z also regulate, according to the National Credit Union Association (NCUA):

• Credit billing and credit payment processing practices
• Credit card practices as well as certain mortgage lending practices
• Standards for most loans secured by dwellings.

TILA and Reg Z also provide consumers securing specific types of credit like a home equity line of credit the right to rescind the transaction within three business days (every calendar day except Sunday and the legal public holidays) after becoming obligated to the debt. If a transaction is rescindable, creditors must provide consumers with a notice explaining that:

1. The creditor has a security interest in the consumer’s home
2. The consumer may rescind
3. How the consumer may rescind
4. The effects of rescission
5. The date the rescission period expires.

Consumer notifications and disclosures can be difficult to track and prevent from slowing down the closing without a good process. Having a loan process management method that matches credit policy that complies with Reg Z and documents each step of the process allows improved auditability. Consumer lending software can systematize the financial institution’s procedures, disclosures, and notifications.

Reg E consumer lending compliance

The EFTA gives borrowers rights regarding disclosures, automated bill payments, and remittances when they take out auto loans, unsecured loans, recreational vehicle loans, and other types of consumer loans. Specifically, lenders must be aware of obligations tied to posting electronic and internet payments, procedures for canceling and refunding remitted transfers, and estimates tied to prepayments. Other requirements for consumer lenders under the EFTA are similar to other areas of financial services, such as those related to correcting errors.

Consumer lending compliance under Reg V

Generally, regulators don't view financial institutions as consumer reporting agencies under the FCRA and Reg V. However, according to the FDIC, they can be deemed as such based on their information sharing practices. For example, lenders have specific requirements for notifying borrowers about risk-based pricing practices when they use consumer credit reports to decide terms for:

• Student loans
• Unsecured credit cards
• Secured credit cards
• New automobile loans
• Used automobile loans
• Fixed-rate mortgage loans
• Variable-rate mortgage loans.

They also have “know your customer”-related obligations for ensuring appropriate proof of identity to match consumers with their credit files.

Finally, the Consumer Financial Protection Bureau reminded lenders recently that when companies furnishing information to consumer reporting companies (CRCs) receive disputes on information that has been reported about consumers, they must investigate those disputes and verify the accuracy of the furnished information.