The financial sector is always changing. Be it due to the dynamics of global economies, market innovation, or even financial crises, changes in the industry are ever-present. This means the laws and regulations that govern the financial sector need to keep up, subjecting them to constant evolution. This evolution presents a challenge for lenders, whose continued success and professional reputation are balanced on top of a rapidly changing regulatory landscape. Compliance may be compulsory, but that doesn’t mean keeping up with regulatory changes is a simple undertaking.
In this article, we’ll take a deeper look at some of the questions you may have as a lender, such as why compliance is such an essential part of success, what kinds of regulations you’ll need to keep up with, and how industry leaders tackle this challenge head-on.
Why is Compliance Essential for Lenders?
Compliance is an essential part of lending for several reasons. Of course, as a registered lender, you’re bound by law to comply with all relevant regulations for your industry and industry niche. Failure to comply means you’ll be subjected to fines, legal action, and even a revocation of your lending license.
However, regulatory compliance can have unexpected benefits for your lending firm. These include:
Risk Mitigation
Many regulations that govern the financial sector exist to encourage financial security, prevent financial crimes, and protect employees and borrowers. Staying compliant can help you stay the course when you come up against unique problems. For example, if you comply with regulations regarding due diligence, you won’t lose money to untrustworthy borrowers because you’ll have made an informed lending decision based on their background.
Strong Reputation
There are a vast number of regulations that are in place to ensure lenders and borrowers cannot take advantage of one another. Compliance with regulations that concern client protection can bolster your reputation and build the trust necessary for borrowers to consider your loans. A proven track record of compliance encourages new customers to borrow from you and turns them into repeat clients.
Business Efficiency
Regulations, such as data storage laws, often govern how your lending firm operates on a day-to-day basis. As well as keeping you compliant, following these regulations means you can implement best practices and efficient operating procedures within your firm or role. This promotes a streamlined business environment with reductions in errors and decreased operating costs.
Understanding the Current Regulatory Landscape
In 2023, the regulatory landscape for lenders will be influenced by myriad factors. These include the chance of recession that has been looming since 2020, the end of multiple temporary pandemic-relief regulations, crime prevention and cybersecurity measures, and, more broadly, the continuing development of fintech.
Some of these factors will inspire specific regulation, while others link to aspects of lending that are consistently governed by various and ever-changing laws. Here are some of the regulatory areas and current laws in those sectors that you’ll need to research, abide by, and keep a constant watch over…
- Consumer Protection - Regulators will always place a focus on ensuring fair lending practices for borrowers. Some examples of consumer protection regulations include the Consumer Credit Act (CCA), the Truth in Lending Act (TILA), and the Equal Credit Opportunity Act (ECOA). TILA requires that lenders provide a breakdown of information regarding loan costs so that borrowers can compare shops. It also protects borrowers from certain boisterous sales tactics by lenders. ECOA ensures that lenders cannot discriminate against borrowers based on their race, religion, sex, or other defining traits.
- Crime Prevention - Lenders are often on the front line in the fight against financial crimes. Should you be caught lending to a money launderer or terrorist organization, you can face harsh punishments as a result of due diligence failures. Compliance with Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations are governed by the FinCEN and OFAC. Useful laws to know in this area are the Bank Secrecy Act and its Patriot Act amendment, as well as the Anti Money Laundering Act 2020.
- Credit Reporting - Lenders have access to potential borrowers’ credit reports and are required to provide information for these reports to Credit Reporting Agencies. These processes are currently governed by the Fair Credit Reporting Act (FCRA), which protects borrowers and potential borrowers from inaccurate reporting.
- Interest Rates - The maximum interest rates you can charge borrowers are capped by the usury laws in the state(s) in which your lending practice is registered and licensed to operate. These differ depending on whether your loan service operates online, and if you operate a payday lending business then interest rates are instead governed by deferred deposit transaction laws. Here is a list of the maximum APRs by state.
- Small Businesses - Lending to small businesses rather than individuals means complying with different regulations. An example of regulation in this area is Section 1071 of the Dodd-Frank Act, which will require lenders to compile data for CRAs on small businesses from October 2024 onwards and report this data within 12 months of collection.
- Data Protection and Privacy - Finally, as you deal with clients’ sensitive financial information, you’ll be subject to cybersecurity laws that govern how you store and protect that data. The most prevalent of these laws is the Financial Services Modernisation Act 1999, also known as the Gramm-Leach-Billey Act. Among other things, this act requires you to explain to borrowers how you safeguard their data and under what circumstances you will use it.
This is not an exhaustive list of regulatory areas and relevant laws that you’ll need to look into, but it does cover the main ones.
How Do Lenders Keep Up With Ever-Changing Regulations?
As you can see, lenders have a huge number of regulations they have to understand and comply with. While it does take significant resources to be fully compliant, there are ways to make it an efficient part of your loan service’s operation. Leading lenders employ the following practices for the best results:
Compliance Officer(s)
If you have the financial resources, employing a compliance officer will ensure you abide by all regulations. Similarly, if your firm already has a compliance team, try to liaise with them regularly. These individuals can help with employee training, draw up compliance procedures, and keep a finger on the pulse of the regulatory landscape.
Compliance Policies
Leading lenders will have a range of policies that ensure compliance. Check your firm’s compliance policies to find out what methods and approaches you must take, and if your firm doesn’t have compliance policies you should create some. These policies should align with regulatory requirements and be regularly updated to account for changes.
Monitoring and Reporting
Policies concerning compliance monitoring will enable you to set up systems that catch unusual or suspicious activity early on. These issues can then be reported to the relevant authority. Leading on from this, some regulatory bodies require you to submit regular reports, so these should be drawn up with time to spare.
Employee Training
Every employee in your lending service should be familiar with regulations relevant to their work and know how to comply with them. Employee training on the subject is a must, either at regular intervals or as and when new regulations come into effect. A culture of compliance emphasizes the importance of abiding by lending regulations and will help employees bring any issues to your attention.
Informing Borrowers
Transparency and fairness in your lending processes should be a priority, as this will allow you to care for your customers and comply with customer protections. Take the time to educate your borrowers on what they can expect, as well as their rights. Make sure your terms and conditions, privacy policy, and loan costs are easy to understand, and encourage borrowers to ask questions.
Internal and Third-Party Audits
Regular compliance audits should be conducted within your lending firm to ensure full regulatory compliance is achieved as standard. Leading lenders may also engage with third-party auditors or firms who can conduct independent assessments and find any gaps in your compliance.
Due Diligence
Many regulatory issues can be avoided with proper due diligence. Even when it is not mandated by law or any regulatory authority, your loan service should have policies regarding expectations for due diligence and in what cases potential borrowers are unsuitable for a loan. Also, if you partner with other lenders, due diligence will need to be completed on the other lender and you will need to ensure their own due diligence policies are up to standard.
Continued Learning
As mentioned, lending regulations are always changing, which means your compliance policies and behavior will need to evolve too. Most amendments or new regulations are announced with plenty of time to spare, so keep up with the news or join a lender's forum to ensure you are up to date. Don’t just blindly follow your firm’s compliance policies; research the actual laws that these policies are based on and exactly what you need to comply with, as well as the bodies responsible for ensuring compliance.
Conclusion
While the regulations that govern lending are constantly changing, leading lenders are always ready to show commitment in this area. This is because compliance is not merely a legal obligation, but it also plays a significant role in the ongoing success of your loan service.
There are various laws and regulations you must abide by, and these will change depending on what type of lending you’ve chosen to engage in. However, at their roots, these regulations are in place to protect consumers, promote due diligence, fight against financial crime, and prioritize trust, transparency, and fairness in the lending landscape.
Leading lenders recognize that compliance is the bedrock upon which long-term success is built. To ensure compliance, they may work with a specialist team that operates within compliance policies. They foster learning, be it their own, their employees, or their customers to ensure any changes in regulations are complied with as and when these changes come into effect.
Above all, leading lenders understand that compliance forms the foundation of a strong lending service. Show your commitment to following regulations and abiding by laws, and you’ll become a trusted partner for borrowers, securing a long and prosperous future in the lending industry.
Sources and Additional Resources
- https://reciprocity.com/blog/heres-why-regulatory-compliance-is-important/
- https://www.360factors.com/blog/essential-regulations-mortgage-compliance-management/
- https://www.ncontracts.com/nsight-blog/fair-lending-qa-lenders
- https://www.occ.treas.gov/topics/consumers-and-communities/consumer-protection/truth-in-lending/index-truth-in-lending.html
- https://www.justice.gov/crt/equal-credit-opportunity-act-3
- https://sumsub.com/blog/aml-guide-usa/#second
- https://www.ftc.gov/legal-library/browse/statutes/fair-credit-reporting-act
- https://www.nerdwallet.com/article/loans/personal-loans/usury-laws
- https://www.consumerfinance.gov/rules-policy/small-business-lending/
- https://www.investopedia.com/terms/f/financial-services-act-of-1999.asp
- https://www.fca.org.uk/publication/finalised-guidance/consumer-credit-being-regulated-guide.pdf
- https://www.rmcmaine.com/8-tips-to-ensure-compliance-in-the-workplace/
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