Lending Technology Traps That May Get Your CU in Regulatory Trouble

December 4, 2024

By John "Ogie" Sheehy, Global CEO, and Crystal Streeper, Senior Compliance Officer & Training Coordinator

Lending is one of the many mainstream financial services currently evolving for the modern era. As credit unions seek to digitize various signposts along the borrower journey, lending strategists are bringing onboard new people, processes and technologies to accelerate the transformation.

As these resources and assets come into play, each brings with them a new set of risks. Not the least of these is failure to comply with fair lending regulations. It’s a risk that carries serious consequences, including examiner findings, regulatory fines, reputational damage and loss of business.

To avoid fair lending or other compliance infractions, credit unions can take extra care to prepare and monitor for the following issues.

Disappearing Data Fields

Credit unions evaluating new loan origination (LOS) or loan management systems (LMS) should consider how well the upgraded software aligns and integrates with their data collection processes. While fewer drop downs may give the impression of faster or more seamless data entry, missing fields or options can cause the lending team to inadvertently neglect requirements. For example, some states have address confidentiality programs that allow borrowers to opt out of providing an address. If the new LOS/LMS workflow does not allow for this option, the credit union could be in violation of the rule.

Insufficient Customization

Any tech tool integrated into the borrower journey should offer adequate configurability, as no two lenders run the same kind of loan program. One-sized-fits-all lendtech solutions can open up trouble spots for credit unions that offer lesser-known loan products and services. Credit unions over $10 billion in assets, for example, must present completely different disclosures and potentially meet additional regulatory requirements as compared to their smaller counterparts. Lendtech that forces credit unions into irrelevant workflows not only complicates compliance, it may also add unnecessary steps to the loan process.

Delayed Implementation

Onboarding timelines for new technology have downstream impacts that can hinder a credit union’s ability to keep their programs running optimally. As early in the implementation process as possible, credit unions should gain a comprehensive understanding of how much support is offered to ensure onboarding goes smoothly, as well as all of the potential hurdles that may come up so they can prepare. It may also be a good idea to ask the tech provider how they compensate clients when delays cause disruption, either to business operations or to compliance with regulations.

Insecure or Vulnerable Data

With a new one announced almost every week, data breaches can feel like a runaway train. Lending teams no doubt adhere to the credit union’s overall vendor due diligence and management process. The critical piece to that is ensuring the compliance team is aware of changes to processes, workflows or data collection so the two teams can work collaboratively to ensure all new regulations for data security and privacy are being met. It’s also very important to understand the fintech provider’s breach notification policies and who carries the liability in the event of a breach of the provider’s systems that exposes the credit union’s data. Even when a technology provider causes a compliance issue, the credit union is ultimately held responsible.   

Inadequate Training

New people, processes and technology throw wrenches in “the way things have always been done.” Credit union compliance and lending teams should develop and execute ongoing training sessions to supplement the coursework staff completes when they are new to the credit union. Even a simple mistake, such as failing to send electronic forms correctly, can open the credit union up to non-compliance. Especially as consumer protection laws continue to expand and remain a top focus for regulators, ongoing training is a best practice for all lending teams, regardless of any dramatic changes to staff, procedures or the tech stack used to underwrite and service loans.

Balancing Borrower Experience with CU Compliance is Key to Digital Transformation Success

Digitizing the borrower journey can create numerous positive outcomes, including a reduction in human errors, improved operational efficiency and a smoother member experience. However, to fully realize these benefits, credit unions must ensure that their tech-driven workflows are compliant, avoiding costly mistakes that could ultimately outweigh the benefits.

Originally published in Finopotamus on December 2, 2024.