Regulatory lending compliance as a small lender can seem overwhelming, especially for lenders without a dedicated in-house legal team. But it doesn’t need to be.
Taking compliance seriously positions your lending business for success—no exaggeration. You’ll build stronger client relationships, support long-term business goals, and protect your operations from the consequences of noncompliance.
In this article, we’ll explain why it’s crucial to be fully compliant, and discuss key regulations that apply to your business. We’ll also share valuable insider tips and best practices you can take action on today.
The Importance of Being Compliant
It pays to stay compliant.
As well as safeguarding your business from risks in the short term, you protect yourself from higher costs later on, including mounting legal expenses, operational disruption, and even possible criminal charges.
There can be severe consequences for noncompliance.
For instance, the Consumer Financial Protection Bureau (CFPB) fined NewDay USA $2.25 million in 2024 for “misleading and incomplete cost comparisons to borrowers refinancing.” The lender has also had to deal with the reputational damage accompanying the regulatory penalty decision.
While falling foul of regulators can lead to severe punishment, complying with your regulatory obligations can create significant business benefits. Effective compliance strategies for small lenders protect your license, preserve capital, and build borrower trust.
Key Lending Regulations
It’s essential to understand all the regulations you must comply with. But it’s just as important to stay informed of how they evolve, as well as any new regulations that might arise.
Let’s look at the key lending regulations for small lenders, their key provisions and requirements, and the consequences of noncompliance.
Truth in Lending Act (TILA)
TILA is federal law that protects individual loan consumers, and mandates that lenders disclose credit terms before a borrower signs a contract. It doesn’t generally apply to business loans. TILA
These disclosed terms include the annual percentage rate (APR), financial charges, total amount financed, total payments for the entire loan, and payment schedule.
To comply with TILA, ensure that you issue standard disclosures promptly.
Risks of Noncompliance
Failure to comply with TILA can result in private lawsuits, significant regulatory financial penalties, reputational damage, and, in severe cases, loss of market access.
In October 2024, the CFPB filed a lawsuit against Climb Credit, Inc. The CFPB alleges that the company violated TILA and the Consumer Financial Protection Act (CFPA). If the court enters the CFPB’s stipulated judgment, Climb Credit would have to pay redress of $6,618,000, as well as numerous other stipulated outcomes.
Fair Credit Reporting Act (FCRA)
The FCRA regulates who can access consumer credit reports and ensures that credit reporting agencies handle personal information with accuracy, fairness, and respect for privacy.
It also provides a broad set of consumer protections and compliance obligations on lenders.
To comply, ensure that you handle consumer credit data accurately and responsibly. This means correcting inaccurate data, protecting their information from being misused or stolen, and corresponding with credit reporting agencies where required.
You are also obligated to inform your borrower, via an adverse action notice, when their credit report affects your decision to deny them funding.
Risks of Noncompliance
Inaccurate reporting can lead to serious legal and financial consequences. These include risk of consumer lawsuits and civil liability, regulatory investigations and financial penalties, reputational damage, and the erosion of customer trust in your business.
In September 2024, the CFPB ordered TD Bank, “to pay $7.76 million in redress to affected consumers and a $20 million civil money penalty” for a litany of FCRA noncompliance issues.
Equal Credit Opportunity Act (ECOA)
The ECOA forbids discrimination of all kinds, including race, color, religion, national origin, sex, marital status, age, or use of public assistance in any credit transaction.
Observe the ECOA and apply consistent credit evaluation criteria (i.e., remain objective with all borrowers), provide written explanations for credit denials, and retain records of applications.
Risks of Noncompliance
Discriminatory lending decisions can result in regulatory action, potentially large financial settlements, and damage a lender’s reputation and ethical standing.
In 2023, the CFPB and Department of Justice settled with City National Bank for redlining—the practice of declining a loan application because the applicant lives in an area with significant racial or ethnic minorities. The settlement was for $31 million, a record amount for redlining.
Fair Debt Collection Practices Act (FDCPA)
The FDCPA regulates third-party debt collection, protecting consumers from abusive, unfair, or deceptive practices.
According to the Federal Trade Commission, “There is abundant evidence of the use of abusive, deceptive, and unfair debt collection practices by many debt collectors,” which it seeks to clamp down on with the FDCPA.
Some of the “abusive and deceptive” practices that are forbidden include:
- Calling borrowers outside 9-21 local time.
- Continuing to contact borrowers after receiving written notice that they wish to cease contact.
- Contacting a borrower at their place of employment after the employer has indicated it to be unacceptable.
- Using abusive or profane language.
When collecting debt, make sure to follow a set of process guidelines: Identify yourself, make it clear that you are a debt collector, and notify the borrower of their right to dispute the alleged debt.
Risks of Noncompliance
Lenders who breach the FDCPA may face money penalties, loss of market access, civil lawsuits, class action lawsuits, and reputational damage.
In December 2024, the CFPB issued an order against Performant Recovery, Inc., “To address its unlawful collection activities involving student-loan borrowers who were attempting to bring their student loans out of default.” The order required the debt recovery company to pay a $700,000 civil money penalty and to “stop servicing and collecting on any student loan debt.”
Small Dollar Lending Rule
Recently, the CFPB established the Small Dollar Lending Rule to address potential harmful practices associated with payday loans, deposit advance products, vehicle title loans, and certain balloon payment and high-cost installment loans.
As a first measure, lenders need to determine that potential borrowers can actually repay a loan, before they can disburse funds.
In addition, for loans with an annual percentage rate of 36% or higher, lenders are prohibited from attempting to withdraw payment from a borrower’s account after two consecutive payment attempt failures.
The only exception to this stipulation is if a lender obtains permission from the consumer first. The ruling also requires that lenders provide certain notices to consumers before making a payment withdrawal attempt.
Risks of Noncompliance
The consequences of compliance failure with the Small Dollar Lending Rule can be broad-reaching and severe.
The CFPB can investigate and bring several enforcement actions. These include civil penalties, injunctions, and restitution to harmed consumers. Violating lenders may also expose themselves to private lawsuits, reputational damage, and, in some cases, states may take independent regulatory action, based on CFPB findings.
Best Practices to Remain Compliant
Knowing the rules is the first step towards compliance. From there, you must carefully plan how your lending business will observe and be true to the rules.
To help you in that path, we’ve developed compliance strategies for small lenders, which will be useful for your organization.
Develop Compliance Policies and Procedures
Establishing documented policies is the cornerstone of every strong compliance strategy. Your policies should clearly outline how your institution complies with federal and state lending regulations throughout the loan lifecycle.
Start by developing documentation tailored to your specific products and jurisdictions. Your policies should cover advertising standards, credit decisioning, adverse action notices, servicing, and collections.
Once you’ve established this documentation, train your team and ensure full understanding for real-world scenarios. In fact, regulators often request proof of workforce training when assessing your compliance with regulations like TILA and the FCRA.
As a final step, schedule exhaustive internal audits quarterly to identify potential compliance gaps before regulators can spot them.
Implement Lending Risk Management Best Practices
Lending compliance and lending risk management are intertwined.
With strong supervisory practices, you’ll be better equipped to identify early warning signs of credit risk, and maintain regulatory compliance across the loan lifecycle.
Here are a few tips to get you started.
- Strengthen your underwriting process: Go beyond credit scores and analyze real-time financial data such as income streams, spending patterns, and recent account activity.
- Monitor borrower behavior after issuing loans: Watch for indicators such as missed payments, overdraft frequency, and changing cash flow. These are often the first signs that a borrower may be heading toward delinquency.
- Tighten internal controls for risk and compliance: Assign ownership of compliance oversight to specific roles, maintain up-to-date loan documentation, and implement a system for tracking exceptions and reporting metrics.
When risk and compliance are handled separately, issues fall through the cracks.
Delinquent loans can catch the eyes of regulators, who might find compliance issues. Likewise, if you follow lending regulations, both you and borrowers will know exactly what to expect.
Stay Informed About Regulatory Updates
Regulatory environments shift fast. Staying up to date with changes at both federal and state levels is essential to avoiding unintentional violations.
You can periodically check CFPB updates. Other important sources include regulatory updates from the Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Association (NCUA).
You may consider requiring compliance team members to attend a certain amount of webinars, roundtables, or workshops on regulation every quarter, and assign an employee to monitor legislative updates in the markets you serve.
As new rules emerge, build them into your policies and staff training quickly. Review your documentation quarterly and update where needed.
At Bankuity, we constantly monitor the lending market for regulatory changes and immediately update our platform accordingly. Keep a close eye on the Bankuity blog as well.
Turn Compliance Into Your Competitive Advantage
Many small lenders view compliance as an overwhelming, time-consuming, costly obligation that they would rather do without.
In the long run, avoiding fines may be the most obvious motivation. But by approaching compliance proactively and with the right technology, you can build a strong foundation to cultivate borrower relationships, and increase repeat business.
Smooth and full compliance requires consistently accurate borrower data, as well as precise, timely reporting. Bankuity’s advanced banking verification is the engine that powers your business’ compliance.
Want to avoid risk and remain compliant? Book a demo with Bankuity today.
