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Pre-approved Loans - Food for Thought.
The pressure to compete is driving (or inspiring) banks to offer a wide variety of pre-approved loan products. Even while traditional types of competitive products seem to crop up almost overnight, new banking techniques keep raising new challenges. For example, pre-approved credit and cyber-banking. As little as a few years ago, pre-approved credit was limited to credit card offerings. Now, pre-approved offerings include car loans and loans to small businesses. Next, they'll be available through the internet.
New practices are vital to the survival of banks in an increasingly competitive market. However, new products and new banking techniques raise new dimensions for compliance.
In looking at the compliance implications of pre-approved products, traditional issues such as pre-screening under ECOA and FCRA jump to the front burner and take on new meaning. Rules that weren't relevant to many banks are becoming more important. For example, increased use and creative new uses of credit scoring clearly play a major role in the ability of banks to offer pre-approved products.
The practice also raises non-traditional dimensions under Bank Secrecy. For example, what happens to concepts such as "Know Your Customer?" How to know your electronic customer is now a very real question for both loan and deposit products.
There will also be ramifications under CRA. Some are technical issues such as defining your assessment area in cyberspace. How should you calculate loan ratios inside and outside the assessment area when offering pre-approved credit or delivering products in cyberspace? Other issues go more to the underlying principles of CRA: How do you use sophisticated technology to meet the credit needs of the low and moderate income members of your community? In the world of advanced technology, what is service that meets the service test?
All of these issues will probably take a back seat to the challenges that arise under Regulations E and CC. Suddenly, electronic banking is much more than use of an ATM and the traditional techniques of electronic transfers. Account transactions, including loan payments, can be handled in cyberspace. The questions of how to provide "written" notices and what is "in a form that the customer may keep" are only the beginning.
As the geography of banking is changed by cyberspace, compliance will take new shapes. Compliance will change as traditional landscapes become "cyberscapes." Part of the compliance manager's job is to anticipate these changes and guide the bank safely into the future. Another part of the job is to bring these issues to the attention of those responsible for writing the regulations. With good vision and active participation, we may be able to make the future work better than the present.
Copyright © 1996 Compliance Action. Originally appeared in Compliance Action, Vol. 1, No. 10, 6/96
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