A future vision of how loans will be structured in 2035 can be found at the Woodsy office park in Athens, Georgia. FormFreemortgage fintech founded during the Global Financial Crisis by Brent Chandler, puts the customer in control of their data, a practice known as “open banking” that could revolutionize lending.
The company offers a product called Passport, which analyzes financial data provided by customers, such as bank history and recurring payments, to assess their ability to repay the loan. This process results in a result known as RIKI (residual income information index), which ranges from 80 to 150—with points above 100 indicating good cash flow. The data is then shared on a marketplace called FFX, which connects lenders and borrowers.
Customer data remains anonymous throughout the process to prevent racial bias or lack of credit history from influencing lending decisions. Borrowers’ personal information is only shared with lenders after giving express consent, allowing the transaction to proceed. FormFree is compensated by the lender when a match is made with the borrower.
“We’re really empowering the consumer with their data,” said Eric Lapin, president of FormFree, in an interview. “But we have the defenses we have; we have separate data containers with people’s identities assigned a reference ID to match their profiles after the game [with the lender] it happens.”
Lapin said FormFree operates within an open banking framework, which is rare in the real estate industry. While the company complies with all current data protection laws, it began adjusting its compliance systems in January to prepare Consumer Financial Protection Bureau‘s (CFPB) is implementing Section 1033 of the 14-year-old Dodd-Frank Wall Street Reform and Consumer Protection Act.
That law, which governs the rights to personal financial data and lays the groundwork for opening up US banking, was finalized just this week. On Tuesday, the CFPB announced its finalization, a year after the proposal was made public. The law mandates that banks, credit card issuers, and payment companies must share personal financial data for free when customers request it.
In essence, the US is transitioning from Web 2.0 to Web 3.0, from a centralized to a centralized Internet model. This new model, powered by artificial intelligence, blockchain, and open banking, aims to give consumers more ownership and control over their data, potentially reshaping industries. The mortgage sector will be affected.
Under Tuesday’s rule, lenders and employees are not required to make data available when they serve in those roles. The CFPB clarified that “first party” payments, including those initiated by loan servicers, are not covered. However, if lenders and servicers choose to use consumer consent data, they will be subject to third-party regulatory requirements.
Additionally, CFPB Director Rohit Chopra said in his speech Federal Reserve Bank of Philadelphia On Tuesday, the CFPB will develop a roadmap for future regulations to promote open banking, including in the mortgage sector, despite the recent challenge of the new law. Bank Policy Institute again Kentucky Bankers Association.
“This first law includes various accounts for payments and transactions. We are considering a number of other use cases, such as how to reduce costs and complexity in the mortgage market,” said Chopra.
I Mortgage Bankers Association (MBA) and American Community Home Lender (CHLA) did not comment on the subject.
Given the CFPB’s expected focus on mortgage lenders and servicers, HousingWire spoke with industry executives, lawyers, and brokers, to answer one important question: Where is the mortgage industry on the open banking journey? Participants said that while open banking has great potential, implementation remains limited and will not be an easy journey for many.
Lending: The sector’s “blind spot”.
Experts believe that open banking will have a significant impact on the underwriting process in the lending business. Over time, decision-making will shift beyond the traditional criteria, such as credit scores and gross income, used to assess ability to pay. With direct access to customers’ financial data, lenders can incorporate more creative methods.
“The industry consensus in the mortgage industry today is that, for the last 50 to 60 years, we’ve been using Fannie Mae again Freddie Mac selling guidelines, which use a person’s gross income to underwrite the loan,” said David Battany, senior vice president of capital markets at the California-based retail lender. Guild Mortgage. “This process is retrospective, with income barriers that will not exceed 45-50% of the debts of the credit account of a typical loan.”
However, Battany said what really matters is the income people take home, as that is how they use it to pay off their debts. While he saw US Department of Veterans Affairs to have systems that allow underwriting based on surplus, these are usually manual. Battany acknowledges that methods like FICO scores have power, but the industry relies heavily on them.
“Opening banks has greatly supported the program by verifying certain documents. We are aiming for the industry to use residual income underwriting, which looks at a person’s actual take-home pay,” said Battany. “We’ve been trying and pushing it – we haven’t used the words open banking, but we’re calling this ‘consumer consent digital banking data.'”
A few years ago, the Federal Housing Finance Agencywhich oversees Fannie Mae and Freddie Mac, has mandated them to use open banking data. Such data typically includes rental history and positive cash flow, which have been used in their underwriting systems to help lenders extend credit. Regarding credit scores, VantageScore and FICO added new credit scoring models that combine bank data with consumer consent and traditional credit data.
David Aach, chief operating officer of Blue Sage Solutionsa company that provides cloud-based digital lending platforms, believes that open banking can set industry standards as MISMO has been doing for over a decade.
However, Aach noted the challenges of competition in the industry: “We all know that people in the mortgage business, lenders do not have a good track record of playing well in the sandbox together. I hate to ask for more government regulations, but would you need some kind of government agency to say you have to do this because if not, what’s the incentive?”
Service: “Paradigm shift”
In the services space, industry experts say open banking enables companies to take a faster approach. By obtaining in-depth information about borrowers’ financial conditions, agents can anticipate problems that may cause missed payments or lead to defaults.
“Diligence allows the operator to see, for example, that the borrower was making $10,000 a month when he took out the loan in March but is now making $6,000 and paying less than before. They may be able to reach out and work with them,” said FormFree’s Lapin.
Open banking is also expected to increase competition in the market for providing services. Nanci Weissgold, a consumer finance attorney who specializes in mortgages Alston & Birdhe pointed out that one long-standing issue the CFPB has had with mortgage brokers is the lack of choice for consumers.
“Opening a bank, in the case of a loan, enables the consumer to choose services, like your cell phone carrier, which can be a paradigm shift,” Weissgold said. “I hope that the Bureau, as it moves down this path, really thinks about the economics and what that would look like.”
Weissgold raised concerns about the potential impact on mortgage servicing rights (MSR) prices, especially since borrowers may switch services during loss mitigation periods, potentially reducing the value of these assets. He added, “The question is: How will companies recover the lost MSR value? They may charge fees at the source, charge for transfers, or increase the overall cost of the service.”
Industry experts agree that building a secure infrastructure to transfer data through customer applications presents a challenge for staff, as well as the costs associated with this change.
“The concern is always: will the Bureau make it more expensive and burdensome for industry players? That may conflict with potential benefits for industry and consumers. This is where I think it will be intense,” said Richard Andreano, who is the leader of the practice Ballard Spahrmortgage banking group.
Andreano noted that open banking is more consumer-centric. In theory, the ultimate goal will be to allow customers to have access to products and services at better prices and conditions. Some businesses may see this as a threat because customers can easily switch to competitors. Others may see it as an opportunity to attract new customers.
Challenges: Fraud, fraud and more fraud
One of the main responsibilities, and a positive aspect of open banking, is the need to comply with all regulations for sending and receiving customer information securely.
Troy Garris, managing partner at Garris Horn LLPhe explained that in practice, opening a bank is easier if consumers accept companies using their data than when companies share customer data with each other in “B2B” transactions. Garris added, “There are risks on the security side—there are all kinds of opportunities for fraud. Therefore, companies must find ways for technology to help. “
Consumer behavior is also important. According to some lawyers, customers should be aware of the risk of exposing their data to fraudsters or unscrupulous companies. If not, this may create “moral hazard,” where consumers are unaware of their information, thinking that only companies are liable for fraud.
To address these challenges, industry experts say companies should update application programming interfaces (APIs), which allow different applications to communicate, develop customer service portals to support data portability and strengthen cybersecurity to protect consumer data.
Additionally, the mortgage industry will need to look at the opportunities and challenges of opening up banks while considering the potential impact of the upcoming election. A change in management could change priorities, creating uncertainty about the future of open banking.
“If there are managers like the one led by Director Chopra, who are focused on affordable housing, and believe that open banking can help reduce the cost of refinancing, underwriting, and applying for loans, I think they will follow it as soon as possible. ,” said Kris Kully, a partner in the law firm Mayer Brown.
If it comes quickly, open banking will shock mortgage lenders and service workers: “I would say that less than 15% probably understand the word “open banking,” said Lapin. “I don’t see this topic being discussed so much; I think it will move slowly in the direction of open banking.”
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