In July 2022, the Federal Housing Finance Agency (FHFA) issued a request for information (RFI) regarding the future role of fintech in housing finance. Following one extension, the comment period ran through Oct. 31, 2022.
This RFI was done in conjunction with the creation of a new office within FHFA, the Office of Financial Technology. Since being sworn in earlier this year, FHFA Director Sandra Thompson has been vocal in advocating for better use of technology in the mortgage industry. This has included some criticism of the industry’s reluctance to adopt technology, including recent statements the mortgage industry is “20 years behind.”
“Relative to other consumer finance markets, many mortgage market processes remain largely complicated, manual, and confusing, making them ripe for further innovation,” the RFI read. “Fintechs are changing how housing finance firms originate, underwrite, process, close, service mortgages, and perform loan quality control. Fintech can affect every phase of these mortgage processes, including how firms identify potential borrowers, verify data, appraise properties, and verify title, as well as how firms interact with each other, with customers, and with regulators.”
Through the RFI, FHFA sought information relating to how industry participants understood and utilized fintech. Specifically, FHFA sought information regarding four subtopics:
- The role of fintech in the ecosystem in which residential mortgages are originated.
- The role of fintech in the secondary mortgage market.
- The associated risks with the use of fintech.
- The application of fintech to compliance and regulatory activities.
The RFI garnered responses from a variety of trade groups, including Mortgage Bankers Association (MBA), American Land Title Association (ALTA), Independent Community Bankers of America (ICBA), and National Association of Federally-Insured Credit Unions (NAFCU), offering information and suggestions on the matter.
“Multiple market participants, including lenders and technology vendors, are actively striving to provide solutions and meet their customers’ needs,” wrote MBA President and CEO Robert Broeksmit as part of MBA’s response to the RFI. “FHFA should ensure that it listens to many voices as it contemplates influencing the direction of the technology ecosystem.”
The MBA response to the FHFA RFI centered on five key themes:
- It is important to understand the industry’s recent history and experience with respect to technology adoption and innovation, and the current focal points for single-family and multifamily lenders when it comes to technology expenditures.
- Fannie Mae and Freddie Mac (the “GSEs”) have an important role to play with respect to the direction of technology within the mortgage industry, but they need to work collaboratively with the industry to ensure that solutions work beyond GSE-specific use cases.
- Data is the source of financial innovation. Without access to data, innovation is hindered. FHFA should endeavor to open up access to data to spur innovation.
- Standards can accelerate innovation in myriad and unexpected ways. FHFA and the GSEs should avoid proprietary solutions and utilize MISMO to develop collaborative, standards-based approaches to issues affecting the mortgage ecosystem.
- FHFA and the GSEs do not need to solve fintech. Helping to identify issues, their root causes, and collaborating on solutions that work for the entire mortgage ecosystem will be a successful outcome of this initiative.
When it comes to innovation and technology in housing finance, ALTA told the FHFA that the primary focus should be on initiatives that improve the overall experience for the consumer, reduce costs in the process or lower the risk to the parties involved.
ALTA recommended FHFA put particular emphasis on innovation initiatives that address the needs of all homebuyers and protect the privacy of consumers. Innovation that evades established regulatory frameworks or compromises security or privacy should not be considered, according to ALTA.
Promotion of attorney opinion letters in lieu of title insurance in certain circumstances is one area that draws particular concern for ALTA.
“These alternative title products increase risks which are ultimately shifted to both lenders and consumers,” ALTA wrote. “Should a title issue arise on a property covered by an attorney opinion only, the buyer would need to prove negligence on the part of the attorney to pursue a claim. If negligence is not proven, a claimant would likely need to pay the legal costs involved to litigate the title matter. Additionally, consumers could be pushed into foreclosure, as that is a condition to make a claim under terms of alternative products currently in the market. By contrast, title insurance policies are backed by statutorily required financial reserves to cover future claims risks.”
In its comment letter, NAFCU offered praise to FHFA for developing the Office of Financial Technology and its recent efforts to promote and facilitate responsible innovation. It also called for FHFA to “remain consistent in the integration of financial technology for all of its regulated entities and coordinate with the other federal and state financial regulators as appropriate.”
NAFCU also pointed out many credit unions are already integrating with fintech to enhance different parts of the mortgage process. “Credit unions work with fintech companies to improve efficiency in the mortgage process and improve member service, when possible. Fintech systems can quickly process large amounts of data, thus introducing speed into the mortgage process. Credit unions’ collaboration with fintechs can make processing mortgage loans much faster than traditional methods, which can provide a huge advantage for borrowers who may be racing the clock, especially in times of lower interest rates and competitive housing sales.”
ICBA emphasized the need for robust industry engagement throughout this process. “[Industry participation] is vital when determining specific industry pain points and the fintech solutions that will hopefully alleviate them.”
The suggestions from ICBA included:
- Develop solutions that improve and maintain community bank access to the secondary market.
- Invest in fintech/regtech solutions that improve originating and closing processes.
- Provide industry stakeholders with more clarity about how FHFA will conduct this fintech project.
- FHFA should develop this project and consider potential fintech solutions with the assumption that the GSEs may one day exit conservatorship.
- As seller/servicers, community banks should not be adversely impacted by being required to submit additional data points.
It is not entirely clear what FHFA’s next steps will be after gathering this information and suggestions from the public. However, there will likely be notable rule and policy changes through the Office of Financial Technology in the near future as fintech becomes an even greater force in the housing finance market.