A future glimpse into how mortgages will be created in 2035 can be found in a woodsy office park in Athens, Georgia. FormFree, a mortgage fintech founded in the midst of the Global Financial Crisis by Brent Chandler, is putting the customer in control of their own data, a practice known as “open banking” that could transform lending.
The company offers a product called Passport, which analyzes financial data provided by customers, such as banking history and recurring payments, to assess their ability to repay a loan. This process results in a score known as RIKI (residual income knowledge index), ranging from 80 to 150—with scores above 100 indicating positive cash flow. The data can then be shared in a marketplace called FFX, which connects lenders with borrowers.
Customers’ data remains anonymous throughout the process to prevent racial bias or lack of credit history from affecting lending decisions. Borrowers’ personal information is only shared with lenders after they provide explicit consent, allowing the transaction to proceed. FormFree is compensated by the lender when a match with a borrower is made.
“We are basically empowering the consumer with their own data,” said Eric Lapin, president of FormFree, in an interview. “But we have safeguards in place; we have separate data containers with people’s identity assigned to a reference ID to match up with their profiles after the match [with the lender] happens.”
Lapin said FormFree operates within an open banking framework, a relative rarity in the mortgage industry. While the firm complies with all current data protection regulations, it began adapting its compliance and systems in January to prepare for the Consumer Financial Protection Bureau’s (CFPB) activation of the 14-year-old Section 1033 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
That rule, which governs personal financial data rights and establishes the foundation for open banking in the U.S., was only finalized this week. On Tuesday, the CFPB announced its completion, a year after the proposal was first made public. The rule mandates that banks, credit card issuers, and payment companies must share personal financial data free of charge when customers request it.
In practice, the U.S. is transitioning from Web 2.0 to Web 3.0, moving from a centralized to a decentralized Internet model. This new model, powered by artificial intelligence, blockchain, and open banking, aims to give consumers greater ownership and control over their data, potentially reshaping industries. The mortgage sector will be affected.
Under Tuesday’s rule, lenders and servicers are not obligated to make data available when operating 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-permissioned data, they will be subject to the third-party provisions of the rule.
Additionally, CFPB Director Rohit Chopra said in a speech at the Federal Reserve Bank of Philadelphia on Tuesday that the CFPB will create a roadmap for future regulations to further advance open banking, including in the mortgage sector, despite a recent challenge to the new rule by the Bank Policy Institute and Kentucky Bankers Association.
“This first rule covers a wide range of 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,” Chopra said.
The Mortgage Bankers Association (MBA) and the Community Home Lenders of America (CHLA) did not comment on the topic.
Given the CFPB’s expected focus on mortgage lenders and servicers, HousingWire spoke with industry executives, attorneys, and vendors, to answer one key question: Where is the mortgage industry in the open banking journey? Stakeholders said that while open banking has great potential, implementation remains limited and it will not be an easy journey for many.
Lending: The industry’s “blind spot”
Experts believe open banking will significantly impact the underwriting process in the lending business. Over time, decision-making will evolve beyond traditional methods, such as credit scores and gross income, used to assess the ability to make payments. With direct access to customers’ financial data, lenders can incorporate more creative methodologies.
“A blind spot for the mortgage industry today is, for the last 50 to 60 years, we’ve been using the Fannie Mae and Freddie Mac selling guides, which use a person’s gross income to underwrite loans,” said David Battany, executive vice president of capital markets at California-based retail lender Guild Mortgage. “The process is backward-looking, with threshold bars for gross income that cannot exceed 45-50% of credit account debts for conventional loans.”
However, Battany said that what truly matters is the income people take home, as that’s what they use to pay their bills. While he sees the U.S. Department of Veterans Affairs having programs allowing underwriting based on residual income, these are mostly manual. Battany agrees that methodologies like FICO scores are powerful, but the industry over-relies on them.
“Open banking has mainly supported the process by verifying certain documents. We are pushing for the industry to adopt residual income underwriting, which considers a person’s actual take-home pay,” Battany said. “We’ve also been trying to push it – we didn’t use the words open banking, but we call this ‘consumer permissions digital bank data.’”
Over the past couple of years, the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, has authorized them to use open banking data. Such data often includes rent history and positive cash flow, which has been applied to their underwriting systems to help lenders to expand credit. Regarding credit scores, VantageScore and FICO have added new credit-scoring models that combines consumer permissioned banking data with traditional credit data.
David Aach, chief operating officer at Blue Sage Solutions, a company offering cloud-based digital lending and servicing platforms, believes open banking can set standards for the industry as MISMO has been doing for over a decade.
However, Aach noted the competitive challenges within the industry: “We all know that people in the mortgage business, lenders don’t have a good track record for playing nice in the sandbox together. I hate to ask for more government regulations, but you would need some sort of a government body to say that you must do this because otherwise, what’s the incentive?”
Servicing: “A paradigm shift”
In the servicing space, industry experts say open banking enables companies to take a more proactive approach. By gaining deeper insights into borrowers’ financial situations, servicers can anticipate potential issues that may cause missed payments or lead to defaults.
“Being proactive allows a servicer to recognize, for example, that a borrower was earning $10,000 per month when they took out the loan in March but is now making $6,000 and is paying the loan more slowly than before. They can maybe reach out and work with them,” FormFree’s Lapin said.
Open banking is also expected to increase competition in the servicing market. Nanci Weissgold, a consumer finance attorney specializing in mortgage lending at Alston & Bird, pointed out that one long-standing issue the CFPB has had with mortgage servicers is the lack of choice for consumers.
“Open banking, in the mortgage context, is having the consumer be able to select servicers, like your cell phone carrier, which would be a paradigm shift,” Weissgold said. “I hope that the Bureau, as they go down this path, really thinks about economics and how that would look like.”
Weissgold raised concerns about the potential impact on mortgage servicing rights (MSR) values, mainly as borrowers may switch servicers during periods of loss mitigation, potentially devaluing these assets. She added, “The question is: How will companies recover that lost MSR value? They could impose fees at origination, charge for servicing transfers, or raise overall servicing costs.”
Industry experts agree that building a secure infrastructure for transferring data at customers’ requests presents a challenge for servicers, alongside the costs associated with this transition.
“The concern always is: will the Bureau make it too expensive and burdensome on industry players? That could be counterproductive to the potential benefits to both the industry and the consumers. That’s where I think there will be tension,” said Richard Andreano, practice leader of Ballard Spahr‘s mortgage banking group.
Andreano noted that open banking is more consumer-focused. In theory, the final goal would be to allow customers to have access to products and services with better prices and conditions. Some businesses may see this as a threat because customers could easily switch to competitors. Others may see it as an opportunity to attract new customers.
Challenges: Fraud, fraud and more fraud
One of the primary, virtuous burdens provoked by open banking is the need to comply with all the rules to send and receive customers’ information safely.
Troy Garris, co-managing partner at Garris Horn LLP, explained that operationally, open banking is easier when consumers consent to companies using their data than when companies share customer data among themselves in “B2B” transactions. Garris added, “There are risks on the security side—there are all kinds of opportunities for fraud. So, companies must find ways for the technology to help. “
Consumer behavior is also crucial. According to some attorneys, customers should be mindful of the risks of exposing their data to fraudsters or negligent companies. Otherwise, this could create a “moral hazard,” where consumers become less cautious with their information, assuming only companies are held accountable for fraud.
To address these challenges, industry experts say companies must update their application programming interfaces (APIs), which allow different applications to communicate, improve customer service portals to support data portability and bolster cybersecurity to protect consumer data.
In addition, the mortgage industry will need to navigate the opportunities and challenges of open banking while also considering the potential impact of the upcoming election. A change in administration could shift priorities, creating uncertainty about the future of open banking.
“If there’s an administration similar to what Director Chopra has led, with a focus on affordable housing, and they believe open banking can help reduce the costs of refinancing, underwriting, and applying for mortgages, I think they will pursue it as quickly as possible,” said Kris Kully, partner at law firm Mayer Brown.
If it comes fast, open banking will shock mortgage lenders and servicers: “I would say less than 15% probably understand the term open banking,” Lapin said. “I’m not seeing the topic discussed that much; I think it’s going to be slow-moving on the open banking side.”
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