FHFA Announces Office of Financial Technology | Ballard Spahr LLP

On July 18, the Federal Housing Finance Agency (“FHFA”) announced the launch of a new Office of Financial Technology with the goal of promoting effective risk management as it evaluates fintech developments in the housing finance space. The FHFA also issued one Ask for information (“RFI”) seeks public input on how to facilitate responsible innovation, identify barriers or challenges to implementing fintech in housing finance, support equity for homeowners and tenants, and increase efficiency and effectiveness in compliance and regulatory processes. In the introduction to the RFI, FHFA noted President Biden’s March 2022 Executive Order. While the executive order focused on cryptocurrency and digital assets, it also directed agencies more broadly to take concrete steps to study and support technological advances and promote equitable access to safe and affordable financial services.

Similar financial technology offices have been established by other financial regulators, including the Office of the Controller of the Currency, the Federal Deposit Insurance Corporation, and the Consumer Financial Protection Bureau. The FHFA indicated that its new Office of Financial Technology will:

• Support the agency in developing strategies for FHFA’s regulated entities to promote fintech and innovation in housing finance in a safe and sound, accountable and fair manner;
• Engage with market participants, industry, non-profits, consumer groups and academia to facilitate the sharing of fintech best practices and housing finance innovation;
• Establish continuous outreach through the regulated entities, promote awareness and understanding of fintech and innovation in housing finance;
• Facilitate inter-agency collaboration with other regulators to enable information sharing and partnership opportunities; and
• Serve as an agency resource for innovations, general trends and emerging risks in housing finance fintech.

In the RFI, FHFA noted the dramatic growth of fintech in the mortgage industry, identifying technological advances including artificial intelligence (“AI”) and machine learning, distributed ledger technology, and smart contracts that are changing mortgage finance in both the primary and secondary markets.

The RFI focuses on four areas: (i) the role of fintech in the mortgage origination ecosystem (or “mortgage technology”), (ii) the role of fintech in the secondary market, (iii) the risks associated with the use of fintech, and (iv) the use of fintech to compliance and regulatory activities (or “regtech”). It also asks for feedback on how to maximize stakeholder engagement. The FHFA appears to share the CFPB’s concern that the use of technology in the mortgage industry may pose reasonable lending risk. In the RFI, FHFA states that “[t]The non-transparent nature of some fintech methods such as artificial intelligence and machine learning highlights the need to ensure that appropriate compliance measures are put in place to reduce the risk of breaches of fair lending laws.”

The establishment of the Office of Financial Innovation and RFI appears to provide an opportunity to engage with FHFA on the technological developments driving the industry. In the RFI, FHFA confirms the regulatory concerns regarding the use of AI and identifies several risk categories, including inadequate regulation of the fintech sector. However, FHFA also recognizes the efficiency and advancements fintech brings to loan origination, servicing and capital markets activities and the transparency that technology can bring to the customer experience. (A recent discussion on the use of artificial intelligence to underwrite consumer loans on the Consumer Finance Monitor Podcast can be found here.)

The deadline for submitting comments in response to the RFI is October 16, 2022.

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