FHFA takes aim at Fintech

As the industry continues to embrace the evolution of technology, the industry’s federal oversight is following suit, as the Federal Housing Finance Agency (FHFA) has established the Office of Financial Technology, which will serve as a centralized information source to support FHFA in addressing emerging risks and advancing the agency’s priorities related to the adoption and distribution of financial technology (fintech).

“When used responsibly, fintech has the potential to improve borrowers’ experiences with the mortgage loan process by reducing barriers, increasing efficiency and lowering costs,” said FHFA Director Sandra L. Thompson. “The new office will help promote effective risk management as FHFA evaluates applications of fintech in housing finance, as well as in compliance and regulatory activities.”

FHFA, which has served as conservator for both Fannie Mae and Freddie Mac since the 2008 financial crisis, has worked to facilitate several innovations that have benefited the housing finance markets, as well as consumers and taxpayers. FHFA has assisted in facilitating the standardization of mortgage-related forms and data, digitization of this data and increased use of e-mortgage and e-closing. As both regulator and conservator, FHFA remains concerned about the potential risks associated with rapid technological change and monitors these risks through its oversight programs.

The goals of FHFA’s Office of Financial Technology include:

• 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 players, industry, non-profits, consumer groups and academia to facilitate the sharing of fintech best practices and housing finance innovation;
• Establish 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
• Serves as an agency resource for innovations, general trends and emerging risks in fintech in housing finance.

Along with the establishment of the Office of Financial Technology, FHFA is soliciting public input on the role of technology in housing finance, seeking to broadly understand the current landscape of innovation throughout the mortgage life cycle and related processes, risks and opportunities.

“Two key concepts underlie this request: responsible innovation and fintech,” the agency said. “FHFA views responsible innovation as balancing the value of new ideas, products and operational approaches with the need for effective risk management and corporate governance. Furthermore, FHFA understands that responsible financial innovation includes assessing and mitigating the possible negative effects of innovation on the stability of the housing finance system, equitable access for consumers to affordable and sustainable mortgage credit, and the competitive environment in the primary or secondary mortgage markets.”

FHFA will focus on the following technical advances in the industry as the Office of Financial Technology takes shape:

• Big data and large or complex datasets, typically including structured and unstructured data that are difficult to manage and analyze with traditional data processing software.
• Data science that uses scientific methods, processes, algorithms and systems to extract and apply knowledge and insights from large and complex data sets.
• Artificial Intelligence (AI) and Machine Learning (ML) tools and algorithms that optimize automatically through experience, with limited to no human intervention, and can be used to analyze large and changing data sets by identifying and adjusting to patterns they detect.
• Intelligent Capture which refers to an automated process to identify and extract critical information from paper and electronic documents without manual intervention.
• Distributed Ledger technology that refers to databases that maintain information across a network of computers in a decentralized manner designed to ensure data integrity and data congruence.
• Blockchain, a data storage technology commonly used in distributed ledgers.
• Smart contracts which are computer programs or transaction protocols that automatically execute, control or document legally relevant events and actions according to the terms of a contract or agreement.