Trade groups respond to FHFA RFI on fintech in housing finance | News

In July 2022, the Federal Housing Finance Agency (FHFA) issued a request for information (RFI) regarding fintech’s future role in housing finance. After one extension, the comment period ran until 31 October 2022.

This RFI was made in connection 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 a vocal advocate 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 that 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,” RFI said. “Fintechs are changing how housing finance firms originate, underwrite, process, close, service mortgages and conduct loan quality control. Fintech can affect all phases of these mortgage lending 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 on how industry participants understood and used fintech. Specifically, FHFA sought information on four subtopics:

• Fintech’s role in the ecosystem where mortgages originate.
• Fintech’s role in the secondary mortgage market.
• The associated risks of using fintech.
• The application of fintech to compliance and regulatory activities.

The RFI received responses from a number of trade groups, including the Mortgage Bankers Association (MBA), the American Land Title Association (ALTA), the Independent Community Bankers of America (ICBA), and the National Association of Federally-Insured Credit Unions (NAFCU), offering information and suggestions about the case.

“Multiple market players, including lenders and technology providers, are actively striving to provide solutions and meet customer needs,” MBA President and CEO Robert Broeksmit wrote as part of MBA’s response to the RFI. “FHFA should ensure it listens to many voices when considering 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 technology adoption and innovation, and the current focus points for single and multifamily lenders in terms of technology spending.
• Fannie Mae and Freddie Mac (the “GSEs”) have an important role to play in the direction of technology in the mortgage industry, but they must work 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 strive to open access to data to stimulate innovation.
• Standards can accelerate innovation in countless and unexpected ways. FHFA and the GSEs should eschew proprietary solutions and use MISMO to develop collaborative, standards-based approaches to issues affecting the mortgage ecosystem.
• The FHFA and the GSEs do not need to solve fintech. Helping identify problems, their root causes and collaborate 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 FHFA that the main focus should be on initiatives that improve the overall experience for the consumer, reduce costs in the process or reduce risk for the parties involved.

ALTA recommended that FHFA place particular emphasis on innovation initiatives that address the needs of all homebuyers and protect consumer privacy. Innovation that avoids established regulations or compromises security or privacy should not be considered, according to ALTA.

The marketing of letters of attorney in lieu of title insurance in certain circumstances is an area of ​​particular concern to ALTA.

“These alternative title products increase risk that is ultimately shifted to both lenders and consumers,” ALTA wrote. “Should a title issue arise on a property covered only by an attorney’s opinion, the buyer must prove negligence on the attorney’s part in order to pursue a claim. If negligence is not proven, a claimant will likely have to pay the court costs involved in pursuing the title case . Additionally, consumers may be pushed into foreclosure as a condition of making a claim under alternative products on the market. By contrast, property insurance policies are backed by statutory financial reserves to cover future loss risk.”

In its comment letter, NAFCU commended the FHFA for developing the Office of Financial Technology and its recent efforts to promote and facilitate responsible innovation. It also asked the 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 that many credit unions are already integrating with fintech to improve various 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, thereby introducing speed into the mortgage lending process. Credit unions working with fintechs can make mortgage processing much faster than traditional methods, which can provide a huge advantage to borrowers who may be running on the clock, especially in times of lower interest rates and competitive home sales.”

ICBA emphasized the need for robust industry engagement throughout this process. “[Industry participation] is critical when determining specific industry pain points and the fintech solutions that will hopefully alleviate them.”

The ICBA proposals included:

• Develop solutions that improve and maintain joint banking access to the secondary market.
• Invest in fintech/regtech solutions that improve origination and closing processes.
• Provide industry stakeholders with more clarity on how FHFA will implement this fintech project.
• FHFA should develop this project and evaluate potential fintech solutions with the assumption that the GSEs may one day exit conservatorship.
• As a merchant/service provider, community banks should not be adversely affected by being required to submit additional data points.

It is not entirely clear what the FHFA’s next step will be after gathering this information and suggestions from the public. However, there are likely to be notable rule and policy changes through the Office of Financial Technology in the near future as fintech becomes an even bigger force in the home finance market.