Open banking is poised to transform the mortgage industry. Most are not aware of it

The Association of Mortgage Bankers (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, advocates, and vendors to answer one key question: Where does the mortgage industry stand in terms of open banking? Stakeholders said that while open banking has great potential, implementation remains limited and it will not be an easy journey for many.

Lending: the ‘blind spot’ of the sector

Experts believe that open banking will have a significant impact on the underwriting process in the lending industry. 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 use more creative methods.

“A blind spot for today’s mortgage industry is that for the past 50 to 60 years we have been using the Fannie Mae And Freddie Mac sales guides, which use an individual’s gross income to make loans,” said David Battany, executive vice president of capital markets at the California-based retail lender Guild Mortgage. “The process looks back to the future, with gross income thresholds not to exceed 45-50% of credit account debt for conventional loans.”

However, Battany said what really matters is the income people take home because that’s what they use to pay their bills. While he The U.S. Department of Veterans Affairs with programs that allow acceptance based on residual income, these are usually manual. Battany agrees that methodologies like FICO scores are powerful, but the industry relies on them too much.

“Open banking has mainly supported the process by verifying certain documents. We urge the industry to accept residual income, which takes into account an individual’s actual take-home pay,” Battany said. “We also tried to push it – we didn’t use the words open banking, but we call this ‘consumer consent for digital banking data.’”

Over the past few years, the Federal Agency for Housing Financingwho supervises Fannie Mae And Freddie Machas given them permission to use open banking data. Such data often includes rental history and positive cash flow, which is applied to their underwriting systems to help lenders extend credit. As for credit scores, VantageScore And FICO have added new credit scoring models that combine consumer bank data with traditional credit data.

David Aach, Chief Operating Officer at Blue Sage Solutionsa company that offers cloud-based digital lending and servicing platforms, believes open banking can set standards for the industry, as MISMO has done for more than a decade.

However, Aach noted the competitive challenges within the industry: “We all know that people in the mortgage industry, lenders, don’t have a good track record when it comes to playing together in the sandbox. I hate to ask for more government regulations, but you would need some kind of government body to tell you to do this, otherwise what’s the incentive?

Service provision: “A paradigm shift”

On the services front, industry experts say open banking allows businesses to take a more proactive approach. By gaining a deeper understanding of borrowers’ financial situations, servicers can anticipate potential problems that could cause missed payments or lead to defaults.

“For example, by being proactive, a servicer can recognize that a borrower was making $10,000 per month when they took out the loan in March, but is now making $6,000 and paying off the loan more slowly than before. They might be able to contact them and work with them,” FormFree’s Lapin said.

Open banking is also expected to increase competition in the services market. Nanci Weissgold, a consumer finance attorney specializing in mortgage loans at Alston & Vogelpointed out that a long-standing problem the CFPB has with mortgage servicers is the lack of choice for consumers.

“Open banking, in the mortgage context, means consumers can select service providers, like your cell phone company, which would be a paradigm shift,” Weissgold said. “I hope that as they go down this path, the Bureau really thinks about the economy and what that would look like.”

Weissgold expressed concerns about the potential impact on the value of mortgage servicing rights (MSR), especially as borrowers may switch servicers during loss mitigation periods, potentially devaluing these assets. She added: “The question is: how can companies regain that lost MSR value? They could impose fees at initiation, charge fees to maintain transfers, or increase overall service fees.”

Industry experts agree that building a secure infrastructure to transfer data at customer request poses a challenge for service providers, in addition to the costs associated with this transition.

“The concern is always: will the Bureau make it too expensive and too burdensome for industry players? That could be counterproductive to the potential benefits for both industry and consumers. I think there will be tension there,” says Richard Andreano, practice leader Ballard Spahr‘s mortgage banking group.

Andreano noted that open banking is more consumer-oriented. In theory, the ultimate goal would be to give customers access to products and services with better prices and terms. Some companies may see this as a threat because customers can easily switch to competitors. Others may see it as an opportunity to attract new customers.

Challenges: Fraud, fraud and more fraud

One of the most important virtuous burdens that open banking brings is the need to comply with all the rules to send and receive customer information securely.

Troy Garris, co-managing partner at Garris Horn LLPexplained that open banking is operationally 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 need to find ways in which technology can help. “

Consumer behavior is also crucial. Some attorneys say customers should be aware of the risks of exposing their data to fraudsters or negligent companies. Otherwise, this could create a ‘moral hazard’, where consumers become less careful with their information, assuming that only companies are held responsible for fraud.

To meet these challenges, industry experts say companies need to update their application programming interfaces (APIs), which allow different applications to communicate, improve customer service portals to support data portability and strengthen cybersecurity to protect consumer data.

Furthermore, the mortgage industry will have to deal with the opportunities and challenges of open banking while considering the potential impact of the upcoming elections. A change in administration could shift priorities, creating uncertainty about the future of open banking.

“If there is an administration similar to Director Chopra’s, with an emphasis on affordable housing, and they believe that open banking can help reduce the costs of refinancing, underwriting and applying for mortgages, then I think they will get started as soon as possible. ,” says Kris Kully, partner at law firm Mayer Brown.

If it comes soon, open banking will shock mortgage lenders and servicers: “I would say less than 15% probably understand the term open banking,” Lapin said. “I don’t see the topic discussed that much; I think it will be slow on the open banking side.”