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) [1] has established the Office of Financial Technology, which will serve as a centralized source of information to support FHFA in addressing emerging risks and advancing Agency priorities related to the adoption and deployment of financial technology (fintech).
“When used responsibly, fintech has the potential to improve borrowers’ experiences with the mortgage process by reducing barriers, increasing efficiencies, and lowering costs,” said FHFA Director Sandra L. Thompson [2]. “The new office will help advance effective risk management as FHFA evaluates applications of fintech in housing finance, as well as in compliance, and regulatory activities.”
The FHFA, which has served as conservator of both Fannie Mae and Freddie Mac since the financial crisis of 2008, has worked to facilitate several innovations that have benefited housing finance markets, as well as consumers and taxpayers. The FHFA has assisted in facilitating the standardization of mortgage-related forms and data, the digitization of this data, and the increased use of e-mortgages and e-closings. As both regulator and conservator, FHFA remains concerned about possible risks associated with rapid technological change and monitors those risks through its supervisory programs.
Goals of the FHFA’s Office of Financial Technology include:
- Supporting the Agency in developing strategies for FHFA’s regulated entities to advance housing finance fintech and innovation in a safe and sound, responsible, and equitable manner;
- Engaging with market participants, industry, non-profits, consumer groups, and academia to facilitate the sharing of best practices of housing finance fintech and innovation;
- Establishing outreach through the regulated entities, promoting awareness, and understanding of housing finance fintech and innovation;
- Facilitating interagency collaboration with other regulators to enable information sharing and partnership opportunities; and
- Serving as an Agency resource for innovations, general trends, and emerging risks in the field of housing finance fintech.
Along with founding the Office of Financial Technology, the FHFA is soliciting public input [3] on the role of technology in housing finance, broadly seeking to understand the current landscape of innovation throughout the mortgage lifecycle and related processes, risks, and opportunities.
“Two key terms underlie this request: responsible innovation and fintech,” said the Agency [3]. “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. Further, FHFA understands responsible financial innovation to include consideration and mitigation of possible adverse effects of innovation on housing finance system stability, equitable access of consumers to affordable and sustainable mortgage credit, and the competitive environment of the primary or secondary mortgage markets.”
FHFA will focus on the following tech advances in the industry as the Office of Financial Technology takes shape:
- Big data and large or complex data sets, typically including structured and unstructured data that are difficult to manage and analyze with traditional data-processing application software.
- Data Science that uses scientific methods, processes, algorithms, and systems to extract and apply knowledge and insights from large and complex datasets.
- 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 discover.
- Intelligent Capture which refers to an automated process of identifying and extracting critical information from paper and electronic documents without manual intervention.
- Distributed Ledger Technology which refers to databases that maintain information across a network of computers in a decentralized manner that is designed to ensure data integrity and data congruity.
- Blockchain, a data storage technology typically 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.