Through every financial transaction in a person’s life — whether a mortgage, auto, student or personal loan — there is one constant: the borrower.
Yet borrowers have had limited agency in the lending process to date. Lenders have always controlled access to borrowers’ ability to pay (ATP) information and, by extension, the transaction as a whole. And because lenders only collect borrower data at a specific point in time — typically, during loan qualification or underwriting — their understanding of a consumer’s ATP has a limited shelf life.
FormFree, the ATP fintech led by HousingWire Tech Trendsetter Brent Chandler, is launching a blockchain-based exchange for consumers to take control of the lending process. The idea behind the distributed ledger technology, called FormFree Chain, is to provide faster close times and more choice for both loan seekers and lenders by giving consumers access to their own Financial DNA. Financial DNA is a real-time, composite view of an individual’s ATP based on asset, employment, identity, income, credit and public records data retrieved directly from financial institutions and other authoritative sources.
Had a blockchain like FormFree’s been in place in the early days of the COVID-19 pandemic, it could have helped avert future lender losses and credit issues, according to Faith Schwartz, who led the HOPE NOW alliance during the 2008 crisis. She now leads advisory firm Housing Finance Strategies and is a member of FormFree’s board of directors.
“When the pandemic forced a shutdown of the economy, Congress gave blanket permission for any affected consumer to place their mortgage in forbearance,” Schwartz said. “Lenders had no visibility into the actual financial state of borrowers requesting forbearance, and as a result many lenders and investors found themselves bearing additional risk. In a world where borrowers provide lenders their up-to-the-minute ATP, modifications or workout solutions could be granted in a more sustainable manner that’s based on the borrower’s true financial condition.”
How it works
FormFree Chain is a private, secure provisioned blockchain that is housed in Microsoft Azure Blockchain Service, the cloud provider that has been the home for FormFree’s other systems since 2013. Brian Francis, FormFree’s CTO and a HousingWire Vanguard, helped design the system alongside Jason Manous and Simon Zekan, who run technology and development at the company.
To determine a borrower’s ATP, FormFree collects consumer-permissioned data directly from financial institutions and other authoritative data sources, then memorializes that data on the FormFree Chain.
A bigger vision
“We’re massively shifting the lender-centric control of data that exists in traditional lending and putting the customer in control of their own data, including how that information is shared with lenders and other credit providers,” Chandler said of the company’s new provisioned blockchain for financial identity. “In this new paradigm, lenders no longer have to individually validate each borrower’s creditworthiness. The ATP is already in the blockchain.”
For each deal, a smart contract known as a Passport Token is created that contains the borrower’s ATP analytics along with immutable references to the underlying source data, including their lending needs. The smart contract presents the borrower’s lending request to the exchange.
If a borrower wants to borrow $50,000 for an auto loan, lenders in the exchange can present loan options to the smart contract based on the consumer’s ATP determination. The smart contract also knows the borrower’s preferred loan characteristics — such as whether they prefer the lowest possible monthly payments or the shortest possible loan term — and can automatically select the lender that best meets those characteristics.
“We’re massively shifting the center of mass in traditional lending and putting the borrower truly at the center of any lending decision,” Chandler said. “Lenders can look at the Passport Token and make sure that it fits in their risk bucket, then automatically create loan characteristics that align with the borrower’s needs.”
The blockchain can offset the need for a human underwriter, Chandler said. “When you are evaluating a borrower based on an ATP determination generated from direct-source data, the human element is no longer a part of the equation, and lending truly becomes a financial exchange.”
Uses of the FormFree Chain do not end with originating loans. Borrowers could authorize sharing of their Financial DNA and ATP with any number of creditors or service providers.
“A borrower’s ability to pay isn’t a static, unchanging number. As income and spending patterns change, the dynamic ATP changes in response,” Chandler said. “Loan servicers — those responsible for collecting payments after the loan closes — have always been in the dark about their borrowers’ true financial status, making it hard to make informed, timely decisions about granting loan modifications and other services for distressed borrowers. With FormFree Chain, they could see the borrower’s ATP at all times and potentially adjust loans in real time.”
Will lenders accept blockchain?
More than 3,000 lenders and partners are already working with FormFree, Chandler said.
“FormFree introduced the concept of direct-source data to the mortgage industry with the AccountChek Verification of Asset (VOA) report in 2009,” he said. “We continue to drive innovations that are helping lenders and the secondary market make better-informed lending decisions while empowering consumers with access to their own financial data.”
Industry observers say the concept has value.
“By focusing on the borrower in a lending transaction, Passport Token shifts the process towards the consumer and away from lenders,” said Brandon Dewitt, co-founder and CTO at MX. “The CFPB and other regulators have long pushed for more consumer-centric practices throughout the financial services industry, especially in lending.”
Lending is a complex and highly regulated business whose many legacy guidelines and outdated processes have at times impeded industry innovation. But FormFree has navigated those waters successfully in the past, culminating in the company’s ability to deliver instant investor representation and warranty relief to lenders using AccountChek VOA.
“We’ve changed the industry once with AccountChek, and we have the chops and the vision to do it again,” Chandler said. “As lending becomes decentralized, lenders will need an immutable source of real-time, direct-source data. That’s blockchain. Where applications of blockchain in lending to this point have focused on post-closing, we are bringing blockchain to the origination side. With the FormFree Chain housing the consumer’s ATP determination and the Passport Token smart contract representing the lending opportunity, consumers are finally at the center of their borrowing process.”
For more information, visit formfree.com.