Blockchain: What Is It and Why Should Mortgage Lenders Care?

by Jason Nadeau
on July 12, 2017 No Comments
Categories : E-Features

If you follow the news, then you’ve been hearing a lot about blockchain lately – it’s everywhere you look.

A simple Google search for blockchain’s impact brings up over 3 million results, including ABC News exploring “Is blockchain technology going to bring more change in our lives than the Internet?” and McKinsey & Company explaining “How blockchains could change the world.”

With all of this buzz, though, it might surprise you that few people understand what blockchain really is. More importantly for businesses, few know what different industries – such as mortgage – can actually do with blockchain to solve their problems.

So, let’s unpack these concepts one by one as we examine how blockchain is poised to disrupt the mortgage industry.

Blockchain in a nutshell

There’s a reason that so few people have a firm grasp on what blockchain technology is and does. It’s because it is not just one thing, and understanding its different uses can be complicated.

Let’s keep things simple: Blockchain enables digital information to be distributed, not copied. It’s similar to the effect of having a database that gets continuously updated and regularly duplicated across a network. In doing so, an immutable digital transaction ledger is created for recording purposes that allows you to store data in a way that can never be changed.

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The technical description of a blockchain, however, only gets you so far. You next need to be able to identify specific types of problems you can solve with it. Because blockchain was originally developed to support digital currency (e.g., Bitcoin), many people only know about blockchain’s uses in connection with financial transactions and securities.

But there are other aspects of blockchain that mortgage lenders may find even more interesting – specifically regarding document management and data preservation.

Putting blockchain to work

How can blockchain help mortgage lenders solve their biggest challenges? Let’s drill down to see what you can really do with it.

The technology keeps records that are easy to verify and also secured because the distributed database isn’t limited to one storage location. It organizes blocks of data into data chains that can’t be changed without compromising thousands of computers and networks.

How is this helpful to lenders? It provides unshakeable data preservation that guarantees the integrity and originality of mortgage-related documents, effectively creating a “tamper seal.” Blockchain technology allows lenders to securely share information that is unalterable and that everybody in the mortgage ecosystem can trust.

To understand the full potential of blockchain as a problem-solver for the mortgage industry in relation to evidence storage, it helps to envision a typical scenario of what happens currently when you don’t use blockchain.

In talking to lender customers, many describe the frustration of giving a client a loan, and then several years later, when the loan adjusts its rate or payment situations change, the client returns to the lender and says, “You never told me that piece of information about my loan” or “I didn’t know that because I wasn’t properly informed in the beginning.”

When that happens, today’s lenders are left scrambling to try to prove that they did, indeed, provide the information in question. Tomorrow’s lenders, however, will be much better equipped to handle any such customer disputes, prove compliance and even address audits if they use blockchain solutions. Lenders can seal the original documents permanently on the blockchain so that no one can dispute down the road that they weren’t provided with the needed information.

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Lenders using blockchain solutions for data management will be empowered to take documents they have in their systems behind their firewall and use blockchain to preserve a copy of the data. Because you can prove that the data has never been altered, it can’t be disputed. They can then prove beyond a shadow of a doubt that the information is exactly the same as what was provided initially. It’s the ultimate way to preserve the integrity of mortgage-related data for everyone involved.

Just think about the fact that any time you interact with consumers – whether by giving them credit, making a credit decision, saying yes or no to a loan, or collecting money – blockchain allows you to prove that you did everything right. If you’re happy with your current policies, wouldn’t it be nice to be able to prove that your procedures are working via document and data evidence storage on the blockchain? Keep in mind that people don’t tend to have issues with their loan package documentation the day after they’ve received it; it’s usually years later that problems arise.

Although it’s very difficult for lenders with most of today’s technologies to prove something that happened years ago, blockchain allows you to preserve documentation at a point in time and essentially “freeze” what happened today. Then, if you need to come back in the future, you have unalterable evidence of compliance. And whether you’re dealing with audits, foreclosures, lawsuits or regulatory reviews, it’s always better to have the proof than to try to recreate the truth.

Jason Nadeau is executive vice president at Factom, a provider of blockchain technology, with a special focus on the mortgage industry.

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