Securing A Mortgage Utilizing Open Banking

John Lambo - Jul 14 2022
Published in: Technology
| Updated Apr 27 2023
Open Banking and associated software programs increase customer satisfaction while reducing lender costs

In the late 1980’s I was responsible for a large insurance company’s group move out of New York City to Charlotte, North Carolina.  One day I received a call from “Alex.”  Alex immigrated from the Soviet Union to Brooklyn, New York, several years prior to joining his current company.  In addition to securing employment, Alex also got married and had one child after coming to the United States.  Alex elected to relocate to Charlotte.  He saw the opportunity as a way to purchase his first home. 

Alex found a home and began the process of securing a mortgage.  He requested a meeting with me to discuss the mortgage process.

Alex came to my office after working hours.  Although this was my first meeting with him, I noticed he was visibly shaken. Of course, I invited him to have a seat and asked how his relocation was progressing.

He proceeded to break down and weep.

The mortgage process had gotten the better of him.  He said securing a mortgage reminded him of what he had to endure at the hands of the KGB when leaving the Soviet Union.

It’s been over 30 years since I met with Alex.

What has changed?

Actually, a lot.

When Alex closed on his home mortgage technology was in its infancy. However, just a few years later, Fannie Mae introduced an automated underwriting system to the mortgage industry. The software had the capability of issuing a provisional underwriting decision using the information from the loan application and a tri-merged credit report.

Although, over the years, automated underwriting systems have been regularly upgraded and different systems have been introduced, the process is still somewhat laborious. 

When used independently of other software, the applicant's information needs to be input into the AUS software program, which includes income, savings, pensions, 401K's, CDs, employment information, and residency for the previous two years. If conditional approval is granted, it’s usually with conditions.  Additional documentation is required, and the process repeats – sometimes several times.

Open Banking technology has the ability to forego these steps. Open banking, an outgrowth of the fintech industry, is a banking practice that provides third-party financial service providers open access to consumer banking, transaction, and other financial data from banks and non-bank financial institutions through the use of application programming interfaces (APIs). Open banking can allow the networking of accounts and data across institutions for use by consumers, financial institutions, and third-party service providers.

Open banking is becoming a major source of innovation that is reshaping the banking industry.

Any access to needed financial information provided through open banking requires consent from the customer, which means that lenders can only see specifically what they have permission to. Some examples of what information is accessible include transactions, balance history, spending habits, recurring payments, savings accounts, credit cards, or business accounts.

APIs can then use the customer's shared data. The mortgage provider could then verify identity, assess affordability, and make a decision on a mortgage in hours, not days or weeks. Lenders can make faster decisions while also ensuring the security of customer data.

Mortgage companies are utilizing open banking technology to streamline the front-to-back process of getting a mortgage, including workflow management, document extraction and management, income and asset verification, employment verifi­cation, title verification, appraisal management, e-closings, automated compliance, and decisioning.

“The utilization of any technology should have the customer in mind,” says Tom Dempsey, SVP of Business Development at Rocket Mortgage.

“By utilizing the full potential of open banking software, Rocket mortgage is able to directly connect to the sources of information needed for a loan decision.  The reliability of the information in this format is second to none. Documents and information attained in this manner are complete and accurate, thereby significantly reducing the need for reconditioning and ultimately increasing customer satisfaction,” says Dempsey.

Freddie Mac has been at the forefront of the movement within the mortgage industry to adopt a fully digital mortgage and make assessments easier for lenders and borrowers.

Last month, the agency introduced new automated underwriting capabilities that allow lenders to verify assets, income, and employment using borrower-approved bank account data.

Although software solutions are designed to improve the mortgage-application process overall, most lenders tend to invest in such technology to primarily enhance customer satisfaction, according to Fannie Mae's Mortgage Lender Sentiment Survey® (MLSS).

The survey finds that Forty-four percent of lenders indicated they prioritize improving the front-end consumer experience, while 18 percent of lenders reported leaning toward improving back-end operational efficiency. Thirty-six percent of lenders gave approximately equal weight to each.

Lenders were also asked to identify the most critical areas they focus on when improving the front-end borrower experience. Most lenders cited reducing cycle time, providing more user-friendly loan application platforms, and training personnel to be consultative as the most critical focus areas.

Lenders also reported a higher success rate with front-end transformation efforts than back-end efforts, citing the sheer number of players in the value chain of back-end processing. Back-end operations are inherently more complicated than the front-end borrower experience. Interconnected parties, including consumers, investors, and an array of service providers and stakeholders, are involved in many processes needed to transmit large volumes of data.

Open banking is fast becoming an essential tool for mortgage lenders to leverage the digital financial landscape to streamline processes, manage risk and provide their customers with a rewarding experience.