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We live in an on-demand world. Obscure trivia is available at our fingertips; entertainment content is binged instantly; groceries are plopped at our doorstep; and junk food is only a Postmates / Uber Eats / Grubhub / DoorDash away. One industry that (until very recently) has stubbornly resisted the digital revolution has been mortgage and real estate. That has changed in a big way.
• Want to find a new home? Easy, just check out Zillow or Redfin.
• What to sell your home in an instant? You’re in luck!—you can get an instant offer to buy your home from places like Opendoor or Offerpad.
• What to apply or get approved online? Great, how about Rocket, loanDepot, or Blend.
• What about closing electronically? We’re getting there. In some states you can close via FaceTime without ever touching a piece of paper!
"Automation and digitization of compliance is the key to not falling behind in an increasingly regulated world"
I won’t say that all of this is seamless. In fact, many of these changes are still in their infancy—a promise of things to come. Often the processes can be clunky and still require human intervention. But the goal is the same—this is where the industry is going. At some point, being digital won’t be cutting edge—it will be the standard. No one wants to be Sears in an Amazon world.
RegTech can, and must, be used to help FinTech organizations manage these changes. Without a regulatory infrastructure that can keep pace with technological advancements, risk exposure increases. Automation and digitization of compliance is the key to not falling behind in an increasingly regulated world.
Block and Tackle (“Let’s Talk Basics”)
The foundational element of a RegTech function is having a robust change management process. Anytime technology is modified or enhanced, the possibility of breakage or glitch increases. To make sure that doesn’t happen, compliance needs to be involved with its IT and business partners to help shape what is built and to understand how it was built. The legality and risk of any process should be reviewed and assessed at the beginning. Before the launch of any system change, user acceptance testing must be conducted to make sure compliance functionality is operating as expected. Post-release regression testing must be conducted to make sure that the production environments are operating the same as the test environments. This basic blocking and tackling isn’t sexy, but it’s critical to the success of any FinTech change.
Automated Controls (“Keep Me From Making Mistakes”)
A digital control environment should be implemented to make sure that data accuracy is maintained and that processes function appropriately. Validations should be layered throughout the manufacturing process. Validations can be as simple as requiring data fields be filled out, to logic-based rules that will force users to correct data inputs if inconsistent with previous answers. The goal here is to take the guess-work out of compliance by providing guardrails for the business. The more the system guides users to the correct answers, the less risk of consumer harm there will be.
Automated Compliance (“Tell Me if I’ve Made a Mistake”)
Robotic Process Automation or “RPA” is a buzzword in today’s FinTech world. It’s just as valuable in RegTech. RPA can be used to eliminate manual processes and speed up operational lifecycles with the goal of reducing cost and increasing precision. For instance, if a certain disclosure is required to be sent to a consumer at a very specific stage of the loan process— if that disclosure can be generated automatically without human intervention, we can save time and money, but just as important, we can be 100% certain that the disclosure wasn’t missed. You might also want to consider Optical Character Recognition or “OCR” to digitize and consume consumer provided documents. In addition, to RPA or OCR, vendor solutions are also key to the process. Automation may not be your core competency, but, it might be someone else’s. Seek out vendors that can be bolted to your current process to ensure compliance. There are many automated compliance solutions in the mortgage space. They’re all good, but depending on your current technology, some of them might be more effective or more easily integrate with your organization. Talk with your peers and see what has worked for them.
Interface with Regulators (“Get Sign-Off Before the Fact”)
With new products come new disclosures, many of which are not contemplated under current regulations. Let’s say you’re inventing an entirely new product type— maybe using your prized orchid-hybrid as a new form of botanical collateral. Botanists the world over would need to know the ins- and outs- of the product or risk having their $200,000 lab grown Shenzhen Nongke Orchid repossessed unawares. The Unfair, Deceptive or Abusive Acts or Practices regulation will still apply to all of these even if the other regulations may not. One way to minimize potential regulatory risk is by reaching out to your regulator. Some regulators (like the CFPB) are proposing the launch of a disclosures or new product sandbox for just such a review.
Ultimately, change in the financial service industry is coming. Just like mobile banking led to the decline of ATMs, and ATMs led to the decline of bank branches, the upcoming digital mortgage evolution will lead to significant changes in the lending process, including significant shifts in the role of loan officers and realtors. The risk of not having RegTech keep pace with FinTech advancements will be fines, penalties and litigation. If RegTech allows for better compliance at a fraction of the cost, it just makes good business sense.