Research Snapshot – Applying Blockchain to Loan Operations

As Blockchain develops, lending institutions are exploring new ways to apply the nascent technology.

One compelling new application lies in loan operations, which includes the loan application, application review, and approval.  In recent years, the profitability of residential mortgage lending has declined and has even caused some lenders to exit the market.  For example, Bank United exited residential mortgage and cited labor intensity as a key factor in lower profitability[1].  We believe the declining profitability will lead to a reevaluation of current processes and practices, and have developed prototype approaches that leverage Blockchain to help residential mortgage lenders begin to return to profitability.

Reduce Loan Processing Time

The Red Chalk Group Blockchain prototype decreases processing time as borrower qualifications are evaluated, approval is made, the loan is funded via a series of smart contracts in a private/permissioned Blockchain. In doing so, redundant verification steps are eliminated.  This approach accelerates loan decisions and reduces the time to fund a loan from months to days.

Reduce Customer Information Fraud

Surprisingly, some 74.0% of mortgage applications contain information considered to be incorrect[2]. In many cases, the incorrect information may be accidental, but this high rate of misinformation, either purposeful or accidental, often goes unnoticed and uncorrected by manual processes.  Much of the information is used in determining loan approval and can potentially lead to incorrect decisions – resulting in incorrect pricing, wrongly identified risk, and potentially higher loan losses.

Fraudulent applicant information can be used to “game” the application to be approved. For example, in the current automated underwriting processes, such as those used to qualify loans for sale to Government Sponsored Entities such as Fannie Mae and Freddie Mac, an application can have multiple submissions with altered information, such as income, employment, or debt until the loan is approved. In the Blockchain prototype, the criteria enforced by smart contracts and the auditability of Blockchain make “gaming” difficult. Importantly, certain loan applications may be exceptions and can be reviewed manually, if needed.

Improve Residential Mortgage Profitability

Comparing our Blockchain prototype to current loan operations processes, the prototype underwriting process would require up to 60% fewer FTE’s than current underwriting processes[3].  In one client situation, the prototype approach required only 2 FTE’s to process a loan, where previously 5 to 9 FTE’s were required. On average, this Blockchain application within loan operations is estimated to produce 20-30% run-rate cost savings and positive operating leverage – as revenue grows faster than operating expenses.

Moving Forward with Blockchain Implementations

Financial services continue to lead Blockchain development and is identifying new areas to apply the technology. Regardless of your stage of Blockchain discovery, from Blockchain 101 to implementation, Red Chalk Group provides the advisory and technology development work you need to meet your goals.  Stay tuned for more announcements in early 2017!

To arrange a discussion with our team and learn more about our client lab where you can access our Blockchain prototypes, please contact us.

[1] Bloomberg, “Bank United Ends Residential Loans, CEO Explains Why” January 29, 2016

[2] LexisNexis, “The LexisNexis 16th Annual Mortgage Fraud Report” December 2014

[3] Red Chalk Group analysis