On July 18, the Federal Housing Finance Agency (“FHFA”) announced the launch of a new Office of Financial Technology with the goal of advancing effective risk management as it evaluates fintech developments in the housing finance space. The FHFA also issued a request for information (“RFI”) seeking public input on how to facilitate responsible innovation, identify barriers or challenges to implementing fintech into housing finance, support equity for homeowners and renters, and increase efficiency and effectiveness in the compliance and regulatory processes. In the introduction to the RFI, the FHFA noted President Biden’s March 2022 executive order. While the executive order focused on cryptocurrency and digital assets, it also more broadly directed agencies to take concrete steps to study and support technological advances and promote equitable access to safe and affordable financial services.
Similar financial technology offices have been established by other financial regulators, including the Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, and Consumer Financial Protection Bureau. The FHFA indicated that its new Office of Financial Technology will:
- Support the Agency in developing strategies for FHFA’s regulated entities to advance housing finance fintech and innovation in a safe and sound, responsible, and equitable manner;
- Engage with market participants, industry, nonprofits, consumer groups, and academia to facilitate the sharing of best practices of housing finance fintech and innovation;
- Establish ongoing outreach through the regulated entities, promoting awareness and understanding of housing finance fintech and innovation;
- Facilitate interagency collaboration with other regulators to enable information sharing and partnership opportunities; and
- Serve as an Agency resource for innovations, general trends, and emerging risks in housing finance fintech.
In the RFI, the FHFA noted the dramatic growth of fintech within the mortgage industry, and identified technological advances, including artificial intelligence (“AI”) and machine learning, distributed ledger technology, and smart contracts that are changing housing finance in both the primary and secondary markets.
The RFI focuses on four areas: (i) the role of fintech in the ecosystem in which residential mortgages are originated (or “mortgage tech”), (ii) the role of fintech in the secondary market, (iii) the risks associated with the use of fintech, and (iv) the application of fintech to compliance and regulatory activities (or “regtech”). It also solicits feedback on how to maximize stakeholder engagement. The FHFA appears to share the CFPB’s concerns that the use of technology in the mortgage industry may present fair lending risk. In the RFI, the FHFA states that “[t]he opaque nature of some fintech methods such as artificial intelligence and machine learning highlights the need to ensure appropriate compliance measures are taken to mitigate the risk of violating fair lending laws.”
The establishment of the Office of Financial Innovation and the RFI appear to present an opportunity to engage with the FHFA on the technological developments that are driving the industry. In the RFI, the FHFA confirms the regulatory concerns regarding the use of AI and identifies several categories of risk, including inadequate regulation of the fintech sector. However, the FHFA also recognizes the efficiencies and advancements fintech provides in loan origination, servicing, and capital market activities and the transparency that technology can bring to the customer experience. (A recent discussion of the use of AI in underwriting consumer loans on the Consumer Finance Monitor Podcast can be found here.)
The deadline to submit comments in response to the RFI is October 16, 2022.