Certain industries, including the mortgage industry, face unique challenges when it comes to proving compliance. Blockchain technologies can be particularly helpful for these industries. To understand why, let’s first compare mortgage to automotive as an example of what’s involved with validating that processes have been correctly followed.
If you’re manufacturing a car and you want to make sure the doors don’t fall off, the first two steps are to engineer the car properly, and then to write policies that explain to the assembly line technician exactly how to attach the doors to the car’s body. But since human error can still occur, the third part of the industry’s compliance process generally stipulates that Quality Control must check every car door after assembly, ensuring it is indeed welded tightly.
The car manufacturer thus has a three-part system for proving procedural compliance if questioned by showing a) that they designed the doors properly, b) that they have written procedures, and c) that QC checked each door’s welding before it rolled off the line.
The mortgage industry similarly needs the ability to prove compliance for their loan products. But their added challenge is that current mortgage compliance consists of rules, procedures and audits — none of which preserve actual proof of compliance. Even the best procedures can only provide a roadmap on how to take the right steps; they cannot assure complete adherence to the rules.
Also, since it’s too time-consuming and expensive to check every single loan package for procedural adherence, lenders often try to handle audits or quality control via sampling. But though sampling can statistically ensure that most loans are compliant, all it takes is a problem with one loan or one borrower to create significant issues and fines for the lender. Plus, the best that today’s lenders can do when compliance is questioned is to say something like, “We checked one in 10 of our loans, and that 10% followed our policies and procedures — so we must be doing things right with the other 90%.”
This, of course, doesn’t necessarily fly. If someone asks you as a lender to prove that proper procedure was followed on a loan that you gave a customer years ago, it isn’t sufficient for compliance purposes to point to policies that should have been followed. It also won’t help to prove you checked other loans that were like the loan in question but never checked that specific loan.
An added challenge is that because of the banking and mortgage industry’s current reputation, people don’t generally assume that the lender is doing things right. Since mortgage lenders are often presumed guilty until proven innocent, they need a solution that’s better than their current “one in 10” loan check to validate compliance.
Blockchain to the rescue
Current mortgage systems lack the ability to preserve proof of compliance since they are designed as manufacturing, checklist or document collection technologies. They were not designed to “preserve” the data, documents, rules, decisions and state of the loan. But imagine the results if each loan could be preserved at the point of every decision. New rules engines could be created to monitor compliance, and lenders would be able to perfectly recreate each loan at any time in the future.
This is where blockchain comes in. Blockchain systems introduce a new approach to data and evidence storage. Specifically, blockchain-based solutions provide the ability to preserve data, rules, and decisions in an immutable format for future evaluation and evidence. Blockchain allows lenders to in essence “freeze” in permanence everything they did for each and every loan. That way, when they get called out on the carpet by auditors down the road, they can easily do a quality control check on the loan in question and prove that everything was done correctly at the time the loan was created.
Without using blockchain, today’s lenders have no way to guarantee what they did from a compliance standpoint, whether the documents were created yesterday or years ago. There’s no proof of compliance. Blockchain, on the other hand, allows you to take your compliance to the next level by truly preserving it. You can then use this trustworthy ledger to prove with certainty at any point in time that procedures were correctly followed.
Getting to 100%
The mortgage industry can no longer afford to limp along with a deficient compliance program that features QC validating with a “one in 10” approach. To raise the bar to 100% provable compliance, you need not only to have solid policies — you must also have a way to permanently preserve information for the future. If you don’t have this, then you can’t ever really prove you did it right. Blockchain solves this problem for the mortgage industry.
As long as you have the proof on the front end, you aren’t stuck scrambling trying to recreate the truth on the back end. If you’re happy with your current policies and procedures, then you’re already halfway there—you just need a way to verify that you’re doing things right by locking it down. This is why the next generation of mortgage compliance needs to include some form of blockchain evidence storage. The beauty of blockchain is that even if you get audited, you can calmly pull up the exact documents needed and say, “Here you go.”
