The mortgage market has significant social and economic implications, as the sub-prime mortgage crisis most powerfully attests. Since 2008, regulators worldwide have intervened in various ways that often directly or indirectly encourage digitisation.
Leading regulatory trends in digital mortgages
Listed below are the leading regulatory trends in digital mortgages, as identified by GlobalData.
Increasing the cost of business
In Europe, Basel III increases the cost of business by obliging banks to hold more money in reserves (and not earn interest by lending that money to customers). In particular, the Basel III risk-weighting of mortgage servicing rights and capitalisation relative to tier 1 capital erode large banks’ balance sheet advantages. It makes it unprofitable to hold short-term mortgages of, say, less than 25 years, putting them at a disadvantage when trying to innovate loan terms.
In the US, the Consumer Financial Protection Bureau (CFPB) continues to increase the cost of business with guidance on loan qualification and capital requirements. Audit and due diligence reporting back to the CFPB is getting more complicated and frequent. Digital first new entrants arguably gain an advantage. This is because they are better equipped to use analytics and automation to reduce compliance costs. Also, firms like Prosper and LendingClub source funding in a way that requires less capital to be held on their own balance sheets.
Regulators worldwide are directly encouraging digitisation to guard against the distribution of unsuitable mortgages to borrowers. In the US, the Department of the Treasury has called for increased adoption of fully digital mortgages, a further push into automated property appraisals, and widespread acceptance of electronic notarisation. In the UK, the Financial Conduct Authority’s (FCA’s) Mortgages Market Study Interim Report published in May 2018 suggested that digital tools could make it easier for consumers to find the right mortgage product – even asking lenders if advice standards were inhibiting innovation. In Australia, the Royal Commission is likely to push digital mortgages so that records are maintained and expenses and income checks are verified automatically. Even without specific initiatives, stricter lending conditions encourage digitisation as providers cannot expand market share by relaxing lending conditions.
Continued focused on fee transparency
Various initiatives, such as the Retail Distribution Review in the UK and Dodd-Frank in the US, have sought to surface the true cost of financial services and guard against product push (or commission-driven) sales. But commissions still exist. Even a 1.5% loan commission can translate into $2,500 per year on a $500 mortgage in the event of a 0.5% rate increase. In Australia, the Royal Commission reprimanded CommBank for not making transparent to customers that 15,000 brokers earn commissions by selling their products.
Increasing access to first-time buyers
In many countries, buy-to-let landlords are seen as pricing first-time buyers out of the market. In the UK, the Financial Conduct Authority (CFA) introduced a cut in the tax relief on mortgage interest payments, increased stamp duty payable by three percentage points, and imposed stricter affordability criteria for “portfolio landlords” (defined as those with four or more properties). This has driven a clear increase in first-time buyers, who are typically younger and more digitally savvy.
Access to more granular customer data will improve decision-making and allow for more bespoke lending. New digital brokers like Mortgage Kart can integrate with bank data to enable quicker applications and reduce fraud.
Authorities are clarifying sandbox environments for partnerships, as the Singaporean Monetary Authority and the FCA have done – with the latter making particular efforts to help promising new mortgage tech companies navigate regulations on “automated advice.”
Digital mortgage initiatives
HM Land Registry’s digital “sign your mortgage deed” service enables people to sign their mortgage digitally when remortgaging, removing the need for pen-on-paper signatures and witnesses to be present. It was launched 12 months ago, and to date 16 lenders (including Coventry Business Society, Nationwide, HSBC, RBS and NatWest, and Atom Bank) have adopted the process.
General Data Protection Regulation (GDPR) prepares banks for the growing importance of digital data-driven business models. Failing to obtain permission to process data will result in fines of up to €20m or 4% of global turnover – whichever is higher.
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