Can blockchain cut down closing costs?
Blockchain is at the core of how Figure Technologies, a fintech co-founded by former SoFi chief Mike Cagney, is originating home equity loans.
The startup claims the same technology can also help reduce mortgage closing costs for new homeowners, who typically pay up to 5% of a property’s value.
The San Francisco company recently spun off that blockchain technology into a separate entity called Provenance Blockchain.
The idea behind Provenance is that it can help lenders, whether fintechs or traditional banks, reduce the costs associated with various loans and pass the savings to consumers, said Wendy Harrington, Figure’s chief marketing officer.
“From originating a loan to servicing and financing a particular securitization, we think we can take 70% of the cost out of it,” she said. “In addition, you get better transparency into the assets, and we believe there will be enhanced liquidity as well.”
Figure developed Provenance as part of its digital home equity loan platform that enables consumers to receive approval in minutes and funding in as little as five days.
Provenance uses a combination of artificial intelligence and blockchain to hasten what is typically a 45-day process while also reducing fees, interest rates and the paperwork associated with home equity loans.
Figure first launched the offering in October after originating its first loan on Provenance in July.
“We think there are a lot of inefficiencies on the back end,” of originating home equity loans, said Harrington.
One particular burden Harrington emphasized Provenance can help reduce is the paperwork involved in the loan process, which factors into closing costs.
One industry analysis determined the typical mortgage application can run 500 pages due to the third parties involved in the process.
What Figure is doing with Provenance is “emblematic of a trend that a lot of companies are following, which is the digitization of the consumer experience,” said Kevin Shtofman, the U.S. real estate blockchain lead at Deloitte.
“Anything that used to involve only paper will in the medium term involve both paper and digital records,” he said. “Eventually, consumers will trust the digital trail enough that we don’t need paper records anymore.”
Harrington said Figure originates the loan “on chain,” as the full documentation for the loan resides on Provenance as a smart contract. “If you click on the smart contract, you’ll be able to see all the information on that borrower,” she said.
The speed at which Provenance can help with loan approvals should also be a boon for both lenders and homeowners.
The AI portion of the platform conducts a soft credit check on the applicant and an automated valuation of the property, calculating the final loan amount based on that value.
“I think that using blockchain at the beginning, while it will provide value on the back end, will not be the main reason why transaction time will be cut down significantly,” Shtofman said. “The digitization of the approval process and the AI involved will play a bigger role.”
“I think they’re on the right track in realizing that it’s not just blockchain technology alone that’s going to solve this problem” of speed, he added.
Shtofman relayed his own experience with a recent home equity loan that took 32 days for approval despite giving his lender the proper paperwork.
“Even with my advanced knowledge of the space and my preparation with the financial institution, it still took that long,” he said.
As part of the new entity, Provenance announced it completed a $20 million security token offering that is intended to support the continued development and expansion of the platform.
Provenance said in a press release that a “diverse set of funds, banks and dealers” are currently active on the network, but the company declined to provide their names.
When asked if Figure would allow potential competitors to access Provenance, Harrington said the company will welcome different lender types, including “home equity loans and lines, personal loans, credit cards and other secured products.”
Harrington said Figure will eventually release a software development kit to enable third parties to build on the platform.
“But the real purpose of this is to unleash a lot of pent-up value that can eventually go back to saving consumers money,” she said. “We want it to be a platform in the industry.”