Blockchain is a type of distributed ledger technology. Blockchain technology stores information across a series of servers. New information is stored in “blocks” of data and each block is given a unique hash number. These hashed blocks are chained together via cryptography.
Blockchain will impact lending by increasing efficiency and transparency. Communications between the lender and the borrower will be secure and traceable. Blockchain records end redundancies and out-of-sync files. Blockchain also reduces the potential for error and miscommunication. Anyone who needs information stored on blockchain will have a cryptographic key. Blockchain will also enable faster, more secure Know Your Customer (KYC) protocols.
Blockchain could also improve credit reporting. Credit scores and reports impact whether consumers get approved for financing. The current credit reporting system suffers from data insecurity and inefficiency. Credit data is currently stored on centralized databases that are easier to hack than decentralized networks.
Communications with borrowers will be secure and encrypted. All parties will have access to the latest documents for efficiency. Borrowers will be able to transmit required documentation in a protected environment and lenders will be assured of their authenticity. The time to fund a loan and to perfect the collateral can be reduced. Recurring documentation requirements such as financial statements can be collected electronically. The filing of documents such as a UCC can be streamlined.
Automatic verification and recording of data on a blockchain will reduce the number of middlemen involved in the borrowing process. Borrowers can be assured that their Personally Identifiable Information (PII) will be protected. The recording of the mortgage documents will be faster and less prone to error. The lender and borrower will be assured of accurate and complete documentation.
Home Equity Loans
Blockchain could reduce approval and closing time, secure and track loan data, and provide eSignature options. PII will be protected in every step of the lending process. Recording of the lien to perfect the home equity collateral will be quicker and more accurate. When a home equity line is closed the lien release process will be traceable and timelier.
Blockchain can be used to support decentralized peer-to-peer lending. Having secure data in a trusted repository will improve the approval process and make application data secure. This will also create a liquid market for trading loans in blocks or individually.
Establishing ownership and valuation of collateral is critical to perfecting a loan. Blockchain will allow for secure succession of ownership even for items that have no title or registration mechanism. New services are being created that will use blockchain for valuation of items such as artwork. This will enable financial institutions to use forms of collateral that were difficult to value and monitor. As real estate recording moves to blockchain the process for recording liens and releasing liens will be faster and more accurate.
Blockchain holds the promise of making lending more efficient and secure. Shaw Systems is exploring integrating blockchain technology into our lending systems to deliver systems that will decrease the time for loan processing while increasing the security of information enabling lenders to serve their clients better.