Only a few decades ago, a mortgage application was a cumbersome and complicated process. Consumers copied and faxed in reams of documents, then waited weeks for a loan approval. The loan closing was an endurance test of signing documents that few people understood while hovering over them.
Today, the process is significantly streamlined. Personal financial input for mortgage applications is typically submitted electronically and is often instantaneous. Applications are usually approved in a fraction of the time and borrowers can close the loan from the comfort of their living room via e-signature.
A lot of the credit for this transformation goes to third-party fintech providers, which offer mortgage originators software packages and other services to take the lender and borrower through the loan application process — as well as optional software tools and apps to help them compete more effectively. Although consumers may not know their names or the role they play, these service providers are an invisible force that hovers over nearly every step in the application process.
Why did CHLA take this action, when it acknowledges that these providers offer a valuable service? Consumers enjoy unprecedented competition among Realtors who offer their services to help them buy a home, as well as unprecedented competition among mortgage originators to help them finance it. But the same is increasingly untrue when it comes to mortgage application software service providers.
If the ICE-Black Knight merger is approved, the combined entity would control about 75% of the market for third-party software services among lenders that do not use a proprietary system. And the dominant market provider of software services for mortgage origination would be combined with the dominant software services provider for mortgage servicing. Add this to the fact that ICE already controls many other key areas of the financial system, including ownership of the New York Stock Exchange.
We already see glimpses of anti-consumer practices that could be unleashed with such a powerhouse service provider and quasi-monopoly pricing power. ICE charges “click fees” to each vendor that works with a mortgage lender — just to gain access to the lender’s own data. CFPB Director Rohit Chopra is calling out firms that charge what he characterizes as consumer “junk fees.” CHLA is suggesting that these vendor toll fees also are effectively junk fees and is asking the CFPB to reign them in.
Anecdotally, we also hear stories of tying add-on services to the core services essential to the mortgage origination process. These are services the lender may not want or need, but they may have no choice but to accept them in order to continue to use the loan origination services essential to processing mortgages.
Ultimately, CHLA’s main concern is that lenders would be most vulnerable when their contract for these services expires and must be renewed. Smaller mortgage lenders typically don’t have the resources to design their own proprietary software.
Theoretically, a lender could shift to a competitor, but this takes time. Even a short transition or changeover period to a new service provider could shut down mortgage closings, which would be costly and could permanently harm the lender’s reputation for reliable loan executions.
ICE claims the merger with Black Knight will streamline their operations, making it possible to reduce costs. Great, but there is no mechanism to ensure that these savings will be passed along to mortgage lenders. Instead, lender vulnerability to a loss of these critical services at renewal time means that they will probably have no option except to accept a significant price increase, if one is imposed at renewal time. And with their market dominance, ICE/Black Knight will probably be in a position to do so.
Competition has always been the primary market mechanism to ensure that consumers are protected on pricing, so CHLA continues to oppose this merger. But if the deal is approved, it is critical that stringent conditions be attached to it, to protect lenders and consumers alike.
First, mortgage lenders must be guaranteed a sufficient period of time to transition to a new service provider — e.g., ICE/Black Knight should be required to continue providing their services after contract expiration for six to 12 months, subject to a reasonable price cap, and must accommodate requests necessary to make the transition. They also should be required to allow five-year access to prior loan data developed on their watch, since record retention is required by regulators.
Second, ICE/Black Knight should be barred from ever owning or investing in a mortgage lender, or from receiving loan referral fees. Their access to voluminous data would give them an unfair and anti-competitive advantage, such as allowing them to target the borrowers best suited for a refinance.
Third, consumer data privacy should be paramount. The combined entity should be barred from selling or otherwise using the vast consumer data they collect while providing their services. Do we really want these providers to cull data and identify borrowers with the highest percentages of non-mortgage debt, then sell this list to payday lenders?
CHLA members appreciate and want to embrace Black Knight and ICE for the great work they do in helping to efficiently process and service mortgages. In return, all they want is a competitive market for these services, along with common-sense protections from anti-competitive practices for lenders and consumers alike. That is why we have chosen to shine a light on this critical issue.