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by Reuben Jackson, May 14, 2018

Blockchains Could Be the Answer to Fairer Lending Systems


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According to economists at the Bank of America Merrill Lynch, as reported by Business Insider, when it comes to homeownership, millennials lag behind every generation before them this century. 

report by the National Association of Realtors shows that millennials who don’t already own a home are delaying buying one for an average of seven years. Some of the reasons given for the delay include tighter credit standards and lifestyle changes. They are getting married and having children much later than previous generations and also, unlike their parents or grandparents, millennials come out of college with heavy debts that make it nearly impossible for them to take up mortgage financing.

When it comes to credit score, this generation is also left behind, with a study by Experian showing that millennials have an average credit score of 625. This is lower than the one held by preceding generations at that age when baby boomers had an average credit score of 709 and “Gen Xers” had one of 650. Consequently, the majority of millennials cannot access the traditional credit facilities including home financing, therefore leaving them with no option but to rent or live with their parents.

However, with the advancement of blockchain technology, this is poised to change. Through the technology, anyone anywhere in the world can raise financing from peers without having to rely on the traditional credit scores and the often heavily bureaucratic conventional mortgage processes.

Blockchain solutions such as Homelend are making it possible for borrowers to directly reach lenders without depending on any intermediary and with no paperwork. The whole process is safeguarded by smart contracts to ensure that all parties in the deal adhere to their part of the bargain. According to Aneeza Haleem, a senior account manager at Cognizant Technology Solutions, blockchain-powered peer-to-peer mortgage financing significantly reduces the costs involved in the mortgage process.

Traditionally, each step of the mortgage process involves charges in legal, financial and transactional fees, which usually add up to between 1 and 2 percent of the property value. However, with blockchains and smart contracts, there are no costs, given that the process does not involve intermediaries. Moreover, blockchain solutions can eliminate the tedious paperwork and the time it takes for a mortgage to be approved. According to Realtor.com, it takes around 30 days on average for a mortgage to be approved through conventional means.

The traditional credit scoring mechanisms are not only often slow and costly but can also be seen as unfair in their assessment of borrowers’ qualifications. A big challenge with the conventional credit scoring system is that it is based mainly on borrowing history, which most first-time home buyers do not have. With blockchain technology, big data analytics and IoT, the type and amount of data analyzed to determine a credit score can be expanded to include a wide range of activities and therefore provide everyone with a more detailed and balanced credit score.

The role of distributed ledger technology is to ensure that a process is transparent and is not prone to manipulation. Also, in these applications, credit history can be accessed anywhere and borrowers can obtain financing wherever they are.

When it comes to user data safety and verification, the blockchain-powered mortgage system also has strong promise. In the past, credit scoring firms and mortgage companies have been a top target for hackers, with the most recent incident involving Equifax, the world’s largest credit reporting agency. According to CNBC, the Equifax data breach affected over 143 million Americans — more than 40 percent of the entire U.S. population.

To avoid incidents such as what happened with Equifax, blockchain technology can be a foolproof solution where lenders can verify the identity of borrowers without putting their data at risk. Blockchain innovations such as Spring Labs are making it possible for lenders, banks and data vendors to easily exchange and verify data without any party taking a central position. The data is therefore safe, given that the decentralized nature of the blockchain makes it nearly impossible to hack.

Bloom is another example of a blockchain solution that seeks to streamline the credit scoring process while ensuring high-level data privacy and safety. The protocol consists of three parts, which include BloomID, BloomIQ and BloomScore. While BloomID is responsible for creating a unique global, secure identity, BloomIQ helps in reporting and tracking current and historical debt obligations that are tied to a user's BloomID. Then BloomScore rates users depending on the data provided by BloomIQ. 

For those without a credit score, Bloom is planning to introduce the first global credit card open to anybody to allow users to build their credit history. However, unlike Homelend, the project does not facilitate peer-to-peer lending. 

As blockchain technology is gaining traction, it will continue disrupting financial processes and wide-ranging industries, changing the economic landscape. Ideally, it will bring in more opportunities and will equalize the playing field like never before so that more people will be able to experience freedom in many areas, some which have yet to be imagined. The transparency, security and decentralized nature of a blockchain has a lot to offer the world, and it's exciting to think of the possibilities in store. 

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