by Charlie Moore, CEO, Global Debt Registry
During the loan origination and servicing process, dozens of individual pieces of information about the loan are established, from names, addresses, interest rates and terms, through to technical definitions around what constitutes a default or a dispute resolution. These data definitions vary across the thousands of participants in the industry.
When these loans are sold, pledged, analyzed, verified or reported en masse as part of the securitization process, all of these similar but not identical pieces of data must be harmonized. This cleansing of data is repeated multiple times by different organizations dealing with a transaction, representing a significant portion of the inefficiencies that now exist in the securitization process.
The idea of reducing these inefficiencies is not new, but the market may now be at an inflection point where the tools are available to standardize data across the ecosystem and distribute the cost savings efficiently. New technology solutions and growing cost pressure in the market mean that the benefits and savings will spread throughout the entire lending ecosystem — from the originator to the underwriter to the end investor.
A role for the industry
Standardization invariably requires the creation of common definitions for terms. While we are advocating for the creation of certain standards, we recognize that the industry will have evolving needs that require active management and industry engagement. Individual lenders may have specialized criteria or data sets that remain unique to their institution — their so-called “secret sauce” when deciding to originate a loan. These would stay outside of any standardized cataloging, meaning standardization will not involve sacrificing competitive advantages. The reality is that the vast majority of data collected is somewhat or nearly identical in its form and function, so redefining would have no meaningful competitive impact, principally on market efficiencies.
Industry organizations will have a role to play in pushing the market towards a common set of standards. MISMO, the mortgage industry’s standards organization, has been effectively creating a common dataset to improve MBS market efficiencies. The organization has hosted workshops and collaborated across the market on efforts through comment periods, releases and engagement. These efforts have been found to lower the per loan transaction costs.
SFIG, the securitization industry association, will have a similar role to play. We applaud the efforts already undertaken by SFIG and know they will be a valuable partner to the industry as it moves towards setting standards. We believe that by following the example set by other sectors, the ABS market can move even faster towards implementing a standardization regime.
A critical reason why now is the opportune moment is technological advancement. The rise of distributed ledger technology (DLT) gives a platform to share loan data, in a more secure, permissioned and synchronized way, across the credit ecosystem to ensure all parties are looking at a common set of underlying loan reference data.
The common ledger creates efficiencies in how institutions interact, allowing all participants to operate with less friction and greater integrity of asset information than before. The impact of standardization is multiplied when applied to these technologies, as information can move more seamlessly through the entire lending and securitization ecosystem.
A frequent confusion around DLT is that it forces complete transparency and the divulgence of competitive positioning. While that might be the goal in certain blockchain applications, that is not the case here and is not the case in most capital market implementations. DLT can allow for the preservation of privacy on sensitive transaction information through data structuring and privacy controls, while allowing for the confidence and consistency of a common ledger of loan information to easily move through the transaction lifecycle. Only the relevant parties in a transaction can see the data relevant to that party, in line with today’s model.
We are at an inflection point where the current path lacks scalability of data management and is wrought with market inefficiencies. Alternatively, commitment to standardization through the shared infrastructure of a common ledger, everyone involved in the ABS ecosystem stands to gain.Charlie Moore is the CEO of Global Debt Registry, which is using distributed ledger technology to improve transaction efficiency and loan data management in the asset-backed securities market. He is based in New York.