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How Blockchain Can Be Used for Compliance

Nov 1, 2017 by Brian Arnesen

Blockchain technology has become synonymous with digital cryptocurrencies such as Bitcoin and Ethereum. However, the technology has much wider applications.  

Blockchain has the potential to impact many different industries. The financial services industry is ripe for innovation and is of great interest to enthusiasts for the adoption of blockchain. Blockchain technology can affect how compliance departments, quality control and many other departments operate. Blockchain technology can also help mortgage lenders save money by streamlining workflows and creating a better customer experience, while reducing risk.

In order to understand how blockchain will affect compliance, we must first understand what blockchain is.

What is Blockchain

Blockchain is most commonly described as “a digital ledger that can be distributed but not copied” (Blockgeeks). Blockchain allows multiple people to make changes at the same time to the same “ledger” — similar to how Google Docs works, but more secure.

“The ledger can only be changed when there is a consensus among the group” (Business Insider). Each change or “block” is added to the existing blockchain and creates a history of verified transactions that make up the blockchain. 

how blockchain works

The main benefits of blockchain are its transparency and security. A blockchain is made up of a network of “nodes” or computers that each get a copy of the blockchain, making it hard to corrupt the entire chain. The blockchain network is also coded to check in and audit itself automatically every 10 minutes, which ensures the integrity of the data.

Since every node has a copy of the blockchain, the information is transparent and the record of past transactions can be viewed by any party at any time.

Applications of Blockchain For Regulatory Compliance

The underwriting process involves verifying information submitted by the borrower, which is time intensive and often involves third party vendors. The mortgage paperwork must be sent from one person to another, which adds even more time to the process. With mortgage fraud on the rise, lenders often don’t trust information provided by borrowers.

This is why the technology can really disrupt the financial services industry. If blockchain were fully implemented, things like title insurance could become a thing of the past. Lenders would be able to see the entire record of ownership, which could be verified by looking at the blockchain ownership history. All information would have already been verified by multiple parties at each change of ownership.

Risk would also be significantly lowered due to the inability to alter the blockchain data. For other businesses, histories such as verifications of employment and income could be done instantaneously. Escrow companies can also use blockchain to record and verify transactions from both parties.

Blockchain can also provide an audit trail for compliance officers, who would be able to show due diligence for specific regulations and show every action taken on a loan. For example:  The Truth in Lending Act (TILA) requires sufficient time for consumers to review mortgage disclosures. Blockchain can record when the documents were sent by the institution and when they were received by the borrower. It can also allow them to be accessed at any time in the future in case of disputes or accusations — protecting the lender and borrower at the same time.

Final Thoughts

While the full potential of blockchain for the mortgage industry is not yet completely understood, the technology will change how transactions occur. Industries that are process heavy or involve multiple parties will be able to benefit greatly from blockchain technology. The hardest part will be integrating this technology into current business processes and workflows. But once set up, blockchain offers transparency and data security like no other technology has before.