Lykken on Lending

We all have consumer data that impacts how we are perceived financially. But how can consumers access that data and use it in their favor? Today’s guest breaks down the process for us. Eric Lapin is the Chief Strategy Officer of FormFree, a market-leading technology company whose patented technology is building a more transparent and inclusive credit and capital market. What are they doing differently? They’re enabling creditors and lenders to understand a borrower’s true ability to pay. In this episode, he chats with host David Lykken as he explains how they’re democratizing data, what borrower-permissioned data is, and what direct source means regarding your finances. He also walks you through the purchase transaction when FormFree is involved. Tune in to this episode for insights to help you make better credit decisions.

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Democratizing Consumer Data With Eric Lapin Of FormFree

I’m excited to have Eric Lapin joining us. He is the chief strategy officer for FormFree. Eric and I have known each other for many years. He has worked for a number of leading companies in the industry. What I’ve always been impressed with when I’m talking to Eric is his critical thought. What he brings to us is going to give you insights into why we formed such a great friendship and why I enjoy talking to him so much. I hope you enjoy this interview. Eric, welcome. It’s good to have you here.

Thanks, David.

I’m excited that you joined up with another technology leader. This one is exciting because of the forward-thinking that Brent and the company are doing there at ForumFree. It would be helpful to our readers to get insights into your background. What has been your path to where you’re at now?

I’ve been fortunate. I’ve been in the business for over 25 years. I worked at some incredible companies. When I say companies, I’m saying the products, the solutions, the culture, and most importantly, the leadership. I appreciate you saying that critical thought. There are a lot of people in our industry that have critical thoughts. It’s becoming more evident and apparent. Each conference I go to and each time I’m doing some sort of a summit or a session, the aggregation of thoughts is more so now than I’ve ever seen.

I’m one of the few that had the ability to learn pretty much every facet of the industry from the various leaders I’ve worked with in the various companies. That would include starting as an underwriter and managing warehouse lines of credit with a correspondent lender to understand what’s the risk. How do you mitigate the risk for that loan to be sold? If it’s going to be sold, who are the investors to buy it? If so, will it be bought as a profit? It better be bought as a profit because that has got to happen on there.

That’s the concept. Although I’m not sure that some are selling at a profit, some people are positioning themselves right on that edge where it’s potentially not profitable to hopefully drive some other companies out of business. We’re seeing a very unusual cycle.

I’m sure we will opine on that. Getting into that origination space warehouse and also great leadership and learning, I worked at a bank called Provident Bank back in the ’90s, and I still keep friendships there to this day. It was a company out of Cincinnati. I have always lived on the coast of South Carolina in my professional career but would go back and forth.

 

 

To this day, decades later, I still talk to them. I love them. They’re great leaders. In Credit Suisse, I learned about the fixed income side of things and the back end of the business. I first went there. There was an office right there in Midtown. You see all the big screens as you see in the movies where the trades happen. They buy and sell pork bellies or whatever is going on in there. It was a great time.

After the crash, I got more into the technology space, data analytics, title insurance, and the strategic approach of tying everything in from the origination loans to evaluating the risk of selling those loans and retaining those on the books as well as ancillary services such as what title insurance solutions you need and what appraisals and valuations. What do you need on a first versus a HELOC?

Going into the secondary market and capital market side of things, you’ve got performing loans, loan by loans, pools of loans that are being traded, RPLs, which are reperforming loans, and nonperforming loans. There’s a great family of people in the business. You know as well that when there’s something that someone doesn’t know in this industry, we’re all a call or a text away from saying, “I’m working on this. What do you think of this? This is my idea. Have you thought of this as you’re working on these?”

Solutions and a consultative approach to working with customers and clients are where success is drawn. We’re moving there with all that. In larger organizations, typically, the action is slower there. It excited me at FormFree. It’s not slow. It’s very agile. It’s innovative thinking. It’s a leadership team that’s congruent with the ultimate goals.

The transformation is ever forward. As we see the macroeconomics in the ebbs and flows, there’s more velocity with those. The ups are faster. The downs are faster. We’re seeing that as we look at valuations of loans as well as real estate in those other areas. FormFree provides the experience behind the solutions to all this. It’s very actionable.

That’s one of the questions I had for you. What drew you to FormFree? You’ve touched on that. The vision is certainly what Brent has come up with. It’s truly a team effort there. They have got some very innovative things. Of all the things they have going on, what piqued your interest the most?

It’s the fact that it’s an innovative thinker. It’s a think tank. It’s thought leaders. Brent and the team that he’s assembled over the years have brought a lot of experience to it. I love the fact that it’s democratizing lending for humanity. It’s what Brent says. It’s what we all say here. For decades of being in the business, I’ve seen that as something that I’ve wanted to be a part of.

A solutions and consultative approach of working with customers and clients is the way that success is drawn. Click To Tweet

It’s very cool to come up with ideas as a group and figure out how you put them together, “What’s the strategic approach? How do we productize this? What’s the ideation? How do we verify and validate? Let’s get it out in the market. We know we can solve it. Let’s measure and refine from there.” It’s the fact that we’re helping consumers widen that net or open that box for additional credit, whereas now you’ve got the traditional credit and then us and the asset piece. You’ve got credit meets asset. Those together provide a wide net of lenders to work with additional consumers.

We have had Christy Moss and Brent Chandler and the team with us on the show. I’m always impressed with the innovative things you’re doing. You’ve already alluded to that. One of the things we learned about is their partnership with the GSEs and how they’re helping lenders responsibly reduce costs and expand the financing opportunities directly to the source of the data. Let’s get in and talk a little bit about that. What is your take on that, especially with your vast background in lending? Talk about that.

Before working at FormFree, I had known the company. I was aware of what the company was solving. One thing that intrigued me was the fact that it’s direct source data. Being a former underwriter and also being on the lending side for fifteen-plus years, you always had a lot of compliance and a lot of rules and processes for making sure fraud was reduced and the loan was in compliance. When you’re dealing with direct source data, you don’t have to worry about the trusting aspect anymore. You’re going right to the truth. The truth is the source data.

Let’s talk about that. I want to expand on what you mean. We have talked about this in previous episodes, but we have some people that never read this concept before. When you say direct source data, what are you speaking of specifically?

It’s directly from the financial institution where I bank. If I give my credentials and bank at South Carolina Federal Credit Union, Chase, or Bank of America, most of us do our banking online. We’re also working within open banking and open finance, which is a method by which our information can be used and shared for the betterment of our financial wealth, growth, and being able to manage our money better. The direct source is when I give that credential information.

The information about me checking my asset statements goes directly to the lender. That’s direct source data. The lender then takes that information. They can utilize everything that’s on there. The analytics that we provide is the sauce. There are a lot of groups that will have analytics, but it’s computational in nature. It doesn’t have the breadth of looking into a human. It doesn’t know me. A lot of lenders don’t know their customers, but it’s changing. You’re starting to see this evolution and a transformation.

It has been a great thing to see, but this direct source data is when you can get information directly from the source. The lender can then make a decision based on actual information knowing that it is what I have going in my account and what I have going out. Do I pay my rent through my bank account? If so, we will see the natural language process there. That is something that the GSEs have taken on responsibly in helping reduce the costs and then expand the financing opportunities in our country.

 

Another part of the data that I am attracted to is borrower-permissioned data. In other words, the borrower gives permission to whomever the lender might be to view the data. How did that hit you when you first heard about that? I never thought of that concept. We always brought the data to the lender. They owned the data and had the data. This is such a novel and new idea, especially when there’s so much concern about the security of our data.

More and more, as we see in our lives, whether it’s social media or it’s apps that we all use day-to-day for work, the script is getting flipped here. We, as consumers, are controlling our data. We understand it more. It’s more enriched. That’s what the democratization of this data means. We’re in the process of SSFI or Self-Sovereign Financial Identity. Where does that come from? My direct source data. I’m unique. I know what my ability to pay is. You, as a lender, know what my ability to pay is.

To be able to have that as permissioned is great. I permission it. We have a relationship now. You let me know what terms you can offer me, whether it’s a mortgage loan, an auto, a student loan, a personal loan, a crypto loan, or whatever it is. I love that. I permission it. When I don’t want to permission it, I don’t have to permission it.

One of the things I like most about the borrower-permissioned data is the borrower never gives up control of the data. You are alluding to that. By means of the Passport, you open it up. You can close that. Talk a little bit more about that. Give our readers some more insights into how that works.

As a consumer, I’m giving permission to my data for you to make a lending decision off on my ability to pay. It’s where it needs to be. Me being in the business, you’ve been in the business. A lot of our readers are in the business. I don’t know if you have this feeling, but when I go to a refinance, which I did twice during COVID, a lot of us did, we wanted to get to that sub3 and we got it, but I have to admit that every time I thought about filling everything out and everything I had to gather, I would push off days and weeks of doing it. It’s not efficient.

This provides efficiency. It provides the reduction of fraud of information that I’m permissioning there. Passport is a digital wallet that I can get right from my phone with facial recognition. I say, “How much do I want?” I plug it in there, “What do I want it for?” I plug it in there. That is tokenized information that is shared with the lender where the lender can say, “Based on what we see here, we’re going to extend this offer to you.”

“Here are the terms, the rates, and the loan amount. Here’s your Residual Income Knowledge Index,” which is something that we created. It is not looking at the debt ratio. It’s looking at cash flow. We will get into that a little bit later. As we look at this as a Passport holder, anyone around the world can utilize that as their digital wallet to know their ability to pay perpetually refreshed at any time.

The script is getting flipped here. We, as consumers, are controlling our data. We understand it more, it's more enriched. That's what democratization of this data means. Click To Tweet

You’re starting to capture the attention of some industry leaders. Guild announced a new lending program powered by FormFree. How does that work? How are they doing that?

We have what’s called the ATP suite of analytics. For quite a while, Guild has been a great partner of ours. We talk regularly with their management team and a lot of their staff over there. It’s led by a gentleman, Dave Battany, who has been a proponent for a long time of helping the underserved and those that are credit invisible and are low and no FICO.

We have done quite a bit of testing with them on our ATP suite of analytics. RIKI is a portion of that. Let me explain what that is. RIKI is the Residual Income Knowledge Index. RIKI is a portion of the ATP suite of analytics. In there, you will see rental history, cash flow, income, and employment. It’s an entire suite in there. What we’re doing is we’re building credit where it doesn’t exist under our credit process. That doesn’t mean it’s a bad process that we have. It means we’ve got transformation going on.

We know that we have to do better and allow more opportunities for consumers and customers out there to start building wealth through the homes. It also allows faster responses to changes in a borrower’s information situation. In working with Guild, they took the torch and said, “Let’s go. Let’s bring in the regulators and capital market outlets. Let’s start working with FHA and make this a reality of expanding this credit box.”

The upside of doing this together was looking at other attributes of a consumer here that were previously being left out. Why is that? There are score requirements. GSEs are still 620. You also have Ginnie May issuers that go down to 580. You can do a manual below 550. It all depends on a lender’s overlays and what they want to do.

We build credit where credit doesn’t exist and where credit meets assets. This is a much broader view. Guild was saying, “We want to be able to help these customers.” There are quite a few loans per year that we were not able to help and assist with because we don’t have that insight into the borrower through their asset statement. It has been a great relationship. It’s helping with inclusion.

Something to bring up that is being brought up quite a bit, especially from the mission of FHFA, Sandra Thompson, and the group over there, this is 100% inclusion here. It removes socioeconomic backgrounds and makes it to where I have a credit profile. There are requirements on the lender side. Is there a match here? We don’t know anything else about that consumer from an ethnic background or socioeconomic background. We’re excited to roll this out with Guild and be part of some of these changes that are happening.

 

If I understand correctly, this also includes those that have no credit score. They can apply for financing where a credit history of some sort has been pretty much an understood requirement.

There’s the thinking of taking on more debt to get debt. It has its place in one way but not if you think about it. There are a lot of people that have the ability to pay some amount for something that they want, but they don’t want to get into debt to have that. Unfortunately, the system doesn’t account for those borrowers. In the last calculation, it’s between 45 and 50 million that we’re running across the low or no FICO band of consumers in the United States. That’s a huge number.

The more we see in the bank statements, the stronger the RIKI. There are some people that may not have a RIKI because there’s no way to tell a typical month, but by looking at cashflow and discretionary income, we can pick all this, remove what we call the gobbly goop that doesn’t make any sense that’s going through there, and come up with this index. This index is looking at regular spending habits. That’s how we create the RIKI.

When you look at RIKI, that stands for Residual Income Knowledge Index. How does it offer you more insights? You’re still getting the same data, but what are you doing as it relates to giving you additional insights, especially as it comes to the ability to pay?

It’s useful for borrowers that have no FICO or thin FICO files. It’s based on the income and expenses of a consumer. In the past, you go through an underwriting process. You’re looking at what kinds of lines of credit you have. Do you get points for it? Was it revolving? Was it an installment? Was it paid off in a certain amount of time? Did you have a mortgage payment that lasted at least 12 to 24 months?

There are all these different percentages that apply and weigh out a traditional FICO score, but now, the data is retrieved directly from financial institutions. We talked earlier about direct source data. It’s with consumers’ explicit consent that allows us to figure it out, “This RIKI index is 120.” There’s a surplus of cash. If it comes in below that number of 100, then it’s 80 or so. That person is going to have less cash flow. There are probably going to be some issues there with being able to make the payments.

Think about this. Where does that go? It means there could be loans that are approved on traditional credit standards where the investor will still buy that loan from the lender, but if I’m at risk, especially now in the market that we’re in, I want as many tools as I can. I want to know the borrower’s ability to pay so I can get this from the asset statement and say, “Based on this RIKI here, something has happened here where there are some cashflow issues that we may want to review and look at manually.”

There are a lot of people that have the ability to pay some amount for something that they want, but they don't want to get into debt to have that. Unfortunately, the system today doesn't account for those borrowers. Click To Tweet

Maybe that lender might not sell that loan because it could be a buyback and affect them. It could be a loan that sits in the warehouse line for a while. It can affect them by not being swept out. A lot of things are going on here. I’m taking it over to the capital market side of things, but we have to think about it, especially in this market.

You announced a partnership with HomeScout. Would you talk about that?

HomeScout is a partner that provides the intent to buy search data with a minimum amount of information that the borrower requires. It’s a national company. They’re a campaign management technology company. They have been around forever. It’s run by a great group of executives over there. The CEO, David Camp, and I have known each other for quite a while.

When I got over here, we put our heads together with our teams, my team here and his team there. We said, “Why don’t we take what we have done in the origination space repped and warranted by the GSEs? Let’s pair it up with the intent to buy search data that you nurtured extremely well. Let’s put it together and make a Qualified Borrower. There’s no more pre-approval and pre-quals.” Let’s go straight to the top and say, “I’m a Qualified Borrower. I showed what I wanted to do here. I want to buy this home. I’ve hearted the home. I’m going to show you that I have the ability to pay.”

We provide the ability to pay analytics, which is RIKI, what we talked about. We rolled this out in August 2022. It’s new to the market but it’s the highest-quality lead that a lender can acquire because you’re going to have an underwritable loan with the rec source data and the ability to pay with the intent to buy. We don’t have that in the market until we came out with Qualified Borrower.

When you look at what you could do to help qualify borrowers, give us some more examples or deeper insights into that.

It’s borrowers who are looking for homes, whether they have a high score, a low score, or a high ability to pay. We’re helping borrowers with low and no FICO or the underserved looking to buy homes. There’s a way that they can do that by becoming a Qualified Borrower with us. We’re taking the Qualified Borrower.

 

I’m thinking of a pre-qualified borrower. Is this a different concept than someone who is pre-qualified per se?

It is because when pre-qualified, you’re working off information that’s provided by someone that’s not validated or verified. We’re getting validated and verified data with the intent to buy direct from the source. I’m qualified. I’m an underwrite loan. Over 42% of information that currently is filled out on long forms when people are searching and looking for homes is incorrect, not that it’s incorrect intentionally.

People don’t know their gross income off the top of their heads. People don’t know what their score is. People don’t know what their rent payment is, believe it or not. They think they pay $2,000 a month. They pay $1,780 a month. It’s all that information that is now coming in direct source with the ability to pay analytics that makes this a QB or Qualified Borrower.

I like everything fitting neatly into a story. It helps us understand this. Walk us through a purchase transaction when FormFree is involved.

I’m a borrower. I want to buy a home, but I don’t know what my ability to pay is. I would love to be able to know what that is, but I want to control that process. I want to let you know that my data is my data. I’m looking for a home. I want to spend this amount. I want to live in this house right here. I’m going to hear that house. The house is $450,000. I click the heart on there.

I want it to be easy. I don’t want to go back, gather a bunch of documents, get checks, and get my pay stubs 2 and 3 times during the loan. I already have to do insurance quotes and get a termite letter, HOA, bylaws, and condo docs. I can keep going, but the way I see this process as I go through this and get everything done. What would I like? I want to get this done in less than ten days.

A lot of people cringe when I say that, but I mentioned this to someone. We can utilize all the information and get an instant title in about 28% to 30% of the country on a national basis. I’m talking about the national housing stock. I can get a remote valuation on the home or a property inspection waiver that the GSEs are doing on some loans as well. You’ve got me as a consumer that says, “I’m ready to go. I’m ready to buy. Let’s make this easy.” That’s the process here.

With pre-qualified, you're really just working off information that's provided by someone that's not validated or verified. We're getting validated verified data with the intent to buy directly from the source. Click To Tweet

You can also look at other ways, “Am I going to give all this information? I don’t know if I want to give my credentials.” There are tens of millions of people that are working with other types of apps in the open banking world, such as Credit Karma, Credit Sesame, and Personal Capital. I’m ready to do it. I’m ready to go. I want to close this loan as fast as I can. I want to get it done with all these pieces together.

Once I do that, I control all this in the palm of my hand with Passport. The Passport information is then sent to the lender. Once that lender gets that information and the loan closes, we have a relationship past the close of the loan. That’s something that’s not talked about as much. We’re starting to see that more in our industry, but once that loan and I go into servicing, I want a relationship all the way along here. That can continue all the way through. That’s something we’re doing here with Passport.

Eric, everyone is focused on the cost to originate it. It’s at an all-time high. How does FormFree help drive down costs?

It’s a common problem to solve. We solve that. This is information I got from a MISMO summit back in June 2022. It’s straight from MBA. Whether it’s a community bank, a medium-sized IMB, a large IMB, or an FDIC large national bank, the range is anywhere from $8,300 to $10,700 for the cost to manufacture a loan. It’s a pretty large number, even on the low end of it.

Think about this. If information is coming in permissioned by me, the borrower, I’m giving permission to the underwriter for this information from my income, assets, employment, and ability to pay. If they rent, you can glean the rental information from there as well. I can glean a lot of things from the asset statements. How many times is a loan being touched by the processor and underwriter? It depends on which lender you talk to.

It can be anywhere from 18 to 26 times. This could get be chopped anywhere from 40% to 50%. Take that cost out. Once we go from origination into the servicing side, you’re typically doing due diligence 5 to 7 times on a file. That could be anywhere from $400 to $700 cost. Eliminate that and chop that down by 4 or 5 times that in due diligence. You’re taking thousands of dollars out.

Lastly, what I want to bring up is some of the lenders are telling us they’re looking at bifurcating their model on the LO comp piece of it. The LO comp is 50% to 52% cost. The mortgage fulfillment is 20% to 25%. That’s the processing and underwriting closing aspect of it. Some of these lenders are looking at models where they have a loan originator getting paid X amount of dollars, which would be dramatically less than half the cost of the manufacturer loan.

 

If they’re working off leads that are handed to them, whether it’s handed to them by other lending channels within the bank or other groups within their organization, the other approach to that is working on a model where the loan officer is working the traditional method of origination through real estate agents, wealth management companies, builders, and the like. We’re reducing those costs by providing a lot of information that’s used in underwriting that typically has a lot of stare-and-compare and touches. We can reduce that dramatically. The cost goes way down.

That has to be a real advantage. Are people buying it for that reason? Are they buying it because of the competitive advantage or all of the above?

It’s all the above. That’s where QBs are coming in. Not only are they getting leads. I like to call it DoorDash for lead gen, especially for people that are used to having leads come into them, especially in the refi market. What’s the number? We were 600,000 people at the height of the business. In a normal cycle, we’re 200,000 to 300,000 people in the mortgage business. There are a lot of people that haven’t been through the ups and downs.

If I’m on the lending side, if you can provide to me not only a leader with the intent to buy, but I also have consumer permission on their financial data where I can have an underwritable file, this Qualified Borrower can be instantly uploaded into over 100 LOS, POS, and AUS integrations that we have. We make it very easy for lenders to consume this and be able to work with their customers in a faster manner.

How could people get ahold of you? What’s the best way to learn more about FormFree for those that are hearing about the company and you for the first time? How can they learn more about you and the company?

They could reach out to me anytime and go to FormFree.com. We will get back to anyone that reaches out to us. I’m also available to be reached directly through LinkedIn or email.

Eric, it’s so good to spend some time with you. I’ve always respected your critical thought as a Chief Strategy Officer there. I’m expecting even greater things from FormFree in the years ahead. Thanks for being with us.

Thank you, David.

 

Important Links

• FormFree
• Christy Moss – Past Episode
• Brent Chandler – Past Episode
• Passport
• Residual Income Knowledge Index
• HomeScout
• Qualified Borrower
• Credit Karma
• Credit Sesame
• Personal Capital
• MBA
• LinkedIn – Eric Lapin

 

About Eric Lapin

Eric Lapin, Chief Strategy Officer, FormFree

As FormFree’s chief strategy officer (CSO), Eric Lapin leverages more than 25 years of experience in leadership roles at marquee mortgage technology firms and financial institutions to steer the strategic vision and partnerships driving FormFree’s growth. His responsibilities include monitoring business initiative execution, identifying key capital projects, driving strategic partnerships, and overseeing communications and marketing.

Prior to joining FormFree, Lapin served as the first vice president of corporate development, and national agency services, at Old Republic (NYSE: ORI). Before that, he held vice president and managing director positions at banner housing fintech and financial institutions including Black Knight (NYSE: BKI) and Credit Suisse (NYSE: CS). Lapin is a graduate of Old Dominion University, where he earned a bachelor’s degree in management. In his spare time, he plays the drums for two popular bands in Charleston, South Carolina, where he resides.