Amid the fallout of the Silicon Valley Bank and Signature Bank collapses in March, depositors looked for safer places for their savings, and big banks benefited from some customer flows during the flight to safety. Earnings for JP Morgan Chase and Wells Fargo also beat expectations, easing concerns about the health of the country’s banking system.
Deposits at Bank of America were above $1 trillion for the seventh straight quarter, posting $1.91 trillion in the first quarter of 2023, down 1% from $1.93 trillion during the same quarter in 2022.
Consumer banking division posted a net income of $3.1 billion, a 13.1% decline from the previous quarter’s $3.58 billion, but still up 4.4% from the previous year’s $3 billion, according to its filing with the Securities and Exchange Commission (SEC).
“We had a great quarter for our micro products (…) We have positive returns there. So mortgages, credit, munis, financing, futures, FX, all of them had a pretty good quarter,” Alastair Borthwick, Bank of America’s chief financial officer, told analysts.
Mortgage, home equity business
Its mortgage business, however, reported disappointing numbers, an issue led by elevated 30-year fixed mortgage rates.
Mortgage originations totaled $3.9 billion during the first quarter, a 25% drop from $5.2 billion posted in the second quarter, and 76.2% below the $16.4 billion in the first quarter of 2022.
BofA’s production decline follows the track of JPMorgan Chase and Wells Fargo, which also posted double-digit mortgage loan production decreases during the first quarter.
The bank’s home equity originations remained flat in the first quarter, posting $2.6 billion from the previous quarter. That’s up from the first quarter of 2022, when BofA originated $2.0 billion in home equity loans.
Bank of America had $229.3 billion in outstanding residential mortgages on its books through March 31, down from $229.4 billion from Q4 2022 and $224 billion in the first quarter of 2022.
The home equity portfolio was $26.5 billion at the end of the first quarter, down from $27 billion from the previous quarter — and a decline from $$27.8 billion a year prior.
Bank of America’s total mortgage-backed securities reached a $32.1 billion fair value as of March 31, compared to $32.5 billion as of December 31, 2022.
Looking forward, Borthwick expected the Federal Reserve to raise interest rates one more time, followed by a couple of cuts this year.
“That obviously assumes our current client positioning and the forward rate expectations. We continue to expect modest loan growth (…) driven by credit card, and to a lesser degree, commercial,” Borthwick said.
The bank expects further Fed balance sheet reductions to continue to reduce deposits for the industry, leading to lower deposits and rotational shifts.
HSBC’s U.S. division is under federal investigation for potentially engaging in discrimination against minority borrowers in six metropolitan areas.
The U.S. Department of Housing and Urban Development is reviewing the bank’s lending practices in majority Black and Hispanic neighborhoods within the six regions, HSBC disclosed in a regulatory filing Tuesday.
The geographic areas where HSBC is facing scrutiny include New York, Seattle and four parts of California — Los Angeles, San Francisco, Oakland and Orange County — according to the National Community Reinvestment Coalition, which filed a complaint that prompted the HUD investigation.
After the NCRC filed the complaint, HUD has been investigating whether HSBC violated federal law by engaging in discriminatory lending practices between 2018 and 2021, the bank’s filing states.
Alan Pyke, an NCRC spokesperson, said in an email that his organization, which advocates for community groups nationwide on financial and investment issues, filed the complaint earlier this year.
“Lending redlining is a violation of the Fair Housing Act,” Pyke said. The NCRC based its complaint on data suggesting “unfair treatment of disenfranchised communities and individuals,” he said.
The nonprofit group is focused on working with government agencies to “pursue any remedies they deem appropriate,” Pyke said.
A spokesperson for HSBC USA declined to comment. HUD did not respond to a request for comment.
HSBC’s U.S. arm has previously faced scrutiny in connection with fair-lending laws.
In 2016, the London-based bank agreed to a $601 million settlement with 49 U.S. states and numerous federal agencies — including HUD, the Department of Justice, the Consumer Financial Protection Bureau and the Federal Reserve — over allegations related to discriminatory mortgage lending and foreclosure practices.
In 2021, Attorney General Merrick Garland launched an interagency initiative to combat redlining.
Earlier this year, City National Bank, a unit of Royal Bank of Canada, agreed to pay a $31 million fine in the largest redlining settlement in U.S. history. The Department of Justice alleged that City National discouraged Black and Hispanic customers from applying for home loans.
In March, Park National Bank agreed to a $9 million settlement over redlining allegations in Columbus, Ohio. And last month, the DOJ announced that ESSA Bank & Trust will pay over $3 million to resolve similar allegations in the Philadelphia metro market.
In 2022, HSBC sold 10 California branch locations, along with loans and deposits associated with its West Coast consumer banking business, to Cathay General Bancorp.
The sale was part of HSBC’s broader pullback in U.S. retail banking, which also included the sale of 80 branches, mostly in the New York metropolitan area, to Citizens Financial Group.
Michigan State University Federal Credit Union said this week that it will make its first-ever expansion outside of Michigan by opening five branches in Chicago next year.
The $7.5 billion-asset credit union in East Lansing said the institution’s strategy has been to locate branches where its members live, and more than 10,000 Michigan State University students and alumni now reside in Chicago.
“Many MSU alumni move to Chicago post-graduation,” President and CEO April Clobes said in an interview. “In addition, the incoming MSU student class has a high number from Illinois.”
The branches will be located in the Lakeview, Lincoln Park, Wicker Park, Gold Coast and Old Town neighborhoods.
Clobes said MSUFCU has been evaluating the Chicago region for some time, and the right mix of retail locations near where its existing and eligible members reside became available.
Post-covid, there were more available location options to consider, she said.
MSUFCU is the second largest credit union in Michigan behind only the $12.4 billion-asset Lake Michigan Credit Union in Caledonia.
MSUFCU has offered services digitally to members outside of Michigan for many years, including selling mortgage products in 18 states across the country.
But Clobes said physical locations grow membership and existing member balances faster than digital services alone.
“Our members and eligible members are able to do all of their business with the credit union online, yet when we move into a market, the members appreciate having a branch location for complex transactions and financial education,” she said.
Whether digital or physical, credit unions need to be able to differentiate themselves to their members and ensure they have the product mix and delivery channels.
While members make nearly 2 million visits a year to MSUFCU branches, they log in to its mobile app 36 million times a year.
“Their branch visits are purposeful for when the member would like to be assisted by our team versus self-serve. Physical locations help to support a growing community through employment and economic activity as well,” Clobes said.
Michael Fryzel, a Chicago attorney and former chairman of the National Credit Union Administration, called the entry into the Chicago market by Michigan State University FCU an “excellent move.”
“The potential exists for substantial membership growth for the credit union. There are thousands of MSU graduates and family members who live and work in the city and surrounding suburbs,” Fryzel said.
Michigan State University FCU has more than 350,000 members. Clobes said historically when the credit union adds a branch to a digital-only region, it grows about 30% in both balances and new members in that area.
She anticipates the Chicago market will see similar growth.
“Our annual new member growth is between 5% and 6%, and we anticipate that moving to a new market area will help us maintain this level of membership growth through better retention of existing members as well as attracting new eligible members,” Clobes said.
So will the Chicago expansion serve as a springboard for moves into more out-of-state markets?
Clobes was noncommittal.
The credit union already has plans for growth in new markets and in the areas it already serves in Lansing, Traverse City Grand Rapids, Oakland County and metro Detroit.
“We will evaluate the success of these locations to determine possible additional locations in the Chicago suburbs,” she said. “While we are moving into the Chicago market, we are still branching throughout Michigan where our members are concentrated without a convenient branch location.”
MSUFCU’s plans continue the broader industry pattern of credit unions continuing to build branches. There were 20,694 branches among federally insured credit unions in March 2023, up 87 branches from a year ago, according to recent data from the National Credit Union Administration.
U.S. Bancorp in late May finished installing updated signage on the West Coast branches it inherited from Union Bank, but executives say their work to take full advantage of the acquisition is still under construction.
Improved cost savings and opportunities to meaningfully boost revenue should be evident in the third quarter, the first full one since U.S. Bank’s conversion of Union Bank, management said when reporting second-quarter results Wednesday.
“We are well positioned as a national bank with greater scale,” said U.S. Bank CEO Andy Cecere.
Revenue and net interest income were lower than expected in the second quarter, but strong fee income and lower expenses helped improve the Minneapolis bank’s bottom line. The quarter also reflected one-time conversion items.
“This was a noisy quarter, which reflected mixed trends,” David Rochester, director of research at Compass Point Research, wrote in a note.
The $680 billion-asset bank completed its conversion of the Union Bank system in the second quarter, marking one of the final steps in the $8 billion acquisition that yielded hundreds of new branches and millions of new customers. U.S. Bank said it would use the deal, in part, to expand its presence in key California markets including Los Angeles, San Diego and San Francisco, where Union Bank had a strong foothold.
U.S. Bank said it has seen more new customers than expected engage with the bank, making use of its app and other online banking services. The bank has boosted its advertising budget to get on the radar of new customers and potential new customers in target markets, executives said.
The deal should deliver as much as $900 million in cost savings delivered through, plus a breadth of opportunities for revenue growth, U.S. Bank said.
In the second quarter, U.S. Bank faced similar challenges to those of banks across the industry, whose net interest income generally shrank amid greater competition in deposit pricing. U.S. Bank said it expects lower net interest income in the third quarter.
U.S. Bank set aside $821 million for credit losses in the second quarter, up from $427 million in the first quarter. Large and small banks alike put aside substantial amounts of reserves early on in the pandemic in case the economic fallout prevented consumers and businesses from making payments on their bank loans.
“Credit quality metrics remained strong versus pre-pandemic levels but are normalizing as expected,” Cecere said on the company’s earnings call Wednesday. “This quarter, we strengthened our balance sheet by increasing the loan-loss reserve, reflective of our prudent approach to credit risk management.”
The bank cited growing credit card balances and continued economic uncertainty as reasons for boosting reserves. Average credit card loans increased 14.5% in the second quarter from the same quarter last year, while average total loans grew 19.9% in the second quarter.
“Consumers are now starting to rely more on credit card debt as a way of paying for their lifestyles,” said U.S. Bank Chief Financial Officer Terry Dolan.
Banks have likely seen the final positive impacts of higher interest rates, Dolan said. U.S. Bank’s noninterest income growth of 7% in the second quarter, driven by higher core fee income, exceeded analysts’ expectations.
U.S. Bank reported a profit of $1.8 billion in the second quarter, in line with expectations. Revenue totaled $7.2 billion, slightly above forecasts.
The bank said its common equity Tier 1 capital ratio increased to 9.1% in the second quarter, up from 8.5% in the first quarter. Capital ratios have been under the spotlight across the industry this year, and specifically at U.S. Bank. The bank’s capital level faced scrutiny this spring, when a research report argued the bank wasn’t holding enough capital for a bank of its size.
“I think there’s been a desire to finish up Basel III,” Brian Moynihan, chair and CEO of BofA, said in a call with analysts. “From a global competitive standpoint, we’ve got to be careful here because the U.S. industry is the best industry in the world and actually does a lot of good for all the countries of the world, including the U.S. And frankly, the rules that are applied tend to be more favorable to those outside our country.”
Moynihan added: “They’ve [regulators] got to think through the downside of some of these rules, and that they could push stuff outside the industry to nonbanks that have the asset classes across the board. And nonbanks, including mortgage lending, which you referenced, half of it goes through nonbanks and those, the resilience of those institutions, is interesting to watch through cycles.”
According to Moynihan’s estimates, a 10% increase in BofA’s capital levels would prevent the bank from making about $150 billion of loans at the margin. BofA had an 11.6% CET1 ratio at the end of the second quarter of 2023, compared to the 10.4% current requirement.
Regulators have said big Wall Street banks might face a 20% average increase in overall capital requirements. Sources told Bloomberg that mortgage capital standards, which were not expected to change from the current 50% risk weight on first-lien residential mortgages, would change to 40% to 90% for large banks, with higher loan-to-value ratio loans receiving higher risk weights.
Mortgage, home equity business
The new rules would affect BofA’s mortgage originations, which totaled $5.9 billion during the second quarter of 2023, a 50.8% increase from $3.9 billion posted in the first quarter but still, a 59% drop from the $14.4 billion originated in the second quarter of 2022.
BofA’s sequential production increase follows that of JPMorgan Chase and Wells Fargo, which also posted higher mortgage volumes during the second quarter. It suggests the first quarter of 2023 may have been the bottom of the current cycle, when rates surged to 7%.
BofA also originated $2.54 billion in home equity loans in the second quarter, compared to $2.60 billion in the previous quarter and $2.53 billion in the same period last year.
Bank of America had $228.7 billion in outstanding residential mortgages on its books through June 30, down from $229.2 billion from Q1 2023 and flat from the second quarter of 2022.
The home equity portfolio was $25.9 billion at the end of the second quarter, down from $26.5 billion from the previous quarter — and a decline from $$27.8 billion a year prior.
Bank of America’s total mortgage-backed securities reached a $30.8 billion fair value as of June 30, compared to $32.1 billion as of March 31, 2023.
Overall, the bank posted a net income of $7.4 billion from April to June, declining 8.6% quarter over quarter and climbing 19.3% year over year.
Deposits at Bank of America were $1.87 trillion in the second quarter of 2023, down from $1.91 trillion in the previous quarter and $1.98 trillion during the same quarter in 2022.
The consumer banking division posted a net income of $2.85 billion, a decline from the previous quarter’s $3.1 billion and the previous year’s $2.88 billion, according to its filing with the Securities and Exchange Commission (SEC).
If you’re wondering how difficult it is to enter the business of originating mortgages, just take a look at Discover.
The credit card company turned mortgage lender is exiting the business after just three years.
The departure coincides with a spike in mortgage rates, which should reduce the pool of borrowers eligible to refinance, the bread and butter of Discover Home Loans.
In fact, it was just a few months ago that Discover Financial CEO David Nelms called purchase-money mortgages a difficult nut to crack.
Call it a failed experiment, or perhaps an unexpected breakdown for a company that seems to be making big gains in its primary line of business.
Regardless, they’re done. They made an announcement on their website yesterday, saying they will focus on their “profitable direct banking products for which the company sees greater opportunities for growth.”
They also noted that the mortgage origination business Discover acquired in 2012 from LendingTree is no longer projected to meet their financial expectations as a result of “ongoing challenges” in their operating model.
It’s unclear what that actually means aside from purchase mortgages being more challenging to acquire/originate, but Carlos Minetti, president of consumer banking for Discover, called it a “difficult decision.”
I can tell you from personal experience that a lot of people were unhappy with Discover Home Loans, as evidenced by the many comments on my blog.
This didn’t really come as much of a surprise, given how unique the mortgage industry is. It’s certainly not the same as slinging credit cards.
As I’ve mentioned before, the credit card industry is very accommodating, whereas mortgage lenders are highly regulated and don’t have tons of room to appease borrowers if they aren’t 100% satisfied.
And if a Discover credit card customer decided to work with the company because they enjoyed their other products and customer service, they probably didn’t receive the same treatment via their home loan department.
This divergence in expectations probably resulted in a lot of unhappy customers.
Nearly 500 Will Lose Their Jobs
The closure will result in about 460 layoffs at locations in Irvine, California and Louisville, Kentucky. The affected employees will all receive severance packages.
The Irvine office stopped accepting new applications yesterday but will continue to process and fund loans already in progress.
The Louisville office will accept new applications through July 31st, after which time Atlanta-based AmeriSave Mortgage Corporation will finish processing remaining applications.
AmeriSave seems to be taking over that mortgage office and is expected to offer jobs to 125 existing Discover employees.
The closure of the mortgage business will result in a charge of $0.04 per share of Discover stock, currently priced at just over $58 and valued at nearly $26 billion.
The company plans to continue offering home equity loans through Discover Bank.
KeyBank on Thursday unveiled a new program aimed at helping potential homeowners in underserved areas cover as much as $5,000 of closing costs and related charges.
It is the Cleveland bank’s third program under a provision of the federal Equal Credit Opportunity Act that is designed to increase credit to disadvantaged groups.
Banks have expanded so-called special-purpose credit programs in recent years, using them to address racial inequities in credit access. For decades before the recent wave of adoption, financial institutions had shied away from establishing such programs, concerned that they would face charges of discrimination for lending to one racial group over another.
“You don’t need a special-purpose credit program to increase lending in majority-minority areas, but it’s one way to do it,” said Richard Andreano Jr., leader of the mortgage banking group at the law firm Ballard Spahr.
Initiatives that address the rising cost of buying a home are among the most popular types of special-purpose credit programs. Last week, JPMorgan Chase announced that residents of more Black-majority and Hispanic-majority census tracts will be eligible for up to $5,000 in grants that are meant to help with down payments and closing costs.
For more than a year, steep increases in mortgage rates have made home purchases less affordable for a wide range of Americans. The average rate on a 30-year fixed-rate mortgage increased this week to 6.81%, its highest mark this year.
“At KeyBank, helping all residents have equal access to homeownership is a priority,” said Dale Baker, president of the bank’s home lending segment.
Earlier this year, fair-lending advocacy groups called out KeyBank, a unit of the $197 billion-asset KeyCorp, for its lack of mortgages issued to Black borrowers. About 2.2% of the bank’s mortgages in 2021 were issued to Black borrowers. That was the lowest rate among the 12 large banks studied by the National Community Reinvestment Coalition, an advocacy group.
In April, more than 80 community groups signed a letter asking regulators to examine whether Key executed community benefits commitments made during its 2016 acquisition of First Niagara Financial Group.
Over the past year, Key has launched two other special-purpose credit programs related to homeownership.
The latest program will provide new homeowners with up to $5,000 to cover homebuying-related expenses including closing costs, insurance, taxes and escrow deposits. To be eligible, buyers must get a mortgage from Key, plan to live in the house they are purchasing, and reside in designated majority-minority or low-to-moderate income communities across the bank’s footprint.
“That’s assuming we don’t keep improving from that $20 million,” Ghamsari said.
Blend is also confident in its growing customer base. Despite the mortgage industry suffering from thinning margins, some of Blend’s mortgage customers are growing their market share, and the firm’s non-mortgage customers are rapidly growing — positive signs for the company, Ghamsari emphasized.
However, getting acquired by another firm is not in the cards, according to the CEO.
“We feel very confident in our customer base and our product set, and our revenue base and our balance sheet.”
Read on to learn more about Blend’s priorities, its focus on improving mortgage companies’ business, and the firm’s plan to cut down costs.
This interview has been condensed and lightly edited for clarity.
Connie Kim: Blend is focused on being a platform company, but the firm’s major customers are mortgage lenders right now. How is Blend navigating to overcome the time needed for customers to see the value of the new platform?
Nima Ghamsari: First and foremost, our mortgage business is by far my biggest focus. We have got to make sure those people are successful. We still have over 200 people working on a mortgage suite of software – building more features and rolling out existing features. What we’re saying is, we want to keep investing. We also want to build for the future.
The Blend Builder (platform) is taking all these components of income, identity, assets, credit decisioning, everything and saying we want to make that drag and drop. And we want to make all the configurations, because that will enable us to move faster and build more products. I want us to be able to enable our customers to take some of the things that we don’t want to build and be able to build it themselves over time.
I also want to eventually have third parties to be able to add more capabilities to that platform to get more vendors and partners into that ecosystem so that they can help our customers benefit. I get called by vendors and third parties all the time who want to be better integrated with our customer base. This (Blend Builder) will enable that to happen faster; I think it’s just going to add speed to the industry as a whole.
This is not just for consumer banking. I know our mortgage suite will be on Blend Builder. So this will be re-platforming as a company.
Kim: How do you bridge the gap between now and the future when customers see the value of the Blend Builder platform?
Ghamsari: One, I would say that (Blend Builder platform) is a pretty meaningful part of our revenue base already. Navy Federal is a big mortgage home equity customer of ours, but now they also signed on to the deposit account side on the Blend Builder platform. We have a lot of non-mortgage customers.
Just from a purely financial perspective, as of last quarter at $350 million in the balance sheet, we have $225 million debt that’s due in the second half of 2026. So we have over three years before that debt is due.
I’ll be the first to admit that we were probably doing too many things a year ago, so all those too many things that didn’t directly help our mortgage customer base, or help us re-platform, I’ve cut all of those things out. That plus the combination of our customer base today and the strength or balance sheet, we don’t foresee any issues given the three-and-a-half year time horizon.
Kim: Following up on the balance sheet — particularly the $350 million liquidity — Blend’s operating cash burn was about $190 million last year. I’ve heard an analyst say that it gives less than two years of runway. What is your perspective is on this?
Ghamsari: We’ve told the street (Wall Street) that we will get our operating losses – through cost cuts and through revenue growth – to $20 million a quarter by the end of this year. And $80 million a year off of a $350 million balance sheet is four-plus years to get that.
But that’s assuming we don’t keep improving from that $20 million. What we’ve also told the street is we will improve that net operating loss throughout this year sequentially. And so we don’t intend to stop when we get to $20 million given the investment we want to make in re-platforming. It’s the right thing to do at this instant.
Kim: A lot of investors are mentioning the loss – the $796 million loss that Blend incurred last year. An analyst even mentioned Blend being an acquisition target. Is an acquisition in the cards for Blend?
Ghamsari: Obviously we hear from people all the time, and if there are ever serious offers made, I’m required as a fiduciary to take it to the board. But the board and I, we feel very confident in our customer base and our product set — and our revenue base and our balance sheet. So it’s not something that’s top of mind for me right now.
Kim:Before Blend went public, the company raised about $665 million over its lifetime. Is another round of funding in the cards for Blend?
Ghamsari: We have nothing planned as of now. The strength of the balance sheet is good. Markets are so low right now; it would just be very expensive to raise money. We are focused on building the company and getting the cash burn down so we can then drive the outcomes that we think are possible.
Kim:What factors do you see as being crucial for the company to post profitability?
Ghamsari: We have to make sure that we are growing our customer base. One thing that’s been encouraging for me is I’ve seen some of our customers grow market share in this time already.
And we successfully show that the non-mortgage consumer businesses – which is actually a really fast-growing part of our business – can continue to grow at the rate that has been growing, and then we get some continued improvements in the cost structure. That will show how do we get the net losses to zero and then positive in the next two relatively medium-term time horizons.
Kim: What are some of the risks you monitor externally and internally?
Ghamsari: I obviously pay attention to macro. Inflation, we look at what the Fed does, the job market every month. We look at our own application volumes internally, because that’s an indicator for loan closings.
We have some other conditions monitoring internally, [such as] what is the health of our customer base? How much are they using our product? One thing we’re monitoring very actively is, what functionality are our customers able to benefit from today? And what are they not benefiting from? How do we put together a roadmap in front of them?
If they’re not getting the benefits from Blend, there’s only two outcomes – they are in a tight market environment or they are just not getting full value from the product. So they’re going to want lower pricing or go to a competitor that’s cheaper. So we’ve got to pay really close attention to that.
One of the things I want to do is, I want to be out there more, making sure our customers know how much we’re investing. I think before you and I talked, you probably wouldn’t have guessed that we had 220-plus people working on our mortgage product today.
Because so much of our marketing and marketing effort is public-facing, we’re so unknown in consumer banking. People don’t realize how much we’re investing in the mortgage product and how valuable Blend Builder is going to be to them in the long term.
JPMorgan Chase is expanding an effort to help close the gap in homeownership between Black and Hispanic communities and the rest of the country.
Residents of some 3,000 additional Black-majority and Hispanic-majority Census tracts in 16 U.S. markets will be eligible for up to $5,000 in grants that are designed to help with down payments and closing costs.
The program’s expansion, announced Wednesday, may help an additional 1,000 customers obtain mortgages, according to Cerita Battles, head of community and affordable lending at JPMorgan.
The bank does not expect to make a profit on the program, particularly as credit conditions worsen, she said. “At the end of the day, this is a long-term sustainable investment,” Battles said.
Chase Home Lending has already spent more than $30 million to help more than 6,000 prospective homebuyers in majority-minority neighborhoods make down payments and pay closing costs, according to the bank.
The $3.7 trillion-asset bank launched the effort in 2021 as part of a five-year racial equity commitment. The year before, nationwide protests sparked by the death of George Floyd prompted industry leaders to reconsider how they serve historically disadvantaged groups.
Following advice from regulators, JPMorgan launched a special-purpose credit program that provides mortgage assistance in majority-Black and majority-Hispanic neighborhoods. Under those programs, which are authorized under a provision of federal law, financial institutions can extend credit access to people who might otherwise be denied access to credit, or might be charged unfair rates.
When the bank rolled out the Chase Home Buyer Grant program, it looked first to provide credit access to Black Americans, who face the nation’s lowest homeownership rates. A year later, the program was extended to Hispanic Americans, a group that has the second-lowest homeownership rate.
The grants are made available to any resident of eligible majority-Black and majority-Hispanic neighborhoods — not only to members of specific racial groups — in part because residents of minority communities often fail to identify their race for fear that they may not receive a loan, Battles said.
The adoption of special-purpose credit programs has historically been stifled by criticism that they favor certain races over others. But attitudes have begun to change as regulators have assured banks that the programs do not violate the law, Battles said.
Blair Bernstein, a spokesperson for the American Bankers Association, reaffirmed the trade group’s support for special-purpose credit programs, calling them “an important tool that allows banks to expand access to credit for underserved communities.”
“Homeownership helps build wealth, and these important, responsibly managed programs provide opportunities for more borrowers, particularly as the cost of homeownership rises,” Bernstein said.
Yet, there are still some who question JPMorgan’s program, Battles said.
“There’s still a lot of education that’s still necessary, because all lenders are not participating in this space today,” she said. “I think it’s very necessary for us to be very intentional about our explanation around it — the how and why.”
JPMorgan has gotten support from nonprofit groups that focus on closing the homeownership gap.
“Homeownership is one of the most important ways to build generational wealth that families can pass down,” said Valerie Navy-Daniels, senior vice president of resource development at NeighborWorks America, a nonprofit organization that supports housing access and affordability. “We thank Chase and other banks for addressing this critical issue.”
Battles said that JPMorgan will be encouraging local market participants to support and promote the Chase Home Buyer Grant program and similar initiatives. She noted that funding from other institutions can be layered on top of the $5,000 grant.
“I would assume that we will likely expand this, expand this program again and go into some other markets, especially if we see the need in the value of going into those particular markets,” Battles said.
To those who doubt whether the grant program makes financial sense, Battles said: “There’s a cost to not being able to serve all who aspire to homeownership.”
A potentially scary, or intriguing thought, depending on your worldview: Whether you are approved for a mortgage could hinge upon the type of yogurt you purchase.
Buying the more daring and worldly Siggi’s — a fancy imported Icelandic brand — could mean you achieve the American Dream while enjoying the more pedestrian choice of Yoplait’s whipped strawberry flavor could lead to another year of living in your parents’ basement.
Consumer habits and preferences can be used by machine learning or artificial intelligence-powered systems to build a financial profile of an applicant. In this evolving field, the data used to determine a person’s creditworthiness could include anything from subscriptions to certain streaming services to applying for a mortgage in an area with a higher rate of defaults to even a penchant for purchasing luxury products — the Siggi’s brand of yogurt, for instance.
Unlike the recent craze with AI-powered bots, such as ChatGPT, machine learning technology involved in the lending process has been around for at least half a decade. But a greater awareness of this technology in the cultural zeitgeist, and fresh scrutiny from regulators have many weighing both its potential benefits and the possible unintended — and negative — consequences.
AI-driven decision-making is advertised as a more holistic way of assessing a borrower than solely relying on traditional methods, such as credit reports, which can be disadvantageous for some socio-economic groups and result in more denials of loan applications or in higher interest rates being charged.
Companies in the financial services sector, including Churchill Mortgage, Planet Home Lending, Discover and Citibank, have started experimenting with using this technology during the underwriting process.
The AI tools could offer a fairer risk assessment of a borrower, according to Sean Kamar, vice president of data science at Zest AI, a technology company that builds software for lending.
“A more accurate risk score allows lenders to be more confident about the decision that they’re making,” he said. “This is also a solution that mitigates any kind of biases that are present.”
But despite the promise of more equitable outcomes, additional transparency about how these tools learn and make choices may be needed before broad adoption is seen across the mortgage industry. This is partially due to ongoing concerns about a proclivity for discriminatory lending practices.
AI-powered systems have been under the watchful eye of agencies responsible for enforcing consumer protection laws, such as the Consumer Financial Protection Bureau.
“Companies must take responsibility for the use of these tools,” Rohit Chopra, the CFPB’s director, warned during a recent interagency press briefing about automated systems. “Unchecked AI poses threats to fairness and our civil rights,” he added.
Stakeholders in the AI industry expect standards to be rolled out by regulators in the near future, which could require companies to disclose their secret sauce — what variables they use to make decisions.
Companies involved in building this type of technology welcome guardrails, seeing them as a necessary burden that can result in greater clarity and more future customers.
The world of automated systems
In the analog world, a handful of data points provided by one of the credit reporting agencies, such as Equifax, Experian or TransUnion, help to determine whether a borrower qualifies for a mortgage.
A summary report is issued by these agencies that outlines a borrower’s credit history, the number of credit accounts they’ve had, payment history and bankruptcies. From this information, a credit score is calculated and used in the lending decision.
Credit scores are “a two-edged sword,” explained David Dworkin, CEO of the National Housing Conference.
“On the one hand, the score is highly predictive of the likelihood of [default],” he said. “And, on the other hand, the scoring algorithm clearly skews in favor of a white traditional, upper middle class borrower.”
This pattern begins as early as young adulthood for borrowers. A report published by the Urban Institute in 2022 found that young minority groups experience “deteriorating credit scores” compared to white borrowers. From 2010 to 2021, almost 33% of Black 18-to-29-year-olds and about 26% of Hispanic people in that age group saw their credit score drop, compared with 21% of young adults in majority-white communities.
That points to “decades of systemic racism” when it comes to traditional credit scoring, the nonprofit’s analysis argues. The selling point of underwriting systems powered by machine learning is that they rely on a much broader swath of data and can analyze it in a more nuanced, nonlinear way, which can potentially minimize bias, industry stakeholders said.
“The old way of underwriting loans is relying on FICO calculations,” said Subodha Kumar, data science professor at Temple University in Philadelphia. “But the newer technologies can look at [e-commerce and purchase data], such as the yogurt you buy to help in predicting whether you’ll pay your loan or not. These algorithms can give us the optimal value of each individual so you don’t put people in a bucket anymore and the decision becomes more personalized, which is supposedly much better.”
An example of how a consumer’s purchase decisions may be used by automated systems to determine creditworthiness are displayed in a research paper published in 2021 by the University of Pennsylvania, which found a correlation between products consumers buy at a grocery store and the financial habits that shape credit behaviors.
The paper concluded that applicants who buy things such as fresh yogurt or imported snacks fall into the category of low-risk applicants. In contrast, those who add canned food and deli meats and sausages to their carts land in the more likely to default category because their purchases are “less time-intensive…to transform into consumption.”
Though technology companies interviewed denied using such data points, most do rely on a more creative approach to determine whether a borrower qualifies for a loan. According to Kamar, Zest AI’s underwriting system can distinguish between a “safe borrower” who has high utilization and a consumer whose spending habits pose risk.
“[If you have a high utilization, but you are consistently paying off your debt] you’re probably a much safer borrower than somebody who has very high utilization and is constantly opening up new lines of credit,” Kamar said. “Those are two very different borrowers, but that difference is not seen by more simpler, linear models.”
Meanwhile, TurnKey Lender, a technology company that also has an automated underwriting system that pulls standard data, such as personal information, property information and employment, but can also analyze more “out-of-the-box” data to determine a borrower’s creditworthiness. Their web platform, which handles origination, underwriting, and credit reporting, can look at algorithms that predict the future behavior of the client, according to Vit Arnautov, chief product officer at TurnKey.
The company’s technology can analyze “spending transactions on an account and what the usual balance is,” added Arnautov. This helps to analyze income and potential liabilities for lending institutions. Additionally, TurnKey’s system can create a heatmap “to see how many delinquencies and how many bad loans are in an area where a borrower lives or is trying to buy a house.”
Bias concerns
Automated systems that pull alternative information could make lending more fair, or, some worry, they could do the exact opposite.
“The challenges that typically happen in systems like these [are] from the data used to train the system,” said Jayendran GS, CEO of Prudent AI, a lending decision platform built for non-qualified mortgage lenders. “The biases typically come from the data.
“If I need to teach you how to make a cup of coffee, I will give you a set of instructions and a recipe, but if I need to teach you how to ride a bicycle, I’m going to let you try it and eventually you’ll learn,” he added. “AI systems tend to work like the bicycle model.”
If the quality of the data is “not good,” the autonomous system could make biased, or discriminatory decisions. And the opportunities to ingest potentially biased data are ample, because “your input is the entire internet and there’s a lot of crazy stuff out there,” noted Dworkin.
“I think that when we look at the whole issue, it’s if we do it right, we could really remove bias from the system completely, but we can’t do that unless we have a lot of intentionality behind it,” Dworkin added. Fear of bias is why government agencies, specifically the CFPB, have been wary of AI-powered platforms making lending decisions without proper guardrails. The government watchdog has expressed skepticism about the use of predictive analytics, algorithms, and machine learning in underwriting, warning that it can also reinforce “historical biases that have excluded too many Americans from opportunities.”
Most recently, the CFPB along with the Civil Rights Division of the Department of Justice, Federal Trade Commission, and the Equal Employment Opportunity Commission warned that automated systems may perpetuate discrimination by relying on nonrepresentative datasets. They also criticized the lack of transparency around what variables are actually used to make a lending determination.
Though no guidelines have been set in stone, stakeholders in the AI space expect regulations to be implemented soon. Future rules could require companies to disclose exactly what data is being used and explain why they are using said variables to regulators and customers, said Kumar, the Temple professor.
“Going forward maybe these systems use 17 variables instead of the 20 they were relying on because they are not sure how these other three are playing a role,” said Kumar. “We may need to have a trade-off in accuracy for fairness and explainability.”
This notion is welcomed by players in the AI space who see regulations as something that could broaden adoption.
“We’ve had very large customers that have gotten very close to a partnership deal [with us] but at the end of the day it got canceled because they didn’t want to stick their neck out because they were concerned with what might happen, not knowing how future rulings may impact this space,” said Zest AI’s Kamar. “We appreciate and invite government regulators to make even stronger positions with regard to how much is absolutely critical for credit underwriting decisioning systems to be fully transparent and fair.”
Some technology companies, such as Prudent AI, have also been cautious about including alternative data because of a lack of regulatory guidance. But once guidelines are developed around AI in lending, GS noted that he would consider expanding the capabilities of Prudent AI’s underwriting system.
“The lending decision is a complicated decision and bank statements are only a part of the decision,” said GS. “We are happy to look at extending our capabilities to solve problems, with other documents as well, but there has to be a level of data quality and we feel that until you have reliable data quality, autonomy is dangerous.”
As potential developments surrounding AI-lending evolve, one point is clear: it is better to live with these systems than without them.
“Automated underwriting, for all of its faults, is almost always going to be better than the manual underwriting of the old days when you had Betty in the back room, with her calculator and whatever biases Betty might have had,” said Dworkin, the head of NHC. “I think at the end of the day, common sense really dictates a lot of how [the future landscape of automated systems will play out] but anybody who thinks they’re going to be successful in defeating the Moore’s Law of technology is fooling themselves.”