Blockchain startup Spring Labs has put its first fraud-prevention tool into production using a permissioned version of Ethereum. The Los Angeles-based firm is now working with two lenders in the Property Assessed Clean Energy (PACE) financing space and onboarding two others, said co-founder John Sun.
Each lender now shares borrower and property data through the Spring Labs protocol, where it is either tokenized or sharded so that only the entity who contributed the data can view it. The lenders have been testing the platform since June and believe that it could save up to $10 million in fraud or 1% of the industry’s total loan transactions.
“They built a real-time database that I could ping to see if there are any other assessments on a property now or coming up,” Mike Schmidt, chief operating officer of PACE Funding, said in an interview. “None of us have done anything [with blockchain] before, but within a week it was paying dividends.”
PACE loans are used to finance construction projects that make buildings more energy-efficient or provide new sources of renewable energy for commercial, industrial and private residential properties. Run by the U.S. Department of Energy, the residential PACE program allows local and state governments in California, Florida and Missouri to provide funding for energy improvements.
Specifically, PACE loans create liens that are repaid by a homeowner’s property taxes. The consumers who seek PACE financing typically have lower-than-average FICO scores because they usually come to the program after getting denied an unsecured loan or home equity line of credit, Schmidt said.
“We are often their only hope of getting a new roof or an air conditioner,” Schmidt said. “We’re helping make solar mainstream and not just for the rich entitled people but for those in the working-class neighborhoods.”
Spring Labs’ blockchain solution was an attractive one for PACE lenders who were concerned a centralized hub for data exchange might be another target for contractors who are trying to game the system, Schmidt said.
The space is dominated by four lenders because the most natural financiers have an incentive not to be PACE lenders: Mortgage lenders have the necessary skills to enter the PACE loans sector, but PACE loans have a “super lien” on the property, meaning they get paid out before mortgage payments.
For Spring Labs, this small number of participants made PACE an attractive space to test the Spring Protocol, said Sun. Because data is either tokenized or sharded, sharing financial data is no longer a competitive disadvantage. Spring Labs’ end goal is to replace credit rating bureaus and data aggregators by making data exchanges possible without centralized data hubs, which can be hacked and which also make data sharing more expensive.
Cutting out middlemen data exchangers is also the same logic Visa’s R&D arm had when quietly developing a blockchain that would allow banks to exchange customer data without data aggregators.
Lien-stacking isn’t the most legally fraught type of fraud the PACE program faces, but it is a problem that customers have been pushing lenders to solve, Schmidt said.
The most immediate pay-off for Schmidt’s business will be pitching other states on the idea of PACE lending. Currently, PACE Funding is a licensed lender under California’s Department of Financial Protection and Innovation.
“Now we can go in and say, ‘California took one on the chin for you, and we’ve learned a lot of lessons the hard way, but we have a lot of consumer protection now so we never have to worry about stacked assessments in your state,’” Schmidt said.
In the future, Spring Labs is also aiming to give PACE lenders more data on bad contractors and more data on PACE borrowers to better determine creditworthiness, Sun said.
“This is an interesting use case for us to apply our technology,” Sun said. “We spun up a bespoke data-sharing network quickly in an industry that hasn’t shared a lot of information before. We think this is a safe technology that is better for lenders and consumers and is at much less risk for data losses.”