Figure Technology Solutions, Inc. (FIGR) Earnings Call Transcript & Summary

Let's turn to lien perfection. Can you talk to us a little bit about how Figure perfects liens and how that technology allows for on-chain verification?

So from a legal standpoint, DART operates similar to MERS, which is the mortgage electronic registry system. It's an ICE product. Leans are issued in the name of DART Collateral Manager, LLC and then as the nominee for the original lender and its successors and future assignes, and the original lender is listed as the lean beneficiary in the DART system. What makes DART novel, so it's a way of sort of assigning a loan upfront and then transacting. That part is not novel. What makes DART novel is the way in which it receives input. Other registries like MERS expect one of the transacting parties to submit a data feed to report the transactions within a relatively loose time frame that is only specified contractually and cannot be enforced technologically. This approach -- that approach sort of relies on the honor system and opens windows for fraud. In contrast, DART takes its input directly from the blockchain, as I outlined, where the transaction processing system, which is the Portfolio Manager application, records the transaction immediately upon execution. DART actively listens to the blockchain for transactions it needs to reflect in its registry. So transactions reflected on DART are always accurate and they are -- they reflect exactly as they were executed without alterations from human errors or malfeasance, and it's done automatically and immediately, as I mentioned before. And so DART's automatic reflection of transactions also does create some operational efficiency because it eliminates the need for transacting parties to provide a data feed and also eliminates these periodic reconciliations that actually something like MERS requires. And so reviewing the DART registry is routinely part of the diligence checks that our clients perform, often done by their custodians. And so it's a much simpler process. And it plays another important role actually in the Figure ecosystem, because we're defining the next generation of capital markets, we are causing a very major disruption in this conservative sector in the sort of county recorders space, but that world is not going to move to blockchain at any time soon, even though if you kind of go back to the early days of blockchain, there was a lot of talk about county records and title insurance. That was a big part of the excitement around blockchain initially. But we know that, that world is not moving to blockchain anytime soon. And so DART's role that we play is important when you think about broader disruption because for disruption to reach its full economic potential, the disruptor must find a way to enable the migration of legacy installed base, right? If you try to make the legacy forward compatible, you're limited by the current technology. But instead, you typically want to make technology backward compatible, right? So an iPhone, as an example, replicated the dial pad of a physical phone. You couldn't try instead to turn a desk phone into a smartphone. So that's kind of what we're doing with DART, right? We're not going to be able to make the counties forward compatible with blockchain. Instead, we're making the new technology backward compatible with the counties. We bridge digital assets with the legacy world of paper instruments. And I think that technology shift is one of the reasons why we've had such robust adoption and have been able to push the market forward. I think that's something that Figure does really well.

I think it's safe to say that many lenders out there are kicking the tires on their books and trying to verify collateral. Does your technology allow for easier collateral verification and auditing and perhaps, why?

Yes. I mean the simple answer is, absolutely. In the aftermath of Tricolor, we saw an increased number of requests for granting of DART access, credentials to users working on behalf of warehouse lenders. And so oftentimes, those would be custodians. And from informal discussions, we learned that this increase in requests was the result of the warehouses performing additional inventory checks of the collateral across all of their assets. So not just assets in the Figure ecosystem, we were sort of a byproduct of that. On one occasion, we were asked to provide access credentials to a person in the afternoon so that, that person could complete an audit report for all of the warehouses holdings on the Figure platform by the close of business. Needless to say, that person completed their report with time to spare because of how easy Figure makes auditing and verification, right, through that Portfolio Manager product. The warehouse lenders know what to do and they know where to look. Figure's Portfolio Manager enables you to see all of your rights. So the assets you own reminder, assets have been pledged to you instantaneously. DART allows you to instantaneously verify that your name is listed as the beneficiary for the relevant legal instruments like liens, e-Notes, et cetera. And what's even more important is that you can have the confidence in these reviews. You don't have to cross-check with other sources to develop confidence in the data. The blockchain systems reflect that common view of the world, right? There's no e-mails or paper going across, as we've talked about, there's one blockchain. Everybody is looking at it. And furthermore, the various systems in the Figure ecosystem are constantly cross-checking the information against each other in the background. Whereas, as I mentioned earlier, MERS, as an example, requires you to periodically, I think it's monthly, download your entire MERS database and certify that there are no discrepancies between the MERS registry and your enterprise records, whereas Portfolio Manager and DART eliminate the need for any of that. So when you start to think about Tricolor and what happened for First Brands and you think like, okay, and granted MERS is mortgage and one of those is auto and one of those is supply chain. But the point being is there are supplier payments. But the point is that you can't -- you can imagine if one of the checks and balances is, please certify that you did, in fact, download your entire MERS database and certify there's no discrepancies, you can see where that falls apart. And so I'd also, James, if you will, allow me to just take a quick opportunity to talk about servicing, loan servicing in this context. Loan servicing, what I mean here is the payments of -- for loans, collecting payments and also managing delinquency. And although we now have some third-party servicers in our ecosystem, Figure still services most of our own loans. So there are some third parties, but we do most of it ourselves. And in this typical servicing construct, P&I payments, crypto principal interest payments from consumer borrowers are received in an omnibus account, like a centralized account and then applied accordingly with remittance monthly. However, you all on the call have likely heard about yields, which is the settlement currency we have introduced that comes with all the benefits of an SEC-approved security with the flexibility and programmability of stablecoin. So that's our stablecoin. Yield is backed by short-term treasuries, pays interest and has a fixed exchange rate with fiat. And yields opens up tremendous opportunities for transparency and servicing. If the relevant parties, such as the asset owner and the warehouse, allow the funds in the custodial account to be held in yields, it becomes very easy to sequester funds accordingly, and the servicer can then use the encumbrances recorded on the blockchain to determine the account or wallet to which the funds from a consumer's payment should be applied. And so this will provide better separation of funds and better security. Reminder, the legacy process is just dumping in random ACH payments into one master account and then trying to apply them. And so this is really just the tip of the iceberg. The deposit of a custodial funds into a yields account for the warehouse lender enables the warehouse to monitor the flow of funds continuously. The unpaid principal balance for the loans pledged as collateral to a warehouse are also then, therefore, updated in real time and they will real-time process the consumer's payment. So if any of the loans were double pledged, the funds from consumers' P&I payments could be applied to the custodial account of only one of the pledges. So there would be an abnormality detected, right? Because, again, it's all back to how do we prevent something like this happening. And you can have -- when you're servicing a stablecoin, the matching of assets would be another way to prevent something like the Tricolor example. And so you get a lot more transparency in asset performance and funds movement through Figure's technology and yields is ushering in a new era of transparency and auditing and due diligence. So I think what that shows you is we're continuing to build tools that -- when people think of stablecoin, often they're talking about money movement, but stablecoin as applied to our ecosystem is really powerful as another way, not only is it much more operationally efficient, which is one of the takeaways here, but it's also a way to prevent these kinds of problems. And I think it's why you're going to see more and more assets migrate towards our capital market.

Excellent. So Michael, you touched before briefly on title insurance. So I want to dig in a little bit on that. You've talked previously about how your technology does not require title insurance for loans. Maybe you could just dig in a little bit on that. How does Figure's technology obviate the need for title insurance? And are you ensuring the title yourself?

Yes. So title insurance performs a number of functions in the mortgage process, in addition to ensuring that the property has free and clear title -- excuse me, that the loan has free and clear title to the property through the owner, and therefore, the loan is not encumbered. And Figure's process does the same. We identify encumbrances to the title at the county level. We search for liens, we pay off existing liens, but we just don't wrap that in an insurance product or frankly, pay someone to do so. So it's part of our kind of low-cost nature in what we do. But instead, we confirm that the lien is clean upfront or we make it so via payoffs, and then we use DART to track the ownership of that lien. So we don't necessarily need the title insurance in our model if these loan steps are taken. And for people that are closer to the mortgage space, they'll probably be aware that the title insurance is -- goes hand-in-hand with the agency process, right, Fannie Mae and Freddie Mac. And what's interesting about Figure is we're building our own capital market that's not just specific to mortgage, but has a lot of mortgage assets, it's a competitor to what Fannie Mae Freddie Mac have built, and it's all on blockchain. And so we don't feel that we need this given all the things I've been talking about, we actually view that as not necessary and potentially at a cost versus the low-cost products that we push.

All right. Turning to the blockchain. So if more lenders and originators do move on to the blockchain, but they all use their own proprietary blockchains. And admittedly, there's been fragmentation in the number of blockchains out there, even in recent months. Does this make the system more complex given lack of interoperability? And how would, in your view, this interoperability problem be solved over time?

Yes. Well, so Figure uses Provenance, which is a public blockchain. It's open to everybody. That having been said, you do raise an excellent point about this proliferation of blockchain. I was actually just talking to someone. I called it a Cambrian explosion of blockchains and stablecoins. And so in technological innovation, it is very common to have this fan-out of solutions in the early days of adoption, and we are still in the early days of blockchain adoption. As adoption progresses, the winning applications crown the winning technologies and there's a natural whittling down process of technologies through attrition, consolidation, et cetera. And we believe that public blockchains have a fundamental advantage since they enable broader market participation, the traction of our Demo Prime efforts support that view. And we also believe that our market position as the leader in real-world assets, reminder, we have about $18 billion plus of assets growing fast with over $65 billion in transactions. These are all available on the Provenance Explorer. That will be crown because of that traction as one of the winners. But I don't think that the world is going to ever get to a single blockchain. There will be a few blockchains and the interconnection technology will make things interoperable. So technology diversity will actually become less of a problem. And if you look at Figure, we recently announced, for example, our Sui announcement where our yield stablecoin is now available in that ecosystem and we're bringing liquidity from those other blockchains to the assets on the Figure platform where we have such a market leader position -- leadership position, excuse me, in RWA. And I think people are very interested and eager to invest in our assets. So you'll see more and more technology that allows us to go towards those pools of liquidity and bring them on to our blockchain, making these things interoperable. And so I think a phase of technological breakthrough, they're typically almost always followed by a much longer phase of incremental innovation that cumulatively does have as much impact on progress as the breakthrough phase. So if you think about it about a ATM networks, say, in the '80s and early '90s, there was a bunch of these, Cirrus, Plus, MAC. My guy would have had to look for a logo prior to using his ATM card to make sure. And nobody worries about that anymore, right? And this is what's going to happen to blockchain. So I tend to view the interoperability challenges more like a nuisance than a major roadblock to somebody like Figure executing this vision we have for the capital markets.

Excellent. Okay. With that, we're about out of time here. So thank you so much, Michael, Macrina. We really appreciate your time, and I look forward to talking to you on the earnings call in just a few weeks.

Thank you, James. Really appreciate the [indiscernible].