Melanie Feliciano is chief compliance officer for document technology provider DocMagic and a board member with the Electronic Signature and Records Association (ESRA), while Tim Anderson is director of e-services and chief legal officer for DocMagic. MortgageOrb recently interviewed the two e-mortgage experts to learn more about how e-signature technology has evolved in recent years and how new regulations including the Consumer Financial Protection Bureau's (CFPB) new integrated disclosures rules are going to push lenders to embrace e-sign and e-document technology.
Q: Electronic signature technology has been around for many years, but the mortgage industry has been slow to adopt it. That is now starting to change. What would you say are the primary factors driving adoption?
Anderson: E-sign and electronic transactions are more prevalent in our daily lives. Consumers are now used to e-signing pads and using their electronic cards in order to make purchases. Now, with Apple's iPay and other electronic payment technologies, it has become ubiquitous. Mortgage is one of the few industries that has been slow to embrace this trend. Â
Feliciano: Another critical factor is the acceptance of electronic signature technology by key parties in the industry, including investors, the IRS, the housing agencies and others. A single document that requires a wet signature poses the risk to perpetuate the paper process. For example, the Social Security Administration still requires a wet signature on the SSA-89.
Q: How much will the implementation of the CFPB's new integrated disclosures drive lenders toward adoption?
Anderson: To be quite honest, if a lender is going to prove compliance of consent and delivery, I don't know how you are going to be compliant without it. Again, e-disclosures are becoming the norm for initial disclosures, so why would the borrower experience be any different for the closing disclosure?
Feliciano: When time frames (i.e., new receipt of delivery rule on closing disclosure) for delivery are required for certain documents in the origination process, the use of e-sign is going to be the key to compliance. Prior to the CFPB, mandatory time frames were around the initial disclosures, some re-disclosure events, and the receipt of the appraisal. The use of e-sign has proven an effective strategy in these cases.
You hit a critical point about the ‘consumer experience’ – that should not be understated. Since the delivery and execution of the initial disclosure documents is part of the early engagement of the consumer, you do not want to introduce a completely different process that is foreign to the consumer when closing the loan.
Q: In your view, will those rules make e-signature technology a prerequisite in order to originate loans?
Anderson: Not only to support compliance of the integrated disclosure reg, but investors want to the ability to show and retain proof of compliance of acceptance, consent and e-delivery for compliance audit purposes. The beauty of e-sign is that from initial application all the way to investor delivery, you have a virtual date and time stamp audit trail of what was disclosure by whom and when all along the mortgage manufacturing process, as well as the ability to track previous versions all along the way. It's extremely difficult to replicate in a paper trail where lost documents, missing pages and signatures is still commonplace and endemic.
Q: What would you say are the final barriers to developing a true end-to-end e-mortgage process?
Anderson: There still isn't enough investors that will buy e-notes, otherwise I think we have pretty much broken down all the major barriers and myths to adoption. The old standard drum beat was that consumers would resist – and now we know for sure that is not an issue. The other was that the county recorders will not accept e-sign; however, the current count is that 45 states support it with 1,249 counties actively e-recording, representing more than 65% of the total activity and over 19 states currently accepting e-notary.
Q: How can those barriers be overcome?
Anderson: Not a legal issue, just education that this is real and can be implemented with little cost. �
Q: Within the e-mortgage there is the e-closing process – how far away are we from seeing e-closings become ‘universal?’
Anderson: I think within two years. Once the CFPB begins to audit lenders for compliance of QM, ATR and TRID (the new RESPA integrated disclosures), you are going to see a major shift to make e-mortgages and e-closing a standard process to prove compliance. We are already seeing adoption of warehouse lenders who see this as a competitive differentiator and advantage.
Q: Do you think a certain percentage of closings will always be in person, despite the development of e-closing technology?
Anderson: Well, unless the law changes in a majority of the states there still is a in the ‘personal or physical presence’ requirement for notaries. But with key initiatives like the CFPB Know Before You Owe e-closing pilot that is about providing additional information and education prior to closing and more will be at time of application with the Loan Estimate form, I believe consumers are going to feel more confident and empowered to do more on their own.
There are also a lot more online companies that are providing better tools and making it easier for an unassisted mortgage process online. But I do believe there are still going to be people who will want that personalized hand holding as this is still one of the biggest decision and investments they are going to make in their lifetime and it's not something they do often to make it a commodity type transaction.
Q: For example, in ten years, what percentage of closings do you think will be handled completely electronically/remotely?
Anderson: In 10 years I believe you will see a significant majority – more than 85% – conducted electronically for many reasons, including compliance, convenience and consumer preference.â�¨
Q: The Mortgage Industry Standards Maintenance Organization's (MISMO) 3.3.1 model is about to go live – what does the new version of the standard do for the industry?
Anderson: It combines all the previous versions into a common and more flexible format that solves many of the data integrity issues of previous versions. It also provide a more robust standard to handle exceptions in a standard way so that all systems can better talk to one another and the data can be more easily verified and trusted between systems.
Prior to version 3, there were separate lending specs that were very transaction specific for labeling data and documents, and various methods for packaging and exchanging information. These standards did not use a single data dictionary, nor was there a common way of exchanging data and documents.
One key example very relevant to the upcoming integrated disclosure rules is the ability to establish common fee definitions and shared placement with the new dynamic forms so they mean the same thing in the lender's system of record, (LOS) as it's does with the title agents system. Without this you could never ensure accuracy of the GFE & TIL calcs and disclosure documents would vary.
Q: E-document and e-sign technology are playing a critical role in facilitating the new ‘assembly line’ or automated approach to building loans. How much do you think this will help lenders reduce gross loan defects moving forward?
Anderson: The impact to this is extremely significant. All along the mortgage process the issue has been, ‘How do I know that the data and documents match?’ From the loan origination process to investor underwriting and funding and ultimate loan servicing, this has been the primary issue with paper documents. With an enterprise e-process the data travels with the documents along with an electronic audit trail (electronic evidence of compliance), ensuring greater data and document integrity and verifiability through-out the process.
The concept of a self-verifying document is now real. That was the original intent behind Fannie pushing MISMO category one SMARTDocs for e-notes; it is the reason the CFPB has mandated the new documents support MISMO 3.3 data spec requirement; and it is the reason the Federal Housing Finance Agency (FHFA) is pushing its Uniform Closing Dataset (UCD) as well. Other examples are the FHFA-mandated Universal Appraisal Dataset (UAD) in all appraisal orders and the embedded verification data for the 4506-T Automated IRS Tax Transcript process.
Q: Considering there will always be some human intervention involved in the loan assembly process, by how much do you think e-docs/e-signatures will reduce the error rate?
Anderson: I don't think e-docs and e-sign by themselves will reduce it that much, but if you make the e-docs intelligent utilizing the MISMO 3.3 spec then I think you are going to see at least a 90% improvement in the data accuracy and document integrity issues seen today. Why? Because lenders can now implement a full automated data verification process to certify the data is current, compliant and complete before they embed it into intelligent documents in a much more automated fashion.
Because some verification are still going to be manual, errors will still occur when lenders have people keying-in information that cannot be self-verified by trusted databases or "sources of truth" as we call them. For example, one can now go directly to the IRS to verify income (VOI) or Social Security Administration for social security numbers. There are other systems that go directly to verify deposits (VOD) – thus allowing assets to be instantly verified online in real time. Fannie and Freddie as part of their Loan Quality Initiative, (LQI) are developing more robust systems to verify data faster.
Q: What would you say are the top three security considerations when looking at e-signature technology today?
Anderson: 1) Third party authentication – being able to ensure the right people at the right times are the ones e-sign ing including other parties involved in the process like notaries. 2) Signature verification – the system needs to be more than a basic signature field overlay. To reduce fraud, signature needs to be physically embedded into the document and be able to be systematically verified/validated. 3) The data and audit trail need to be embedded in the documents to provide electronic evidence of who did what on the forms. Because of compliance concerns, investors are requiring this electronic proof, in order to pass future audits. Â
Q: What are the top security concerns and how are they being addressed?
Anderson: Obviously since you are dealing with legal documents, you need to be sure they are tamper sealed and e-sign ed within a secure SSAE-16 environment. Also, the delivery of the documents needs to be more than just email but have secure encrypted security wrapped around those documents with ability to authenticate both the sender and receiver as well as full delivery tracking. Finally, if you are doing a true e-closing, you will need an e-vault to ensure the security, sanctity and integrity of the data, documents, signatures and security wrappers. Â
Q: How is ESRA involved, if at all, in the implementation of the TRID Rule?
Anderson: ESRA's mission is to globally lead endeavors to advocate the use of electronic signatures and records, promote process efficiencies and provide educational resources to the public, businesses and government. To that end, ESRA has been educating its members about how the use of e-sign technology will enhance compliance with the rule's timing and delivery requirements of the integrated disclosures.
In addition, ESRA arranged for a representative from the CFPB to attend ESRA's Winter Meeting to speak to its members about the CFPB's e-closing pilot. In turn, the CFPB invited its members to provide feedback about the pilot, the use of e-sign technology, and the barriers to adoption.
Although the pilot uses the current GFE/HUD-1 and TILA forms, it will help the CFPB determine whether there are advantages to an end-to-end electronic closing process. The pilot's results will certainly influence the CFPB's policy with respect to e-closing after the integrated disclosures go into effect.
Q: What other activities has ESRA been involved in this year?
Feliciano: The ESRA Board is hard at work planning for its annual conference in November, including lining up speakers for such topics as electronic transactions in the auto industry, e-closings in the mortgage industry, e-vaults and more. In addition, the public policy committee focuses on salient issues that affect adoption of electronic signatures and records at the state, federal and international levels. Over the years, the ESRA has become a trusted resource to regulators, lawmakers and the public, and the committee has achieved positive results by maintaining a high-integrity, vendor-neutral stature.