The adoption of e-mortgage technology continues to transform the mortgage industry, bringing lenders into a new age of streamlined production. Despite the fact that e-mortgage adoption has been driven primarily by regulation, lenders are finding that e-signature, e-document, e-delivery, e-recording and e-vaulting technologies are yielding tremendous efficiencies and cost savings, as well as improved customer satisfaction.
Still, e-note adoption remains a final barrier to achieving a completely end-to-end e-mortgage. In its online FAQ on e-mortgages and e-closings (November 2015), Fannie Mae says an e-mortgage is not truly an e-mortgage unless “the promissory note is signed electronically” and the document is “stored electronically.” The problem is, that means the mortgage custodian must be willing (and able) to accept documents electronically – and that started to happen only recently.
Although several U.S. banks, along with Fannie and Freddie, now accept e-notes (and, hence, e-mortgages), only about 350,000 fully electronic e-mortgages have been executed on the Mortgage Electronic Registry Systems (MERS) system so far, which is not a great deal of adoption considering how long e-notes have been around.
So, what will it take to tear down the so-called “wall of the custodian”? To find out, MortgageOrb recently interviewed Tim Anderson, director of e-services for e-mortgage technology firm DocMagic; Nancy Alley, vice president of strategic planning for e-recording solutions provider Simplifile; Stanley Street, president of warehouse lending technology provider Street Resource Group Inc.; and Brenda B. Clem, e-warehouse director for Street Resource Group Inc. What follows are excerpts from our interviews.
Q: What do you think are the top reasons today that mortgage lenders are hesitant to move away from paper-based processes?
Anderson: Old habits die hard. From the very beginning – when you took a paper 1003 loan application and manually keyed it into a screen that mimicked the form – the process has been baked into lenders’ workflows and systems. The process has always started with paper; to make it all electronic is a tail wagging the dog. It is very hard for lenders to conceptualize starting the process electronic and finishing it electronic.
One of the biggest challenges is that all of the parties in the process have to agree. Mortgages, as opposed to simpler transactions, take an army to process and close. Though there are a lot of participants internally that a lender controls, there are many, externally, that it doesn’t, such as title companies and county recorder offices, that all must agree to accept a fully electronic process.
Then there is often a lack of education and understanding with regard to the legal aspects of the Uniform Electronic Transaction Act (UETA), which was signed and effective in 1999, and the federal Electronic Signatures Act, which was signed into law in 2000. You still find people arguing if [they are] legal or not.
There’s also the issue of investor acceptance. So far, the government-sponsored enterprises (GSEs) are primarily the ones buying e-notes. Most of the other major investors that the mid-tier lenders sell to don’t.
Alley: I believe lenders are ready to move to digital. However, they want to do it comprehensively rather than by running a bifurcated operation. They cling to the paper because they might need it, depending on the loan and what combination of trading partners may need to touch and accept it. Lenders don’t control their own destiny on going “e” until they have confidence that the digital process is an industry standard that is widely accepted.
Clem: For non-bank mortgage lenders, the largest obstacle to e-mortgage adoption is the lack of investors and counterparties that are willing to purchase and fund e-notes. Purchase and sale agreements between non-bank lenders and aggregators/investors typically do not permit lenders to sell loans with electronic signatures or that are in an e-note format. Currently, Fannie Mae and Freddie Mac are the only investors that are willing to purchase e-notes, but this carries an additional requirement that the seller be a MERS member for use of the e-registry, e-delivery and e-vaulting of the collateral.
At the same time, TILA-RESPA Integrated Disclosure (TRID) rules compliance is creating a watershed movement for the adoption of electronic documents. Non-bank lenders are seeing increases in origination costs due to loans taking in excess of 50 days to close and fund, which results in additional interest carry charges on their warehouse lines. If the lender had the ability to e-deliver the entire closing package, not just the closing disclosure (CD), and have electronic acknowledgement of receipt for audit, this would satisfy the investor’s requirements for compliance. This opens the opportunity for a complete electronic closing package, not just the e-note.
Street: Still another obstacle is the lack of education on and awareness of the legal standing and enforceability of e-notes. The GSEs accept electronic signatures on most of the origination mortgage documents, and there is industry support to permit electronic signatures on the closing documents, as well. Loans closed with electronic signatures have been foreclosed upon in all 50 states, so the lack of enforceability of the e-mortgage itself has become a non-issue. Digital signatures, which are based on a public key infrastructure, offer a higher level of security due to encryption, which is an advantage over electronic signatures.
With regard to warehouse lenders, though, there is a real concern that no case law exists regarding the perfecting of a security interest on a warehouse line repurchase. That said, with proper legal warehouse agreements in place, the risk should be minimal.
In adopting new technologies, there is a significant investment in changing business processes in terms of both financial cost and human effort. The ultimate cost savings, efficiency improvements and risk mitigation by implementing e-mortgage technology far outweigh both the real and opportunity cost of not innovating to meet the needs of changing borrower expectations.
Keeping paper or adopting e-mortgage technology are not mutually exclusive propositions. The two methodologies are completely compatible, albeit requiring slightly different operational workflows. A consumer has the ultimate choice of whether he or she wants to sign documents electronically or with pen and ink. It is highly unlikely that technology will completely displace the “old-fashioned way.” Most likely, mortgage lenders will always have a hybrid combination of consumer choice. If lenders can transition to using electronic disclosures, then there is no compelling reason not to innovate.
Q: So, do lenders and/or others in the mortgage chain have valid arguments for keeping paper and postponing adoption of e-mortgage technologies?
Anderson: Literally none whatsoever. We now have over 1,441 counties representing more than 80% of the population in counties now accepting e-recording, and there really are no legal issues with the states accepting e-notary. Again, it’s more of a lack of education and will to change than anything else. Even Richard Cordray, director of the Consumer Financial Protection Bureau (CFPB), announced during the Mortgage Bankers Association’s Annual Convention that seeing mainstream adoption of e-closing is his No. 1 goal – and it certainly helps to document compliance with TRID.
Q: In your opinion, how much is the topic of security discussed among mortgage lenders when they consider e-mortgage initiatives? Is this is a concern that is preventing adoption?
Anderson: There have been some major publicized hacks in the commercial space, so it comes up, but not as a major discussion or concern because they already have huge databases they need to protect and adding e-mortgage is not a big factor. The paper world is significantly less secure and not fire- or flood-proof. I have not heard that to be a big factor, in terms of lenders considering for or against adoption, because lenders already have the risk with their current databases and online files.
Alley: I don’t believe concern over security is a barrier to adoption. The technology exists to do an electronic mortgage as securely, if not more so, than a paper mortgage.
Street: Security risk can be viewed from two perspectives: systemic infrastructure breach and loan-level fraud. Technology makes it feasible to have a fully digital lending process. With any technology, security risk is always a critical issue.
However, digital lending is not new – one just has to look at the consumer and auto lending industries. Moreover, loan applications, loan origination and loan processing have been automated for years. It is only the closing and secondary market delivery processes that have remained manual. I would suggest that there is much more systemic security exposure in loan origination systems than there is in the closing process, if only counting the number of people who have access to data.
Security concern should be less with e-mortgages because of the closed transmission architecture in which electronic data and documents are exchanged and tracked. If anything, security is most paramount in the identity verification of the closing parties (e.g., the borrower, notary, witness, etc.), as well as the validation of consent to electronic signing that is required under e-sign and UETA. Ensuring this security component is critical in authenticating and defending the security interest in the e-note.
In addition, the physical security of paper files containing personally identifiable information is at greater risk to theft or rogue disclosure at any point in the process more so than electronically secured data.
Q: Hypothetically, if there is a major “Target-like” attack on a lender’s or vendor’s loan origination system or enterprise network – or worse, an industry-wide breach of some sort – do you think it could lead to lenders reverting back to paper-based processes? Or do you think it will it be too late, if they have already gone all digital?
Anderson: I concede that many will use that to justify going back to or staying with paper – but look at all of the risk, fines and penalties lenders have already paid in the paper world when they couldn’t show or document what they said they did. How many county public records have been lost to fires, floods or hurricanes?
Lenders such as Quicken Loans, with its Rocket Mortgage, and Guaranteed Rate, with its Digital Mortgage, are already leading the way. It’s now about offering consumers efficiency and convenience. The genie is already out of the bottle. The new millennium borrower already lives online. There is no going back if you want to stay in business.
Alley: Security of data is a primary concern of any mortgage lender or service provider, and new threats are always emerging. However, even steeped in paper, I do not know of any lender, settlement provider or investor that doesn’t maintain a system of record containing sensitive data. The reality is that as an industry, we already run in parallel, and these processes are inefficient and expensive and don’t really offer any security benefits. Technology offers the ability to improve security as long as, as an industry, we remain vigilant about our data – something we already have to do today.
Clem: Leveraging technology in mortgage manufacturing is the only way to remain viable and compete for the millennials, who expect to conduct all of their financial transactions electronically. In addition, automating and streamlining process workflows and implementing tools to extract data from documents and third-party providers is necessary to gain efficiency and rise above an antiquated paper-based process. The CFPB is all about the consumer experience and stressed the importance of technology to successfully implement the loan estimate and CD. New technology advancements are necessary to meet that requirement for consumer convenience and satisfaction.
Street: Out of the approximately 40 different business processes involved from originating to processing and closing and selling a mortgage, e-mortgage only introduces a new technology overlay in the closing and secondary market delivery process. There is no such thing as “too late” to be digital. There is no reverting back to paper as a norm. Finally, in the legal world, there is only one authentic promissory note, whether paper or digital. It is inevitable that mortgage bankers must innovate through automation, whether in whole or in part, but the days of paper are ultimately numbered.