Have you ever thought that the evolution of our industry towards e-mortgages is a bit like watching your children grow up? Growth comes gradually through incremental change. The changes are often quite memorable, but they come in small steps as opposed to radical and disruptive ones. It isn’t until you look back at old pictures that you see clearly how much they have grown.
The FHA’s recent acceptance of electronic signatures on mortgage loan documents is a good example of this analogy. The FHA’s revised policy has been years in the making, thus making the announcement something quite noteworthy. Yet, it is an incremental change, another single puzzle piece that has finally fallen into place. We can now look back and appreciate that all government agencies that influence mortgage in any way are on board with electronic signatures.
While that’s great, what’s next? Will there be a larger, more demonstrative advance we can make? I believe the CFPB’s commitment to driving e-mortgages could be the catalyst that brings about faster evolution – the adolescent growth spurt, so to speak, that could move us forward in a big way. I also believe that process flexibility – one that is a hybrid of paper and electronic – will be important because even with the weight of the CFPB, it won’t happen in one fell swoop. There will be parts that are going to be awkward for a while as we collectively figure out how to make all phases fully support electronic workflows.
The Flexibility of a Hybrid Approach
The vast majority of documents in a closing package can already be electronically signed. The legal acceptance has been in place for over a decade and the technology capability has been proven. Other factors are what continue to hinder the broader adoption of e-mortgages. One is the difficulty in integrating various systems across multiple workflow participants. There are numerous parties involved in the mortgage process and every one of them must get comfortable with the legality of electronically signed documents, and every one must modify their workflows to accept the electronic delivery of documents. The inertia of existing processes is very difficult to overcome.
A second challenge is the development of an effective approach to e-notarization. This is another example of where process proves to be much harder than technology. Electronically notarizing a document is not technically difficult, but the guidance on what is allowable varies from one county to the next. Furthermore, the specific method in which e-notarization is conducted can vary. There are many approaches from mobile notaries to electronic closing rooms. Which way is better? What will work the best?
This combination of inertia and an unclear path forward results in very slow change. If forced to evolve by an external agent (i.e. the CFPB), having some flexibility in process will make the change much easier to accommodate. Being able to accommodate both paper-based and electronic transactions and gradually transitioning more from the former to the latter will ease the journey to a total e-mortgage. Here’s what a hybrid evolutionary path that supports both processes along the way might look like.
The first step is to transition all disclosures to electronic delivery and signature. With the IRS now accepting 4506T forms, there is no reason to delay the use of electronic formats in the pre-close phase where interaction with the loan applicant is the primary activity. During this initial phase, all other workflows remain paper-based.
Second, establish linkages with the various “back end” mortgage process participants. Once you decide to approve a loan and you move into the closing phase, there are numerous other parties to exchange data and documents with: title underwriters, appraisal companies, settlement agents, escrow agents, etc. Whether through multiple system integrations or via a centralized pre-integrated communication hub, enabling an electronic workflow in the closing phase is an important next step.
Third, convert to an e-note. There is still a frequent misconception that the note needs to be notarized. This is not the case. Transitioning from a wet-signed note to an e-note is feasible but will almost certainly involve a phased migration. Does loan type affect which can go e-note? Are certain investors more prepared for e-notes as compared to others? During this period of time, having the flexibility to handle different but concurrent workflows is important.
Finally, tackle the e-notarization challenge. This is still the most difficult to solve. Separating out documents that require traditional notarization is an important workflow step that must work efficiently while this phase is being designed. Supporting multiple options is also important in order to accommodate the constraints or limitations of certain counties or jurisdictions.
The path to the e-mortgage is getting clearer every year. We still have much road to travel, but being able to transition in phases will make the challenging parts of the journey easier to get through.
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