The Real Vote That Lenders Need To Cast


The November election is not the only choice lenders face as they make decisions regarding the future of the mortgage industry. As the legal obstacles to electronically-signed loan documents fall and more consumers demand electronic documents for their home-buying process, lenders must evaluate and decide which of the two formats best serve their needs.

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On one side is the dynamic data-driven Securable, Manageable, Archiveable, Retrievable and Transferable document (MISMO SMART Doc). On the other side is the Adobe Portable Document Format (PDF).

Which format will win the hearts and implementations of lenders everywhere? While it’s too soon to know for sure, there are some key differences between the formats lenders should know.

Understand the Issues – What is Different Between the Formats?

SMART Docs and PDF-based documents both reach the same outcome – a legally binding loan document. However, each format uses a different technology and provides different benefits to the end user.

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From a technology standpoint, an electronically signed SMART Doc is a single electronic document with five sections. These sections are XML-based and the creation, viewing, signing and storage are all typically completed in a Web-based environment.

PDF Documents on the other hand, are often created in another application and converted to the PDF format which is then viewed within a Web browser or through stand-alone utilities like Adobe Reader.

While there are significant differences, eSigned SMART Docs and eSigned PDFs each have benefits useful to the lender. The choice is driven by each lenders’ individual needs, but it is also important to consider that the two types of eDocuments are not mutually exclusive. For example, a SMART Doc can include an embedded PDF file that has been electronically signed.

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Many advocates of the SMART Doc tout the format’s native Web structure and data integrity. The SMART Doc Version 1.02 format has also been implemented by most eClosing technology providers. Most importantly, it is the only electronic note format currently accepted by Fannie Mae.

SMART Docs are data-driven and system agnostic. They do not require proprietary software to implement, and the format can automatically extract loan data. SMART Docs also provide an extra level of data security with an Audit Trail feature that can track every change made to the document and provides a secure record of all signatures, deliveries and modifications.

The challenge to SMART Doc eNotes has often been around implementation. Lenders and financial organizations trying to consolidate technology formats for electronic documents across all departments have also struggled since few industries outside mortgage lending use XML for binding legal documents. The required XHTML View (for SMART Doc Category 1 eNotes) can also create inconsistent displays on different Web browsers, and print rendering can be inconsistent. This is a headache for consumers who want a simple process to view, print and sign documents.

eSigned PDF documents, which have been in use longer than SMART Docs, are the most widely used format by mortgage lenders and other financial services, even though most investors still do not accept them. These documents are also legally binding (remember, the legal foundations of ESIGN and UETA are technology-neutral), and eSigned PDF files are accepted by many industries outside of mortgage lending. PDF documents are arguably easier to implement and present a consistent display across all Web applications. In addition, all eSign providers can electronically sign PDFs. PDF documents are also easy for the borrower, since free PDF reader software is readily available for home computers, allowing borrowers to easily receive, view, save and print the documents for their own records. However, it is more difficult to embed data into PDF Documents in a standardized format, something that SMART Docs were designed for from the start.

Is There a Third Party?

While the selection of SMART Doc or PDF sounds like an all-or-nothing decision, there have been recent changes to the proposed formats that incorporate the best of both formats. The MISMO SMART Doc V3 protocol (an inherent part of the MISMO Version 3.x Reference Model XML specifications) includes both the native XML Data section and a View section that can contain any file format, including PDF, images, Microsoft Word and others. This closes the gap between the formats by providing a consistent, standardized structure for all loan documents – disclosures, closing and title – with XML data along with an easy-to-use PDF view for consumers.

Fannie Mae and Freddie Mac are also looking hard at ways to facilitate broader eMortgage adoption, per their FHFA Scorecard mandate, and moving to SMART Doc V3 with PDF View is one consideration. In addition, the MERS® eRegistry allows for registration of PDF or SMART Doc V3 eNotes through the Data Point registration method, eliminating one of the biggest obstacles to embracing one format over another. These considerations are being vetted within the MISMO eMortgage Workgroup, which will meet in person in Crystal City, Virginia during the week of September 12 – see to register and join us there.

While neither PDF nor SMART Doc 1.02 answer the industry’s need for a universal intelligent electronic document format, SMART Doc V3 with a PDF View provides a universal View format coupled with intelligent, standardized XML data. Widespread adoption could be spurred on by broad investor acceptance, which could be led by GSE acceptance and an associated timeline for required delivery.

Today’s top document vendors can already dynamically generate multiple output formats. Adding the SMART Doc V3 to their systems would be relatively easy, and would provide lenders nationwide with the data security, technology and usability needed to propel electronic loan documents into the mainstream.

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