The regulatory environment for today’s mortgage lender has become exceedingly complex. Compliance becomes more difficult each day, as a cascade of new disclosure and lending requirements are imposed by federal, state and local regulators. With this avalanche of regulation it is becoming very difficult for mortgage lenders to gauge whether their internal compliance systems are functioning properly and whether the continuing cost, in both human and financial terms, of adopting and maintaining adequate regulatory controls can be sustained in a volatile origination market.
At the same time, the absolute risk of non-compliance has become intolerable. Audits by regulators and investors alike are now commonplace and fines, penalties, and loan repurchase demands are escalating. As tough new regulatory standards increase the scope and absolute number of loans that must be evaluated carefully for compliance, investors have become acutely aware that several regulatory changes impose liability on the purchase of a mortgage loan for compliance errors made by its originator. It is no surprise that investors are increasingly demanding, prior to funding a loan purchase, that originators provide loan specific data in an electronic format complete enough to permit comprehensive automated compliance reviews on each loan to be purchased.
Lenders, in order to cope with these added regulatory compliance risks, are faced with an immediate and compelling need to re-evaluate, and upgrade, the capacity of their internal systems to recognize and incorporate mandated regulatory changes. Static document systems and templates simply will not suffice to keep you compliant. To ensure compliance, mortgage disclosure and documents systems need to be dynamically constructed.
For compliance professionals “letter of the law” compliance is no longer enough. For regulators, letter of the law compliance is a given. Lenders should be following the rules – period. The new standard for compliance is more rigorous. The CFPB has stated that it wants to see lenders going beyond what’s required by law, addressing the more esoteric aspects of mortgage origination with an eye towards improving the consumer’s experience. They are encouraging lenders to incorporate borrower satisfaction as a key component to their compliance strategy.
Of course, this is easier said than done. After all, so much of the impact of compliance on the borrower’s experience is outside of the lender’s control….or is it? The key to addressing the challenges of this enhanced regulatory compliance environment is to embed compliance within smooth electronic business processes. This enables a lender’s compliance department to manage regulatory risk and foster a culture of compliance across the organization, while, at the same time, enhancing the borrower’s overall perception of a positive consumer experience.
This involves creating and managing real-time software and delivery systems with programmed rules to get the right product, with the right mapping, into the right channel and deployed. If a lender is doing thousands of loans in multiple states and one state has changed its rules, it can be a major undertaking to adjust just a single form. Tools and software designed to completely automate that process, paper out, go paperless, or go e-mortgage are a necessity. Everyone in the lender organization gets the right forms, mapping, stacking order, rules, etc. and the lender can make adjustments to the form or package at any time.
Key elements of any such system involve:
>> The ability to program and enforce business rules and policies
>> Functionality to effectively manage compliance issues and changes in real-time
>> The flexibility to be the first to market with new product innovations
>> The ability to allow growth and improved volumes without adding staff
There will soon come a point when the CFPB begins to seriously audit lenders for TRID compliance. Many of the errors investors are citing, and subsequently rejecting TRID loans for, can be chalked up to lack of collaboration between the three major service providers in the transaction: the Realtor, the lender, and the title/settlement agents. The CFPB has said it will be sensitive to “good faith efforts” to comply, and it can be hoped that errors made due to lack of coordination will not be dealt with as harshly as would more egregious and/or deliberate attempts to circumvent the rules. However, if that overall lack of collaboration results not only in errors, but in a poor experience for the consumer, the CFPB may be less inclined to be lenient.
Consider the CFPB and its range of “Know Before You Owe” efforts. Two key components of their initiative have been TRID and the eClosing pilot. TRID is the CFPB’s attempt to improve the beginning of the transaction by providing consumers with easier-to-understand loan documents and more consistent pricing estimates. The eClosing pilot is aimed at demonstrating how to improve the closing transaction (a process that has remained largely unchanged for 50 years or more) via technology.
It’s clear from the CFPB’s findings after their evaluation of the eMortgage pilot project that eClosing provides consumers a better closing experience. Thus, eClosing adoption is a simple way to signal to the CFPB that customer satisfaction is a lender’s priority and, thus, earn the bureau’s goodwill. Furthermore, the functionality inherent in eClosing platforms can provide compliance professionals with much needed process efficiency and audit support.
So – what is an eClosing? On its website, Fannie Mae describes an eMortgage as one that entails electronic promissory notes, SMARTDoc Format, and other execution processes. The GSE exhorts lenders to consider eMortgages for their automation delivery, paperless trail, and reduced impact on the environment. The more radical notion is the all-digital eClosing. This involves a process that contemplates the electronic delivery, execution and recordation of all documents involved in consummation of the mortgage. Its mainstream adoption isn’t so far-fetched. Many lenders anticipate they’ll be closing mortgage loans entirely online in the next several years.
Compliance measures like TRID will tend to drive migration to electronic and virtual platforms. With the Federal Housing Finance Agency set to compel electronic delivery of the Uniform Closing Dataset next year, it’s all the more likely that lenders will want to manage its bureaucratic requirements with a virtual data solution involving all of the documentation generated in the closing process.
A complete eClosing anticipates at least the following lender driven elements:
>> Mismo 3.3 compliant XML data and doc exchange metrics
>> Bi-directional integration with leading LOS systems
>> Integrated eDelivery of borrower LEs and CDs
>> Continuous compliance and TRID tolerance monitoring for all disclosures and closing packages
>> eSignature architecture for all closing docs and CD
>> Automated event logging and audit train throughout the disclosure and closing process
>> Real time chat and instant message portal for Lender interaction with both the borrower and realtor, as well as doc prep and closing staff.
Regardless of whether one is simply contemplating a basic eMortgage or a complete eClosing, there are a wide variety of processes involved. For the purpose of this explanation, discussion will be limited in scope to the requirements to create documentation and apply electronic signatures. For the most part, the industry has adopted the eMortgage format and guidelines developed by MISMO as the accepted means of creating eMortgages. Fannie Mae and Freddie Mack have each published eMortgage Handbooks or Seller’s Guides which document their requirements for sellers of eMortgages.
Requirements surrounding the documentation are relatively straightforward. In the case of an eMortgage, Fannie and Freddie require that the Note (eNote) be in the form of MISMO SMART Document Category 1 (xml document) and that specific language is included in the eNote. MERS eRegistry requirements must also be met in order for the eNote to registered with the MERS eRegistry, as both GSE’s require this. Additionally, these investors require the Consumer Consent disclosure to have been provided to the borrower identifying the transaction as an eMortgage and obtaining their consent, and Freddie requires this document be retained as an electronic document in the file. The GSE’s permit the rest of the loan file to be paper based, resulting in a “hybrid” eMortgage, which are the most common form today.
The process requirements for an eMortgage are more complex. The basic process flow is:
1.) Electronically present and sign the eNote or other documents to be electronically executed
2.) Apply a tamperseal to the signed documents
3.) Close the transaction
4.) Package all the electronic documents in a form suitable for delivery, typically a “MISMO package”
5.) Register the eNote with the MERS eRegistry within 24 hours
6.) Transfer the eNote to a secure, approved “eVault” for storage
7.) Eventual transfer of the eNote to Freddie/Fannie (eDelivery)
At the highest level, a “click through” signature of the eNote, which satisfactorily meets the requirements of the law, is also sufficient for both GSE’s. At a lower level, each of the GSE’s has specific requirements, with some overlap, for applying a signature on an electronic document. Freddie is more specific in its requirements. Some of the requirements on how the signature must be applied include the following:
>> Not effected by means of video or audio recording
>> Not effected by means of object signatures such as biometrics or specialized signing pads (Freddie only)
>> Meet all ESIGN and UETA requirements
>> The signed documents/records must be “self contained” meaning all information necessary to reproduce the signed document is present
>> Some additional representative Freddie Mac specific requirements:
A.) Each document must be individually reviewed, signed, and modified by affixing all required signatures prior to moving on to the next document
B.) All signing parties must be physically present in the electronic closing location at the time of signing
C.) Signers must validate their credentials in the closing system by entering their user IDs and passwords
TRID has dramatically changed the real estate closing process. Roles and responsibilities have shifted, the average time to close has risen significantly, and there is increased pressure from the Consumer Financial Protection Bureau (CFPB) to put the consumer first in the transaction. In order to meet the CFPB’s consumer-first mandate, real estate service providers need to adopt and implement “state of the art” digital closing platforms and conduct fully electronic mortgage closings (eClosings). It will provide ease and cost efficiency for the borrower, more accurate data management for the lender and an auditable electronic ability to examine the transaction and see what actually happened if a regulatory audit occurs.
About The Author
Michael L. Riddle is the managing director of Mortgage Resources Group, LLC., responsible for the overall operations of the firm. He guides the teams within the firm that develop and deliver “best in class” compliant disclosure and documentation systems to single family mortgage lenders throughout the country. Mr. Riddle is the co-founder and managing partner of the Middleberg Riddle Group, one of America’s preeminent mortgage banking law firms and, in that role, has spent much of his 40 plus year professional career providing advice and legal counsel concerning regulatory compliance, enforcement and litigation to clients including banks, mortgage lenders, insurers and related financial service entities.