eClose: Moving Toward The Holy Grail

A fully paperless eClose has long been the Holy Grail for the mortgage industry. Just as Sir Galahad embarked on a quest to find the Holy Grail that would bring the ultimate benefits of self-actualization and salvation, brave lenders and tech vendors have been working tirelessly to achieve fully electronic closings and reap their invaluable benefits.

Not only do eClosings offer a wealth of operational benefits for lenders—improved efficiency, cost savings, tighter security and compliance, just to name a few— but they also enable lenders to extend more convenience and transparency to their customers. For lenders, they truly are the Holy Grail worth questing after.

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Luckily, eClosings are seeing more traction within the industry than ever before, but there’s still some distance to journey before they become standard. The first important step is understanding where the industry is currently and where it still needs to go before it can get its hands on the Holy Grail.

The Current State of eClose

A majority of eClosings today are hybrids between a standard paper closing and a full eClosing, meaning part of the process takes place electronically, but some portion still involves paper, usually for the notarized and title documents. Hybrid eClosings indicate progress for the industry and are still preferable to an entirely paper-based process, as transferring even part of the closing to digital brings business benefits to the lender and an improved experience to the borrower.

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Now it’s time for pioneers in the industry to address the handful of obstacles that remain on the path to eClosing.

(1) eNotarization

eNotarization is the aspect of eClosing that has perhaps most complicated the industry-wide transition to paperless closings.

This difficulty can be traced to confusion and lack of consistency in the current legal environment. While there is an existing legal infrastructure to confirm the validity of electronically notarized documents, notary legislation is controlled on a state level, which has resulted in a patchwork of differing laws.

While some states simply accept the ESIGN/UETA legal infrastructure, others have crafted their own legislation, and still others have yet to proclaim whether or not they will recognize eNotarization. This issue has been complicated even further now that some states recognize remote eNotarization—similar to standard eNotarization except the notary witnesses the closing ceremony via webcam instead of in person.

Due to differing state laws, title underwriters have been hesitant to insure loans closed with remote eNotary, because of the risk that a county recorder might notice that the notary was from a different state than the borrower and refuse to record the loan. As a result, investors have also been hesitant to purchase loans that have been remotely eNotarized unless they’re working in the few states, like Virigina and Montana, that have explicitly passed laws around the practice. Fannie Mae and Freddie Mac’s official policies initially stated that they would accept remotely-notarized loans only for borrowers and properties in the same state as the remote notary. More recently, those policies seem to be evolving toward acceptance of a remotely-notarized loan “as long as the title underwriter insured it,” regardless of location.

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The most straightforward solution would be for all states to simply accept the legal validity of electronic notary signatures under the existing ESIGN/UETA legislation. Only once the legal landscape has become more standardized across states will eClosings become the norm.

(2) Widespread Misconceptions

While most lenders and consumers recognize the benefits of conducting closings electronically, commonly held misconceptions among all parties involved have also impeded eClose traction. Luckily, this is an easy obstacle to overcome, as addressing it simply requires a little more education.

With the increasing frequency and complexity of data breaches, perhaps the biggest worry among lenders is that eClosings could be less secure than paper closings. However, digital mortgage processes actually have the potential to be more secure, as there’s less manual data management and better authentication methods to confirm the borrower’s identity. And it’s always important to remember that regardless of the method used to sign the final documents, on paper or electronically, lenders must store and secure the borrower’s personal information in the same back-end LOS systems, so eClosings don’t introduce any new issues related to data breaches.

Borrowers are generally happy to embrace eClosings, since many of them are already familiar with completing financial transactions online and would prefer the convenience of this method. However, they may also have security concerns, so lenders should make it a point to be transparent during the process to ensure borrowers feel comfortable.

(3) Technology

Technology solutions supporting eClose exist today, but they vary in their areas of focus and don’t yet comprehensively address every need at the closing table. Solutions that focus on eNotarization or remote notarization lack tight integration with document generation and employ manual tagging for signature points, introducing opportunity for human error if a signature point is missed.

There have been recent announcements of “completely electronic closings,” which indicate good progress toward a completely paperless process. However, in each case a lot of manual work and document handoffs were necessary to pull together all of the closing documents into a single eSigning event. Still, as the industry develops greater integration between lenders’ loan origination systems, doc generators, title production systems, closing agents, and electronic notarization and recording, we will continue to move toward more seamless solutions where document assembly and tagging will be performed automatically.

These developments attest to the hard work technology vendors have been putting into heralding in the age of eClose with optimal technology. The increasing prevalence of APIs and vendor partnerships are also facilitating the transition.

Additionally, there are still individual solutions that lenders can use to take some of the paper out of the process. Since eClosings hinge so significantly on documents, the most important feature to have in today’s lending environment is integration between the doc source and eSign platforms.

The industry is closer than ever to possessing the Holy Grail of mortgage lending: a fully paperless eClosing. All that remains of the quest is to overcome some difficult but conquerable obstacles, and then the entire industry will reap the benefits of eClosings.

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