The Consumer Financial Protection Bureau (CFPB) released “Leveraging Technology to Empower Consumers at Closing” on August 5, 2015. This is an eagerly anticipated report covering the eClosing Pilot project the CFPB conducted with a group of lenders and mortgage technologists during the first four months of this year. (Full disclosure: we participated in the pilot with BECU, our long-time partner and one of the most experienced users of our lending technologies.)
A little background: The CFPB issued a Request for Quotation last April from teams of lenders and technology partners to help them test several hypotheses concerning the paper-based mortgage closing process as it exists today versus the newer, still under-utilized eClosing processes successfully used by some lenders. The CFPB’s hypotheses — that consumers would favor eClosing over paper closing because it would give them a better understanding of the process and a feeling of empowerment, leading to greater satisfaction — all turned out to be true.
We – Accenture Mortgage Cadence and BECU – thought we would make ideal pilot project participants because of our longstanding interest in improving the borrower experience, as well as our more than seven years of history in eClosing mortgage loans. For BECU, eClosing has, since October 2008, been one part of a bigger, overall eMortgage process to make the origination cycle completely paperless, from origination through closing and delivery.
Improving the borrower experience was one big reason for this initiative; increasing lending efficiency was the other. An efficient mortgage program, after all, is both a profitable and competitive program. Being a pioneer eCloser also provides competitive differentiation. Thousands of BECU members have closed electronically in the last seven years, enjoying the benefits of receiving their closing package days before the closing itself, giving them the opportunity to review the documents before their closing meeting. It also leads to time savings at the closing table. Receiving a copy of their completed closing package on a memory stick is an added welcome bonus, too — more secure than a large file folder, much more accessible, and tremendously space-saving.
It obviously helped that we believed in the CFPB study and the hypotheses it tested, which made us eager to participate. The results, we believed, would also provide hard data to support the benefits of moving beyond traditional processes, pushing consumers and the industry forward.
One important note on eClosing: It does not have to be entirely paperless. The CFPB’s report discusses a hybrid eClosing model that involves both electronic and wet signatures depending on lender capabilities, comfort and recording entity preference and readiness for new technologies.
Why Don’t More Lenders eClose?
We have been closing loans electronically for more than seven years, yet eClosing is still relatively uncommon. One likely reason for this is the hard work required to transition from paper closings. It takes a fair amount of time and a true commitment from the entire organization. Timing is often challenging, too. For example, 2008 marked the beginning of the recession and its aftermath, and nearly every year since has seen new regulations to which lenders must adapt. Lenders have been far too busy to even think about major process changes.
In addition, refinancing recently captured everyone’s attention, as borrowers scrambled to take advantage of rates not seen since the 1940s. While seven years may seem like a long time for eClose to remain in development, it was far from an easy seven years for the mortgage industry. Another issue holding back eClosing is the persistent belief that mortgages closed electronically aren’t legal, valid, enforceable loans. This is despite the Electronic Signatures in Global and National Commerce Act (ESIGN) and the Uniform Electronic Transaction Act (UETA), which establish clear legal authority and procedures for electronic signatures. UETA came first in 1999, followed by the ESIGN Act in 2000. Both provide for creating an electronic record with the equivalent enforceability of a mortgage note.
Legal traditions in the mortgage industry are ancient. Yet electronic consent first appeared in mortgage transactions at the dawn of online lending. Electronic signatures for all sorts of financial transactions are so commonplace as to be expected; in fact, being presented with a pen and document is almost a surprise in some situations. It is time, we believe, to make this true at the closing table, too.
Times have changed, yet again, for mortgage lenders. Mortgage workouts are almost a thing of the past. Most refinancing is probably activity seen in the rearview mirror, as well. Big regulatory changes such as ATM/QR and the Mortgage Disclosure Regulation (also known as TRID and KBYO) will be behind us in October. With the market settling into a steady, long-term purchase run estimated to produce consistent annual volume in the $1.1 to $1.4 trillion range, and these big projects checked off the to-do list, will eClosing finally become a top priority for lenders?
We think the answer should be “yes” for all the reasons cited in the CFPB’s report:
>> During the pilot program, consumers who received their closing documents three days before closing perceived greater empowerment through the closing process. They also said they had a better understanding of the closing process. Receiving documents early gave them a chance to read through their closing packages, check for accuracy and ask questions.
It is important to mention that, during the pilot, borrowers received their entire closing package three days prior to closing. This is different from the Mortgage Disclosure Rule (TRID/KBYO) requirement that they receive only their closing disclosure three days ahead of time. There is nothing in the regulation that prohibits providing the entire closing package early. In fact, learnings from this project show borrowers prefer this approach.
>> Pilot program consumers who received their closing documents three days before closing reported shorter closing meetings than those who experienced paper closings, which indicates greater efficiency in the process as well as higher borrower satisfaction.
>> Consumers who were provided access to the CFPB’s educational materials along with their closing packages reported using them and also reported they found them helpful. Mortgage documents can be confusing, especially since most borrowers see them once every five to seven years. When you only see something a few times in your lifetime, every time you see it again is an entirely new experience. Providing reference material along with the closing package is a good idea, and one that borrowers like.
Greater consumer satisfaction, understanding, empowerment and increased efficiency are good reasons to consider eClose, but there’s another reason. A new generation of borrowers is emerging. The Millennial generation, the largest in history, is poised to begin forming households and, thereafter, to become homeowners. The U.S. economy and the mortgage industry have been expecting them to engage for the past several years, and, while it has not happened yet, the Joint Center for Housing Studies of Harvard University predicts that it will, driving annual household formation to above 1.2 million per year between now and 2020. Even with homeownership rates in the low- to mid-60 percent range, that equates to more than 750,000 new homeowners each year.
Millennials have different expectations than their predecessors when it comes to transactions. They grew up online and do not remember a time when there were no smart devices. Paper-based processes, such as those traditionally used in the mortgage industry, are not going to fly with this important group. Millennials have also lived through the housing crisis, watching parents and relatives deal with the aftermath. Consequently, they are going to have a lot of questions about their mortgages. They will research online, they will want to watch their mortgage ‘mature’ throughout its lifecycle, and they will want time to review their closing package before arriving at the closing table. These factors will all push toward eClose adaptation.
Yet eClose is not just for Millennials. Boomers and Gen-Xers fostered the technologies that make electronic mortgages possible. These, too, are the generations that learned to work in paperless formats. Most of these individual do not want to read large stacks of papers, nor do they want to be presented with a closing package, e- or otherwise, moments before they are expected to review and sign them. While Boomers and Gen-Xers will not buy as many houses over their lifetimes as the Millennials, they will remain important borrowers for several more decades, especially the youngest of these cohorts.
What Does It Take to eClose?
The CFPB report provides invaluable information on what it takes to eClose. The lenders and technologists in the pilot program were a mix of seasoned eClose veterans as well as those new to the process.
The report shares their experience preparing for the pilot and highlights three key success factors:
>> Commitment. Transforming an entire operation is a big endeavor. Big projects cost money, take time, and require focus. Those who have made the transition agree it takes the entire organization to make it happen. And it will not happen overnight; it is a months-long or year-long project to design, test and implement for all borrowers who opt in. Some will not, and, for those, paper closing processes must remain in place.
>> Collaboration. There are plenty of moving parts in every manufacturing operation. As with all manufacturing, it takes suppliers and partnerships to produce a finished product. The same is true in mortgage lending – especially with eClosing, since most lenders rely on a partner to close their loans. When working toward eClosing, close collaboration with settlement agents is crucial.
>> Communication. A natural extension of collaboration, regular and ongoing communication with the eClosing team is essential to a program that works. Expanding the definition of “team” is critical. The mortgage team should be joined by settlement agents, Realtors, and other staff members who interact with borrowers as well as others who influence the mortgage process.
The full report can be found at consumerfinance.gov. It makes excellent reading and provides valuable insight into what it takes to make the eClose transition.
When I read the final version, I came away thinking that an eClosing in which borrowers receive their closing package early, report a quicker closing, and feel more empowered, more knowledgeable and generally more satisfied has to be a good thing for the industry. When we’re closing the biggest, most complex transaction most people will ever engage in, and we’re doing it faster and making consumers happier, we’re doing the right thing. There’s no doubt in my mind that eClose is an idea whose time has come. Now lenders have to start thinking about how to make it happen.
About The Author
As Executive Vice President, Operations for Mortgage Cadence, Dan Green works with the team to create greater efficiencies in all areas and coordinating efforts that enhance service quality and teamwork. Formerly, Green served as Chief Operating Officer/Chief Marketing Officer of Prime Alliance Solutions followed by Marketing Lead for Mortgage Cadence. Prior to that, he had an eight-year career with CUNA Mutual Mortgage where he was responsible for origination, servicing, lending technologies, process reengineering and education. With over 30 years of financial services and mortgage experience, he’s keenly interested in lending performance and performance benchmarking that helps lenders constantly increase efficiencies while enhancing the financing experience for borrowers.