BY AUSTIN KILGORE
THE FHA’S ADOPTION OF E-SIGNATURES BRINGS THE INDUSTRY’SLAST MAJOR HOLDOUT INTO THE PAPERLESS WORLD.
IN A LONG-AWAITED move that’s expected to reduce origination costs and streamline processes, the Federal Housing Administration will immediately start accepting electronic signatures on all mortgage insurance endorsement and servicing documents, and will accept e-signatures on promissory notes beginning Dec. 31.
The new policy allows mortgage lenders and servicers to use esignatures on the FHA’s documents for insurance endorsements, servicing and loss mitigation, insurance claims and real estate owned property sales, according to a Jan. 30 Mortgagee Letter issued by the Department of Housing and Urban Development.
Previously, FHA only accepted e-signatures on third-party documents that are included in loan files, but aren’t created by lenders, like property sales contracts.
“The fact that another major agency is going to accept electronic signatures helps the trend toward a full e-signature
and paperless environment for the industry. It eases the burden on the industry to not have different processes depending on where a loan is going to go,” said Harry Gardner, president of document preparation technology provider SigniaDocs and a board member of the Mortgage Industry Standards Maintenance Organization, the industry data standards body operated by the Mortgage Bankers Association.
FHA will also begin accepting enotes at the end of the year on forward mortgages, but not for Home Equity Conversion Mortgages. The policy allows e-signatures on all other documents for HECM loans, which are also known as reverse mortgages.
“This extension will not only make it easier for lenders to work with FHA, it also allows for greater efficiency in the home-buying and loss mitigation process,” FHA Commissioner Carol Galante said in a statement.
The long-awaited policy change paves the way for greater e-mortgage adoption because lenders will no longer need different policies in place for mortgages backed by the FHA and sold to Ginnie Mae, and those sold to Fannie Mae or Freddie Mac.
Lenders and technology vendors that have already implemented e-signatures for other loan programs will benefit from their existing investment and infrastructure, said Patrick Hartford, vice president of enterprise architecture at Detroit-based online lender Quicken Loans.
“The letter itself is fairly open, meaning it didn’t specify very specific or proprietary technologies, so the lenders and vendors that are already working together on e-sign can leverage their existing technologies,” he said. “It’s going to increase their productivity because they won’t have to worry about the paper side of things and they really don’t have to increase the cost either because it’s going to be part of their mainstream process now.”
The policy is a welcomed change that will improve efficiency and reduce costs, said Keith Luedeman, CEO of goodmortgage.com. The FHA’s previous ink-signature requirement cost $75 to $100 more and takes three days longer to process than loans with esigned documents sold to Fannie Mae and Freddie Mac, he estimates.
But he’s concerned that loan aggregators, which bundle FHA mortgages from various lenders, may not allow e-signatures or mandate extra requirements.
“The investors may have different esign rules and regulations than what the agencies require, so there’s not consistency in what constitutes a full e-sign package,” he said, adding that the situation is further complicated if different lenders each have their own rules. “If they match, we’re OK. But with some of the bigger banks, they may come out with different guidelines.”
The federal Electronic Signatures in Global and National Commerce Act became law in 2000. Freddie began accepting e-signatures in 2001, followed by Fannie in 2002. In 2004, the first e-signed promissory notes, or e-mortgages, were originated.
MBA President and CEO David Stevens doesn’t fault the FHA for the time it took implementing its e-sign policy. During his time as the FHA’s commissioner from July 2009 to April 2011, “I had frequent meetings on e-signatures. The primary issue affecting e-sign was focus.”
During Stevens’ time leading the FHA, the government mortgage insurance program was a burgeoning source of lending after other sources of market liquidity had dried up.
It strained the organization, most notably in 2009, when the annual actuarial review of the FHA’s Mutual Mortgage Insurance Fund revealed that the fund’s capital ratio was below the federally mandated 2% for the first time — where it still remains today, as the FHA’s latest report, issued in December 2013, put the capital ratio at negative 0.11%.
Establishing an e-sign policy for the FHA couldn’t be done in a vacuum, Stevens said. It required approvals from HUD’s Office of Inspector General and other auditors, as well as the Department of Justice, which wanted assurances that e-signed documents would hold up as evidence when it pursues fraud cases.
Now that the policy is in place, Stevens is hopeful that lenders will take advantage of the opportunity, but added he expects lenders will carefully review the directive so they can ensure that their implementation of the e-sign policy align with the nuances of the FHA’s rules.
“Each financial institution needs protocols and unless the HUD rule is explicit, you’re going to see different policies,” Stevens said.
That may be harder than it seems. Esign advocates are warning that some language contained in the Mortgagee Letter that outlines the FHA’s new policy is confusing, and will likely require further clarification from the FHA.
“There’s a lot in here that could be subject to interpretation or companies saying, ‘What does that really mean? Our system does this, but it doesn’t do that; is that ok?’” said Margo Tank, a financial services attorney that specializes in e-signatures as a partner at the Washington, D.C. law firm BuckleySandler, and as a counsel for the Electronic Signature and Records Association, an industry trade group.
For example, in the section outlining “Integrity of Records” requirements, the FHA’s Mortgagee Letter reads: “Mortgagees must ensure that documents signed electronically cannot be altered. The documents must be tamper sealed to ensure their validity.”
But the industry standard has long been to require tamper-evident seals, not tamper-proof.
“Within MISMO, we’ve always defined the tamper evident seal because it’s virtually impossible to say you can completely prevent a document from being tampered with,” Gardner said. “We did the next best thing, which is provide solid evidence that tampering has occurred, instead of trying to prevent the tampering in the first place.”
“That might be a difficult bar to meet and it’s certainly something that’s not required on the paper side,” Gardner added. “If you think about paper documents, there’s no requirement that says you have to ensure that a paper document can’t be tampered with because it’s impossible.”
The Mortgagee Letter also requires a lender’s “system must be designed so that the signed document is designated as the Authoritative Copy.” But the legal concept of an “authoritative copy” applies to transferable records, the digital equivalent of negotiable instruments in the paper world.
Transferable records and negotiable instruments are used for mortgage notes and other loans, where physical possession of the original document substantiates a creditor’s claim to a debt. E-sign and e-doc standards — as well as the equivalent practices in the paper world — have not previously applied the “authoritative copy” standard to initial disclosures or closing package documents outside of the promissory note and mortgage/deed of trust because nonoriginal versions of the forms can still be enforced.
“I know what they’re saying and what they probably mean and how I’d interpret it, but there’s some wording in here that’s a little careless,” Tank said.
And if the FHA actually expects all documents in a loan package to meet the standard of an authoritative copy, it would require a centralized registry like the MERS eRegistry, the system of record operated that tracks the owners and custodians of e-signed promissory notes.
“It’s not necessary for the other documents in the closing package to be designated as an authoritative copy because there is no legal concept of possession and in fact, it doesn’t actually make any sense,” Gardner said.
HUD’s Office of Public Affairs declined or ignored Mortgage Technology’s numerous requests for an interview with Galante or other FHA officials involved in the e-sign policy to provide details about these concerns.
The Internal Revenue Service began accepting e-signatures on its 4506-T forms last year, following pilot testing from 2011 to 2012. The form, also known as the “Request for Transcript of Tax Return,” gives lenders permission to review borrowers’ tax returns for income verification. That left the FHA as the last major industry participant holding out on adopting e-signatures, leaving many lenders reluctant to go paperless because they didn’t want separate processes for FHA loans and mortgages sold to the GSEs. Now, all the pieces are in place for broader paperless processing and a migration to full e-mortgage closings.
“It was always one more thing and one more excuse why you couldn’t do an e-closing,” said Tim Anderson, director of eServices at document preparation technology developer DocMagic. “But you can’t come up with any more excuses why people can’t do e-closings.”
The Consumer Financial Protection Bureau called the new FHA policy a “step toward improving the mortgage closing experience for consumers.”
“Electronic closing processes have the potential to reduce errors, limit unexpected surprises, and create more time and opportunity for consumers to review critical documents with the tools they need to make informed decisions, CFPB Director Richard Cordray said in a statement. “HUD’s decision to accept electronic signatures for FHA loans can help jumpstart the move towards a more seamless, paperless, and consumer-friendly process.”
Amid growing regulatory compliance requirements in the mortgage industry, the FHA’s optional e-sign policy could be a low priority for some lenders. But upcoming changes to borrower disclosure requirements emphasize the timing of when consumers receive loan paperwork, and using electronic documents that can provide a time stamp for both delivery receipt and the e-signature will actually help lenders not only comply with the requirements, but prove it to regulators.
“This is all about making sure that you have an electronic audit trail and proof that you’ve complied, because when the CFPB comes in later and wants you to prove that you actually disclosed to the consumer and verified the information prior to closing, they’re not going to do that with a paper file, they’re going to want to see an electronic date and time stamp,” Anderson said.
“It’s all about showing electronically the document was received because receipt of the document is very hard to prove in a paper world.”