By Ted Cornwell
After more than a decade of hype and promise, fully electronic loan closings remain rare, even as the mortgage industry increasingly adopts digital workflow. But some industry observers believe a new regulatory pilot program may do what technology advances and e-commerce advocates could not: spark widespread adoption of e-closings.
For the record, the Consumer Financial Protection Bureau isn't taking sides on whether lenders should embrace electronic disclosure and closing practices. But the CFPB's mortgage e-closing pilot, coupled with the agency's much anticipated "Know Before You Owe" initiative, could nudge the industry in the direction of e-closings, say participants in the pilot.
Speaking to credit union executives this year, shortly after the e-closing pilot program was announced, CFPB director Richard Cordray said the stack of papers consumers face at the closing table has become burdensome, overloading them with information without helping them understand the process or make informed decisions.
"Indeed, it is counterproductive insofar as it causes consumers to zone out and sign documents without properly evaluating and understanding critical information about the largest financial transaction of their lives," Cordray said in the speech.
The CFPB is revamping its disclosure requirements by replacing the Good Faith Estimate and HUD-1 disclosures. The latter, called the Closing Disclosure, must be delivered to borrowers three days prior to closing. Putting this into practice "will require significant changes to business operations and technology platforms," Cordray noted.
The pilot aims to foster innovation in e-closing practices, and find out how use of e-disclosure technology helps increase consumer understanding and engagement while promoting efficiency, Cordray said.
E-Closing vs. E-Disclosure
There is a widespread misconception about electronic closing practices in the market, according to Tim Anderson, director of e-services at DocMagic – one of the technology vendors selected to participate in the CFPB pilot.
Many lenders that claim to do e-closings are really doing hybrid electronic/paper closings, providing disclosures and related material electronically, but still requiring a wet signature on a paper mortgage note at the closing table. If one disclosure document goes electronic, but consumers still face a stack of other paperwork at the closing table, that doesn't improve the process, Anderson said.
To fully realize the efficiency benefits of electronic closing, he said, lenders will have to wash the paperwork out of their workflows and become fully paperless through the whole origination process, right down to the closing table.
"When we talk about e-closing, it is a full paperless process that includes the ability to e-record all the legal documents," Anderson said.
The first phase of the CFPB pilot focuses on digitalizing those disclosure documents that are expected to be implemented in August. The CFPB may be starting small, recognizing the low adoption of full e-closings today, in hope of achieving wider adoption of e-closings after the disclosure piece is tackled.
The benefits of electronic disclosure documents go beyond the convenience of being able to review and sign them anywhere and anytime, Anderson said. An electronic disclosure process could integrate links that help consumers obtain more education if they need it. For instance, the e-disclosures could allow consumers to click on a link to learn more about Fannie Mae and Freddie Mac or other entities and terms mentioned in the loan documents.
With the "Know Before You Owe" rules on the horizon, lenders may decide that e-disclosure and e-closing are compliance driven technology investments. With paper disclosures, lenders will find it difficult to prove they complied with the three-day disclosure requirement, especially if changes were made to the terms or fees on the loan.
Dated and time-stamped e-disclosure forms make it easier for lenders to create an audit trail that protects them from litigation or regulatory charges in the future, Anderson said. Lenders will be able to show when consumers viewed documents, what they clicked on, and when they electronically signed the forms.
"Now it's about ensuring compliance around disclosure and the three day delivery to the borrower," Anderson said. "This really gets into electronic evidence so you can prove you said what you said."
It's a myth that e-closing adoption is being held back by consumer reluctance and an inability of county recorders to accept electronic notes, Anderson added. The CFPB pilot encouraging digital preclosing disclosures may further build consumer expectations that they should be able to complete the process electronically. "The consumers already are there. Why aren't the lenders providing this?" he said.
For the industry to truly benefit from e-closings, the digitization of disclosures will not improve things much unless it is part of a broader effort to automate the entire loan life cycle.
Anderson said he expects the CFPB will want to maximize e-disclosures in order to improve consumer protection.
"They are going to run analytics against the data file," he said. "That's really where it's all headed, is the ability to verify what you said you did."
He noted that lenders got sued in the wake of the housing crisis because they couldn't verify what was done four or five years earlier. They couldn't find the documents, or the documents contained errors, so they had to enter into large regulatory and civil settlements.
"They lost their shirts because [an important document] wasn't in the file anymore. If we've learned anything from this, it's that you'd better be able to document everything now."
That is what Anderson thinks will push lenders to make e-closing technology a priority. "Finally, I think this is really the inflection point that's going to create adoption, because now it's about compliance."
Mountain America Leads the Way
Mountain America Credit Union, one of the lenders selected to participate in the CFPB's e-closing pilot, is no stranger to electronic signatures and hybrid e-closings.
"We started e-closings about four years ago on a directive from our CEO to make it easier for our members to do business," said Amy Moser, vice president of mortgage services at Mountain America. Currently, the lender relies on e-signatures for all the disclosures and other forms, but still requires a wet signature on the note at closing. However, Moser said the credit union plans to adopt full e-closing using e-notes.
Earlier this year, Mountain America became the first lender to conduct an e-closing on an FHA and VA loan. Moser said the company's experience with e-closings on conventional loans paved the way for adapting the practices for government-backed loans once the FHA and VA began accepting e-signatures.
Moser said when the CFPB began planning an e-closing pilot program, the agency reached out to Mountain America because of its experience with electronic documents. Mountain America put together a proposal outlining what the credit union was doing and planning to do in the electronic closing area. The CFPB apparently liked what it saw and selected the credit union to participate.
Moser noted that the pilot is part of the CFPB's initiative to overhaul the disclosure requirements around the terms and costs of the mortgage, making it easier for consumers to understand.
"The best way to do that is electronically, because otherwise everyone has to go in and pick up the papers and go back home to review them," Moser said.
She said electronic review is particularly popular with first time homebuyers, who often want to have their parents, friends or colleagues go over the documents with them ahead of time.
"They don't feel the pressure to just sign them, because they actually have time to get comfortable with the documents," Moser said. "The opportunity to review the documents also empowers them to ask better questions as they have been allowed time to digest the information."
One reason Mountain America eventually plans to use e-notes at closing is that the note can be shipped immediately to the investor, cutting down on delays that crop up using paper documents.
Today, Mountain America uses a hybrid e-closing process on about 60% of the mortgage loans the credit union makes. Moser said that number would be higher, but some investors still do not accept e-signatures. With the CFPB backing e-disclosures, and eventually full electronic closings, she expects that all investors will someday be comfortable accepting electronic documents and e-signatures.
Education regarding electronic closing and pre-closing activities is one of the main benefits of the pilot, she said. "Just the awareness is big for the industry."
Christopher Christensen, an associate with the law firm of PeirsonPatterson, said that as the deadline for implementing "Know Before You Owe" rules gets closer, some mortgage investors are concerned the industry may not be ready to implement another set of new rules.
He said the CFPB may not be a driver to make lenders implement e-closing technology, but "it's one more push" in that direction. PeirsonPatterson, based in Arlington, Texas, owns PPDocs, an e-document vendor participating in the pilot.
The best driver for adopting new technology in the mortgage industry is loan pricing, Christensen said. When lenders see improvement in their secondary market execution or increases in market share because of e-closings, it will drive adoption.
And one hindrance today is that many investors are not buying e-notes. Most mortgage companies are too small to sell directly to Fannie Mae and Freddie Mac, so they have to go through an intermediary. Investors, meanwhile, blame the marketplace for the slow adoption.
"If you ask investors why they haven't rolled out an e-mortgage program, the number one answer I get is that there's no demand," Christensen said.
That leaves the market with a lot of smaller lenders eager to implement e-closings, but they can't do it because their secondary market directors don't have a place to sell the loans. Only lenders big enough to sell directly to the GSEs are able to do it.
The CFPB pilot provides an opportunity for the mortgage industry and regulators to work together on a shared goal.
"Really, we share the same vision that the CFPB has — that technology can improve the consumer experience in mortgage closings," Christensen said.
Today, few borrowers come away from the closing table bragging about how great the experience was. More often, they feel intimidated by a large stack of documents and many feel they don't understand what they're getting into.
"If you can reshape yourself as a lender based on the consumer experience at closing, that's a great opportunity." Christensen said.
Efficiency could also promote e-closings, but it will take more than eliminating one FedEx package to drive adoption.
"There's very little margin left to cut in terms of being competitive in the mortgage industry," he said. "The opportunity lies in automating processes that today are manual. That's the new margin cut."
Another driver of e-closing adoption could be the SEC's new Reg AB2, which creates stricter asset-backed securities disclosure, reporting and offering processes.
Christensen said issuers face "very high liability" for data errors and discrepancies. The downstream benefits of verified e-closing data could be where lenders see a "pricing uptick" from e-closing.
The bottom line, Christensen said, is that if one lender can implement an e-closing workflow that improves secondary market pricing, others will rush to join the e-closing bandwagon.