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Notes on the cost of compliance, down payments & default rates, eSignatures & eWarehouse developments

Mon, 08/31/2015

By Rob Chrisman

Let’s lead off the letter’s I’ve recently received with this one from Nevada: “With TRID, I believe people in the industry and maybe a few outside are realizing what a horrendous rule TRID actually is. It is NOT just a couple of forms redone or changing how we get paid. TRID is an ‘invasion’ of the RE industry in historical proportion – no area is left untouched.” Yes, lenders know that the devil is in the details.

“Rob, do you have any data regarding the cost of compliance in a mortgage lending operation? Specifically I am seeking either % of loan amount or, basis point cost per loan as an average for a mortgage banker. Also, because our industry is going through a learning curve, is there any data on the first year implementation cost of compliance vs. the eventual cost of compliance?”

For expert advice I trotted off to the MBA’s Marina Walsh for the answer. “The MBA does produce a history in basis points and $ per loan for total production expenses from our quarterly Performance Report (represents costs for independent mortgage companies only – based on MBFRF reporting). This is a new FREE product to all MBA members so if you want quarterly updates, just go to: MBAProducts. Click here to learn more about the Performance Report. We don’t specifically track the cost of compliance but if you compare the costs for similar volume quarters, you can get a sense for the variance between now versus 2-3 years ago – a large part of that variance can be attributed to compliance either directly or indirectly.”

Regarding the ability to predict default rates by the size of the down payment (does size matter?), Steve Harney, the founder of Bridge Builders Inc. writes, “I very much enjoy your daily emails. However, I disagree with your thoughts on low down payments and default ratesHere is a blog I wrote that addresses that issue.

The discussion about eSignatures continues, and I received a note about the admissibility of them in court. “Documents that are signed electronically have all the same legal protections as those that are signed with a ballpoint pen. Despite this, the leading concerns among the majority of businesses interested in obtaining e-signatures on contracts and other important paperwork is whether these electronically executed documents will be both legally valid and admissible in court.

“In the United States, judges have ruled for e-signatures time and time again. Thanks in large part to the E-Sign Act, which states that transactions should not be ‘denied legal effect’ solely because of their electronic form, businesspeople and consumers can have full confidence that their e-signatures are legally valid. As long as an electronic signature is obtained in the appropriate way, using compliant technologies, certifications, and authentications, it will have full validity under the law. But will the document be admissible in court and will a judge enforce the terms of the contract?

“Businesspeople and consumers should know that legal validity, court admissibility, and enforceability are not the same thing. Each concept has a distinct definition, set of requirements, and, most importantly, contribution to the outcome of a legal dispute. The E-Sign Act states that signatures should not be denied legal validity solely because they are electronic, which means that a contract that is signed electronically can be brought into trial. However, a judge’s willingness to accept that contract will depend on how the electronic document was signed.

Certain criteria must be met in order for an e-signature to be admissible in court. Any person who hopes to present an electronically signed contract in front of a judge needs to be able to prove the intent of the signatory and the security of the signed document. If the document could have been tampered with or altered in any way after it was signed, there is a high likelihood that a judge will refuse to allow it to be admitted in court. Specifically, an e-signed document may be legally valid but ruled inadmissible in court due to weaknesses in security, audit logs, or authentication. This is why it is critical that businesses select an e-signature solution that is highly reputable and meets the highest standards of technical integrity.

“Lastly, the enforceability of a contract depends not only on its validity and admissibility, but also the contents of the agreement itself. In a dispute, a judge may examine whether the terms of a particular agreement were clear and consistent, there was consideration (an exchange of value between parties), the parties had legal capacity (ability) to sign, whether a party was under duress or undue influence, and whether a party signed by mistake or without knowledge of the agreement’s meaning. Most businesses have an attorney draft or review their agreements prior to execution with these criteria in mind in order to maximize enforceability in the future should the contents of the document face scrutiny in court.”

The note went on. “In examining the admissibility of an e-signed document in court proceedings, a judge will analyze the security, auditing, and authentication protocols of the e-signature technology and process.

“An e-signature system should be fortified with bank-level security protocols to ensure that documents and audit records may never be tampered with or accessed by unauthorized parties. If there is any security vulnerability which provides credence to an argument that an executed electronic document’s integrity may be questionable, a judge may rule the document inadmissible.

“From a judicial perspective, audit logs are an important part of legal compliance. Time stamped audit logs enable parties, including the court, to verify when a document was created, viewed, signed, and archived. Audit logs should be detailed and secured with a digital signature, checksum, or similar method to ensure they remain tamperproof.

“The more an electronic document can be authenticated, the higher the likelihood that a judge will accept that document as evidence in court. However, authenticating documents can be a slippery slope, and some authentication measures can be so burdensome that they detract from the accessibility and convenience that have made e-signatures so popular. The key, then, is to find ways to authenticate documents that are verifiable, admissible, and defensible, without overwhelming the parties involved. Best practices in e-signature authentication involve a multivariate approach that includes biometric authentication, audit logs, and signature certificates.

“Biometric authentication identifies people based on intrinsic physical traits. Right Signature, for example, has a proprietary biometric authentication technology that captures unique characteristics related to the speed and timing of a person’s signature. This type of data is representative of a particular person’s physical movements and establishes the proof of the signer’s identity and intent if either is questioned in court.

“By confirming access to a particular email account and capturing an IP address, e-signature systems are able to link the identity of a signer to the computer and software used in the electronic signature event. And by taking SHA-1 or similar digital checksums, sophisticated e-signature platforms are able to record evidence of every stage of the contract creation and signing process. This tracks every change and modification, and prevents anyone from tampering with a contract at any time.

“Photo authentication is one of the most cutting-edge tools used to validate the identity of signing parties. When a webcam or mobile phone camera captures the face of a signatory during the electronic signature event, all doubt is removed as to that person’s identity and capacity to sign. And court-admissible signature certificates offer judges and legal professionals a way to view and verify a document’s validity data, audit logs, and signatory information – such as full name, signature, IP address, email address, and any other identifying details. Signature certificates are a significant component in authenticating signed documents in court.

The note wrapped up with, “One of the toughest challenges for businesses that are trying to conduct transactions electronically is to know how far they should go when vetting and authenticating signatories. For many companies, the ultimate goal is to create a contract that is legally valid and admissible in court without establishing a process that is cumbersome to the people whose signatures are needed to complete the transactions.”

And another contributor wrote, “The Mortgage Bankers Association’s Residential Technology Forum recently created an eWarehouse Workgroup to inform and educate originators and warehouse lenders on the benefits of supporting an eClosing process and the secondary marketing efficiencies it provides.

“The eWarehouse Workgroup has been hosting monthly calls toward that goal. ‘We are encouraging collaboration and participation from all counterparties to develop industry standards for eWarehouse business processes, based on electronic exchange of data and documents, which improve operational efficiency among lenders, document custodians, investors and warehouse lenders,’ said Rick Hill, MBA vice president of industry technology.

“Hill said the Dodd-Frank Act, along with new Consumer Financial Protection Bureau requirements, such as Qualified Mortgages, Ability to Repay and the upcoming TILA/RESPA Integrated Disclosure rule (slated to go into effect Oct. 3 ) “almost mandate that all parties implement an electronic process in order to prove compliance and defend against future audits or challenges.” With the new regulations, all parties now must retain electronic evidence for a minimum of five years to prove that they met all compliance and regulatory requirements. Brenda Clem, CMB, eWarehouse director with Street Resource Group Inc., Cincinnati, and Tim Anderson, director of eServices with DocMagic, Saint Johns, Fla., are co-chairs of the eWarehouse Workgroup.  For more information on participating, contact Rick Hill.

“A lot of people are now connecting the dots with the upcoming TRID deadline and three-day delivery rule,” Anderson said. Many see the advantage in cutting down the delivery time from (six to ten days) with Mailbox Rule Vs advantage with eSign/eConsent to assure ‘receipt of delivery’ three days prior to consumption. Lenders and title companies/agents say ‘If I can do this with the one document, (electronic delivery of the Closing Disclosure) why can’t we do “all” the closing documents three days prior to closing?'”

“Anderson also noted increased interest from major warehouse banks on board now to start buying eNotes to differentiate themselves in the marketplace by providing a “new and better way of doing business” as well offering better execution and efficiencies on funding.  One of the significant benefits of eClosing is ensuring that all the data and documents are current, compliant and correct prior to closing so you don’t have to incur the time and costs of re-underwriting the loan post closing prior to funding.  “Another benefit of eClosing is to have a full electronic audit trail to show proof of compliance, (electronic evidence) around eDelivery, eAcknowledgement and eConsent of receiving the disclosure from application to closing which travels with the documents,’ he said.”

(Yes, the usual joke comes after this blurb, but this week I was fortunate to be accompanying 100+ folks from Utah-based Academy Mortgage on their public work project in the village of Amaru, Peru. Academy’s staff are helping villagers build an irrigation system and a production center where the villagers will make their local handicrafts; guiding the village school children with craft projects; bringing a doctor and nurse to provide much-needed healthcare services; and helping to paint a local church. Please excuse any delays in responding this week, and any potential delays in the daily commentary itself.)

Herb, a capital markets guy, decides to retire – which these days means still working but doing something entirely different. A road crew supervisor in Fayetteville hired Herb from Columbus County to paint the yellow line down the middle of route 32 heading up toward Hope Mills. He was skeptical about hiring him since he didn’t have any painting background, but he appeared enthusiastic and told him that he really needed the job. At least his wife Lorrie-Jane told him so.

He explained to Herb that his work day would be to complete 2 miles of centerline on the road.

He was set up with brushes and paint and his boss got him started.

After the first day, the supervisor was pleased to find that he’d painted 4 miles of road in his 8 hour shift, instead of the two expected of him.

He told Herb, that he did an excellent job, and said how pleased he was with his progress.

On the second day, Herb completed painting just the 2 miles of road that was asked of him.

His supervisor was surprised, because on the first day, he had completed twice as much work. But he didn’t say anything, since 2 miles of road was the amount that the job required anyway. He decided to just accept it, and to look forward to the next day when he was sure that Herb would pick up the pace again.

On day 3, the supervisor was disappointed to learn that in his 8 hour shift, Herb completed painting only 1 mile of road. Herb was called to the supervisor’s office and asked what the problem was.

“On your first day, you completed 4 miles of road, on your second day, 2 miles of road, and now on day 3, you were only able to complete 1 mile of road. What’s the problem, Herb?”

“Well,” Herb replied, “I’ll tell you watt is da problem dare boy, but I taught a smart man like you would figger it out fer yourself. Every day I got farder and farder away from da paint can.”

As featured by Mortgage Daily News, September 2015