By Bonnie Sinnock
A plan by the government-sponsored enterprises to begin electronically collecting the new Closing Disclosure data is designed to promote Fannie Mae and Freddie Mac's loan quality and risk management goals. But the initiative may also prompt broader use of electronic signatures and paperless processing in the mortgage industry.
The Closing Disclosure is one of two new borrower forms implemented under the Truth in Lending Act/Real Estate Settlement Procedures Act Integrated Disclosure regulations that took effect Oct. 3. To facilitate lender submission of the document, Fannie and Freddie have developed the Uniform Closing Dataset, a digital file that allows the individual data points in the document to be stored in a database and analyzed.
"We're hoping these standards help the industry digitize the loan file or at least some of the critical documents," said Samuel Oliver, a vice president at Freddie Mac, in an interview.
The project is the latest component of the Uniform Mortgage Data Program, which has previously included efforts to collect fully electronic appraisal documents and an upgraded loan delivery file. The GSEs plans to start collecting the UCD file no later than the fourth quarter of 2016, and mandatory submission will begin no earlier than the second quarter of 2017.
"You don't have to go paperless but you must be able to deliver an electronic copy of the UCD," Oliver said.
The GSEs' intent with the UMDP is not to force lenders into paperless transactions like an e-closing, but to improve the pre-funding due diligence on loans sold to Fannie and Freddie.
"The GSEs, like other organizations, are trying to be more efficient in the processing and gaining access to the loan application data available upfront from origination and underwriting through closing," said Jeff Knott, an Equifax assistant vice president who chairs the Electronic Signature and Records Association.
But the new requirement for lenders to submit a digital file in the specific UCD format — combined with existing regulations that mandate lenders deliver the Closing Disclosure to borrowers three days before closing — pushes lenders to further automate the flow of information in the most stubbornly paper-intensive and manual part of the origination process.
"We'll continue to keep lenders posted on the specifics as to how they can deliver this data," said Fannie Mae spokesman Andrew Wilson. "There will be appropriate and sufficient lead time for lenders to get up to speed. That's the goal."
The timeline "gives the industry time to concentrate on the TRID implementation," added Oliver.
TRID implementation "was painful" and required the expansion of industry data standards by as many as 300 data points, said Tim Anderson, a director at mortgage software vendor DocMagic.
The UCD, which is in testing now, adds a few dozen more data elements to the Mortgage Industry Standards Maintenance Organization guidelines and is "manageable," he added.
Both the UCD and TRID data standards add more momentum to efforts to electronically close mortgages, said Anderson. DocMagic is a member of the Electronic Signatures and Records Association.
In a recent pilot program, the Consumer Financial Protection Bureau found borrowers who had an electronic mortgage closing, as opposed to an manual one, had 7% higher positive feedback in terms of their feeling they understood the quotes and final costs of the loan.
UCD adoption should be similar to previous UMDP efforts like the Uniform Appraisal Dataset and the Uniform Loan Delivery Dataset. But unlike the appraisal delivery requirement, where Fannie and Freddie built a joint portal to collect the electronic documents, each GSE will have a separate delivery system to collect the UCD files — which will require lenders that sell to both agencies and their technology vendors to train and test for two separate processes.
"We'll certainly be providing training and implementation support for the UCD," Oliver said.
Concerns that there is insufficient borrower identity verification in electronic documents and signatures persist as roadblocks to a completely automated process.
Although government agencies that dominate the secondary market encourage electronic transactions, private investors are a different story. A warehouse lender, for example, might not accept an electronic promissory note.
"The biggest hurdle has been the [private] secondary investors. They are slow to accept electronically signed mortgage documents," said Alec Cheung, vice president at technology vendor eLynx. "My impression is they feel more confident knowing that they have a paper document and that feels more secure to them."
Although some private investors have a different view, Cheung said he has confidence in e-signatures' validity as a means of authentication because they've stood up in court.
Difficulties involved in getting all county recorders' offices and notaries automated also have been barriers to e-closings but Anderson was dismissive of these as technical challenges. The barriers to e-closing are more about adoption than lack of sufficient automation, he said.
About 70% of the U.S. population is represented by county recorders equipped to handle the process, he said. Also federal law allows electronic notarization, and closing attorneys are only questioning it because there is more-spotty state authorization of the practice, he said.
"I'm biased, but I think most of the technical issues including counties and notaries, that's pretty much done now," Anderson said. "And whether an investor will accept it or not, that's business practices, not technology."