Whitepaper: E-Closings – The Future of Real Estate Closings
The mortgage industry has been struggling since the implementation of the TILA-RESPA Integrated Disclosure (TRID) Act to produce and deliver accurate documents to consumers on a significantly shortened timetable. It seems that adopting electronic closing (e-closing) procedures should have become mainstream procedure by now, yet it remains on the fringe of common practice. Consumers and investors have played a role in this delay, along with lenders themselves, despite the Consumer Finance Protection Bureau's (CFPB) advocacy for using e-closing procedures. Why would the mortgage industry and its consumers resist a change that will produce more efficient closings with better accuracy?
In June of 2000, President Clinton signed the Electronic Signatures in Global and National Commerce (E-Sign) Act into law. The E-Sign Act allows consumer disclosures to be provided to the consumer in electronic form alone, provided the consumer affirmatively consents. The Federal Reserve Board also laid out a six-step consumer consent process for financial transactions, which requires lenders to provide consumers a "clear and conspicuous statement" of their right or option to have the records provided in hard copy; ensures that the consumer has the right to withdraw consent and specifies the consequences for withdrawal; details whether consent applies to a particular transaction or to a broader category of information; and determines what hardware or software the consumer may be required to have in order to access and retain records. The consumer must give consent electronically "in a manner that reasonably demonstrates that the consumer can access information in the electronic form that will be used to provide the information that is the subject of the consent." Finally, the lender must provide an After Consent Disclosure reviewing the above and informing the consumer that they can withdraw consent without penalty and cannot be held subject to any condition or consequence that was not disclosed to them.
Lenders are required to maintain accurate, reproducible, and accessible records of all contracts, notices, and disclosures for a legally specified period of time. Although the E-Sign Act dramatically reduces the required amount of paper involved in each transaction, applying it to mortgage lending requires a new way to manage the workflow, security, procedures, and accessibility for digital documents.
Federal consumer protection regulations like TRID have been updated to specifically support electronic disclosures. The E-Sign Act provides general legal approval of, though no requirement for, electronic signature of those disclosures. In 2014, the CFPB released a report based on a four-month study of e-closings versus paper closings among seven lenders and more than 3,000 consumers. The CFPB study revealed that consumers who used e-closing understood the process better, as well as the terms, fees, and costs associated with their loans. Those consumers also reported a greater sense of empowerment throughout the process (fifteen percent greater than consumers who closed on paper), and that they felt the process was accurate and efficient (seventeen percent greater than paper-closing consumers). Because electronic closing provides the closing documents to the consumer in advance, they have time to review them more fully and to consult their attorney or agent, whereas consumers who were involved in a traditional paper closing felt more overwhelmed by being presented with a stack of paper to read and sign on the spot. The CFPB is currently promoting e-closing as a Best Practice and actively advocating for its adoption, though they have not yet taken action toward making e-closing a regulatory requirement.
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Slow Adoption Of E-Closing
Despite its clear advantages, the mortgage industry has been hesitant to adopt a completely electronic closing procedure and there is a complex set of factors behind that reluctance. One factor is that some government agencies involved in the mortgage process still require a "wet signature"; one of those is the Social Security Administration, which requires the consumer's physical signature on form SSA-89 to consent to the SSA releasing information to verify for the lenders that the consumer's name, date of birth, and social security number match.
Investors have also played a significant role in the industry's cautious approach to adopting e-closing. Investors in today's market are more conservative than ever before in their decisions to purchase loans; they want strong reassurance that those loans are going to perform as expected, without critical errors. The revision of Government-Sponsored Entity (GSE) requirements for verification of ability to repay came with new standards for data verification, storage, and format. Loans sold to Fannie Mae and Freddie Mac must now conform to these upgraded standards, which will ultimately drive conformity across the board and provide other investors a greater level of assurance. In order to create standardized data and greater credibility, the Mortgage Industry Standards Maintenance Organization (MISMO) created its Reference Model and the current version, MISMO 3.4, is specifically aimed at compliance with GSE regulations and boosting investor confidence by including the recent Uniform Loan Application Dataset (ULAD). The information included in ULAD will help ensure more accurate eligibility determination and better underwriting and data quality along the entire mortgage production chain. As technology brings greater assurance of sound mortgages, investors are warming to the possibilities of e-closing.
Consumers have also had a part in slowing the wide-spread adoption of e-closing. The demographics of those consumers are shifting rapidly, though, and that shift is beginning to drive a demand for more streamlined mortgage closings. As the baby boomer generation ages out of the home-buying market, the last generation of people who were largely suspicious of technology, especially in financial matters, and who placed greatest confidence in good old-fashion ink and paper are no longer a primary consideration. Generation X is a transitional generation where technology is concerned. They're more accepting than their parents, but less apt to demand a fully digital environment, which their children, the Millennials, want. Unlike their grandparents, Millennials tend to view paper transactions with mistrust and consider electronic media more trustworthy and accurate. As services like PayPal, online banking, Apple Pay, and other digital financial services have become commonplace, public trust and acceptance of secure digital financial transactions has increased. With Gen X willing to accept technological advances like e-closing, and the Millennials entering the mortgage market with their demand for technological efficiency, the mortgage industry can finally make serious plans to move ahead.
As for lenders themselves, they most often cite the time, cost, and potential for errors in the transition to e-closing as reasons not to move to a fully digital production cycle. It's little wonder that lenders are leery of additional change, given the massive upheaval TRID caused to the mortgage industry, and many lenders are only now beginning to find equilibrium under TRID. Making the changes required to comply with TRID was costly and the increased costs continue as the industry tries to develop or adopt ways of achieving compliance efficiently. Adopting another large set of changes like e-closing offers an opportunity to streamline compliant closing, but the transitional process continues to daunt those companies involved in mortgage production because of the perceived risk for errors and liability.
Acceptance Is Finally Coming
With the Federal Housing Finance Agency's mandate for GSEs to adopt ULAD, the CFPB pushing for e-closing in order to provide a more understandable and efficient process for consumers, and additional changes to TRID in the offing, the pressure to move to e-closing is increasing rapidly. At the same time, the forces that have offered greatest resistance to e-closing are finally subsiding, which leaves lenders, closing agents, and real estate attorneys free to start moving toward a fully digital process. Further regulatory changes will obviously be needed to remove the final barriers, such as removing the wet signature requirement for SSA-89 verification. As increasing numbers of mortgage producers begin moving toward e-closing, they're driving demand for developers to work out integrated systems that manage compliance, security, workflow, transmission, and storage of all the required documentation to produce mortgages that are digital from end to end.
Preparing For The Shift To E-Closing
E-closing for mortgages is going to become the gold standard in a short time because, despite the concerns of investors, consumers, and lenders, it will ultimately provide the most reliable and accurate way to achieve full compliance with increasing regulation in the mortgage industry. If the mortgage industry has learned anything from TRID implementation, it should be that making massive, sudden changes to a system as large and complex as mortgage production causes chaos.
Mortgage producers can begin preparing for this next sweeping change now by incorporating automation and digital documentation in their workflow procedures. Making a more gradual transition will help prevent system-wide overload and allow producers the opportunity to fine-tune their systems in a lower-pressure environment.
Easy Soft Real Estate Closing Solutions can help with its integrated suite of modules to make every aspect of closing faster and more accurate. The suite uses a relational database to automatically populate forms and make calculations; the data for each transaction is entered only once, reducing the risk of human error. TRID-compliant disclosures are ready in no time with EasyCDF, and Easy HUD provides required documentation for VA home loans along with an automated ledger and electronic 1099-S filings. There are more than 200 standard forms in the Easy Soft library and users can add custom forms to share within their licensed work groups.
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