ESRA examines the results of the 2015 CFPB pilot program, and where we’re heading in 2017.
Electronic closings in the mortgage industry have long been a roller-coaster experience. Pulling together a tremendous amount of stakeholders to commit to digitizing paper-intensive processes is an ongoing endeavor. One of the most ambitious projects implemented to modernize the mortgage industry was the 2015 e-closing pilot run by the CFPB – the Consumer Financial Protection Bureau.
ESRA brought together two experts to discuss the 2015 program, what it meant, and where we’re heading.
The participants were Tim Anderson, Director of eServices for DocMagic, and Alec Cheung, Vice-President, Product Management and Marketing, for eLynx. Anderson started off with an overview of the status for e-mortgages, with a focus on MERS, the registration for e-notes for the industry. MERS makes it legal to take an electronic asset and transfer it to an investor, Anderson explained. There had been over 300,000 e-registrations so far, he added.
He continued: “And then PRIA, the property records association, tracks the number of counties. The issue with e-mortgages was that people thought consumers weren’t asking for it, although they were, and then you had to get counties to accept it. With over 1,000 counties doing it, and another 15-20 a month being added monthly, we’re already at over 70% of the counties doing e-recording. Now we have mass adoption.
“And then MISMO is the mortgage industry standards maintenance group. And there’s an e-warehouse group because the other thing we had to do was get people buying e-notes. A lot of lenders don’t sell directly to Frannie and Freddie, which are the main buyers of notes. The rest sell to mid-tier guys, or guys like BofA or Chase, who don’t buy e-notes yet. And small guys aren’t buying them yet. The warehouse group has some large lenders doing some piloting of this during the first of next year.”
Anderson then turned to SMARTDoc: “The new SMARTDoc is to be verified. Everyone is pushing these standards because they’re data-driven. To trust the data, it has to be verifiable, so you can trust the data in the document. People are working on a SMARTDoc verifiable document because the new TRID rules have really affected the mortgage industry and locked it up for a full year.
“One of the original TRID requirements was supposed to be this machine-readable format. That’s what MISMO 3.3 and this thing called universal closing is. Eventually people will audit against the data file, not the paper file, so that’s why this is important. They’re redefining what these new documents are.
“The old ones are what I call dumb docs. A PDF is a dumb doc – what’s important is the XML data. You can update data and update documents, but they’re not the same thing, so you don’t always know which one to trust. A smart verifiable document allows you to sync both so you can trust the document and the data, and then verify it.”
He went on to talk about a new agency, the Consumer Financial Protection Bureau. “The desire was to figure out a way to automate compliance. Five vendors and seven lenders got involved to pilot e-closing, to get to a fully paperless process, through delivery. You have to show receipt of delivery and other things to comply.”
The CFPB Pilot
Anderson then turned to Cheung, who gave background on the pilot. “The intention was to focus on closings because that process was an area where there were the most complaints from consumers, who didn’t fully understand the process,” Cheung explained. “The CFPB wanted to make a difference in that area. When they decided to pilot the process, they wanted to have some vendors and lenders partner on e-closings to see if technology could help the process. They wanted to generate some real world data to help them.”
He noted that the CFPB wanted to focus on three things regarding the technology being used in the e-closing process:
• If consumers better understood what was happening during the closing process.
• If consumers could feel better empowered at the closing table. They often don’t understand what they’re signing.
• If efficiency could be improved.
Cheung said: “What the CFPB found was very encouraging. In the first quarter of 2015, they had us do some loans in a control group with all-paper loans, and some of those had e-closings. They compared the two groups, paper closings and e-closings, and found that in terms of saving time, the data corroborated that e-closings can happen faster. About 40% of e-closings took less than 15 minutes.
“The other thing that was encouraging was that across the board, on average, the e-closings scored much higher in the three areas they wanted to focus on. They had four metrics they used to score each of those three areas. Empowerment and efficiency had the biggest gains. In terms of understanding the process, they used perception and quantitative measures and saw small improvement there.”
Anderson then stepped in with a comment: “The reason why understanding didn’t change much was because if someone has questions about the loan, they’re going to ask at the beginning of the process, not when they’re signing the docs, especially for a first-time home buyer. So we didn’t measure at the time of the application. If we had measured at the initial time of application, you would have seen a greater change there.”
Cheung continued: “CFPB also asked vendors to supply feedback on the process. They had three main takeaways there:”
• E-closings can be successfully performed and improve the consumer experience, as the data showed.
• The technology is not the hurdle – it’s the application of it in the closing process. All the vendors used a hybrid approach, so not everything was e-signed. Notes and deeds were signed on paper, for example, because downstream investors had to be reassured.
• The CFPB had asked vendors and lenders to team up, and they said that title agents should have been involved in the process too.
Anderson then offered a wrap-up: “There will be more phases to this, once we get past the impact of TRID. We will see more e-closings and better education around the time of the application.”
Anderson and Cheung fielded questions from their conversation’s attendees:
• Will a dual process still be needed? “You can have that with TRID too,” Anderson replied. “If you have a hybrid, that’s more work for a title agent. They want all electronic or paper. And there will always be exceptions.”
Cheung added: “There were some lenders in the pilot program who were more electronic, so they could do more of the process that way. But the CFPB in their report said that the hybrid process wasn’t significantly worse. It just needs more coordination.”
• Since TRID went live, are lenders having their loan documents ready three days in advance of the closing? (Prior to TRID, docs were typically received the day of closing or the day before.) Cheung responded: “That’s a big question in the industry. Yes, but we need to see more volume come through so we have more data and can see if the process has normalized. We’re seeing it move in that direction, though.”
Anderson added: “Because of the technology, you can deliver documents as soon as an hour before closing, which a lot of lenders are doing. But then you don’t know if the documents are right or if anything is missing. The three-day requirement allows everyone to make sure the documents are correct and verified.”
Cheung then said: “What’s most important is, can the industry hit the three days and do it correctly? You can meet that deadline, but it’s useless if the documents are full of errors.”
• Do you know if or when the CFPB plans another pilot? Cheung replied: “No, that’s undetermined right now. They want to give time for TRID to settle into place before they decide what to do next.”
Anderson added: “One thing TRID did do was force collaboration between the title system and the lender system for fees. That didn’t exist before. That is a good thing moving forward.”
• How did they find the vendors to participate? “They chose the best ones,” Cheung replied to laughter. Anderson added: “There are not a lot of lenders that can do it. That’s why it was a hybrid process.”
Cheung noted: “They put it out for bid and invited vendors and lenders submit proposals. Then they selected from the proposals.”
• Was everything ADA-compliant? For example, appraisals aren’t ADA-compliant. Anderson responded: “That wasn’t in scope for this. Even finding the jurisdiction that could do e-recording or e-notary was difficult, so that’s why this was a pilot.”
Cheung added: “Our lenders gave borrowers the option to participate in the pilot, so they could opt out. And we did set criteria that had to be met by participants.”