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The state of global e-mortgage

Two global e-mortgage experts joined an ESRA panel at a recent event to discuss the current state of the industry.

The participants were:

  • Tim Roberts, Senior Manager of Product and Quality, Westpac (from Australia)
  • Brenda Clem, eWarehouse Director, Street Resource Group (from the US)

 Roberts started by asking: “Why did we get on the ESIGN journey? Three years ago, we were hearing from our customers that they were missing their settlement dates. We have about three or four weeks before the settlement in Australia, and since we’re paper-based, we were taking too long.

“I broke the process down and analyzed it, and could see that a big chunk of the process was sending off the documents in paper, getting customers to meet with lenders, and then sending the paper documents back to be scanned and imaged and sent back to where they needed to go. We found that the process didn’t get the customer ready to settle, which meant they were ready to move into the house but couldn’t because the process wasn’t finished.

“We thought about delivering the documents electronically, and they said, ‘Why don’t you make that happen?’ We now have ESIGN live and have moved into a virtual product cloud. We’ve got one state, Victoria, in Australia that accepts e-signatures on mortgage documents without a witness, which means we can have a paperless post-approval process. So the lender doesn’t have to be involved in that part of it, and within minutes we can have them back and ready for certification and settlement. It used to take 11 business days and sometimes it can now take minutes. We can even do it on a mobile device.

“The documents can be hundreds of pages long, with small text and tables, so it can be hard to read on mobile devices, which the lawyers don’t always like. We’ll probably have to stop using mobile devices. We’ve moved from paper-based into a digitized paper-based process. We’re moving PDF documents around, but we can now see the future, which is moving toward a digitized process using blockchain and other technologies to make it much easier.”

The warehouse lending perspective

Clem said: “I’ll start with a baseline on warehouse lending, which supplies all the money used at closing. In 2016, of all of the loan transactions, $1.3 trillion of that was funded by a warehouse facility. Out of that, there are 85 warehouse lenders in the US right now. So looking at that and wanting the full digital transaction, warehouse lenders have been hesitant because they’ve been concerned about the security of the collateral.

“Warehouse holds the note and wires the money to the closing agent. The loan is funded, the borrower walks away, and the warehouse lender receives the original collateral. The rest of the closing package goes back to the originator, which sells it to the original investor, and the warehouse delivers the original collateral to the end investor, which wires the money to the warehouse. Any additional funds are returned to the originator as premium. It’s a very important component in real estate.

“The most significant barrier has been training around digital transactions during closing. They’re still a big part of the industry that doesn’t understand all those components. There was a 2016 survey that found that over 70% of the lenders said they’d begun some kind of implementation. They’re allowing some e-signatures on some documents, and the desire is that there are some hybrid closings where they’re signing everything but the note and the recordables. That’s phase one.

“As we look at phase two, we’re looking at adding the smart document e-note into that and then extending that out to include e-recording of the mortgage and other documents but adding e-notarization to it too.

“As we look at those phases, some of the key technology considerations are, if you’re not a MERS member – warehouse lenders aren’t, but they need to be for e-notes. So that’s something new for them to deal with. That allows them to use e-registry and e-delivery.

“As we look at the electronic documents and adding smart doc e-note version 1, some of the doc vendors out there are supporting 3.0 and beyond, having the electronic closing room, whether they’re recordable or not. Having an e-vault solution. County recorders have been resistant because there’s the click sign where it looks like typed words and they have issue with that. So there’s an initiative at the county level, and there are about 1,800 counties that accept e-recording right now, but we need all 3,600 to do it.

“E-notarization: there’s legislation going on. There’s an initiative with MISMO, and I’m one of the co-chairs of that group. They’re implementing data standards around that. There’s power of attorney and other documents that don’t need to be recorded that could easily have the signature notarized.

“There have been 16 press releases around e-mortgage, so it’s something to keep track of.”

Back to the beginning

Clem recalled: “The first e-note was closed and funded in 2000. Fannie Mae developed their e-note in 2003, and in 2002 automated underwriting was the dominant technology, and most originators were using it. Cloud technology was still on the drawing board.

“When we look at going forward, the legal foundation for this was created 20 years ago, and that is the legal structure that we’re using for this. We have a lot of originators who are permitting hybrid closing, but they’re not using smart doc e-note because they’re an investor that’s not Fannie or Freddie that doesn’t always permit them to sell e-notes. A lot of conversations are being had by our company to allow aggregators to buy e-notes and why that’s important. We’re going to add e-notarizations and e-recording for all kinds of documents.

“There’s a difference between e-closing and digital mortgage. We’re looking at taking the future state, the big picture we want to get to is to look at the transactions on the New York Stock Exchange, we’re looking at a mortgage transaction being something like that, where millions of trades are transacted in nano-seconds.”

How to change the industry

Clem continued: “What do we need to do to change the business in 2018? We have MERS registrations, and that is growing by about 200 a month, so we’re not setting the world on fire. We had 2,038 e-notes registered so far this year. We have 65 companies active on the MERS e-registry. We had 20 lenders who have registered at least one e-note. We have 10 warehouse lenders funding e-notes and we have 13 vendors on the Frannie and Freddie technology provider solutions list. That’s a small sliver of the folks who can provide that, so we need others to see this opportunity.

“Lenders are accepting online applications. There are very slick user interfaces out there. Quicken and others have capitalized on it, but when we get to the back end of the process, we’re still papering that out, and it’s labor-intensive and costly. In a previous job, we had a million docs in a holding area and the floor was collapsing because of the weight. They went out and signed up with Iron Mountain and started scanning documents, which was the catalyst for them to move to electronic images.

“Looking at it purely selfishly from the secondary side, the collapse of our industry in 2007 and the mortgage-backed securities that had been sold to the industry to insurance companies and retirement accounts, the visibility wasn’t there. People had no idea what the quality of those loans were, and when they started to collapse, the investors in those assets lacked visibility to see what was going on. We’ve had trouble getting the private label market to get back into these assets because they were burned before.

“Our desire is to bring them back into the market and through that is full visibility into the mortgage transaction. That’s the only way that will happen. So with a lot of retooling in the LOS and servicing systems, now you’re bringing warehouse back in, and with large data grabs, all of that gives better visibility for the end investor because they can tie everything together and feel more comfortable with the assets they’re buying. Now they can examine them and kick out what they don’t want when buying a pool of these loans. It’s a win-win.

“The great thing about MERS is that it was bought by ICE, which also has the New York Stock Exchange. Some new enhancements will come out with MERS and ICE in 2018. MERS will be able to expand what they’re offering. We have e-vault technology. We can use e-delivery to examine the authoritative copy with the other MERS members. From the warehouse side, we’re working to expand the delivery of the smart authoritative copy from the warehouse to the end investor but also including the wiring instructions so we can close that loop. Then they know where the collateral came from and who needs to be paid for the transaction.

“The other piece is that if you’re not a MERS member, they have developed their site and made it easier to become one and go through testing. There are good tools out there aiding our industry toward adoption.”

Looking forward in the US

Forecasting the future, Clem said: “We know that we have to slow walk originators and title and servicers into this space. Part of that is showing them the benefit. We’ve done a great job on the front end with origination, but on the back end, it takes more time for the loan closer, title, those involved in the post-close process, so we need a clear roadmap for how they get started. At the executive level, we explain what’s great about it and the ROI. But the conversations we have with settlement involve how many mouse clicks and so forth.

“Right now, I might have 12 closings that I get done a day. By introducing this new technology, if I drop back to 10 or 11, I can’t do it, but if I can go to 14, I’m all in.

“We’re getting good feedback from the industry. It’s about education and awareness. We became industry advocates two years ago. We’ve been talking to everyone we can get an audience with. We’ve been talking to various associations to explain what it means to their industry and how we can help. It has led to future conversations and we’re grateful for that. We want to figure out where and how to move this forward.”

Looking forward in Australia

Roberts explained: “We’re just at the beginning of the public cloud. We’ve only just been allowed to roll it out to customers. We’re going to take it from state to state and make sure all the banks and brokers can offer this to customers. We’ll refine the process as we go. We’ll talk to the states that aren’t on board with e-signature and see what we can use, such as video, to address the challenges.

“We’re going to evangelize it too. I feel like I’ve been through a war, but we’re the only bank in Australia doing it paperless end to end. There’s a lot of problem-solving that we’re doing.”

Q&A

Q: “Victoria is testing e-sign. Is that their digital version of e-notary?”

Roberts: “In some states. Queensland, for example, requires a justice of the peace, which is close to a notary, to be the witness. Other states require an adult not related to the person. They can witness it electronically, as long as they’re in the same room. It can be the lender too.”

Q: “Presenting and rendering mortgage documents on a small mobile screen is a challenge. Do you have to deal with that too?”

Roberts: “We have that challenge too, where the mortgage documents’ look and feel is dictated by regulators. We’ve moved to a national mortgage that has some elements standardized, but not the requirements behind it. And looking at that on a mobile device is tricky. The type is often small. It doesn’t pass the ‘easily legible’ legal test. There are teams that are redesigning home loan documents so they can be responsive on a mobile device and pass that test.

“I’m not in the huge enterprise project. I take what we have and digitize it and adapt it. We’re being told we have to block mobile devices until we can redesign them so they’re easily legible. I was annoyed but I realized that giving a customer over 200 pages to read, absorb, and sign on a mobile device is a challenge.”

Q: “You’re evaluating data to evaluate mortgages. I presume that’s a by-product of the electronic process. You evaluate them – do you pass that on to investors?”

Clem replied: “I’m on the warehouse side, so I’m just providing the money that’s on the table. The end investors didn’t have visibility into the transactions when it was paper-based, so digitizing it lets us get more data from the LOS that wasn’t being delivered to end investor before.

“They’ll be able to get all that data and tie it back to the electronic documents so that the interest rate in the LOS is the same as the document. No need to ‘stare and compare’ anymore. So you just have to investigate the anomalies. It cuts a two-hour process to minutes. The end investor who has more visibility can figure out pricing for populations of loans more easily. That’s what we’re h

The long – and unfinished – path to Remote eNotarization

Remote eNotarization has long been a fascinating – and controversial – topic. A panel discussion at a recent ESRA conference discussed various aspects of online notarization and business and legal perspectives on the subject.

The participants were:

  • Pat Fry, Professor of Law Emeritus, University of Missouri-Columbia School of Law
  • Nicole Ehrbar, Vice-President of Public Policy, Quicken Loans
  • Renee Alberty, General Counsel, Title Source
  • Joe Habib, Associate Counsel, Quicken Loans
  • Bill Anderson, Vice-President, Government Affairs, National Notary Association
  • Michael Chodos, General Counsel, Notarize.com

Ehrbar led off the discussion by noting: “Consumer wants and needs have changed, and that’s also true in the world of notaries.”

She then handed the proceedings off to Anderson, who started by saying: “I’m often asked, ‘What’s a notary and why do we need them?’ Notaries are humans, which I note because in the online world, it’s a word often used to refer to electronic time stamps and such. We mean people licensed by the state in which they live or work, to be an official and impartial witness to the signing of important records.”

He also noted that notaries confirm that the signing parties:

  • Are who they claim to be
  • Are signing the document of their own free will
  • Have a baseline mental competence (required in most states)

Those items are stated on a certificate that’s included with the document. “That certificate is granted a presumption of genuineness by the courts,” Anderson said. “I think that Penny Reed from Wells Fargo said it best when she said that notaries are needed in the real world ‘because we can’t be there.’ Properties are conveyed, medical wishes are respected, and adoptions are finalized all because notaries’ acts are seen as trusted.”

A demo of Notarize.com

Chodos then stepped in to show a video demo of the product offered at Notarize.com and noted that it’s the same process used by competing products. The video described the following scenario in Virginia:

  • Someone needs a “minor consent to travel” form notarized so his son can travel overseas.
  • He taps the Share icon and selects “Copy to Notarize.” Once it’s uploaded, he taps Next to begin the process.
  • He confirms his personal details and payment information, which are mandatory before each notarization.
  • ID verification is more stringent than an in-person notarization. It’s confirmed with antecedent proofing, using knowledge-based veroification, including the last 4 digits of their Social Security number.
  • The system queries credit files and other sources of information and creates identity challenge questions that only the customer can answer. They must answer five questions within two minutes. If they fail four of the five, they have to start over. If they fail again, they’re locked out.
  • Then the customer must have their driver’s license verified too. Each license in Virginia has hidden features that the system can verify when the customer photographs the front and back of their license. That completes the verification process, which takes about a minute.
  • Then the customer can fill in their document and confirm that they’re ready to connect with a notary. A notary then begins a live call with the customer and completes the transaction, which is recorded. The notary can ask to see the room the customer is in and can terminate the transaction at any time if they feel that fraud is being committed.
  • The notary fills out a certificate the same way they would in person and attaches the digital certificate, so that the digitally encrypted file can’t be altered.
  • The entire process takes about six minutes.

Remote notarization

Fry then discussed the various ways documents can be notarized in person. “Assuming you can find a notary who will work with you if you don’t have a prior local relationship,” she quipped before describing the typical notarization process. “That’s been around in various forms since the first Anglos entered this continent,” she said. “It also changed much in concept since then.”

She continued: “Then there’s electronic notarization. The federal ESIGN Act enables it, along with other laws. And I understand that about 1,749 counties in the US now accept e-records for recording. The revised Uniform Law on Notarial Acts explains how you can do it, such as ensuring that an e-record has tamper-evident technology applied.

“Remote is a small subset of electronic recording. I’m deliberately just saying remote because I’m not sure if we’ll be doing it with audio-visual communication in 10 or 15 years. Some lawyers are putting together the case to do remote notarization within UETA and ESIGN. We hope to have an amendment to the revised Uniform Law on Notarial Acts by next June or July that will allow for remote electronic notarization.

“The National Notary Association published a model act last year, and it includes provisions for remote appearances. The National Association of Secretaries of State is working on standards for them too, and MISBO is working on technical standards. Others are working on their own draft statutes for this too, so we should have a strong statutory base for this within a few months, assuming people get behind their states.”

Asked which states are in play, Fry replied: “Lots of them. Some of them basically stutter-stepped – they introduced bills and then put them off. We’ve had enactments of the uniform act in Minnesota, Pennsylvania, Washington, and Colorado. Idaho, Vermont, and DC all have it pending but not enacted. Texas and Nevada and Ohio have passed non-uniform acts, but the Ohio bill was repealed and will be reintroduced next round. And Virginia and Montana had previously enacted legislation for remote appearances.”

Are people ready for this?

Habib responded: “I think we’re ready for it. You can apply for a credit card without the bank seeing your face. Remote notarization goes to third party sources and does forensic analysis of your ID. Biometrics could be involved eventually too. It reduces error and increases the probability that the person is who they say they are – if they’re committing fraud, it will be recorded.

“You can buy things online in chat, in text, and so forth, so the market is ready for this. It will improve security and reduce fraud. Multi-factor authentication will help combat fraud, as will the recordings, depending on how and where they’re stored. Third party vendor analysis and distributing the risk beyond the notary helps too – those vendors are specialized in checking IDs from 50 states and so forth.”

Fry added: “In the paper world, many states have refused to require the notary to maintain a journal. The education that applicants go through isn’t very hard – you can get the test online and take it as many times as you want to pass it. When it comes to persuading states to enact these provisions, it’s easier to persuade them that you need the audio-visual part and having a log.”

Habib said: “As you see technology evolving, commonplace fraud will drop off. High-level fraud will increase, to be true, but safeguards can help mitigate that. It will be hard for someone to pull off a fraud scheme with, let’s say, a mortgage.”

Regarding keeping notary journals, Alberty said: “Just over a dozen states require keeping one. Other states recommend it, but within it, it’s just information about the document and the signer and the fee. There’s no recording of the transaction, like with a remote notarization, but I don’t think they should have to maintain recordings of remote notarizations.”

Anderson added: “The knowledge in the paper world is that the notary keeps control of the paper record and only has to turn in their log when they stop being a notary. But the video recording brings up issues around privacy and so forth.”

Should video recordings be maintained with notaries’ journals?

Habib said: “I’m a fan of divorcing the recording from the journal requirement. I would have it kept with the lender or someone else who can supply the right IT resources and cyber security for that. But some states say the recording should be part of the journal, which could be an issue if the notary holds the files in a hard drive that could be lost or could end up not working with newer operating systems.”

Fry said: “One thing that has happened is it’s become clear that you’ll get opposition from the Secretaries of State – the regulators of notaries – if they’re asked to maintain the journal. The state archive doesn’t want it. But standards are needed. One advantage of standards over statutes they can be modified to keep up with technology.”

Alberty agreed that there needs to be standards. She said: “One of the nice things about the ULC revision and their draft is that you see the notary getting to permit a custodian to hold onto the recording on their behalf.”

What would be the signature record?

Habib replied: “People think of signatures as a holographic signature, but it could be a sound, it could be a click, it could be a thumb print on an iPhone. It needs to have standards, since some states are pushing back on that. The bottom line is that you need a recognition that the event of the signature is passed on.”

Fry added: “All of the statutes so far say you must indicate if it’s been done remotely. I hear a lot of noise that you need to say if it’s been done remotely, and my guess is that in 5 or 10 years, people won’t care that we bothered with that. But to get over the nervousness, it helps.”

Habib said: “Some states are saying it needs to be done in the certificate and others say it needs to be done in the seal. I prefer the seal because then you know where to look. The problem with that is that if a notary has multiple seals, they need to make sure they use the right one. That can be solved automatically – for example, if you’re using a remote platform, you’re using the remote seal. The trend is going toward certificates, but I prefer seals.”

Anderson offered his thoughts on that: “The laws don’t require an image, just the information. If it gets there in text form, that functions as a seal, but a number of states have enacted laws to bridge the gap between the real world and the electronic one and have said the signature and seal need to look like physical ones.”

Who will use this?

Fry said: “We started by looking at a situation where the signer was outside the US, and I heard all kinds of tales. I talked to a colleague who was teaching one summer somewhere in China, and it was a six-hour plane flight to Beijing and the US embassy, where he’d have to go to get a notarization. I’ve heard stories of people outside the US who interrupted vacations or work stays to fly back into the US to find a notary and pay them $25 to handle a paper.

“I heard stories of people who tried to commission notaries outside the US and they wanted the whole document translated first. These are obvious cases for something simpler and less expensive, and even less technologically sophisticated. An electronic platform can handle it more easily and cheaply.

“In the US, it could be someone who is tied up at work in a busy downtown and the notary they would use is an hour or two away but there’s been an accident on the bridge. Or it could be someone in the next office building. The requirement right now is that they not be in the physical presence of each other.”

Anderson added: “When we started working on this what seemed like decades ago, people didn’t really see the value of it. But when the remote concept came in, it clicked that this would provide easier access to a notary.”

Habib said: “There are also service men and women abroad. For example, if they’re trying to close on a property where one person is stationed abroad, that can be a challenge. It’s not a very clean process because that service member might need to get permission to go to another base to access a notary. As long as you can get them an iPad in the field and an Internet connection, they can sign a document.”

Alberty said: “The final thing here is someone who has a disability or can’t leave their home, this gives them access to a notary.”

Fry said: “You can look at it a couple ways: accessibility, such as a disability or being in a remote part of the world, and convenience: as more and more electronic notarizations are done and more home buyers are younger, more people would prefer to do it.”

Are other states accepting remote online notarizations?

Anderson said: “One story I heard was someone outside the country needed a notary to convey power of attorney for a North Carolina property. They went to an online notary and had it done. Initially the recorder in North Carolina rejected it but after talking to the Secretary of State, they found that it was legal in Virginia, where the notary was.”

Fry added: “There have been a couple enactments in at least one of the bills I’m aware of that have said they will only recognize notarizations by out-of-state notaries if the other state’s law was substantially similar to their own.”

Habib said: “This is why there needs to be federal movement on this. Good luck getting 50 states to be substantially similar to this.”

Questions

One person asked: “What about complex documentation, such as multi-page mortgage documents? On a mobile device, that seems to be next to impossible. And how do you ensure that the signer understands what they’re signing? They should have the documents ahead of time so they know what they’re signing.”

Chodos replied: “I think that’s a question about handling mortgages in the real world. We already handle mortgages with large documents at Notarize, and the signer goes through all of them from beginning to end and signs. The concept is the same. The CFPB has the view that enabling electronic processes allows the signer a more realistic chance to review documents before time and ask contextual questions during the process. It has a richer set of opportunities for review and questions.”