After more than a decade of hype and promise, fully electronic loan closings remain rare, even as the mortgage industry increasingly adopts digital workflow. But some industry observers believe a new regulatory pilot program may do what technology advances and e-commerce advocates could not: spark widespread adoption of e-closings.
For the record, the Consumer Financial Protection Bureau isn’t taking sides on whether lenders should embrace electronic disclosure and closing practices. But the CFPB’s mortgage e-closing pilot, coupled with the agency’s much anticipated “Know Before You Owe” initiative, could nudge the industry in the direction of e-closings, say participants in the pilot.
Speaking to credit union executives this year, shortly after the e-closing pilot program was announced, CFPB director Richard Cordray said the stack of papers consumers face at the closing table has become burdensome, overloading them with information without helping them understand the process or make informed decisions.
“Indeed, it is counterproductive insofar as it causes consumers to zone out and sign documents without properly evaluating and understanding critical information about the largest financial transaction of their lives,” Cordray said in the speech.
The CFPB is revamping its disclosure requirements by replacing the Good Faith Estimate and HUD-1 disclosures. The latter, called the Closing Disclosure, must be delivered to borrowers three days prior to closing. Putting this into practice “will require significant changes to business operations and technology platforms,” Cordray noted.
The pilot aims to foster innovation in e-closing practices, and find out how use of e-disclosure technology helps increase consumer understanding and engagement while promoting efficiency, Cordray said.
E-Closing vs. E-Disclosure
There is a widespread misconception about electronic closing practices in the market, according to Tim Anderson, director of e-services at DocMagic one of the technology vendors selected to participate in the CFPB pilot.
Many lenders that claim to do e-closings are really doing hybrid electronic/paper closings, providing disclosures and related material electronically, but still requiring a wet signature on a paper mortgage note at the closing table. If one disclosure document goes electronic, but consumers still face a stack of other paperwork at the closing table, that doesn’t improve the process, Anderson said.
To fully realize the efficiency benefits of electronic closing, he said, lenders will have to wash the paperwork out of their workflows and become fully paperless through the whole origination process, right down to the closing table.
“When we talk about e-closing, it is a full paperless process that includes the ability to e-record all the legal documents,” Anderson said.
The first phase of the CFPB pilot focuses on digitalizing those disclosure documents that are expected to be implemented in August. The CFPB may be starting small, recognizing the low adoption of full e-closings today, in hope of achieving wider adoption of e-closings after the disclosure piece is tackled.
The benefits of electronic disclosure documents go beyond the convenience of being able to review and sign them anywhere and anytime, Anderson said. An electronic disclosure process could integrate links that help consumers obtain more education if they need it. For instance, the e-disclosures could allow consumers to click on a link to learn more about Fannie Mae and Freddie Mac or other entities and terms mentioned in the loan documents.
With the “Know Before You Owe” rules on the horizon, lenders may decide that e-disclosure and e-closing are compliance driven technology investments. With paper disclosures, lenders will find it difficult to prove they complied with the three-day disclosure requirement, especially if changes were made to the terms or fees on the loan.
Dated and time-stamped e-disclosure forms make it easier for lenders to create an audit trail that protects them from litigation or regulatory charges in the future, Anderson said. Lenders will be able to show when consumers viewed documents, what they clicked on, and when they electronically signed the forms.
“Now it’s about ensuring compliance around disclosure and the three day delivery to the borrower,” Anderson said. “This really gets into electronic evidence so you can prove you said what you said.”
It’s a myth that e-closing adoption is being held back by consumer reluctance and an inability of county recorders to accept electronic notes, Anderson added. The CFPB pilot encouraging digital preclosing disclosures may further build consumer expectations that they should be able to complete the process electronically. “The consumers already are there. Why aren’t the lenders providing this?” he said.
For the industry to truly benefit from e-closings, the digitization of disclosures will not improve things much unless it is part of a broader effort to automate the entire loan life cycle.
Anderson said he expects the CFPB will want to maximize e-disclosures in order to improve consumer protection.
“They are going to run analytics against the data file,” he said. “That’s really where it’s all headed, is the ability to verify what you said you did.”
He noted that lenders got sued in the wake of the housing crisis because they couldn’t verify what was done four or five years earlier. They couldn’t find the documents, or the documents contained errors, so they had to enter into large regulatory and civil settlements.
“They lost their shirts because [an important document] wasn’t in the file anymore. If we’ve learned anything from this, it’s that you’d better be able to document everything now.”
That is what Anderson thinks will push lenders to make e-closing technology a priority. “Finally, I think this is really the inflection point that’s going to create adoption, because now it’s about compliance.”
Mountain America Leads the Way
Mountain America Credit Union, one of the lenders selected to participate in the CFPB’s e-closing pilot, is no stranger to electronic signatures and hybrid e-closings.