In Japan, the word for “improvement” is kaizen. In business, kaizen refers to activities that continuously improve all functions and involve all employees from the top down. One area in the mortgage and real estate industry that has been evolving for nearly two decades is digital closings.
Much like efforts to achieve full self-driving vehicles, the road to achieve full digital closings has been bumpy. However, the COVID-19 health crisis provided the high-octane fuel needed to open the throttle for digital closings.
E-mortgage volume spikes
During the first six months of 2020, the Federal Housing Finance Agency reported that the volume of e-mortgages purchased by Fannie Mae and Freddie Mac spiked significantly. Fannie Mae and Freddie Mac attributed the spike to the COVID-19 pandemic. The FHFA reported that lenders have accelerated their e-mortgage implementation plans because of social distancing requirements and borrowers’ desire to conduct business remotely.
Earlier this year, Fannie Mae and Freddie Mac modified their Seller Guides and provided guidance on several policy areas to support mortgage originations. The changes affected various items including the acceptance of remote online notarization (RON) and remote ink-signed notarization (RIN). The modifications were made to allow for flexibility in getting transactions completed without increasing credit risk and while at the same time reducing health risks.
The FHFA reported the government sponsored entities expect e-mortgage purchases to increase in 2021. Its estimated that e-mortgages will represent 5% of total GSE volume by the end of the year. GSE officials said longer-term expansion could be impeded because e-notarization (including RON) was not available in all 50 states.
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Bipartisan national solution
At the federal level, there’s a strong bipartisan effort to ensure transactions can continue to occur safely during this health emergency— or during the next crisis — and for increased convenience and flexibility into the future. Earlier this year, Sens. Kevin Cramer, R-ND, and Mark R. Warner, D-Va., introduced the Securing and Enabling Commerce Using Remote and Electronic (SECURE) Notarization Act of 2020, which allows for the immediate use of RON nationwide. A bipartisan companion bill has been introduced in the House by Reps. Guy Reschenthaler, R-Pa., and Madeleine Dean, D-Pa.
Highlighting the bipartisan support of the bill, there are four co-sponsors in the Senate and 73 in the House. The SECURE Act would authorize every notary in the United States to perform RON using two-way audio-visual communication. It would establish guidelines such as multifactor identity authentication and record keeping via audio-visual recording of the notarization.
The American Land Title Association, the Mortgage Bankers Association and the National Association of Realtors all endorse the legislation. With the need for social distancing to help prevent the spread of the COVID-19 virus, there must be options for consumers to close their transactions. The SECURE Notarization Act offers a safe alternative to help get transactions completed during this health crisis and beyond.
The strong standards in the bill are important to prevent fraud and offer consumers a more secure alternative rather than simply using free online audio-audio technology when buying property or refinancing a mortgage.
Prior to the pandemic, ALTA and MBA saw a need to develop model RON legislation. In 2017, the associations collaborated to create standard legislation that is safe for consumers, ensures the transaction can be insurable and is technology neutral. The model legislation creates legal certainty across the country by providing a uniform and consistent framework that is based on a common set of core principles.
The model bill, like the SECURE Notarization Act, requires safeguards against fraud, enforces standards to protect data and privacy, ensures consumers have the option to close their loan using RON and does not limit competition. A majority of states across the country have taken the prudent and secure route by passing RON legislation. In October, Pennsylvania became the 29th state to pass legislation that either emulates the ALTA-MBA model or closely follows it.
History of ‘e’
To appreciate this improvement to the closing process, you need to understand the various laws that allow for digital closings at different stages of the transaction. All states — except Illinois and New York — have legalized electronic transactions, signatures and notarizations by enacting the Uniform Electronic Transactions Act (UETA). The Electronic Signatures in Global and National Commerce Act (E-SIGN) is a federal law that applies many of the same provisions as UETA to interstate and national commerce.
At the county level, the Uniform Law Commission in 2004 promulgated the Uniform Real Property Electronic Recording Act (URPERA), representing a model statutory framework to provide county clerks and recorders the authority to accept electronic recording of real property instruments.
To date, 37 states and U.S. territories have enacted URPERA. The pace of implementation has picked up over the past few years. Through October 2020, more than 2,200 of the 3,600 recording jurisdictions in the U.S. offer electronic recording.
In July, the Uniform Law Commission approved updates to its model state notarization law — the Revised Uniform Law on Notarial Acts (RULONA) — to allow remote online notarization. ALTA and the MBA worked closely with the ULC drafting committee to ensure consistency between RULONA and the model RON bill.
Treasury recommends standardization
In a 2018 report aimed at identifying improvements to the regulatory landscape that will better support financial technology and foster innovation, the U.S. Department of the Treasury offered recommendations to improve the electronic closing and recording process.
The first recommendation was for states to authorize RON and to pursue legislation that permitted the use of this technology and the interstate recognition of remotely notarized documents. Treasury recommended that states align laws and regulations to further standardize notarization practices.
Meanwhile, Treasury also encouraged Congress to consider legislation to provide a minimum uniform national standard for electronic and remote online notarizations. A Treasury report stated such legislation would facilitate, but not require, this component of a fully digital mortgage process and provide more legal certainty across the country. Federal legislation is not mutually exclusive with continued efforts at the state level to enact a framework governing the use of electronic methods for financial documents requiring notarization, according to the report.
However, a handful of states during the ongoing pandemic have implemented or are considering digital closing options which, while simpler to implement and use, don’t follow the same essential safeguards as RON. As an example, Minnesota passed legislation that would temporarily allow for remote ink-signed notarizations (RIN) throughout the health emergency. This occurred even though Minnesota passed a RON law a few years ago.
In addition, some state leaders are considering policy discussions that would codify standards not consistent with RON and would introduce unnecessary legal uncertainty and risk to transactions.
ALTA, the North Carolina Land Title Association, the MBA and the Mortgage Bankers Association of North Carolina in a letter encouraged North Carolina’s secretary of state to maintain RON requirements, which provide robust consumer protections and legal certainty to the transaction. The letter stated that while the COVID-19 crisis has led to emergency measures allowing video notarizations to occur without protections like mandatory multi-factor authentication of signers, this should not be considered a viable long-term policy approach.
“The actual outcome of codifying these temporary measures into permanent law is a non-uniform standard that interjects a high-level of uncertainty into what might constitute a valid notarial act. Further unintended consequences resulting from passage of this type of legislation will without a doubt include rejection of North Carolina notarizations to certify business transactions in other states,” the letter said.
Model legislation by the Uniform Law Commission, as well as laws enacted by states to allow RON, incorporate core principles for the safe use of remote notarization technology. Safeguards include requiring multiple layers of third-party identity verification, use of tamper-evident technology and retention of an audio-video recording of the notarial act.
In real estate transactions, notarizations must provide certainty for property transfer. Industry professionals support remote notarization options that leverage technology to improve the consumer experience, while protecting consumers from fraud and providing enough confidence for use in real estate transactions.
Rather than taking measures designed to be short-term solutions and making them permanent, lawmakers should pursue technology-neutral notary legislation containing robust standards to protect consumers, prevent fraud and provide legal certainty.
When considering long-term use, it is important to note that the RIN process does not provide the same anti-fraud protections the notary process is intended to solve for, especially when it comes to identity verification. In addition to creating consistency, the model helps ensure adequate consumer protections and anti-fraud measures.
Use of e-mortgages carries both potentially heightened risks and risk management benefits. The FHFA has reported that both GSEs said e-mortgages create fewer signing errors and ensure that documents, pages and signatures are not missing from closing packages, which minimizes post-closing review delays.
While underwriting parameters are the same for an e-mortgage versus a traditional paper-based mortgage, differences in signing processes introduces potential risk. According to Fitch Ratings, e-mortgages can increase risk if counterparties do not have proper controls and remediation plans for their e-mortgage systems and platforms. For example, Freddie Mac told the FHFA that if counterparties do not comply with ESIGN and UETA in the e-mortgage and e-closing processes, then the resulting e-mortgage may have issues or delays in enforcement. According to Freddie Mac, the potential for enforceability issues with e-mortgages is their highest risk.
Consumers like digital
A recent ClosingCorp survey of 690 borrowers who had purchased or refinanced a home since March 15 found that 90% were satisfied with their closings during the COVID-19 pandemic even though most of the transactions involved e-signing and remote closings. More than half of all borrowers (55%) said their closings were conducted remotely, and not in traditional locations, such as a title company’s or lender’s office.
The survey did not denote whether closings were conducted using RON or some digital closing variation such as RIN. According to the survey, going forward, 82% said they preferred e-signing documents prior to closing and more than two-thirds of borrowers said that in the future they would prefer remote closings over in-person.
Advances in technology have the potential to improve the consumer experience. We must remember that purchasing a home is the largest investment most Americans will make in their lifetime. It’s the job of professionals involved in the mortgage and real estate process who can provide the most secure and efficient platform, not just the easiest.
Easiest not always best
The robo-signing debacle during the financial crisis showed us that rapidly approving and signing important foreclosure documents was not prudent. We should not follow the same strategy with digital closings. One of the concerns arising from the increased use of electronic transactions is ensuring that the documents are validly executed and in a recordable format.
This concern is exacerbated with various standards for digital closings. Protecting the integrity of the land records upon which our industry relies is imperative. To ensure that the title insurance and settlement industry can protect the property rights of consumers, we need to have a reliable land records system that is free of any contamination of unlawfully executed and/or recorded documents.
The push to provide digital closings on a broader scale will continue to grow. In addition to improving the consumer experience, RON-enabled digital closings also will drive efficiencies for title and settlement companies, lenders and the secondary market. Finding the right balance between convenience, security and risk are all key issues we must consider as we build a road to smarter closings. The proper path forward is found in the SECURE Notarization Act.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the author of this story:
Bill Burding at [email protected]
To contact the editor responsible for this story:
Sarah Wheeler at [email protected]