Challenges in automating eMortgages: work is progressing on many fronts to overcome the countless hurdles to producing a widely available paperless mortgage.
So if eMortgages are so great, why isn't everyone offering them? To answer that, it first helps to go back and trace how far we have come.
The automation of eMortgages really began in earnest in the late 1990s, when several factors started to converge. First, the Mortgage Bankers Association (MBA) and leading mortgage organizations realized that industrywide data and document standards would be essential to create all electronic or eMortgages.
In 2000, the Electronic Signatures in Global and National Commerce Act (E-SIGN) became law, providing eMortgages a strong legal basis. MBA formed the Mortgage Industry Standards Maintenance Organization (MISMO) industry group to develop the eMortgage core standards. Around the same time, several companies attempted to develop the first eMortgage closing platforms.
Stewart Title Co., Houston, an industry leader in mortgage services and technology, took some pioneering steps with live trials of electronic closing technology. From these early trials, Stewart learned key lessons it later applied when the time came to build a production eClosing system based on MISMO standards. However, being a pioneer always presents challenges.
To help understand some of those challenges in the context of eMortgages it helps to review the complex landscape of the varying closing processes, regulations and standards. Also, to fully understand the complex nature of this challenge, one needs to consider how the industry could adapt technology to address these needs while working with existing technology platforms.
The closing process
The mortgage closing is the culmination of a lengthy process in which the buyer, seller, settlement agent and others come together to review, adjust and finalize the documents involved in the loan closing. The closing affects two primary actions. The first is the transfer of the title of the property in exchange for the sale price. The second is the activation of a mortgage, when a loan is required to complete the transaction.
Certain documents required by law to protect the borrower and the lender in the lending process are also required. In general, these documents include:
* HUD-1 settlement statement, Truth-in-Lending statement
* Promissory note, mortgage or deed-in-trust (security instrument), deed
* Sworn affidavits, riders, notices, applications for information, endorsements, disclosures, addendums
* Sale and purchase agreement, appraisal report, title insurance, property survey
* Other required insurance--including mortgage, home-owner, flood, etc.
* Certificates--including occupancy, etc.
Certain actions performed on the documents will impact which technology is used for automation, how automated processes occur and which standards, laws and regulations come into play. Specifically, these actions include:
* Review--applies to all documents
* Signing--applies to most of the documents
* Notarization (witnessing)--applies to the mortgage, deed and affidavits
* Recording--applies to the mortgage (security instrument) and deed
* Assignment--applies to the mortgage note
Figure 1 shows the closing document flow from pre-closing to secondary marketing.
Because of the need throughout the process to create, route and review these documents among many parties, paper generates delays, errors and added costs. However, automating the process is equally challenging because the laws, regulations and customs at the county, state and federal levels practically guarantee that no two counties have the exact same process.
A service provider that wants to offer eMortgage automation on a national level will have to adapt its solution. This adaptation must apply to each document and process variation across the 3,400 counties and 50 states, as well as for the various laws and regulations enforced by specific federal departments and agencies.
Impact of laws, regulations and standards on eMortgages
There are many laws, regulations and standards the various parties in the process must follow to ensure compliance throughout the eMortgage process. While there are significant benefits to eMortgages, there are also many risks. The greatest risk is that the resulting process will not be in compliance. The impact of noncompliance can be significant:
Unenforceable transactions: This is the most serious situation. If a court finds the enforceability of key electronic documents invalid or unreliable, then the value of the transaction may be in jeopardy for any of the parties in the transaction. Problems can result, including fraud due to poor security or improper closing practices due to poor process automation.
Fines and penalties: With the complexity of federal, state and county regulations affecting real estate transactions, it's easy to misinterpret how they apply in the context of eCommerce laws such as E-SIGN and the Uniform Electronic Transactions Act (UETA). A poor implementation could create a noncompliant closing process, resulting in fines from regulators or penalties from investors.
Lack of acceptance: The mortgage process is a supply chain with many participants. A lack of standards, clear laws and regulations will slow acceptance by all the parties in the supply chain. A participant will be reluctant to adopt electronic records and signatures if other participants cannot access them or if they are skeptical of their enforceability.
Laws, regulations and policies
To avoid the consequences of noncompliance, it is critical to determine how to apply the various laws, regulations, business policies and standards to the automated eMortgage process. The following describes the key laws, regulations and business policies that apply to the mortgage lending supply chain, and outlines their impact on the process.
E-SIGN and UETA: These are federal and state legislative equivalents that provide the legal basis to perform most eCommerce transactions, including eMortgage. The laws enable the use of electronic records and signatures where paper or writings are mandated by law. In addition, these laws also address the issues of consent, integrity and storage of electronic records. Finally, both laws also have provisions for electronic negotiable instruments, such as the mortgage note, required at a closing and for sale to the secondary market.
Lending and consumer disclosure laws: E-SIGN/UETA enables any legal requirements for paper or writings to be fulfilled by electronic records and signatures. Legally mandated disclosures may not always need signing, but still need to be delivered or made accessible electronically. Failure to deliver the correct disclosures in a timely manner may result in penalties for the lender and may impair its ability to sell the loan to investors.
Electronic recording laws: Recording mortgage documents creates a public record of a lien on a property. eRecording laws allow counties to record electronic records with electronic signatures and notarization as well as electronic lien releases and other records needing recording. Acceptance has been slow without a national framework of uniform laws, but the National Conference of Commissioners on Uniform State Laws (NCCUSL) has commenced the development of a uniform model law for eRecording.
In the meantime, county recorders operate based on a patchwork of laws, rules and policies promulgated at the state and county levels. Overall, 10 states have eRecording laws and 35 counties accept eRecording, and another 20 counties are scheduled to start eRecording in 2004.
Electronic notarization laws: E-SIGN/UETA address the notarization of an electronically signed record allowing notaries to notarize electronic records using their own electronic signature. Some interpretations of E-SIGN/UETA have taken this to mean that no seal or stamp is required. However, the remaining legal requirements of the notarial act must be preserved. In particular, in-person identification and verification of acknowledgment and intent are still needed. In addition, many state and county laws have specific requirements about notary information that must be attached to notarized documents. While there has been much discussion about state notarial laws addressing eNotarization, little has been accomplished yet.
Business policies: Investors and major lenders involved in the mortgage market have significant business policies and rules that borrowers and other parties must follow to do business with them. The most notable examples are the extensive lending policies of the government-sponsored enterprises (GSEs) including Fannie Mae and Freddie Mac, which have now developed rules that lenders must follow if they want to sell them eMortgages.
To help companies automate eMortgages that can move among market participants easily and create trust in their legal enforceability, the mortgage industry has worked together under the umbrella of MBA to develop key standards. The following is a summary of the most relevant standards efforts.
MISMO: MISMO was formed by MBA to develop standards directly affecting electronic mortgages. To date, MISMO has developed several standards, including the significant standardized data field set to allow for seamless electronic exchange of mortgage data among parties. MISMO has also defined the SMART doc (securable, manageable, archivable, retrievable, transferable document), a standard electronic document format used to replace paper documents and provide secure transport and storage of mortgage data. MISMO is also involved in developing standardized electronic processes for document packaging, eVaulting and the closing process.
Secure Identity Services Accreditation Corporation (SISAC): SISAC, an MBA sister organization to MISMO, accredits issuers of secure identities based on digital certificates. To date, Mountain View, California-based Verisign Inc. has been accredited as a certificate issuer, and New York-based KPMG LLP has been accredited as an auditor. SISAC's mission is to create trust in the security being used in eMortgage documents and processes, including the registration and transfer of an eMortgage among investors.
Standards and Procedures for Electronic Records and Signatures (SPeRS): SPeRS is a standard developed by the SPeRS committee of the Electronic Financial Services Council (EFSC). SPeRS provides guidelines and best practices for developing processes that will comply with E-SIGN, UETA and other laws and regulations affected by electronic records and signatures. Through an alliance, SPeRS works closely with MISMO to promote the acceptance and enforceability of eMortgages.
Property Records Industry Association (PRIA): PRIA was formed by the land title industry to develop standards for land title documents. Its main efforts are in electronic recording of eMortgage documents and eNotarization. PRIA is also allied with MISMO to ensure compatibility of their respective standards.
[FIGURE 1 OMITTED]
Mortgage Electronic Registration System (MERS): MERS has created and continues to run the National eNote Registry. This registry allows eMortgage notes to meet the requirements of mortgage investors and the legal enforceability under E-SIGN and UETA with respect to the transfer and management of eMortgage notes held in a custodian's eVault.
eMortgage solutions requirements
Automating an eMortgage closing is complex, to say the least. In the past, overly simplistic approaches focused on using high-security technology to authenticate the user and securely store the electronic records. However, the result was an inflexible system that did not meet the requirements of documents, users and processes, or the integration required by other participants' systems. Nor did it deliver the benefits and cost savings that were expected.
Today the industry realizes there is far more needed in an eMortgage closing than just a secure eSignature to create a successful solution.
Configurable document handling: As illustrated in Figure 1, documents come from a variety of sources that may not all share the same formats. However, the eClosing solution must be flexible, easy to use and support a variety of documents sources so the entire transaction can be completed without paper, if possible. At the same time, it must also accommodate paper processing for hybrid closing processes.
Adaptable security systems: User-authentication, document-authentication, secure audit trails and eVaulting all need to be addressed by the solution. Various methods of authentication must be supported to balance cost, risk and ease of use. In addition, secure communications between parties and systems must also be addressed.
Flexible business approval process management: System flexibility for business process automation is needed to accommodate process innovations in eClosings. For example, while signing, delivery, review and storage of eDocuments are critical, significant process improvements are possible by allowing borrowers to securely review and correct documents online prior to closing.
Standards-based system integration: In addition to integrating with an overall eClosing back-office system and portal, the solution must also integrate with other systems. These include the MERS eNote Registry; eRecording aggregation platforms; mortgage document production systems; lender loan origination and delivery systems; investor loan submission systems; eVault custodians; eNotary systems and many others. Without document and data standards such as those mentioned earlier, widespread integration among participants would not be possible.
Figure 2 shows both the capabilities and the document and data flow for an eMortgage, and where MISMO standards would fit in the process.
A case study in eMortgage
To illustrate the extent of coordination and innovation required to produce an eMortgage solution, consider the example of Stewart Title. The company partnered with Montreal-based Silanis Technology to build an eClosing portal application that would meet Stewart's business and technical requirements as well as the legal, regulatory, policy and standards requirements for an eMortgage. Figure 3 depicts the solution at a high level.
SureClose[R]: This is the Stewart Title information management system that allows a closing agent to manage all aspects and documents for the closing process through a Web portal application. It controls the eClose application that permits a full eMortgage closing in an agent's office.
[FIGURE 2 OMITTED]
[FIGURE 3 OMITTED]
eClosing Room: This Web application was developed using the Silanis business approval process framework to combine all the necessary resources needed to initiate, manage and complete the eClosing through three specific processes. The transaction manager process manages the overall closing process and all the involved documents. The borrower process allows the borrower to review and sign all the closing documents. Finally, the notary process allows the notary to notarize the applicable closing documents.
Approvelt[R] Web Server: This is the core transaction engine involved in the actual eClosing process to capture the review, signing and distribution of the eClosing documents. It's the technology that provides the necessary security and process flow for the borrowers and notary in the closing process. It also ensures the resulting transaction will provide the necessary evidence to make it enforceable with respect to the review, signing and distribution of the electronic records.
Approvelt Transferable Records Manager (TRM): TRM receives the signed electronic records and takes care of registering them with the MERS eNote Registry. It also provides eVaulting capabilities and eNote Registry capabilities for local storage and control by the document custodian. It also furnishes a secure interface to provide authorized persons to perform trust and custodial operations on the electronic records.
Scratching the surface
This article only scratches the surface of all the details involved with implementing an eMortgage solution for eClosing. It provides an overview for those wanting to explore and better understand the wide variety of issues that must be addressed to deliver legally enforceable eMortgages.
Designing and implementing a successful eClosing solution requires a particular set of skills that combine a strong understanding of the mortgage closing process, as well as all applicable laws, regulations, policies and standards. It requires extensive knowledge of the appropriate technology needed to implement the solution and good user-interface design to make the system user-friendly without compromising legal enforceability.
Combining these skills from various experts to produce a truly compliant and secure solution requires a true team effort. Considerable work has been done on developing standards to enable lenders and investors to move ahead in deploying these solutions with the confidence that when properly implemented, transactions will be legally enforceable. So, while the challenges ahead are significant, real progress is being made on the path to the eMortgage.
Michael Laurie is vice president and co-founder of Silanis Technology, Montreal. Silanis is an electronic signature and approval technology provider. He can be reached at firstname.lastname@example.org.
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|Date:||Dec 1, 2004|
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