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   ARTICLE   |   From Scotsman Guide Residential Edition   |   July 2013

Is Legislation Paving the Way to a Paperless Office?

With the rise in popularity of energy-efficient homes, the need for specialized appraisers grows.

Is Legislation Paving the Way to a Paperless Office?

With the continued effects of the Dodd-Frank Act Wall Street Reform and Consumer Protection Act, the refinance market coming to a peak and the purchase market gaining steam once more, the mortgage industry is changing. As a result, the present loan-origination process soon will be a thing of the past. The line has been drawn — or depending on how you look at it, the curse is cast. No one can foresee all the effects of regulatory change, let alone multiple ones. But no mortgage professional would disagree that Dodd-Frank will continue to have significant effects on the industry.

On the positive side, however, new rules and regulations are a trigger for the mortgage industry to work differently. In particular, one effect may be the elimination of paper in the loan-origination process. For years, there have been many predictions about the paperless office, the fully electronic mortgage and a world with more trees.

To date, however, the concept of having a paperless office is far-fetched, trees still are falling and electronic mortgages make up a small percentage of overall loan volume. There are many reasons for the slow rate of adoption, but there is no need to dwell on this. The new rules contain some agents of change that may be the ones needed to enable a fully electronic mortgage process, starting with the first document in the process — the loan application.

Changing definitions

Today, a borrower may fill out a loan application online — or if shopping around, fill out multiple applications with several lenders — but by the time that the loan closes, that application likely will be printed on paper and signed with a pen. The only way to eliminate the need to print a loan application is to create a “smart mortgage application” that captures the loan information once, allows for electronic signatures and provides a mechanism to easily extract data for the life of the loan. The question, however, is this: How will these new regulations create this change in behavior?

Newly proposed requirements from the Consumer Finance Protection Bureau and the U.S. Department of Housing and Urban Development are likely to play an instrumental role. There are new criteria for the definition of a loan application and on the timing of when a loan estimate must be provided by a lender. According to the final rule from the Real Estate Settlement and Procedures Act: “Application means the submission of a borrower’s financial information in anticipation of a credit decision relating to a federally related mortgage loan, which shall include the borrower’s name, the borrower’s monthly income, the borrower’s Social Security number to obtain a credit report, the property address, an estimate of the value of the property, the mortgage loan amount sought, and any other information deemed necessary by the loan originator. An application may either be in writing or electronically submitted, including a written record of an oral application.”

This proposed rule specifies that when six pieces of information have been collected (the address, loan amount sought, monthly income, estimated value, borrower name and Social Security number), lenders must provide a loan estimate within three business days. In effect, a “loan application” is now defined by the collection of six pieces of information.

Additionally, this loan application must be retained in an electronic, machine-readable format. “Machine readable” means a format where the individual data comprising the record is available for export and import electronically.

Ability to repay

But wait — there’s more. A fundamental new rule requires verification of mortgage-loan information about the borrower’s general ability to repay. The ability-to-repay information that must be considered includes the borrower’s income and assets, employment status, monthly payments, debt obligations, alimony, child support and credit history.

Considering that, origination processes will need to be modified so that there is documentation verifying that applicants have met each aspect of the ability-to-repay requirements, information that must be retained for three years. Along with the six pieces of information that now define a loan application, these items must be included in the loan file.

Clearly, the loan application is the cornerstone of the loan information, and a smart electronic document can be key to meeting requirements for exchanging data and retaining information collected throughout the origination process. How could this be best achieved?

The Mortgage Industry Standards Maintenance Organization (MISMO) develops industry standards that enable all parties to exchange real estate finance-related information securely, efficiently and economically for the life of a loan. The format of information in the MISMO standard is machine readable. Additionally, MISMO has developed the SMART Doc specification, a standard for the representation of mortgage documents in an electronic format. This specification was developed in such a way as to allow for secure and efficient transfer of both the loan’s data and the electronic document between parties in a mortgage transaction.

The SMART Doc specification is ready and available to capture the loan application. The MISMO standard has the functionality to represent the Uniform Residential Loan Application (i.e., Fannie Mae’s Form 1003 or Freddie Mac’s Form 65), allowing for electronic signatures and providing for secure and tamper- resistant record retention in a way that will meet these requirements.

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Will these new rules and regulations be the agent of change that the industry needs to adopt the fully electronic mortgage? Perhaps. If loan applications were never dedicated to paper and instead were made fully electronic, the exchange of data for the application and the retention of ability-to-repay requirements could be secure, efficient and economical. If the loan application begins its life as an electronic document, this could be the driver needed. Remember: Big changes can start with small, fundamental steps, and the new definition of loan applications combined with the ability-to- repay data requirements certainly seem to be fundamental steps.


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