For the better part of two decades, technology has been poised to transform the time-consuming and paper-centric process of closing a mortgage. In order to perform an electronic closing or e-closing, all documents need to be electronic.
Additionally, systems must not only have the capability to sign and notarize electronic documents but also must be able to record the electronic document in public land records. To accomplish this, there are still figurative monsters to slay on this voyage.
Complying with various state and local requirements for notarization and recording were — and in some cases, still are — reasons to use paper as a settlement crutch. The COVID-19 pandemic has forced lenders and title companies to move home loans online, find creative solutions for notarization and eliminate paper.
An e-closing is remote and meets physical-distancing requirements for all parties: the borrower, the settlement agent and the notary. So, why aren’t all closings electronic, especially in these times?
The paperless mortgage has been on a 20-year odyssey requiring a unique combination of legislation, technology and acceptance by mortgage professionals and borrowers. Prior to 1999, individual states had adopted electronic signature (e-signature) laws but the kinds of e-signatures cited and the legal recognition of them differed. Many state laws had “statute of fraud” requirements that made it unclear as to whether electronic documents met the requirement.
Reliance on paper documents and manual signatures assured that transactions were legally enforceable — it was less risky to use printed documents. To overcome this, a model state law called the Uniform Electronic Transactions Act (UETA) was created in 1999 by the Uniform Law Commission to create e-signature uniformity across all states. The states were slow to adopt their own versions of this law and there was no provision for interstate or foreign commerce. So, home loans remained on paper.
When President Bill Clinton signed the Electronic Signatures in Global and National Commerce (ESIGN) Act in 2000, e-signature technology became valid and legal for all 50 states, even for those states that had not yet passed a version of UETA. This was good for the real estate and mortgage industries as ESIGN ensured that electronically signed documents were as binding as paper documents. Twenty years ago, the issue of e-signature enforceability was settled.
One document in the closing package, the promissory note, has unique legal requirements as an electronic document. Since it is easy to make copies of an electronic document and not so easy to determine which copy is the electronic equivalent of a paper original, the industry agreed to designate a registry to identify the authoritative copy, the controller (holder) and location (custodian) of the electronic promissory note (e-note).
The Mortgage Electronic Registration Systems’ eRegistry has been in operation and has served as the system of record for e-notes for more than 15 years. The voyage was not over when the legal hurdles were solved as the industry needed to define standards for mortgage documents and data.
The mortgage banking industry formed the Mortgage Industry Standards Maintenance Organization (MISMO) to standardize electronic data. In the early 2000s, MISMO developed a standard representation for electronic mortgage (e-mortgage) documents called the SMART document.
These documents carry data in a standardized format and link the visual presentation to the data. It is possible to automatically verify that the data provided for machine consumption matches the information presented to humans. By 2005, the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac had adopted SMART documents for delivering e-mortgages. This paved the way for lenders to originate electronically.
Even with legislation and industry standards in place, it was still deemed less risky to use printed documents ― especially with respect to notarization. Duties of a notary vary from state to state but, overall, the physical presence of a notary is to act as an impartial and public witness to a signing ceremony.
For an e-closing, the notary’s role includes performing a reasonable check of the identity of the signer, witnessing the actual signing, and electronically affixing a notary stamp and seal to the documents. This attests that the signatures were not executed under duress and by the free will of the signers. There are, however, many issues and potential legal challenges with performing the notarization electronically that are creating confusion and delaying the paperless mortgage as the norm.
One issue is that acceptance of electronic notarization (e-notarization) is on a state-by-state basis. Some states have published rules for the process, while others have stated publicly that it is allowed but have not provided any guidance. And there are states that have remained silent on the issue.
This has created a patchwork of differing rules and laws that is similar to the situation in the 1990s regarding e-signatures and the need for UETA. Technology enables in-person electronic notarization and remote online notarization (RON). With RON, the notary is not face to face with the borrower and conducts the notarization using audio and video technologies. RON also allows for the notarizations to occur across state lines.
With remote notarization, for example, the signer could be in Maryland and the notary could be in Montana. The issue is legally clouded. In some states, a notary is only allowed to perform the notarial act where he or she has a commission. And will a remote e-notarization stand up in court of law?
Certain real estate documents that are notarized must be recorded on public records and this occurs, in most states, at the county level. Recording protects interests in the real property by publicly naming the party who holds these interests. State laws govern local recording offices, and every state has requirements relating to the originality and authenticity of paper documents that are presented for recording.
UETA included optional provisions for governmental authorities to accept and use electronic records. Not all states adopted these optional provisions. Another law, the 2004 Uniform Real Property Electronic Recording Act, addressed how a local recording office could accept and process electronic documents and signatures for recording, known as e-recording. Approximately 88% of the U.S. population now lives in an e-recording county, but it is still important to ensure that the recorder recognizes electronically notarized documents and accepts electronic submissions. If not, the documents will be paper.
The COVID-19 outbreak and the need for social distancing has highlighted the need to remove in-person requirements for mortgage closings. Leaders in many states issued emergency orders to temporarily address notarization in different forms. Some included guidance for remote ink-signed notarization (RIN) in which the notarial act is performed using video-conference technology for witnessing the signing ceremony on paper documents. The notarial act occurs at a later time when the notary physically receives the document. RIN does not remove paper and is only a temporary solution.
Lastly, what about the borrower experience? A paperless mortgage is nirvana for borrowers who are accustomed to a digital experience for banking, bill paying, shopping, searching for properties, electronically signing documents and making purchases. With an e-closing performed through RON, borrowers can review loan documents at their convenience prior to closing; have flexibility in scheduling the closing without the need to take time off from work; and experience a faster and easier signing process that likely has fewer errors on the closing documents.
Are we ready to be paperless? Not quite yet, even though the volume of e-notes registered has increased substantially over the past year. This past May, for example, there were 31,238 e-notes registered as compared to 7,026 in May 2019 and 450 in May 2018.
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In some ways, the odyssey to the paperless mortgage is akin to the journey of Odysseus, which also was a 20-year ordeal between the start of the Trojan War and his return home. Although it is not battling mystical creatures, overcoming terrifying monsters or facing the wrath of the gods, the mortgage industry is slowly slaying the obstacles.
If you are on a quest for e-closing, it is important to keep all of these aspects of the mortgage process in mind. The journey certainly has been long and full of trials and tribulations. But the struggle with paper is coming to an end. The paperless mortgage is the future. ●