The COVID-19 pandemic has transformed the mortgage industry in unprecedented ways. The speed of the outbreak and initial shutdown of the U.S. economy was met with an urgency to quickly adopt digital processes.
Mortgage originators who were further along in their digital transformation found themselves ahead of the curve, while the majority of lenders scrambled to adapt to new circumstances and ensure business continuity. For lenders that had no way of conducting closings in a way that removed or minimized in-person contacts, business became incredibly difficult.
Today, the impetus for digital transformation of the mortgage industry is the ability to keep the lending engine running. But lenders cannot let urgency override the need to meet the regulatory requirements that govern digital mortgages and ensure legal enforceability of these loans. Mortgage originators must adopt a compliance-first perspective on their path to digital transformation. Even though speed may be a current need, compliance and certainty are forever.
Shifting priorities
Prior to the outbreak of COVID-19, mortgage originators were aware of the benefits of going digital, but change is an uninvited guest and many stuck to the traditional way of doing business. A vast majority of transactions were (and still are) done with a paper component and require an in-person meeting.
Even with the popularity of digital closings, of the more than 6 million mortgages originated in 2019, slightly more than 100,000 electronic promissory notes (e-notes) were originated. In the first half of 2020, however, that volume surged to a rate that is four times higher than that of 2019.
Efforts to digitize were focused on the front-end client experience ― primarily from the perspective of borrower convenience. Improving the experience was paramount, so lenders focused on consumer-facing technologies such as online applications and were slow to adopt solutions that enabled a fully end-to-end process. Few mort-gage originators offered borrowers the choice of the closing experience they desired ― whether it be in person, fully remote and digital, or a hybrid process.
Today, remote closings can no longer be seen as a luxury. There is concern from all parties ― including borrowers, real estate agents and settlement agents ― of being exposed to COVID-19. Even as the economy begins to reopen and stay-at-home orders are lifted, with no effective vaccine available, ignoring the need to digitize could result in greater risk for all parties. Businesses must prepare for the likelihood of extended stay-at-home orders and subsequent economic shutdowns.
The pandemic quickly and dramatically shifted priorities to the adoption of a fully end-to-end digital process. In addition to ending or limiting in-person meetings with borrowers, lenders were forced to figure out a remote solution for employees who were now working from home. For the first time, many mortgage originators had to create a solution that would allow for touchless, paperless transactions ― including remote, contactless back-office processing. An industry that conducted 99% of its transactions with some paper element now needed to quickly find a solution that eliminated the need for paper-based processes.
Meeting requirements
Being fully remote means that all documents must be electronically executed ― including the promissory note. The good news is that e-notes are fully supported where remote notarization is legal. And where remote notarization isn’t legal, hybrid closings that include an e-note can be easily executed.
Originators also should look for purpose-built applications capable of meeting the requirements of legally enforceable digital loans. This means that digital mortgages must be created, stored and assigned in a manner that complies with the laws that govern digital lending practices, and also meet the safe-harbor provisions of the Consumer Financial Protection Bureau and other industry standards.
As a mortgage moves from creation to its sale on the secondary market, simply using an electronic-signature solution is not enough to ensure its legal validity. Lenders must be able to prove that loans were created and stored properly, and that lien priority is maintained. This requires not only e-signature capabilities but robust e-vault technology as well.
Contrary to conventional wisdom, enterprise content-management solutions are insufficient even with encryption. Although encryption will provide data protection, it will not provide asset protection or interest perfection. To create legally enforceable loans, mortgages stored electronically must be properly tamper-sealed, and solutions must produce an auditable chain of custody and evidence.
Documents cannot be altered without prior authorization, and all actions must be auditable and traceable. Most importantly, a solution should prove that there is only one authoritative copy and that every other copy in the system is not the authoritative version.
Rigorous standards
The mortgage industry is an ecosystem that requires trust from all parties. To maintain liquidity within the system, lenders must prioritize regulatory compliance that meets the rigorous standards of digital loan governance.
Mortgage originators should look for purpose-built applications that can instill trust throughout the entire loan lifecycle by ensuring that every loan is the authoritative copy, compliant and legally enforceable. All parties involved in mortgage transactions should be able to trust the integrity of a digital loan as it moves throughout the loan ecosystem, whether it is pledged as collateral, transferred, sold or securitized on the secondary market.
The COVID-19 pandemic may have fundamentally changed the mortgage industry, but the laws and regulations governing digital mortgages remain the same. In spite of enormous financial pressure to adopt remote and contactless lending, mortgage originators bear a great responsibility to take a compliance-first perspective in their digital transformation. ●
