- Know Before You Owe compliance has been less painful for companies that offer digital mortgages.
- The legal and regulatory changes necessary to allow for the acceptance of emortgages have been a major barrier to adoption.
- The importance of lenders, title companies, settlement agents, real estate agents and others being able to collaborate to close a loan and communicate efficiently and effectively with each other is paramount to complying with Know Before You Owe, especially over time.
Settlement agents and other companies that embrace the advantages of digital mortgages may be in the best position to successfully navigate the new mortgage process. That’s according to the Public Records Industry Association (PRIA), an organization that brings together the property records industry, government and business to address issues of common concern in the world of property transactions.
As the dust begins to settle on the Consumer Financial Protection Bureau’s (CFPB) TILA-RESPA Integrated Disclosures (TRID), or “Know Before You Owe,” rule, PRIA examined how Know Before You Owe compliance has been less painful for companies that offer digital mortgages since the rule took effect on Oct. 3.
Taking advantage of disruptive events
“Just like any disruptive event in any industry, there are going to be people positioned to take advantage of it, and you have the old stalwarts who gracefully step aside,” said Mark Ladd, PRIA’s president, who also serves as vice president of regulatory and industry affairs at erecording technology provider Simplifile.
“I don’t know anyone in the lending world with significant stature that feels emortgages are a bad idea. Now it’s just about the practical steps of how we get there.”
Digital mortgages — also known as emortgages — can be defined narrowly as an electronic form of a borrower’s loan documents, or broadly as the process that real estate and mortgage professionals use to conduct a closing.
“When you think about mortgages in terms of paperwork, making that huge stack of paperwork electronic is not a small enough sandwich for the industry to digest. It’s been a long process, but the industry is making more progress than some people realize.
“We are definitely seeing a shift from ‘are we going to get there?’ to ‘how are we going to get there?’ While that fits nicely into a sound bite for a PowerPoint presentation, making it work is a little trickier,” Ladd said.
Barriers to digital-mortgage adoption
Organizations like PRIA, the Mortgage Industry Standards Maintenance Organization (MISMO), the Mortgage Electronic Registration System (MERS) and Electronic Signature and Records Association have been working for about 15 years to make digital mortgages the accepted standard in the industry, but along the way, there have been significant barriers.
“Back when I was still the register of deeds in Racine County, Wisconsin, I went to a MISMO meeting in 2000, which turned out to be the meeting where MISMO started its E-Mortgage Workgroup and began talking about the data and technology standards needed to support emortgages.
“At that time, we said emortgages could be accomplished within three to five years. Harry Gardner, who was president of MISMO and is now at Ellie Mae, still jokes, ‘we’ll do it in three to five years,’” Ladd said.
Public key infrastructure — necessary or not?
First, the technology and uniform standards used to authenticate and validate a signer’s identity, ensure document integrity and prevent fraud had to be developed. Early technology was centered on public key infrastructure (PKI) technology, “which was difficult and expensive,” Ladd said.
“Those early initiatives failed, and that put a chill throughout the industry, especially for notaries public and secretaries of state, who regulate notaries,” he said. “These early experiments created a lot of doubt and confusion, and PRIA has made a point to engage with secretaries of state to make sure they understand that emortgages can be technology-neutral.
“You don’t need PKI to do electronic notarizations. States just need to come up with a simple way for notaries to register their electronic signatures with the state,” he said.
Legal and regulatory barriers to adoption
The legal and regulatory changes necessary to allow for the acceptance of emortgages have also been a major barrier to adoption. Some states have made more progress than others, but even within a state, adoption can vary, as some county recorders and registers of deeds may have their own standards for what kind and form of document they will accept.
“With 3,600 county recording jurisdictions in the country, many of which are led by elected officials, we have seen it all,” Ladd said. “We have seen candidates run for election on the promise they will digitize their offices and win, and we have also seen others run on the promise to actually take their offices back in time and win.
“PRIA works hard to create consistency at least within individual states, but we’re also concerned with people who aren’t PRIA members, because our members have already bought into the message,” Ladd said.
Electronic mortgages and closings better for consumers
But the tide may finally be changing. Recently, the Consumer Financial Protection Bureau (CFPB) undertook a study of how emortgages and eclosings may benefit consumers’ understanding of and experience with the homebuying process.
After looking into the issue for four months with a consortium of seven lenders, more than 3,000 consumers, four technology companies and many settlement agents and real estate professionals, the bureau’s “Know Before You Owe” eClosing project found that borrowers who closed their mortgage using an electronic platform are generally better off when it comes to understanding, efficiency and feeling empowered than borrowers who used just paper forms.
“The CFPB came to our conference last year and briefed our members on what the pilot project was set up to do, and what they were hoping to be able to analyze,” Ladd said.
“My feeling is the only way companies are going to be able to comply with the Know Before You Owe initiative is by applying technology to it, The scope of the regulation is just too broad, and the complexity of the mortgage transaction is just too high.” – Mark Ladd, president of PRIA
“Just having the CFPB stand in front of the room saying, ‘we are exploring eclosings because we think they will be beneficial to the consumer’ made everyone in the room sit up and take notice. If the CFPB thinks emortgages are good for consumers — and the pilot program participants all had glowing comments about it — I think this will really be a great catalyst to help some people get off the sidelines.”
Adoption rates vary, but Know Before You Owe is an opportunity
At the present time, acceptance and adoption rates for emortgages vary among lenders and other companies. Industry leaders like Quicken Loans regularly advertise on television that they are trying to electronically automate the entire homebuying process, while some small, local credit unions and community banks that lack the resources to retool their technology and ensure regulatory compliance so cumbersome, they feel like they are being pushed out of the mortgage space, Ladd said.
At the same time, Know Before You Owe provides a big opportunity for a lot of companies to finally take the plunge, Ladd said.
“My feeling is the only way companies are going to be able to comply with the Know Before You Owe initiative is by applying technology to it,” he said. “The scope of the regulation is just too broad, and the complexity of the mortgage transaction is just too high.”
The importance of lenders, title companies, settlement agents, real estate agents and others being able to collaborate to close a loan and communicate efficiently and effectively with each other is paramount to complying with Know Before You Owe, and “while you can absolutely collaborate offline, you can’t do that successfully in large volume over time,” Ladd pointed out.
“This should make emortgages or moving other parts of the process to an electronic platform easier to adopt. It’s a great motivator to move folks forward,” he said.
Other technological perks
Technology can also help to shorten closing times, which is a concern in the post-Know Before You Owe world, Ladd noted. As many compliance experts have noted, closings will likely take longer, with some experts advising the industry to expect 45-day or 60-day closings as they work to iron out the kinks of the new closing process.
“The lenders and settlement agents that figure out how to automate the best and collaborate the fastest will be the ones to whittle that timeframe down,” Ladd said.
And perhaps the biggest advantage that technology offers companies that must comply with Know Before You Owe is the ease of creating an audit trail for every transaction — just in case the CFPB ever comes knocking on your door with a civil investigative demand in hand.
“If you can click a button and run a report, and hand it to the CFPB and say, ‘here is evidence of my compliance,’ as opposed to going through a long, cumbersome, expensive discovery process that looks at every email and piece of paper, that is huge,” Ladd said. “So it’s no longer about whether technology will yield enough of a return on the investment — now it’s about how it will help you survive.”