eClosing –

Modernizing Loan Origination Climax

Abstract-

An exploratory look at the role of technology to empower mortgage consumers at

closing

Author- Mahesh R Pawal

pawal.mahesh@gmail.com

Executive Summary-

As an extension to the ‘Know Before You Owe’

project, the Consumer Finance Protection

Bureau (CFPB) started to look into the critical

pain points of the mortgage industry closing

process.

The CFPB analyzed feedback from customers

and industry stakeholders related to the

process in order to understand the key

challenges resulting in frustrations. It was

observed that during the closing process,

customers face an overwhelming package of

closing documents that are large and too

legally worded making it difficult for a lay

man to comprehend. The significant reasons

being -the number & complexity of

documents, errors in documents, and scarcity

of resources to raise awareness of the

terminology used in the mortgage industry.

Besides customers, others stakeholders also

reported their challenges with the process

itself like, lack of standardization in paperwork

resulting in redundant and repetitive

documentation, etc.

The latest initiative by the CFPB - technology

enabled eClosing process has been tested

through a pilot program. The Pilot program is

in line with the CFPB’s mission to make a

mortgage process more efficient and

consumer-friendly.

The core modules of the eClosing process are

eDocumentation, eDelivery, eSignature,

eClosing platform, eNotarization and

eStorage.

On the customer front, pilot program resulted

into increase in perceived understanding,

empowerment, and convenience. This was an

outcome of early delivery of documentation

along with mortgage related awareness

material. Overall, the remedial actions

included digitizing the closing process,

altering the documents presentation and

storage, etc. This, however, also led to

concerns like technology adaptation risk,

Information Technology capital investment,

and coordination issues in regulatory

authorities.

1. Introduction:

Lending industry driven by technology based

innovations has been evolving in line with

information technology sector during the last

few years. This includes the latest development

on borrower front like websites for comparison

of lending rates from plethora of lenders to

online tools for equated monthly installment

(EMI) analysis, rent vs buy decision, refinance

break even analysis, etc. On lender front, the

stage is moving from a paper based manual

process to information technology driven

automation. This involves potential client

segmentation, progress from spreadsheet based

loan origination process to developing a

completely dedicated software application for

loan origination and servicing.

However, technology has yet to make a

significant impact on the documentation

mortgage process. The first electronically closed

mortgage received by Fannie Mae was in the

year 2000; but recession and slowdown in the

housing market followed by the sub-prime crisis

apparently killed a growing interest in

technology based closing process as lenders had

to focus available resources and energy on

survival.

As economy is back on the track, the industry

influencers, stakeholders, and regulators want to

test the waters again. As a part of this initiative,

Consumer Financial Protection Bureau (CFPB)

announced electronic loan closing pilot program

to make the process more transparent, effective,

and efficient.

2. Background:

The Dodd-Frank Wall Street Reform and

Consumer Protection Act (Dodd-Frank Act)1

required that the CFPB should combine

necessary documents involved under the Truth

in Lending Act (TILA)2 and the Real Estate

Settlement Procedures Act (RESPA)3 to publish a

single, integrated disclosure for mortgage loan

transactions. Accordingly the CFPB launched

new project called ‘Know Before You Owe’ to

design the prototype of integrated disclosures.

Existing mortgage closing process is one of the

major pain points for borrower, lender, and

other stakeholders included in the process

because of complexity involved in the

documentation process. During regulatory

implementation efforts, the CFPB decided to

extend scope and include the mortgage closing

process also.

1:http://www.cftc.gov/ucm/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdf 2:http://files.consumerfinance.gov/f/201503_cfpb_truth-in-lending-act.pdf 3:http://files.consumerfinance.gov/f/201503_cfpb_regulation-x-real-estate-settlement-procedures-act.pdf

3. Existing Process and Current Issues:

Buying a home is one of the biggest financial

decisions that most people make in their

lifetimes. Potential borrower generally identifies

a property as per budget constraint and

approaches to lender for additional financial aid.

After the initial analysis of income, liabilities, and

other financial parameters – a customer formally

applies for a mortgage loan. Once application

has been received by a lender, it triggers back-

end driven processes like information

processing, credit report check, black listing

check, valuation, and underwriting. These

processes does not require direct interaction

with a customer. During process, lender sends

few documents as required by the regulatory

authority driven by various parameters like

mortgage type, amount and so on. E.g. - Good

Faith Estimate (GFE) document, one of the

document mandated by authority, gives an

estimate of settlement charges and loan terms.

The direct interaction with customer is required

for the loan closing process, which is the last

step in a customer’s largest and most complex

financial transaction. The closing documents

package is presented to a customer at the last

moment and contains language that is too

difficult to comprehend. Moreover, the list of

documents varies from place to place and

include federally mandated documents,

state/local mandated documents, contractual,

and lender specific risk mitigation documents.

The clauses, terms, and structure of documents

put significant pressure on a customer who is

required to sign the documents within the given

time-frame.

3.1 Overview of major pain points of ‘AS-IS’

mortgage closing process:

One of the key motives behind establishment of

the CFPB was to increase transparency in

consumer financial market and provide tools,

opportunities to customers to make better

decisions. In line with this mission, the CFPB

directed its efforts to understand the challenges

in the closing process (Exhibit 1). Following three

channels were used to capture pain-points &

challenges from customers and industry

stakeholders.

1. Review of complaints related to the closing

process.

2. Interviews with customers and industry

stakeholders (e.g., settlement agents, housing

finance professionals, housing attorneys, etc.)

3. Responses received via

electronically/mail/through other means to the

CFPB’s request for information (RFI).

The research was focused on the negative

experiences of the mortgage closing process. In

general, Bureau has identified five outcomes of

the negative experiences from the process as

follows:

a. Confusion

b. Time pressure

c. Cost

d. Delay

e. Stress.

Exhibit 1

The common issues cited by customers and

industry stakeholders during the closing process

are as follows:

3.1.1. Documents package delivery timing –

The timing of document delivery was the most

common challenge in the RFI responses,

appearing in 43 percent of comments.

Specifically, 31 percent of customers, 51 percent

of notaries, and 58 percent of settlement agents

that responded to the RFI. Before closing, each

document passes through multiple stakeholders.

A common concern reported by stakeholders

was that, sometimes document delivered behind

schedule by processing stakeholder due to

reasons like mistakes, processing lag, etc.

Delayed document delivery can create a ripple

effect through the process that can push back

each subsequent relevant processes.

Furthermore, forcing each party to rush through

the documents to send them to the next party in

line can lead to additional errors and stress – a

typical case of ‘domino effect’.

Many documents do not reach the customer

until the closing meeting. With close to 100

pages to review and sign during a meeting that

is typically no longer than an hour, customer

finds it difficult to read and digest all of the

documents. For this obvious reason every

customer during the targeted interviews,

confirmed that he/she would prefer to receive

the documents at least two days prior to closing.

3.1.2. Errors in documents –

Stakeholders also noted the existence of errors

in the closing documentation, which can lead to

additional delays. RFI response cited by 24

percent of customers, 31 percent of settlement

agents, and 42 percent of notaries. Even a small

error in the paperwork can result in long delays.

One document generation provider explained

that the most common errors, such as a

misspelled name or missing spouse name,

require closing agents to send back and correct

the entire closing package. Customers and

industry stakeholders were particularly frustrated

since these errors occurred at the closing table

when all parties had reserved the meeting time

and expect to complete the transaction.

3.1.3. Large number of documents –

As mentioned in previous section, list of

documents varies and is driven by different

parameters related to mortgage and often

contain redundant information. Each customer

needs to sign all documents related to federal,

state, contractual, and lender specific mortgage

documents.

Customer-specific challenges:

In addition to the common challenges, there are

a few set of challenges uniquely linked to

customers.

3.1.4. Language comprehension –

Customers find closing documents language too

much legal and full of jargons related to

mortgage industry which is difficult to

comprehend. This issue came up in a majority of

the interviews with customers, and 38 percent of

customer RFI responses mentioned confusing

documents. Customers stated that many

documents seem to be designed for lawyers and

not for the average borrower.

3.1.5. Resources availability and awareness-

Customers find fee variation in closing

documents with respect to Good Faith Estimate

(GFE) document. Lender has complex fee

structure which considers different parameters.

The GFE quote is designed with ideal range for

minimum borrowing cost, but actual calculations

vary and adds additional fees. The existing

material explaining all details, is not available to

the customer readily. Apart from that,

sometimes mortgage based terminology is not

supported with few examples that adds difficulty

in understanding the meaning of the specific

terms. 27 percent of all RFI respondents

mentioned that no one was available to explain

the process or content to them, and 18 percent

noted that key participants (e.g., loan officers)

were difficult to reach throughout the process.

Industry stakeholder-specific challenges:

Similar to customers, each set of industry

stakeholder faces particular challenges.

3.1.6. Absence of standardization-

Industry stakeholders need to deal with various

regulations and need to be familiar with a large

set of documents. As standardization has been

not up-to the mark in closing package,

documents list is driven by mortgage based

parameters which contains redundant

information collected by various regulatory

authorities.

3.1.7. Risk Mitigation documents-

The legal risk is perceived with different

sensitivity among stakeholders. This forces

additional documentation.

4. Pilot Program Overview:

Based on a preliminary review of the current

closing process challenges, the CFPB believes

that the opportunities exist to improve the

current process to address the obstacles faced

by both consumers and industry stakeholders.

The CFPB has identified seven potential actions

to address key obstacles in the closing process.

The potential actions include:

1. Simplify and streamline documents

2. Reduce number of documents

3. Standardize forms

4. Digitize the process

5. Alter order/presentation of documents

6. Improve process and timing

7. Add educational tools

The Bureau grouped these actions under two

broad solutions.

The first solution is ‘Reduction/Simplification of

Closing Package’ which deals with first three

action items. Under this solution, the Bureau is

involved in studying existing closing packages

along with other relevant regulatory authorities

in order to remove redundancy without touching

customer’s right or protection.

The remaining four action items come under

second solution – ‘Leveraging technology-driven

eClosing solutions’. Electronic solutions are an

important building block toward the Bureau's

vision for a process that empowers consumers

via education and transparency. Additionally,

eClosing provides new opportunities to embed

educational tools into the closing process in

order to increase understanding and further

enable the customer to play a more active role.

The use of technology could also reduce time

and burden for industry as customers will be

aware of most of the things in closing process.

4.1 eClosing Pilot Program:

The term ‘eClosing’ or electronic closing, refers

to a mortgage closing that relies on technology

for stakeholders involved to view and/or sign

documents electronically. It has six technology

components as follows (Exhibit 2).

4.1.1. eDocuments-

Electronic documents can be as simple as a

scanned PDF version of the traditional paper

documents or as sophisticated as a SMART Doc.

SMART Doc® is a registered trademark of

MISMO, the Mortgage Standards Maintenance

Organization. SMART Doc is a standards-based

document view like PDF, HTML or TIFF that is

complemented with specific document level

meta-data, tamper-evident seals, audit trails,

electronic signature attributes, and easily

accessible data.

4.1.2. eDelivery-

In the eClosing process, documents can be

electronically delivered to customers by email or

accessing an online portal within a vendor

platform. eDelivery impacts two stages of the

closing process. First stage involves electronic

delivery of documents to a customer prior to

closing for review and acknowledgement of a

receipt. Second stage involves delivery of

documents after the closing process by the

settlement agent to downstream stakeholders,

including the lender, investor, and county

recorder. This process gives ample time to

customer for review purpose before signing it.

4.1.3. eSignature-

This is a critical component of the process.

eSignature can be collected in multiple ways,

such as using a digital signature pad or by

clicking to add a computer-generated graphic

signature. The legal framework governing

electronic signatures is the Electronic Signatures

in Global and National Commerce Act (ESIGN)

and the Uniform Electronic Transaction Act

(UETA). Additionally, a group of industry leaders

created the Standards and Procedures for

Electronic Records and Signatures (SPeRS) to

articulate guidelines for following ESIGN and

UETA.

Exhibit 2

4.1.4. eClosing Platform-

Here, each and every page is electronically

reviewed and signature is attached as per

preferred method. A customer can preview

closing package beforehand and can point out

any spelling mistake, missing names, etc. A

customer asks any additional questions to

closing agent, if any.

4.1.5. eNotarization-

Few sets of closing documents require

notarization as per regulatory authority. In a

traditional mortgage, a notary will apply his or

her seal directly to the paper documents.

However, notaries can also apply these seals

electronically in certain jurisdictions. Regulations

and requirements for eNotarization of electronic

documents vary by state. Areas of variability

include requirements to earn eNotary

certification, the physical location of the notary

during the transaction, and how an eNotary

affixes the tamper-proof seal to the eDocument.

4.1.6. eStorage-

All the mortgage related documents are saved in

eStorage. These documents can be accessed by

relevant stakeholder as and when required

secured by access based control. Each document

has meta-data which stores the changes made

or accessed information. This information is used

in audit purpose and to track changes.

4.2 Minimum Required Capability for

Participants

The CFPB has laid out minimum required

technical capability and functionality to

participate in the eClosing pilot program. Few

critical criteria have been listed below.

4.2.1. Document management and transfer

standards-

A pilot participant should have the ability to

store and transfer documents and data securely

between different parties involved in the real

estate transaction, including the lender,

consumer, settlement agent, and downstream or

secondary investors.

4.2.2. Central platform with collaborative

workflow-

A pilot participant should provide central

platform either online or through dedicated

application where other stakeholders can view

and edit the closing document package

controlled by access based control mechanism.

The mechanism will help to avoid privacy issues

and unauthorized edit by stakeholders.

4.2.3. Electronic signature facilitation-

A pilot participant must offer the ability to

accept electronic signatures from the

stakeholders on the closing documentation. The

process to accept e-signature must be

consistent with the legal framework outlined in

ESIGN and UETA.

4.2.4. Ability to audit and controlled access-

A pilot participant should be able to handle

documents with audit trail for all the

transactions including view only. Stakeholders

should be given role based access to closing

documents.

4.2.5. Ability to sanitize data-

A pilot participant should be able to mask, strip

and remove sensitive information from

documents when it is sending for analysis

purpose.

4.2.6. Educational and awareness material-

A pilot participant must have portal with

terms/jargons and terminology used in

mortgage industry. It should also provide direct

links, if possible, in document itself.

4.3 Participant List

4.3.1. Technology Vendors-

Accenture Mortgage Cadence

DocMagic, Inc.

eLynx

Pavaso, Inc.

PeirsonPatterson, LLP

4.3.2. Lenders-

Blanco National Bank

Boeing Employees Credit Union

Franklin First Financial, Ltd.

Flagstar Bank

Mountain America Credit Union

Sierra Pacific Mortgage

Universal American Mortgage Company

5. Pilot Program Outcomes:

The CFPB believes that eClosing solutions

contributed toward the long-term vision of

improving the closing process and providing

specific benefits to customers.

5.1 Benefits:

Pilot program’s benefits include the following:

5.1.1. Perceived understanding-

Customers understanding level increased as

education and awareness materials were

available beforehand. The change in fees,

technical terms, and jargons were understood by

customers relatively easier compared to

traditional approach.

5.1.2. Increased Empowerment-

Customers felt empowered as closing

documents package was available for review

purpose much earlier than traditional method.

Customers were able to mark points which can

be questioned at closing platform.

5.1.3. Increased Convenience-

All relevant closing documents package were

delivered via eDelivery model online which

added convenience factor for the customers. The

documents were reviewed by customer at their

own time and schedule.

5.1.4. Decreased delay and cost-

Customers review helped to find miscellaneous

errors from closing package and changes were

rectified faster, thus reduced delay in closing and

cost associated with delaying process.

5.1.5. Reduced consumer anxiety-

Another advantage of eClosing is that it could

transform the closing experience in ways that

may lead to less anxiety for consumers. The

large stack of complex documents is clearly a

source of stress for many people, who indicated

that they often do not read part or all of the

documents. A less anxiety-inducing closing

process could lead to increased understanding

and a more positive consumer experience.

5.2 Risks:

Potential risks involved in eClosing process are

as follow-

5.2.1. Ignorant review-

Although many customers indicated that they do

not read part or all of the documents that are

presented to them in a traditional closing, there

is a risk that switching to an electronic process

could reduce the amount of time customers

spend reading and understanding the closing

documents.

5.2.2. Technology adaption risk-

Close to 16 percent of the US population still

does not have a computer at home and does not

have access to Internet elsewhere. In addition,

while mobile options are narrowing the digital

divide, the small screen format of mobile devices

may present particular challenges for eClosings.

Some customers are concerned that if they

cannot access their documents and do not

otherwise have the terms of their transaction

readily available, there could be increased

opportunities for unscrupulous lenders to

commit fraud.

5.2.3. Infrastructure capital investment-

Although eClosing process has advantage in

long term, currently the CFPB can’t force small

scale lenders to invest into technology

components. The capital investment might prove

bigger liability compared with portfolio and

earnings of small scale lenders.

5.2.4. Resistance from secondary investors-

There is still some confusion and perceived risks

among secondary investors. In absence of

concrete rules and regulation from government

body, few secondary investors are reluctant to

changes.

5.2.5. Coordination challenges-

The number of stakeholders involved in process

depends on mortgage parameters. Ideally all

parties should provide consent and work

towards achieving benefits. The resistance from

any stakeholder will affect mortgage eClosing

ecosystem. Also, there are various regulatory

institutions involved in closing documents which

needs to compromise on authority.

5.3 Key Factors:

The key factors required in mortgage industry to

achieve benefits of pilot program and change

the industry, are as follows:

5.3.1. Clear expectations and consistent

communication-

All stakeholders should be made aware of results

of pilot program and communicated the benefits

of pilot program. It will help to establish

common set of expectations from homogeneous

group of stakeholders in the process.

5.3.2. Technology investment

commitment/Third party service-

Mortgage industry players, particularly involved

in closing process should make the technology

investment and upgrades in order to get fit into

process. Small players, which are unable to make

such changes, should seek service from third

parties with necessary infrastructure.

5.3.3. Timeframe for rollout and hybrid

solution-

The CFPB should announce the timeframe for

rollout of eClosing after getting required

approvals from government. The option to use

hybrid solution with relevant interface and

integration options should be carefully designed

in order to provide flexibility.

6. Conclusion:

The results of eClosing pilot program, as per the

CFPB, were encouraging for mortgage industry

participants that are currently using eClosing,

working towards it, or in early discussion of the

process.

The borrowers, who participated in eClosing

pilot program, experienced benefits while using

eClosing process partially or completely as

compared to traditional paper-based process.

This implied the proposition that eClosing can

be valuable option. The supporting pillars for

proposition were increase in perceptions of

empowerment, understanding and efficiency

from customers’ point of view. Industry

participants will be benefitted in the long term

on parameters like cost, time, quality, and

automation.

However the pilot project should not be treated

as final verdict on potential eClosing process as

the data samples, technological, financial and

methodological constraints put restrictions on

the number of participants including customers,

technology providers, and lenders. The risks or

challenges involved in the process should be

handled via risk mitigation or prevention

methods after vigilant thorough study.

The CFPB has been committed to improving the

mortgage process for customers, empowering

them and fostering more efficient process. The

‘Know Before You Owe’ mortgage disclosure rule

implementation results will provide additional

boost for the detailed level regulatory changes

for the eClosing process that will acts as one

critical milestone in the mortgage industry

history.

7. Footnotes:

7.1 References:

7.1.1. The CFPB guidelines:

http://files.consumerfinance.gov/f/201404_cfpb_

guidelines_eclosing-pilot.pdf

7.1.2. Closing process:

http://files.consumerfinance.gov/f/201404_cfpb_

report_mortgage-closings-today.pdf

7.1.3. US population and technology

penetration report

http://www.census.gov/prod/2013pubs/p20-

569.pdf.

This white paper is for information purpose only and views expressed are

subjected to author’s understanding of references mentioned.