The eMortgage has been an industry vision for years, yet progress toward that vision has been slow, hampered by inertia, acceptance and long-entrenched processes. All that is about to change due to three factors that are converging to finally tip the scale and make eMortgages a reality for the mainstream. The first is large-scale, consumer-focused regulatory change brought about by the Consumer Financial Protection Bureau (CFPB); the second is growing adoption of data standardization; and the third is the consumer expectations of Millennials, the first generation to come of age in a largely mobile and always connected world.
The influence and impact of the CFPB
When the CFPB wrote the TILA-RESPA Integrated Disclosure (TRID) rule, they were carrying out legislation hard-coded into the Dodd-Frank Wall Street Reform and Consumer Protection Act to improve borrowers’ ability to understand and make well-informed decisions when shopping for a mortgage. But the result of actions taken by the CFPB ended up having a much larger effect, some of which will only be fully understood when the mortgage industry has had sufficient time operating under these new rules.
Nevertheless, it is not difficult to recognize some of the early effects of the new regulatory requirements. For example, lenders and settlement agents must collaborate much more closely together and earlier than before. Also, information exchange has to be quicker, more accurate and occur in a timelier manner in order to meet the delivery schedule required by TRID, as well as to meet the responsibility of proper disclosure to the consumer. As a result, the cost of compliance is going up for creditors: Not only do the new forms and new processes result in more regulatory considerations, the cost of new solutions to address these new rules has also been significant.
Given this new environment, it's only natural that eMortgages and eClosings are coming back into favor. They both help offset the cost impact of TRID, while also providing better transparency and data-driven evidence of compliance. The cost-savings and other value-added benefits for both originators and consumers include:
►Reduced cost to originate: Electronic processes are less costly to support. Savings come not only from less printing and mailing, but electronic workflows are simply more cost-efficient than manual processes.
►Fewer errors: eMortgages and eClosings cut down on some of the most common errors found in mortgage documents, such as missed signatures and inconsistencies in name or address. When governed by electronic processes, consumers cannot proceed until all signatures are complete. Furthermore, automated data checks can ensure that fields such as name, address, loan amount, and others are consistent throughout all of the loan documents. This cuts down on re-work for the lender and makes the experience better for consumers, who avoid having to re-sign corrected or previously un-signed documents.
►Easier sale to secondary investors: Because eMortgages are less likely to contain errors (easier to check), secondary investors have better visibility into the portfolio of mortgages they are buying. This increase in transparency leads to a more confident buyer and thus a quicker sale.
►Faster process turn times: Because electronic documents and processes can transact quicker, the total processing time can be much lower. When this is applied to processes where documents must be sent back and forth, electronically delivered documents result in faster transaction time. This creates a more efficient experience for consumers, real estate agents and lenders alike, since the mortgage transaction is completed more quickly.
In addition to its regulations, the CFPB is also propelling the industry forward through their support for eClosings. Earlier this year, we took part in the CFPB's eClosing pilot which was conducted to provide a hands-on test of how eClosings can benefit consumers. Upon publishing their results this past August, they held a private roundtable to solicit input and feedback on next steps. Many at this roundtable, including eLynx, felt that the CFPB could drive progress toward eClosings (and more broadly toward eMortgages) by helping to accelerate acceptance of electronic documents by more and more mortgage participants. We encourage the CFPB to continue voicing their strong support for electronic processes and promoting the use of technology to address consumer's expectations. The pilot’s results survey clearly indicated a consumer preference for the electronic process over the paper alternative, with 17 percent finding it more efficient and 15 percent deriving a feeling of greater empowerment in the mortgage transaction. This level of success with the first live test of the eClosing process is positive affirmation for the CFPB to continue championing industry change.
Data standardization has growing momentum
A second important trend that is accelerating the move towards eMortgages is data standardization. Through our involvement with the Mortgage Industry Standards Maintenance Organization (MISMO), we see the growing success MISMO is having at advancing the standardization of data for the mortgage industry. With programs like MISMO certification at the company and practitioner level, it is becoming easier to recognize and seek out those that are up to speed with the latest mortgage data standards.
Other influential groups are adding their own momentum. A good example of this is how Fannie and Freddie are now actively working towards a Uniform Closing Dataset (UCD) built using MISMO standards. As explained by Freddie Mac, "The UCD is a common industry dataset that allows information on the Consumer Financial Protection Bureau's Closing Disclosure to be communicated electronically."
As part of the long-standing Uniform Mortgage Data Program (UMDP), UCD addresses the need for better collaboration between creditor and settlement agent on the Closing Disclosure. UCD shows how the GSEs continue to push ahead with data standardization, recognizing the many benefits it brings, including stronger fraud prevention, better credit risk management and improved transparency, all of which are needed to bring private capital back to mortgages in a big way.
Millennials are a new factor
Even with the CFPB instigating change and data standardization making eMortgages more viable, one new factor is contributing to making eMortgages a reality—shifting consumer expectations and preferences. Just this year, the Millennial generation, those under the age of 34 in 2015, became the largest component of the workforce and the largest homebuying segment. This is the first generation that has come of age in a predominantly mobile and online world. Their preferences and expectations will ultimately compel the mortgage industry to make the changes required to make eMortgages and eClosings a reality.
Earlier this year, the Pew Research Center reported that in the first quarter of 2015, the Millennial generation had become the largest sector of the workforce at 53.5 million. According to Pew's analysis of U.S. Census Bureau data, Millennial workers now outnumber Generation X, ages 35-50 in 2015, who come in at 52.7 million. Furthermore, the 2015 National Association of Realtors (NAR) Home Buyer and Seller Generational Trends finds that Millennials are now the largest segment of recent homebuyeres, coming in at 32 percent of all buyers, ahead of Generation X, who comprised 27 percent of all buyers. Given the size of these groups, their preferences will re-shape how business is done, including the process of buying a home.
The Economist Intelligence Unit, the research arm of The Economist magazine’s Economist Group, reports that more than 80 percent of banks will use mobile tools as their primary communication channel for Millennials by 2020. But for Millennials it's more than just communication. Technology is ingrained in their daily lives and the homebuying process will need to change to meet the very specific ways this generation uses technology.
Now, does this mean Millennials care about eMortgages? I doubt it. But Millenials do care about many of the things that will make eMortgages feasible. For instance, the ability to receive, review and sign mortgage documents via mobile or tablet devices will accelerate the mass adoption of paperless lending. And not just for portions of the mortgage workflow, but for the entire process. Once this happens, end-to-end data from mortgage transactions will become available, and with MISMO data standardization, it becomes easier to capture, exchange and analyze even across multi-party workflows. Electronic processes will then finally make it to the various downstream activities that have been holdouts and that have inhibited eMortgage and eClosing processes such as electronic notarization, county recorders, and secondary market investors.
The preferences and expectations of the Millennial generation are large enough to provide a demand pull that hasn't existed before. When paired with the dual push of the CFPB's influence and the industry's own adoption of data standards, eMortgages may soon become mainstream.
When it happens, and paper-based mortgages go the way of rotary telephones and black & white TV, we will wonder why it took so long. Originators will create and close more loans, borrower experiences will be far more pleasant, and investment capital will flow in at levels not seen in a decade—all to the benefit of consumers, the industry, the economy and the nation.
Alec Cheung is vice president of product development and marketing for eLynx, a provider of on-demand Web-based services for secure, paperless document and data collaboration and distribution. He has more than 20 years of experience in finance, technology and mortgage services. He can be reached by e-mail at [email protected].
This article originally appeared in the October 2015 print edition of National Mortgage Professional Magazine.
