Harry Gardner: Closing the Gap on e-Closings

Mortgage Media’s Eric Souza had the opportunity to speak with Docutech’s Harry Gardner and take a very deep dive into the progress, challenges and future of e-closings and the impact on the mortgage industry.

Eric Souza: Hi, this is Eric Souza with Mortgage Media. I am happy to have on the call with me, Harry Gardner from Docutech. He’s the Executive Vice President of eStrategies. Docutech is a leading provider of document e-sign, e-close, and print fulfillment technology for the mortgage industry and I really appreciate Harry coming on to talk about e-closing with us. Harry, it says on your LinkedIn profile that you are an eMortgage Evangelist. Can you tell me what that means?

Harry Gardner: Hey Eric, it’s great to be with you. Yeah, that tagline goes all the way back to my days at the Mortgage Bankers Association when MBA was still publishing Mortgage Banking Magazine every month. We started years ago doing a quarterly technology-focused issue. It was my tagline for those technology columns. I would always do an e-mortgage or e-closing focused column in those magazine issues.

My tagline there was the eMortgage Evangelist and it just kind of stuck since that’s what I’ve been working on since back in the year 2000 or 2001 and ever since. It seems like eMortgage Evangelist is probably a good term right now.

Souza: How did you get to become an e-mortgage specialist?

Gardner: Well, I started my entry into the mortgage space with a little dot com startup back in the dot com boom in 2000. It was called Ultraprise and they weren’t focused on e-mortgages specifically. They were actually doing kind of a buying and selling of loans in the secondary market and had a very early web technology engine for that. After Ultraprise moved on, I guess you could say, and as many companies did in the dot com boom, I ended up at the MBA.

I was working there with Gabe Minton, who was heading up the beginnings of the MISMO (Mortgage Industry Standards Maintenance Organization, a not-for-profit, wholly owned subsidiary of the Mortgage Bankers Association) back in those days. He brought me into the MBA to facilitate the operations of the eMortgage work group and this whole brand new concept of trying to do a completely electronic mortgage.

I’ve been at that since the very beginning and kind of organized all of the industry’s efforts around designing the standards, and the guidance, and the concepts and the everything related to how an e-mortgage and an e-closing would work for the industry. And how everyone can speak the same language and be on the same page.

Souza: So, a challenge there.

Gardner: Dates all the way back to 2001… Yeah, no small challenge. Right, exactly.

Souza: Well, can you tell me what components go into an e-mortgage and e-closing?

Gardner: Sure. If you think of a typical mortgage process, there’s a number of components that are common to any full e-closing process, but depending on the particular solution, they may come from one solution provider – what I like to call an integrated e-mortgage or e-closing solution. Or they might come from a number of different providers who have done their own integrations back and forth with each other.

The fundamental components – number one, you need the closing documents themselves and they need to be electronic and they need to be tagged somehow for e-signatures. Those might come from a doc provider like Docutech where they’re already pre tagged as part of the library. So, when we generate them they are tagged, or they might come from the LOS that the lender’s using or from another doc provider who’s not specializing in e-closing. In those cases, they might not already be tagged and they need to be tagged after they’re generated.

Then there would be the e-signature engine itself. Again, that might be inherent in the integrated solution or it might be a third-party e-signature provider, like a DocuSign, for example, one of the big gorillas in the e-signature world.

You also need the e-vault, which is specifically to not only manage the security of the closing documents, both pre-closing and post-closing after signing, but also specifically to interact with the MERS (Mortgage Electronic Registration System) e-registry and e-delivery capabilities. That allows the lender to register their e-note to protect their legal ownership of the e-note and then to do a subsequent transfer of control to an investor, for example, when they want to sell that e-note and all of those things related to that.

There’s e-signatures, documents, e-vault, and the last couple of pieces, the first of which is e-notarization. That’s kind of a separate piece simply because a notarization laws vary from state by state. Now there’s both face-to-face electronic notary and there’s also this new concept, relatively new, a remote online notarization where the notary and the borrower might be physically separated but are joined up through an audio video link.

Then the final piece is after closing, of course the documents need to be recorded with the county recorder. Typically nowadays most of the loans in the country can be electronically recorded. That’s true whether the recordable documents were paper, ink signed, or whether they were electronically executed. About 87% of the country now is covered by counties who are enabled for electronic recording.

Souza: I didn’t even think about how regional restrictions might limit some of the e-mortgage opportunities. Looking at a lot of the statistics, most mortgages, what five out of six, seem to have e-mortgage capabilities as least part of the process. It seems like a quarter of them, or little less than a quarter are, funded completely digitally. How quickly has this grown and how long do you think it’ll take until we get a hundred percent digital instead of some amalgamation of partial digital?

Gardner: Well that is the $64,000 question as they say. It’s actually a funny common joke from those who have known me for a long time in the industry going all the way back to 2002 or 2003 when I started speaking on panel sessions and trying to explain e-mortgages to the industry at large and trying to get that momentum going. We were saying even all the way back then that mainstream e-mortgage adoption was only three to five years away. Of course then the crisis happened and 20 years later here we are.

We are definitely gaining traction now. But yeah, it’s taken longer than anybody would have dreamed. Part of that is what you mentioned – the fact that there are some geographical challenges – notarization by state law and then e-recording by the county recorder.

Then there are other factors. Of course, there’s investor acceptance of electronic notes because typically in the paper world the lender doesn’t have to worry so much about where they’re going to deliver a paper note until after they’ve closed the loan. Then they can determine their best execution and bundle it with other notes.

In the e-world, if you’re doing an electronic note, you pretty much need to be sure before you close that the electronic note is going to one of the specific investors that will buy them today. That’s primarily Fannie Mae and Freddie Mac. Although we are seeing some movement now, for example, with Wells Fargo in the correspondence space. Now the Federal Home Loan Banks and Ginnie Mae are working hard to become part of that e-note infrastructure in 2020 and to embrace that as well. That’s a very positive sign.

Still, there are other investors that don’t necessarily accept e-notes and so the lender has to change their process a little bit and determine that before they close.

Souza: That’s interesting … mentioning the GSEs needing their adoption with it. I’m also seeing in the private industry, exchanges playing a greater role. I’m assuming that you’re having to work with them as well. Can you tell us a little bit about the adoption rates in the industry for e-mortgages?

Gardner: Sure. A way to think about the adoption rates is in two different areas. Number one would be the acceptance of e-notes and the growth of e-notes that are registered on the MERS e-registry because that’s a very direct indicator of how much is happening in terms of those types of e-closings.

Those numbers have skyrocketed over the last 18 months or so. I think in 2018 the grand number of e-notes that were closed on the MERS e-registry was around 16,000 – maybe a little over 16,000. In 2019, in the first quarter of 2019, there were over 19,000 e-notes just alone.

Souza: Wow.

Gardner:  In all of 2019, I believe it ended up being over 100,000 e-notes. That absolutely eclipsed the numbers in 2018, but that doesn’t even show the full extent of e-closings because there’s also a hybrid e-closing. That’s where a lender, maybe they’re not doing an electronic note for the reason we just talked about with the investor acceptance. That doesn’t mean that they can’t do a hybrid e-closing and just have the ancillary documents be e-signed by the borrower before they sit down at the closing table.

The borrower might be able to sign 80% of their documents at home, the non-notarized documents. They can get up in the morning, have their morning coffee on closing day, and electronically sign most of their package. Then they sit down at the closing table, they sign the notarized documents and the note and they’re done. They might have a 10 minute or nine minute closing ceremony.

The borrower’s happier, the closing agent is happier, and the borrower has a much more pleasant experience and certainly has the chance to review all their closing documents before they get to the closing table, which is a significant source of stress.

The thing about that type of hybrid e-closing, if you don’t have an e-note, then there’s no real industry-wide numbers. I can tell you from our perspective within Docutech, we have several major lenders who are really embracing that hybrid e-closing. Those numbers, we’re up into many thousands of those types of e-closings per month that aren’t reflected on the MERS e-registry. I suspect some of the other major e-closing providers would say the same thing.

Souza: Okay. So, looking at the challenges that you’re facing in implementation, can you talk a little bit about the recent growth of new e-closing solutions focused from different angles into problem space?

Gardner: A few years ago we mentioned the RON, the Remote Online Notary … some of the RON solution providers (and there’s still more that are cropping up, even now a new one just down in Florida recently), they approached the e-closing equation from the remote notary perspective. They have created solutions that they will ingest all of the lender’s closing documents and all of the title and settlement documents. They’ll tag them all for e-signing and then they will host the actual, e-closing ceremony.

The borrower can stay home and just connect through their computer and there will be a remote notary from, say, the state of Virginia or Texas. One of the states that have adopted remote notarization laws. The entire closing can be completely virtual then. That’s one solution.

Another aspect that has cropped up more recently is that some of the major title companies are now looking to provide a title-centric e-closing solution. The reason for that, as you know, that title and settlement agents are challenged historically by having to learn lots of different lender-centric technology systems.

When they get the lender documents for example, I’ve heard there’s upwards of 40 different systems that they have to remember and maintain their passwords for. Log into one and download the documents or maybe it’s in DropBox or they’re sent an email link on a different system. There’s quite a mix and match of systems they have to understand.

A similar situation is cropping up with lender centric e-closing systems because of course they all have their different user interfaces and different process flows. The way we’ve approached that is to try and make our solution as streamlined and straightforward and kind of simple from the settlement agent viewpoint as we possibly can so that they have all the information they need.

Again, they view those lender solutions as, that’s another thing that they have to learn and they might do an e-closing one day on the Docutech system or the Pavaso system or someone else. Then they might not do another one for a couple months and by that time maybe they’ve forgotten it.

First American and Fidelity this past year announced that they were going to approach an e-closing solution from the title agent viewpoint and their goal there was to have a consistent experience for those agents, where they’re familiar with the agent portal and the lender documents come through in that kind of a scenario.

The tricky part there is that of course the lender can’t control the choice of the title and settlement agent for a purchase loan. And the e-closing would subsequently happen on the lenders own e-closing system. Some other ones might happen on the title and settlement’s e-closing system, and the borrower might be seeing a different experience from what they were accustomed to seeing when they reviewed and signed their disclosure documents, because now you’re switching to a different e-closing system at the time of closing.

Then there’s also the question of what about the e-vaults if you have an e-note? The lender can’t really have two different e-vaults. There’s a lot of stuff to consider there and work out in terms of the information being passed back and forth and how the process flows will work. It’s a work in progress, I guess right now.

Souza: Yeah, lots of different handshakes. It’s hard when you have different companies building their own solutions, working as hand-in-hand with larger accepted solutions, It’s quite a challenge.

One more question for you and again, appreciate your time here. Thank you. If you were given a magic wand and allowed to change whatever you wanted about this whole process, what would that be?

Gardner: Gosh, I think that there would be two things I would love to change. One would be that all investors would accept electronic notes and have a consistent policy there and would embrace it so that from a lender viewpoint, then they can do all their closings electronically and not be concerned about investor acceptance.

Number two, that all 50 States would have a consistent electronic notary legal infrastructure. Where they all just recognize that from an e-signature viewpoint, electronic notarization is just essentially the equivalent of using a different kind of pen to sign the paper. You’re using an electronic signature instead of an ink pen. Other than that, there’s no reason to have more complex regulations and structures around e-notarization.

If all 50 States would simply do e-notary the way they do paper notary just with a very straight-forward notary stamp and seal and e-signature, then national lenders wouldn’t have to be concerned about what’s their e-eligibility in this state or that state. That’s something that, of course, as the solution provider we handle for them, but it still does add complexity to the overall process. I’d love to see that be evenly done for all 50 States.

Souza: Logistically, how would you make that happen? Who or what would be the enforcer. Are you thinking CFPB, or how would that happen?

Gardner: It’s the age old question of state’s rights versus federal government. We live in this brave new world of technology where there are no borders and there’s a national infrastructure and even international infrastructures. Yet states still want to be able to determine their own laws and their own legal infrastructure that’s best for their own needs.

This is one of those areas that kind of falls in that gray area. You could definitely make an argument that e-notarization, the basic principle of witnessing someone’s signing ceremony could be largely consistent nationally and not be a state-by-state variation. The states might not like that, but I think we’ve reached a point in technology where that’s not an unreasonable argument to make.

Souza: Where would that directory come from? FHFA or…

Gardner: Well, yeah, it would have to be some sort of a national preemptive law and it could get into quite a debate as to overriding the state’s rights to control their own notary laws. Realistically, I don’t think many people think that’s going to happen. Even if the states that don’t have the notary laws today, if they just clearly stated that “we recognize that under e-sign and electronic signatures are legal and therefore we have no issue with people doing electronic notarization.” Even just that difference alone would enable something much to 50 state e-notary.

Souza: Well, if I find that magic wand, I’ll make sure to pass it along and hopefully I can make it work.

Gardner: That would be great.

Souza: Thank you. Harry Gardner is an eMortgage Evangelist with Docutech, based out of the New York city area. Thank you so much for talking with Mortgage Media and I hope to have you back.

Gardner: Thanks, Eric. My pleasure.

Content has been edited for length and grammar.