Standards, Regulation in Place for Electronic Closings
|May 31, 2007|
By Matt Carter
Standards, regulation in place for electronic closings
Part 3: Paperless progress: Who's winning, who's losing
Thursday, May 31, 2007
By Matt Carter Inman News
The paperless closing is turning out to be sort of like landing a man on the moon -- we've got the technical know-how to do it, but it's not exactly a routine event.
The complexity of the real estate transaction, although not quite as daunting as a moon shot, means there are many participants, procedures, forms and laws to contend with.
The key to making e-closing an everyday occurrence lies in standardization, regulation and adoption rates, those pushing the real estate, mortgage and settlement services industries in that direction say.
Much has been done to standardize the processes and data used in e-closings and to empower government agencies to handle the results. It's in the area of adoption where the most work remains to be done.
"The vision of the end-to-end electronic transaction is much clearer today than even a year ago," said Travis Wright, president of Stewart Transaction Solutions. "More parties from title insurance, mortgage, and notaries to county recorders are saying we've got to go electronic. We are seeing more and more isolated pockets of success in these distinct channels."
Although paper documents can be converted into electronic form to perform an e-closing, the task is simplified if the process of buying and selling homes is paperless from the get go. Transaction management applications are being designed with that goal in mind.
Walt Clark, senior vice president of transaction management solutions with Fidelity National Real Estate Solutions, said Fidelity's TransactionPoint can import MLS data, and is easy for real estate brokerages to integrate with other products agents use such as AgentOffice.
TransactionPoint is also compatible with electronic forms like ZipForm, WINForms and AutoRealty, and back-office accounting systems, which "really helps to tie from beginning to end, the whole real estate transaction cycle," Clark said.
Clark said Fidelity's largest client in Southern California, Prudential California Realty, is "now putting 100 percent of transactions through TransactionPoint," he said. "They are truly seeing the benefits of eliminating paper."
Besides cutting costs and reducing exposure to risks caused by human error, going paperless can be an effective marketing tool for an agent making a listing presentation.
"For a lot of our customers using TransactionPoint, it's become a differentiation for them," Clark said. The information collected and managed by TransactionPoint can also be made available online to prospective buyers.
"You can post your disclosure documents on there, or your latest inspection report, and they can be accessed publicly," Clark said. "It's an added value that gives the potential buyer more of a comfort level."
Wright said Stewart's SureClose transaction management software has similar capabilities.
"It's changing what I call deal documents," Wright said. After a purchase and sale agreement comes in, "There's a three- to five-day period where multiple offers start coming in. All of a sudden the fur starts flying," he said. "People start saying, 'Do you have a disclosure agreement?' There's a burst of activity where buyers and sellers are trying to negotiate an agreement and get a deal done."
Making that information available online is "great for negotiating," Wright said.
Stewart recently purchased two software companies, Formulator and Reveal Systems Inc.
Reveal System's TrueForms is used by about 85,000 real estate agents in 20 states, Wright said.
The "cool part" of Stewart's acquisition of Reveal Systems is that "the real estate transaction begins with the real estate agent and the consumer," Wright said. "We purchased TrueForms and Reveal to have access to the beginning of the process, with the Realtor."
Stewart plans to launch a proprietary e-signature application for TrueForms in the third quarter, to enable e-signed documents to be moved into the SureClose transaction folder.
While the advantages of transaction management software may be readily apparent, one past obstacle to adoption by real estate brokerages has been the concern about the need to re-key information into yet another system, Clark said.
"Having the data from point of origin to back office accounting system, there is no re-entering of information," he noted.
TransactionPoint also allows electronic service orders to be sent to lenders and title companies through the RealEC platform used by 20,000 vendors, Clark said. Jointly owned by Fidelity National Financial, Stewart Title Co. and LandAmerica Financial Group, RealEC is an online exchange that facilitates e-commerce in XML (Extensible Markup Language) formats. The company transforms XML forms used by various providers into a standard format, and routes orders between users.
Completely paperless closings remain relatively rare, as it's common for promissory notes and other mortgage documents to be "wet signed."
Since the first paperless closing was completed with much fanfare in 2005, the number completed to date probably remains in the thousands, if the number of e-notes on file with the MERS e-Registry is any indication.
The e-Registry helps lenders sell loans to investors in the secondary market instantaneously by transferring control of them electronically. Although the MERS e-Registry has more than 30 million loans on file, most were originated using paper promissory notes.
The number of eNotes on file with MERS numbers a little more than 2,400. That compares to more than 7 million home sales completed each year.
Harry Gardner, senior director of industry technology for the Mortgage Bankers Association, said that while the use of e-notes remains limited, there has been a steady rise.
The MBA's technology committee has created an eMortgage Adoption Task Force that's active in areas like investor adoption, warehouse lending and e-servings, Gardner said, and is working with the Property Records Industry Association to increase the adoption of electronic recording by lenders.
Gardner said one "very positive trend" is that some states are creating Web portals for e-recording. New Jersey, Gardner said, has not only created its own e-recording portal, but is offering the software it created to do the job free to other states.
With government mortgage repurchasers Fannie Mae and Freddie Mac handling e-mortgage applications, "Adoption by lenders is starting to ramp up," said Peggy Baker, director of strategic solutions with First American Corp.'s Enterprise Technology Group.
"We are seeing a ton of lenders request information on e-mortgages and e-closings," Baker said. "It could be because of the volumes they are doing (have fallen with the slowdown in the housing market) and people are able to focus on how they might improve their process."
Baker said getting into e-mortgage and e-closings isn't an all-or-nothing proposition.
"You can start really simply to get your feet wet," she said. "You don't have to have every single player on board to improve the process. The key player is the investor, and the lender."
First American's transaction management system, like other popular applications, allows borrowers to receive and sign disclosure statements electronically, for example, which can mean one less task to take care of on paper, if not paperless closing.
"They get an e-mail with a link and a key to type in" to acknowledge they have read and understand their loan disclosures, Baker said. "The closing becomes a much more amicable process. The borrower is not showing up saying 'I was expecting an ARM loan, not a 30-year fixed.' "
First American in March announced the expansion of its eClosing Services suite, which is designed to help lenders and settlement agents streamline the closing process. The eClosing Services suite is powered by First American Web Services, which the company says ensures compatibility with all loan types, investors, settlement technology, and business service platforms through an integrated and open architecture.
One selling point of First American's eClosing application is that it's already in use by the company's network of closing agents, Baker said, and any closing agent can register to use the system.
"You have to start somewhere, and if everyone just keeps waiting, you're never going to get to 100 percent. So let's just start," Baker urged. "We think one of our value propositions is bringing the closing agent network."
Although Baker expects all transaction management software will eventually be able to import MLS data, that capability does raise quality-control issues. The address on a listing, for example, may not be the same address used on legal documents.
"It makes it easier if the MLS listing is there," but it's important to be able to resolve such discrepancies by deciding who "owns" data and tracking changes in history logs. The ability to go to settlement services providers and bring back data helps ensure data is "clean."
"You would usually say that with an address mismatch, which source of information do you want to use, and set up a rule, saying for example, 'Title owns that,' " Baker said.
Data integrity "should be the goal of any system whether you're going to e-closing or not," Baker said. "Right now what's happening, if you have bad data on the (paper) docs, it's nobody's fault. You have the bad data -- you start doing everything else until somebody catches it."
Transaction management software not only reduces the likelihood of accidental errors, but is a tool for combating fraud.
With paperless closings, "I know that what I sent to the closing table is what got signed," Baker said. "If you're going to print out documents and white out, I'm going to know that."
Wright said Stewart's SureClose transaction management software uses an eClosing room, an encrypted space in the transaction management platform where documents are delivered and electronically signed and pushed to county recorders using Stewart's eRecording solution. An eNote may then be transferred to an eVault for safe storage.
Smart documents, or intelligent PDFs, have an XML data layer that allows the information they contain to be seamlessly -- and automatically -- read by software applications.
Software applications are able to exchange data because they use common standards.
Two groups that work together on developing standards for e-closings and e-mortgage are the Property Records Industry Association (PRIA) and the Mortgage Industry Standards Maintenance Organization Inc., or MISMO, which is a subsidiary of the Mortgage Bankers Association.
MISMO has worked with the mortgage industry since 2001 on voluntary processes, transactions, and XML data standards that allow mortgage data and documents to be exchanged electronically. PRIA focuses on standardizing other electronic documents and procedures in the real estate transaction and works with MISMO and other groups to ensure compatibility.
As anyone who's ever sat down at a closing table knows, even a routine property sale may involve a formidable stack of recordable documents, including the deed, quitclaim deed, warranty deed, reconveyance, blanket assignment, power of attorney, signature affidavit, mortgage, satisfaction of mortgage, security instrument, and release of lien.
Mark Ladd, PRIA's technology coordinator, said PRIA and MISMO data standards "greatly reduce the technology friction," between applications that generate and process a wide range of documents and procedures. "We are seeing more and more interoperability all the time. Application developers know it is in their best interest to adopt national industry standards as they upgrade their product offerings."
PRIA maintains a list of counties that have enabled e-recording, which as of April 25 numbered more than 240 counties in 25 states.
"As far as county recorders are concerned, the early adopters are onboard and the technology is proven," Ladd said. "We are well past the pilot testing phase."
Ladd said counties that are still sitting on the sidelines are watching the volume of electronic documents the early adopters process to judge when to implement e-recording in their operations.
"For counties it's not a matter of if e-recording is a useful tool -- it's a matter of when to deploy," he said.
Skip Strause, an attorney, closing officer and founder of electronic closing services provider ecloz.com, said his company plans to be operating in 30 counties by the end of the year, and in even more if states move quickly to adopt the Uniform Property Electronic Recording Act, or URPERA.
"The county recorders are great, they're very progressive" about embracing e-closings, Strause said. "Closing agents and attorneys are ready because they want to use the technology. The mortgage lenders are interested but they are not ready to transform their entire operations."
Ladd said there are two predominant models of e-recording: a hybrid in which scanned images of paper documents are combined with XML data, and "native" documents that begin life in electronic form.
The "vast majority" of e-recordings today fall into the hybrid category, with counties adopting the approach seeing up to 75 percent of documents submitted electronically, Ladd said.
"Ultimately we'd like to be working with natively electronic documents," Ladd said. "However, the hybrid approach is allowing the industry to migrate toward the paperless process in a manner that educates consumers and closing agents in a 'walk-before-we-run' approach."
On the legal and regulatory front, 46 states and the District of Columbia have now adopted the Uniform Electronic Transactions Act (UETA), which removes barriers to paperless transactions by establishing electronic records and signatures as legal equivalents to printed documents and handwritten signatures.
UETA, approved in 1999 by the National Conference of Commissioners on Uniform State Laws (NCCUSL), allows basic real estate real estate transactions to be conducted electronically, including sale contracts, mortgage instruments and promissory notes. States that haven't adopted their own version of UETA have other laws on the books that allow paperless contracts and agreements. Congress has enacted similar legislation at the federal level, the Electronic Signatures in Global and National Commerce Act (E-Sign).
UETA and E-Sign don't explicitly address the issue of recording documents related to each real estate transaction at the county level, which are also governed by state law. So NCCUSL developed the Uniform Property Electronic Recording Act, or URPERA, which goes a step further in giving county clerks and recorders the legal authority to accept and store real property records and mortgages in electronic form.
URPERA allows electronic documents and signatures to be considered "original" documents suitable for recording as public records, establishes the standards recording officers will follow in accepting and making those documents available to the public, and establishes a board that sets uniform standards to be implemented statewide. That's not as easy as it sounds, since the laws for conducting and recording real estate transactions vary from state to state.
"Inserting URPERA in the law of a state requires careful scrutiny of its real estate law. If paper documents are effective … when they are time-stamped when delivered to a recording office, when should electronic documents that may be delivered electronically when an office is closed be considered effective?" NCCUSL notes on the group's Web site. "Answers to questions like this one will take some work and some complex decisions as URPERA is considered for enactment in any state."
In 2005, Arizona became the first state to enact URPERA, which by the end of 2006 had been adopted by 11 states, including Texas, Arizona, Virginia and Wisconsin, according to NCCUSL. Lawmakers in 11 other states introduced legislation to implement URPERA in 2007, including Florida, Washington, Illinois, Massachusetts and Nevada.
Copyright 2007 Inman News