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The Paper Problem 

Editor's note: This feature appears in the September 2021 issue of DS News magazine, available here

Believe it or not, it is 2021.  

Cars are driving themselves, cash is (bit)coin, and SpaceX has beat out Blue Origin to bring us back to the moon. Humans have been shut in their homes for the better part of the last 18 months—and yet, default mortgage servicing is still a paper-based process. Times have changed, but when will the industry do the work (where feasible) to digitize in order to: 

  • make internal processing more efficient 
  • create capacity to ride the COVID-19 resolution and foreclosure wave 
  • meet the consumer (and our foreclosure staff) where they are in this otherwise largely electronic world?  

The State of the Servicing Industry 

The COVID-19 pandemic has ignited almost-never-before-seen mortgage delinquency across the United States. As of February 16, 2021, more than 10 million homeowners were delinquent on their mortgage payments, with at least 2.7 million homeowners participating in the forbearance relief offered to federally backed mortgage portfolios.  

Loss Mitigation 

Even with each investor and insurer’s extensions to the consumer forbearance protections, if these consumers (and assets) are to avoid foreclosure, the vast majority of COVID-impacted assets will need a loss mitigation solution (including loan modifications) in the next year. Servicer call centers and loss mitigation departments across the country have been inundated since March of 2020, while attempting to scale for what was supposed to be a big loss-mitigation bang in the second quarter of 2021—this bang is now more of a slow painful burn into next year.  

It really hasn’t stopped.  

Foreclosure 

On June 24, the Consumer Financial Protection Bureau (CFPB) issued its highly anticipated amendments to the federal mortgage servicing rules addressing additional protections afforded to consumers between its effective date of August 31, 2021, and the end of the year in an effort to prevent unnecessary foreclosure for the “at least 900,000 homeowners projected to exit forbearance between now and the end of the year.”2 With foreclosure moratoria lifting, servicer foreclosure departments and the foreclosure legal network must scale to meet the volume of assets that will eventually move through these processes, even though foreclosure has been at an outright standstill since March 18, 2020.  

Practically speaking, and without leveraging any technology or other efficiency to make the process easier, this means that servicers will need anywhere from five to 10 times the number of agents managing assets in these departments to keep up. Worse, while staffing models may yield a lower number, inexperienced agents cause a different risk to preparedness from a pure capacity perspective.  

Widespread Use of Paper in Loss Mitigation and Foreclosure  

The practical reality of even the most efficient servicing process puts the onus of properly completing the signature requirements associated with loss mitigation closing packages (including notarization) on the consumer—the consumer is sent via postal carrier (or equivalent) a comprehensive closing package, with instructions to seek out a notary, and is guided by sticky tabs where to “Sign Here.” These consumers are typically unfamiliar with the requirements and complexities of real estate transactions, are ashamed of their inability to make their mortgage payments, and struggle to timely and/or accurately return the documents in a recordable format.  

The result? Servicer loss mitigation departments, already taxed with the volume realities of the COVID-19 pandemic, are forced to start over and redocument the loss mitigation packages and produce new packages to consumers (sometimes two to three times per loss mitigation transaction) due to borrower signing or completeness error. 

Compounding this issue are rejections by county recorder’s offices for documents without compliant signature and notarization, requiring re-initiation of the entire loss mitigation approval/acceptance process. 

This is a timely and expensive process that, if not corrected, exposes the consumer to a higher risk of foreclosure. And what of foreclosure?  

Even though the Federal Court system has been completely digital since 2012,3 and most judicial foreclosure states fully support electronic case filing, foreclosure has universally remained a paper-based process. Much like loss mitigation, the foreclosure document review and signing process is inefficient, largely manual (download, print, review, edit, download, print, sign, scan, upload, FedEx—repeat). In the last recession, this process was subject to substantial criticism as servicers and law firms had a hard time scaling to keep up with volume.  

With the growing acceptance of digital solutions, including Remote Online Notarization (RON), there are solutions to the mistakes of the past, in lieu of repeating them. If we can’t recruit, hire, and train humans given the time constraints, what can we do to optimize this process as we move into higher volume environments?  

The Basics: Traditional Paper vs. Remote Online Notarization  

When compared to RON, and the high standard required for the technology that can meet the enhanced state and federal enterprise standards associated with it, it becomes challenging to support the notion that traditional paper notarization is better.  

Traditional paper notarization dates back to the bundle of sticks4 and the founding principles of property ownership in this country—where property ownership necessarily had to be managed and tracked locally. Its governing rules have historically been managed with only state law, and state issuing authority, and rely exclusively on the humans of the state (with proper certification) to get it right, including:   

  • putting the onus on the person seeking property transfer or ownership interest in locating, scheduling, and paying for notarial services; 
  • hosting a person-to-person transactions in-real-life; 
  • the manual review of a driver’s license photo or other valid photo identification, with confirmation by the notary that the signer is who they say they are; 
  • adhering a physical stamp and seal for the documents to demonstrate an authentic transaction; and  
  • logging each transaction in a “journal,” which in many instances is a paper notebook kept at the desk of the notary.  

Further, specific to servicing, traditional paper notarization has also been: 

  • a key breaking point between the consumer and the servicer during loss mitigation; 
  • a servicing business process requiring both loss mitigation team members and foreclosure team members to “come into the office” to sign and notarize documents; and  
  • a key-target for the foreclosure defense bar—requiring servicers and law firms to participate in time-consuming “notary depositions” merely to delay that action’s forward movement.  

RON, comparatively, must meet the same state law, and state issuing authority, and then adds state e-certification requirements, state RON entity certification requirements (which often includes a demonstration of compliance with relevant state law), MISMO certification and standards, and/or the enhanced standards set forth by the GNMA Digital Collateral Guide. Without limitation this includes:   

  • scheduling a remote transaction that can be conducted to the consumer’s convenience and from the comfort and privacy of the home or place of business of the consumer; 
  • multi-factor, knowledge-based authentication that relies on multiple components of the consumer identity (passed addresses, loan transactions, and other identifiable information), as well as actual digital identity verification utilizing forensic technology that exceeds the capabilities of the human eye;  
  • life-of-loan recordings of the notarial ceremony with cutting-edge information security preservation requirements; 
  • tamper-sealed electronic documents that cannot be altered by a third party without the documents yielding the interference; and   
  • mechanisms under each relevant state or government standard that permits the “papering-out” of the documents for ease of Recorder’s Office use, and Document Custodian management.  

The SECURE Act of 2021 & Other Authorized Acceptance of RON with States and Investor/Insurer Paradigms 

Like a lot of technology that eventually trickles to the mortgage space, effective and secure methods for document transfer, authentication, and digital signatures are not new, just not widely leveraged. With the combo-platter of (a) the growing acceptance of these technological enhancements and (b) the wide-scale lockdown of the country during the COVID-19 pandemic came expanded state support for RON. As of May 2021, 32 states have endorsed RON as acceptable vs. traditional notarization--including states with critical mortgage servicing volume around the country including Florida, Texas, Michigan, and Washington. Further, key industry advocacy groups such as the American Land Title Association and the Mortgage Bankers Association have supported and lobbied for a national standard.5 

The SECURE ACT of 2021 

Notably, on May 13, 2021, the Securing and Enabling Commerce Using Remote and Electronic Notarization of 2021 (the SECURE Act) introduced with bipartisan support to:  

“authorize notaries public to perform, and to establish a minimum standard for, electronic notarizations and remote notarizations that occur in or affect interstate commerce, to require at Federal court to recognize notarizations performed by a notarial officer of any State, to require any State to recognize notarization performed by a notarial officer of any other State when the notarization was performed under or relates to a public Act, record, or judicial proceeding of the notarial officer’s State or when the notarization occurs in or affects interstate commerce…” 6 

Perhaps said best in an op-ed by Senator Kevin Cramer, one of the SECURE Act sponsors: “(t)he past several months can be called a Black Swan Event, something unpredictable that results in great change and innovation.” 

The SECURE Act honors the individual states’ standard for implementing RON guidelines but streamlines some of the variable components to ensure consistency within, as well as ensuring that properly authorized RON is widely recognized. Further, it provides universal support for a minimum technological standard already employed by states and the MBA’s Mortgage Industry Standards Maintenance Organization (MISMO) whose name is apropos to its mission—to develop standards for the mortgage industry.  

State Support of RON 

While the States have largely adopted some form of the Model Law and supporting materials put together by the good work of ALTA, MISMO, and the MBA,8 if SECURE Act of 2021 became law, it would reduce the hesitancy of legal and compliance professionals in endorsing a full-scale push to digital. Moreover, it may encourage state holdouts (largely in the Northeast and South) to adopt a digital notarization standard.  

While the specific legislation language varies by state, the basic components of the RON laws include: 

  • State-approved vendors who are subject to review and certification with individual state offices to ensure that the relevant RON vendor can demonstrate the use of their technology, as well as compliance with minimum requirements. 
  • Identity proofing through multi-factor authentication including capabilities such as digital identity verification utilizing forensic technology that exceeds the capabilities of the human eye and knowledge-based authentication (also known as “KBA”) that relies on multiple components of the consumer identity (previous addresses, loan transactions, and other identifiable information) to verify identity. 
  • E-Notary requirements for those holding state seal who wish to conduct RON, along with electronic record requirements. 
  • Recording requirements up to life-of-loan, of the notarial ceremony with cutting-edge information security preservation requirements. 
  • Document security requirements including the tamper-sealing of electronic documents so that they cannot be altered by a third-party without the documents clearly indicating the interference. 
  • A standard for “papering-out” the transaction which permits the printing of documents if necessary for ease of Recorder’s Office use, and Document Custodian management. 

Even though the state laws vary, a RON provider that is MISMO certified and retrofitted for servicing likely follows the most conservative, consistent standard, making the variables largely blocking and tackling. But in evaluating providers, servicers should certainly consider these factors.  

Federal Investors/Insurers Affirmatively Support the Use of RON. 

Nearly every federal investor and insurer including the FHA, the VA, the FHFA, Fannie Mae, and Freddie Mac, have authorized the use of RON for loan modification transactions.

The Federal Housing Financial Agency (FHFA) / Fannie Mae (FNMA) / Freddie Mac (FHLMC)  

The FHFA/FNMA/FHLMC has broad, published acceptance of RON for both origination and servicing, including loss mitigation.10 Notably, both entities accept delivery and servicing of loans with electronic documents, including security instruments or mortgage loan modification agreements that have been electronically notarized. 

The Department of Housing and Urban Development (HUD) / The Federal Housing Administration (FHA) 

HUD has applauded the efforts of states and other agencies who have adopted and implemented RON during the COVID-19 crisis and urges the Conference of State Bank Supervisors to “secure additional flexibilities, wherever possible, to facilitate the full functioning of the real estate mortgage market within the confines of the President’s directive to avoid public interactions wherever possible.”11  

Further, the FHA does not regulate the use or format of the notarization of documents. Instead, the mortgagee must ensure that the mortgage and note comply with all applicable state and local requirements for creating a recordable and enforceable mortgage, and an enforceable note, including the requirements for notarization of these documents, stating that, generally, that state law governs what requirements are applicable for proper notarization of a document.12 

The Veteran’s Administration (VA) 

 The VA reminds lenders and servicers to be cognizant of GNMA Guidelines, but explicitly authorizes for VA guaranty the use of RON provided that the “notarization is valid and effective under applicable law and regulations.”

Ginnie Mae (GNMA) 

GNMA announced its Digital Collateral Initiative (All Participants Memorandum 20-10) in July of 2020, which implements the policy, technology, and operational capabilities necessary to accept electronic promissory notes and other digitized loan files as collateral for GNMA securities (Digital Collateral). However, while the GNMA Digital Collateral Guide prohibits digital modification of e-notes/e-mortgage transactions, it is silent on whether digital signatures can be leveraged on paper documents.  

A clarification or expansion of even this narrow use case (e.g., permitting digital signatures on paper documents) would assist in industry adoption of RON.  

Of course, the hurdles to make the shift to digital are not without challenges. However, in the words of Tony Robbins, “Change happens when the pain of staying the same is greater than the pain of change.” Does it hurt enough yet for the default industry? Time will tell.  

About Author: Courtney Thompson

With a background in high-risk regulatory solution management, operations, innovation, and human-first strategies, Courtney Thompson has recently launched Consigliera. Consigliera is a consultancy focused on revolutionizing mortgage servicing by building bridges between financial institutions and the fintech community to deliver meaningful, connected, efficient solutions. Since 2014, Thompson has been the SVP in charge of Flagstar Bank's best-in-class default mortgage operations team, delivering industry-leading transparency into, and the strongest control environment around, the default mortgage servicing process. Passionate about servicing transformation she led the bank’s partnerships with the fintech community through its mortgage-specific fintech accelerator program. 
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