NetOxygen: Loan Processing
Software for the Real World

eMortgages and their Benefits to Lenders

By Scott T. Langston, Technical Writer, and Greg Alvord, Senior Consultant
This article originally appeared as the ABA Banking Journal's White Paper for March 2002: Banking on the Internet.

Introduction

With the passage of the Federal Electronic Signatures in Global and National Commerce Act (E-SIGN) and as states pass the Uniform Electronic Transactions Act (UETA), the door is opening to truly electronic commerce for the banking and mortgage-lending industries. Under these laws, electronic signatures can be used wherever existing law states that a document must be signed and documents that are signed with an electronic signature hold the same legal weight as their paper equivalents. Also, organizations cannot be forced to produce paper documents if the originals are in electronic form. These laws allow the mortgage industry to develop processes for electronic documentation, eliminating paper forms completely.

These two sets of legislation have paved the way for end-to-end electronic transactions, which occur entirely within the digital realm, and enable a paradigm shift in the way lenders conduct business. The laws themselves do not dictate how electronic transactions should take place; only that electronic documents and signatures can be used wherever a signature is required. This means that each industry may define its own process recommendations for electronic transactions that meet the legal requirements of UETA and E-SIGN.

One of the key differences between UETA and E-SIGN is that E-SIGN provides detailed instructions for obtaining consumer permission to use electronic signatures. Since the passage of E-SIGN in June 2000, the car loan industry has experienced nearly 100% consumer acceptance of the electronic signature option. For the limited use of the electronic signature option in the mortgage industry, reports indicate nearly 95% acceptance.

If the mortgage industry agrees to the adoption of standards for electronic mortgages, or eMortgages, the road will be clear for the widespread implementation of electronic mortgage solutions. Before any standards may be agreed upon, however, they must be developed with the involvement and cooperation of the industry itself. To that end, the MBA formed the Mortgage Industry Standards Maintenance Organization (MISMO) in January 2000.

MISMO, which includes representatives from all sectors of the mortgage-lending industry, was founded to "develop, promote, and maintain voluntary electronic commerce standards for the mortgage industry."¹ This mission is being carried out by a number of MISMO Workgroups, each of which is focused on a particular aspect of mortgage lending. The primary responsibility for the eMortgage standards resides with the eMortgage Workgroup.

The eMortgage Workgroup was established in January 2001 to develop electronic formatting and presentation specifications for electronic mortgage documents, along with specifications for the storage of electronic documents, otherwise known as eVaulting. The eMortgage Workgroup is also working closely with the Information Security/Public Key Infrastructure Workgroup and the Real Estate Finance Security Management Organization (REFSMO) to develop security standards for eMortgage transactions. The eMortgage Workgroup also seeks to promote these standards by recommending guidelines for their adoption across the mortgage industry.

The promotion of these standards is perhaps the biggest hurdle to the acceptance of eMortgages in the industry. While lenders are typically quick to implement technology that provides clear advantages in the marketplace, there is a natural tendency to adopt a "wait and see" attitude toward emerging technologies for which the benefits are, as yet, unproven. To address these concerns, this article examines the proposed eMortgage standards and attempts to explain some of the benefits that lenders will enjoy by implementing solutions that are based on these standards.

Lender Benefits

The adoption of eMortgage standards that conform to UETA and E-SIGN will provide lenders with the ability to process mortgages using electronic documents that are secure, easily stored and retrieved, portable and legally binding. The eMortgage standards address concerns of privacy and confidentiality, authenticity, information integrity, and paper reduction. However, the primary benefits of adopting an eMortgage solution are increased operating efficiency and cost savings.

These benefits are most evident in the closing process. This process can take anywhere from a few hours to several days, as documents are prepared, printed, sent to the closing agent, signed, registered at the county level and returned. Currently, after information from an origination system is committed to paper, key facts are frequently modified. These changes require lenders and investors to undertake labor-intensive post-closing review processes to compare the facts on paper with their electronic form. The average time between closing and the availability of a complete collateral package for a residential first mortgage purchase is five days or more.

The use of electronically signed documents will reduce the amount of time that is required to transfer the necessary documents, which will reduce the cost of courier and package services. eMortgage solutions will allow lenders to process and deliver loans to investors much more quickly than the traditional paper-based process allows.

eMortgage standards will also save time in the recording process. The process of sending the necessary documents to the County Recorder to be recorded and returned to the lender can take up to several days to complete for first mortgage purchase documents. Refinance recording can take from six to eight weeks, while bulk assignments can take up to six months in some jurisdictions. The development of electronic recording standards will reduce the substantial delays between closing and settlement.

Essentially, any reduction in the amount of time between the disbursement of funds to the borrower and the receipt of funds from the sale of the mortgage collateral to an investor will have a dramatic impact on lenders’ cash flow. Whether a lender transfers funds from other sources or borrows funds from a warehouse bank, any decrease in the amount of time to replenish the funds will lower the lender’s opportunity cost or actual interest expense. The same dynamic applies to the number of loans that can be originated for a fixed warehouse line, in that a shorter loan processing cycle means that more loans can be originated.

Additional cost savings can be realized by those lenders that employ a document preparation company to generate their mortgage documents. For their services, these companies charge a fee for each loan processed. The electronic transfer of loan information and reduced labor expense for generating eMortgage documents will reduce the associated fees. This could equal huge cost savings for these lenders, depending on their production, as well as increased customer service as document preparation organizations shift from production to quality issues.

Other aspects of eMortgage standards will benefit lenders as well. Platform independent electronic document standards mean that lenders will not have to worry about compatibility with their trading partners software to participate in eMortgage transactions. The reduction in paper documents will result in a reduction in both printing time and the cost of consumables. All of these factors contribute to lenders’ ability to process mortgage loans more quickly and cheaply.

Current MISMO Standards

To provide these benefits, MISMO has developed a set of data exchange standards and is working on additional standards. MISMO has defined a single electronic format for requesting and receiving credit reports fro any vendor, as well as formats for mortgage insurance, flood certification, and hazard insurance. There is also a single formatted file to request the services of an Automated Underwriting Service (AUS), including Fannie Mae’s Loan Prospector^® and Freddie Mac’s Desktop Underwriter^®, as well as a single format for transferring a loan from a loan origination system to a servicing system. Still in the works are loan delivery standards and standards for a variety of exchanges required by secondary marketing.

These standards provide the framework for the electronic exchange of the relevant information required for the preparation of electronic closing documents. Standards for these documents are being developed by MISMO’s eMortgage Workgroup in the eMortgage Document Specification.

The eMortgage Document Specification

The eMortgage Document Specification outlines the proposed recommendation for the representation of mortgage-lending documents in an electronic format. This format has been dubbed the SMART document specification, as it describes documents that are Securable, Manageable, Archivable, Retrievable, and Transferable.

The SMART document moniker is more than just a clever acronym. It is derived from a set of requirements that were developed by the eMortgage Workgroup in October 2001. Since E-SIGN requires any system to be able to reproduce the exact presentation of the data presented at the time of the signature, many of these requirements derive from the requirements in the legislation.

These requirements state that SMART documents must meet the following criteria:

• They must include the relevant data and the presentation information that is necessary to render the document, and they must establish links between the two, within a single file.
• They must allow the actual data within the document to be compared to the data in the presentation of the document to verify that it matches.
• They must support a standard approach to electronic signatures and allow for multiple segments of signed data. Further, the supported signature standard must allow for the detection of unauthorized changes to the document.²
• They must be based on non-proprietary, platform-independent technology.
• They must support the ability to store an audit trail of status changes.³

Further objectives of the eMortgage Document Specification were to "allow for multiple views or presentations of the information" in the documents and to "allow for the electronic packaging of multiple mortgage documents."⁴

To fulfill these requirements and objectives, the eMortgage Document Specification proposes the use of Extensible Markup Language (XML) documents that contain Extensible Hypertext Markup Language (XHTML). Constructing SMART documents from existing international standards like XML and XHTML is consistent with MISMO approach. Because XML is based on Standard General Markup Language (SGML) and XHTML is based on the worldwide standard Hypertext Markup Language (HTML), both languages have an inherent longevity and universality that other standards lack. Also, because XHTML documents are XML documents, the combination of the two offers the tightest possible integration between data and the presentation of that data.

SMART documents also fulfill legislative requirements that electronic documents must be reproducible in the form they were in when the borrower signed them. By preserving the presentation of the document, XHTML allows SMART documents to be reconstructed exactly as they appeared to the borrower at the time of signing in a browser or other XML-compatible application.

However, it is not strictly necessary to view SMART document data in a browser or other application to make sense of it. The information contained in the data section is easily readable in its raw form, thanks to the standardized XML elements, such as or , that identify each data point or grouping of data points. These elements, along with the structure of each type of document, are outlined in the eMortgage Document Type Definition (DTD).

The SMART document structure also allows for multiple SMART documents to be combined into one file. This process, referred to as ePackaging, allows for the transfer and storage of an entire loan package, or even multiple loan packages, in a single file. According to the eMortgage Document Specification, "the packaging of eMortgage documents together will be addressed in the forthcoming eMortgage Packaging Specification."⁵

The current draft of the eMortgage Document Specification, which is available for viewing at http://emortgage.mbaa.org, has been endorsed by both Fannie Mae and Freddie Mac. The approval of this standard by the two largest mortgage investors establishes the groundwork for the rest of the mortgage industry to accept the SMART document format. However, there is still work to be done. The eMortgage Workgroup continues to improve the eMortgage Document Specification, using feedback from the industry to refine and expand its requirements. According to the scheduled outlined at the January MBA/MISMO Technology Workgroup Meetings in Nashville, TN, the goal of the eMortgage Workgroup is to release the final 1.0 version of the specification at the MBA’s 89th Annual Convention Expo in October.

Public Key Infrastructure

The second component of the eMortgage equation is the adoption of a Public Key Infrastructure (PKI) that provides for the means to digitally sign SMART documents and enables their secure transfer. PKI is an agreement or framework that enables various organizations to conduct business using electronically signed transactions that can be trusted by all parties. PKI establishes this trust by allowing individuals and businesses to identify themselves using digital signatures. A digital signature is a form of electronic signature and is, therefore, acceptable under UETA and E_SIGN.

The digital signature process is facilitated through the use of unique pairs of public and private keys, which are issued to each participant in the PKI by a Certificate Authority (CA). A private key can be stored on the bearer’s computer or on a smart card or USB token. The public key is stored in a digital certificate, which also contains the bearer’s name, as well as the name and public key of the CA that issued the certificate. Public keys are also published by the CA in a public repository. Documents or transactions that are encrypted, or digitally signed, with a private key can only be decrypted with the corresponding public key, which virtually guarantees the identity of the signor.

Through MISMO’s Information Security/Public Key Infrastructure Workgroup and REFSMO, the MBA has been working to define a common PKI for the mortgage industry. As part of its partnership with the ABA, the MBA has selected TrustID^® as the standard digital certificate for the mortgage industry. Further, the MBA has designated Digital Signature Trust as the preferred provider of digital certificates for the MBA.

However, this does not mean that Digital Signature Trust is to be the exclusive provider of digital certificates to the mortgage industry. As evidenced at the January MISMO Technology Workgroup Meetings, there is some concern about the adoption of TrustID as the standard digital certificate, given that the name TrustID is indelibly associated with its creator.

According to REFSMO representatives, the coming months will see the formation of a new organization-consisting of both ABA and MBA members-that will oversee the maintenance of the TrustID network and to which the TrustID trademark will be entrusted. This means that any organization will be able to participate in the TrustID network and issue TrustID certificates.

Further, the TrustID standard is a baseline to which potential CAs can add value by providing additional features beyond the simple verification of identity or employment within the digital certificate, such as the authentication of the bearer’s authority. Ultimately, the adoption of the TrustID PKI in the mortgage industry should promote business opportunities for participants, rather than preventing them.

Conclusion

It is clear that the eMortgage standards being developed and refined by MISMO’s eMortgage Workgroup have tremendous potential benefits for those lenders that adopt solutions that are based on these standards. The eMortgage Document Specification, SMART documents, and the TrustID PKI promise to bring secure electronic transactions to the mortgage industry, which will result in increased efficiency and profitability for those lenders that implement them. However, like any standards, the eMortgage standards effectiveness in the marketplace will depend on the level of participation across the industry. Only through the combination of legislation, technology, and the cooperation of the mortgage-lending community will the potential of the eMortgage standards be realized.

1. The MISMO Mission—http://www.mismo.org
2. At the MBA/MISMO Technology Workgroup Meetings in January 2002, XML Signature was adopted as the recommended signature technology.
3. eMortgage Smart Document Requirements, Version 1.1; MISMO eMortgage Workgroup; October 8, 2001
4. Executive Overview to eMortgage Document Specification, Version 1.0; MISMO eMortgage Workgroup; September 7, 2001
5. eMortgage Document Specification Baseline, Version 1.0 Draft; MISMO eMortgage Workgroup; September 7, 2001

About Wipro Gallagher Solutions
Founded in 1985, Wipro Gallagher Solutions, formerly Gallagher Financial Systems, is one of the nation's largest residential loan origination systems providers. WGS is headquartered in South Miami, Fla., with its national operations center in Brentwood, Tenn. Wipro Gallagher Solutions' NetOxygen architecture allows lenders to improve efficiencies via dynamic workflow routing and rule-driven, streamlined business processes. NetOxygen was designed to handle all aspects of the lending process for all channels and loan types using a component-based, end-to-end system, which allows enterprise-wide data access for improved customer service. WGS also provides an off-the-shelf solution that can be tailored to meet technological and business challenges that arise in an ever-changing industry. GFS was acquired by Wipro Limited in July, 2008.

About Wipro Limited
Wipro provides comprehensive IT solutions and services, including systems integration, information systems outsourcing, package implementation, software application development, and maintenance, and research and development services to corporations globally. Wipro Limited is the first PCMM Level 5 and SEI CMM Level 5 certified IT Services company globally. Wipro’s IT Services business was assessed at Level 5 for CMMI V 1.2 across Offshore and Onsite development centers. For more information, please visit our website at www.wipro.com.