E-sign considerations in mortgage lending

In the fast-paced world we live in, everybody wants things done as quickly and conveniently as possible. People are so busy that having to take time to actually come into the bank to conduct their business seems like an imposition. We have made it so easy for our customers that, in many cases, they never have to step foot in the bank.

Online account opening, particularly for mortgage loans, is one area that continues to grow. At first, banks were just using electronic banking as a way to deliver disclosures faster; these days, however, more and more banks are taking applications, delivering disclosures and closing loans all online and without ever seeing the borrowers. This being the case, let’s take a look at each step of the process and what the bank must do to stay compliant, from application to consummation.

Application form

We’ll start with providing mortgage applicants with the application form. There are a few regulations that come into play here. Regulation B allows you to provide an online application without first obtaining consent to receive documents electronically. Keep in mind that if you are providing an online application for a home equity line of credit (HELOC), you must also provide the initial HELOC disclosure and HELOC brochure (When Your Home is on the Line) at application, as required by Regulation Z 1026.40(d) and (e).

What about E-sign consent, though? E-sign requires that the consumer applicant must first consent to receive documents electronically. This consent must contain the listing of documents that will be sent electronically, the hardware and software requirements, how to receive paper copies, how to revoke consent and an agreement to maintain email address information.

Then, the creditor must “reasonably demonstrate” that the consumer can access the documents electronically. This is typically achieved by emailing a document formatted the same as those that will be sent electronically. Within the document, there could be a code or a signature line for acknowledgement. The consumer would then email back the code or the signed acknowledgement and this would “reasonably demonstrate” the ability to access the documents electronically.

Another disclosure required for an applicant of a first-lien mortgage loan is the Notice of Right to Receive Appraisal required by Regulation B 1002.14(a)(2). This notice states that the creditor may order an appraisal or other written valuation to determine the value of the property securing the loan and will promptly provide the applicant with a copy, even if the loan is not consummated.

Under Regulation B, the notice may be provided without regard to the consent requirements as long as it accompanies an electronic application; however, if the appraisal itself is provided electronically, it must be done in compliance with E-sign.

If the consumer submits a completed, closed-end residential mortgage application electronically, the Loan Estimate and the written service provider listing, if applicable, must be provided within three business days. These are both subject to E-sign so the creditor must have documented consent and demonstrated access before they can be emailed to the consumer.

In addition, for certain closed-end loans with adjustable rates (ARMs), the initial ARM disclosure and the Consumer Handbook on Adjustable Rate Mortgages (aka the CHARM Booklet) must be provided at application or before the consumer pays a non-refundable fee.

Another concern with electronic mortgage originations is the requirement in Regulation Z 1026.19(e)(2)(i)(A) that fees other than a credit report fee cannot be imposed until a consumer receives the Loan Estimate and indicates an intent to proceed with the transaction:

“If a consumer submits an application online, the loan originator should have a procedure to verify and capture the applicant’s intent to proceed after the required disclosures have been provided. For example, after providing the disclosures, the creditor could call the borrower or send a follow-up email to determine if the borrower wants to proceed with the loan. If the creditor does this by phone, the call should be documented in the creditor’s systems.”

Closing the loan

Now let’s focus on preparing to close the loan. Under the TILA-RESPA Integrated Disclosure (TRID) rules, a consumer must receive the Closing Disclosure (CD) at least three business days prior to the consummation date. The CD is also considered the “material disclosures” for rescission purposes under Regulation Z, which is even more reason for it to be delivered timely and accurately in order to close the rescission window on time.

Like the other disclosures we’ve discussed, the CD is also covered by E-sign. Note that “receipt” of the CD does not include an automatic delivery receipt; however, subject to policy, it can be a “read receipt” from the consumer or an email response from the consumer acknowledging receipt.

Flood notices, initial escrow statements, risk-based pricing notices and any other applicable closing documents can also be delivered electronically, subject to E-sign compliance. If rescission applies, the creditor shall deliver one copy of the rescission notice electronically to each consumer entitled to rescind in compliance with E-sign (note that the rule requires two copies if provided in paper form).

Electronic delivery of time-sensitive disclosures is one of the main mortgage processes increasingly being used today. While there are still banks that use paper disclosures, the most practical way to shorten the process from application to consummation is through the use of electronic banking.