Improving the Loan Process With eNotes: A Game Changer for Risk Reduction, Processing Speed and Overall Efficiency

Brian D. Pannell is Senior Implementation Executive with DocMagic, Torrance, Calif. He can be reached at bpannell@docmagic.com. Chris Lewis is Enterprise Solutions Specialist with DocMagic; he can be reached at chrisl@docmagic.com. Leah Sommerville is Senior Account Executive with DocMagic; she can be reached at leah@docmagic.com.

The Inherent Weaknesses of Paper Notes

Paper promissory notes have long been the mortgage industry standard. But should they be? The electronic equivalent, eNotes, are quickly rising in popularity; over 124,000 were filed in 2019, a huge jump from the 18,000 filed in 2018 and 5,000 in 2017. It’s not hard to see why they’re so in demand —eNotes are faster, cheaper and more secure.

Paper notes are slow, expensive and delicate. They are often damaged or misplaced and require significant preservation efforts throughout the life of loan. Historically, paper notes are stored by a custodian within a physical vault designed to withstand natural disasters; they’re commonly retrofitted with fireproof walls and waterless sprinkler systems.

These traditional protections are essential because one of the paper note’s biggest weaknesses is that there is only one “original.” There is no concept of a “backup”—a copy of the original note has no value whatsoever. Due to this fundamental weakness, great care and expense must be used in the handling, management, and safekeeping of this vital piece of paper, which on average is worth hundreds of thousands of dollars. The paper note is like an endorsed check—if you lose it, you can’t cash it.

Additionally, each time the paper note is shipped, the risk is magnified exponentially. Before ending up in the custodian vault, a paper note is physically shipped several times—for example, first to the warehouse lender, then from the lender to the investor, and then from the investor to the custodian. Each time it is shipped, the expense and risk of loss or damage is substantial.

Why eNotes?

By comparison, the eNote effectively eliminates all the risk associated with the paper note because an eNote cannot be lost, since there is no single original record to lose. On top of that, eNotes can be backed up to the point that “losing” it is virtually impossible.

So how does this work? In the paper world, the note is signed and a copy is scanned and emailed to the appropriate business partners. It is clear who possesses the original note—which has a wet-ink signature— and who has copies. But in the eNote world, the concept of an “original” signed document is moot, as it is impossible to visually determine the difference between the executed eNote and its copies.

Instead, while multiple copies of an eNote can exist at any given time, only one is deemed the “authoritative copy,” or the equivalent of the original paper promissory note. In the eMortgage industry, the authoritative copy of the eNote is determined by the MERS eRegistry system, in conjunction with eVaulting technologies. The copy of the eNote that is stored within the MERS eRegistry-designated “Location” Rights Holder’s eVault is considered the authoritative copy.

The Power of eDelivery

Before an eNote is entered into the MERS eRegistry, an eSignature(s) and a tamper-evident seal are applied. After it is in the MERS eRegistry, eNotes can then be instantly eDelivered to multiple parties, with each party given a byte-by-byte exact representation of the document originally eSigned by the borrower(s). Additionally, eNotes can be confirmed that they are exactly the same by programmatically comparing them to each other. At any point, MERS eRegistry users can confirm that the eNotes in their possession are exact copies of the registered eNote. The MERS eRegistry also stores each registered eNote’s hash, which provides a “fingerprint” for each eNote that can be verified.

Additionally, eVaults that have interfaces to the MERS eRegistry allow for the eDelivery of an eNote copy, as well as the transfer of rights-holder permissions between MERS members, which can be completed in seconds while paper delivery takes days. The eDelivery/transfer process updates all impacted members of the MERS eRegistry that the authoritative copy has moved from one member to another. These steps can then be repeated as many times as necessary when the eNote is transferred to the next participant in the mortgage chain (e.g. originator to warehouse to investor). This improved process allows for multiple copies of an eNote to exist at any given time, while only one is considered the “authoritative copy” by the MERS eRegistry.

An Effective eStrategy

As you examine your current processes, you’ll see that with paper promissory notes, many resources are required to protect these delicate and vulnerable pieces of paper. Meanwhile the eNote—with its reduced risk, speedier processing, and overall efficiency—is the most significant game changer the mortgage industry has ever seen. The core of any effective eStrategy must include a durable, secure repository to retain all electronic artifacts. This system must be capable of receiving inputs from all aspects of a client’s workflow and must be integrated into the process to ensure all assets are managed in a consistent, verifiable manner. DocMagic’s entire suite of solutions has been designed to seamlessly interact with our eVault to achieve this objective.

Join DocMagic on May 27 for a Compliance Edge Webinar: TRID: Beyond The Basics. This is the second webinar in our TILA-RESPA Integrated Disclosure (TRID) Rule Series. Guest presenter, R. Colgate Selden, Counsel at Alston & Bird LLP in Washington, D.C will be taking the webinar audience Beyond the Basics of the TRID Rule. For more information, click http://blog.docmagic.com/tila-respa-integrated-disclosure-rule-beyond-the-basics-webinar.

(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at msorohan@mba.org; or Michael Tucker, editorial manager, at mtucker@mba.org.)