Sponsored Content from Wolters Kluwer: Rethinking Digital Lending in A Down Market; Focus on What You Need and Then Start Where You Can

By Kevin Wilzbach, Director, Technology Product Management, Wolters Kluwer

In a year like this one, no one should be surprised to see that digital lending has slipped a few notches down on lenders’ to-do lists.  This is totally understandable given that lenders across the board are now laser-focused on cost control, finding new sources of volume, protecting top talent and in some cases, just keeping the doors open.

This doesn’t mean, however, that digital lending has stalled entirely, far from it. What we’re seeing in the marketplace is that early adopters of digital lending are for the most part staying committed to eClosings and eNote creation.  In fact, in a recent survey of mortgage banks, nearly a third of the respondents said that “the sharp decline in overall originations increased [their] organization’s progress in implementing digital initiatives.”

This is particularly true for some of the nation’s largest lenders that have incorporated eClosing into their purchase operations. It’s the reason why eNote creation as a percentage of overall new registrations on the MERS eRegistry has remained steady, even as unit volumes have declined.

Where progress has slowed, or in some cases come to a full stop, tends to be among lenders that were still planning or were in the early stages of their digital lending programs when the volume slide hit. 

This article will discuss the benefits re-engaging digital initiatives on a more modest scale in the current environment in order to be ready for when the market normalizes.

The outlook is still bullish

Survey after survey, including one that Wolters Kluwer conducted among independent mortgage banks just this past March, shows that lenders of all sizes recognize the benefits of being more digital, particularly in the closing and secondary market processes. Among the top reasons cited: improved operational efficiency, a more modern customer experience and a reduction in loan defects in closing documents due to signing and notarization issues.

They also agree, no matter where they are in the process today, that digital lending, not paper-based processes are the future. Even lenders with programs on hold say they will reengage once economic conditions improve. In fact, more than half of the lenders in a recent survey said that being fully digital is their goal.

Having said that, there were structural headwinds to full digital transformation and the adoption of eNotes, even before the market downturn. Lagging investor and warehouse lender acceptance are commonly cited as examples. While the GSEs and now Ginnie Mae are strong advocates of eNotes, this tends to benefit larger lenders that are direct sellers or that are able to deliver pools to be insured. Smaller correspondents that sell to aggregators often aren’t able to take advantage.  Recently a smaller correspondent summed up the situation this way: “I don’t always know who I’m going to sell to when I originate a loan. So, I’m not going to close with an eNote and then find out that I could have gotten 70 bp more by going to an investor that doesn’t buy eNotes.”

And there are other friction points, as well. For example, Remote Online Notarization (RON) is permitted in 43 states, but not in some of the largest, like California. (Hopefully, this will change when the SECURE Notarization Act, which has cleared the House and is making its way to the Senate, is finally passed and establishes nationwide RON standards.) While many settlement service providers offer some form of eClosing, not all do and there are a number of different systems. Some lenders are worried that borrowers, particularly purchase borrowers, expect more ceremony at closings and will resist hybrid or full eClosing options. Loan officer buy-in is often a factor, as well. Overcoming loan officer resistance often comes down to education and incentivized behavior.

Not everything all at once

The very concept of digital transformation can be both confusing and intimidating for small to mid-sized lenders. Often it is associated with other large scale tech implementations—like changing an enterprise-level LOS or a new servicing system—that come with six-figure-plus high price tags and implementation schedules that stretch out a year or more.

While it true that for large enterprise clients, digitization can be a “journey”, there are discrete phases of digital lending that are far less expensive than big-ticket investments (like an LOS) and that can be implemented relatively quickly.

Also, this is a process that can incur incrementally: It doesn’t have to happen all at once.

Considerations in selecting a partner

When evaluating technology partners, lenders need to consider if their partners will enable a transition from paper to hybrid to digital without significantly impacting their workflow and processes.

The reality is that there will continue to be a need for disparate types of closings. The goal might be to do RON, but in-person electronic notarization (IPEN) might work better for purchase closing ceremonies.

In fact, most lenders start with some form of hybrid eClosings—for example, eSigning disclosures and/or some closing documents and then wet signing the final documents. And for the foreseeable future, paper closings will continue.

The good news is that every finished piece or phase can and does produce a “win” in terms of efficiency and reductions in defects.

As we’ve discussed, a lender needs to understand the level of digital adoption of its various counter parties, like aggregators and warehouse lenders, and the readiness and acceptance of their settlement service providers, title companies and custodians. They will all be digital someday. Just some will get there ahead of others.

If a closing platform is part of the strategy—and increasingly it is a starting point for many lenders —does the lender want a propriety platform that can be used by a few vendors or an agnostic one, like Wolters Kluwer’s ClosingCenter which can work with any settlement service provider or title company? This is an important factor in a purchase environment, like the one we are in…because the lender no longer controls the title and is dependent on the borrower’s title provider.

The lender might also consider if there are other asset classes that it might want to originate:  For example, HELOCs and HELs?  In that case, the lender may want to select a partner who can deliver a common experience and provide enterprise-wide transparency across asset classes.

Spoiler alert: Not every first mortgage document and eVault provider can accommodate other asset classes.

Finally, a lender’s entire digital lending strategy doesn’t have to be fully in place to get started.  A launch can occur with the completion of an incremental deliverable.  Success can come in large part from “chunking” various parts of the process into smaller, more digestible parts. Hybrid, for example, versus full digital or IPEN versus RON.

(Sponsored content includes material submitted independently of the Mortgage Bankers Association and MBA NewsLink and does not connote an MBA endorsement of a specific company, product or service. For more information about sponsored content opportunities, contact Bill Farmakis at bill@jlfarmakis.com or 203/834-8832.)