Fixing Core Failings of the Mortgage Industry: Data Quality, Transparency, Auditability
The mortgage industry has always been cursed by its inability to prioritize initiatives that promote and ensure the efficacy of processes versus the efficiency of processes. Things were so bad that during the thick of the origination and housing boom, a 2007 Mortech study uncovered that two-thirds of lenders had no (zero) system for managing financial or operational risks. It’s always been far easier to justify investments and quantify returns on investments in the areas of loan sales and production than on quality assurance.
We all recognize that a lack of data quality, transparency, and auditability are core failings of the mortgage industry. Efforts to validate the integrity of loan data and quality of loan documents have been underway since the discovery of meta data and XML data (machine and human readable data) and eventually SMART documents over ten years ago.
President Clinton gave mortgage companies ammunition to fight fraud and improve processes with the enacting of E-SIGN legislation in July of 2000. The federal law gave “…electronic signatures, contracts and records the same validity as their handwritten and hard copy counterparts…”
E- Signatures became the linchpin to a fully automated, auditable, and rules based process – the eProcess. Loan software companies and document preparation companies quickly followed suite to be a part of the paradigm shift. Inaccurate and incomplete loan documents could not be signed until they were fixed. Loans would not – could not -progress unless everything was accurate. Anyone electing to “E-SIGN” documents went through rigorous and multi-pronged identification processes – even biometrics – that had virtually eliminated identity fraud cases. A digital seal was applied to the document and the embedded loan data was protected by a “hashmark” that ensured data could not changed once the document was notarized. The very things that could have prevented the mortgage and foreclosure debacle at its core are available, but for how long?
Last week, President Obama vetoed a bill that was designed to facilitate electronic mortgages and e-commerce, in large part over fears that the legislation would make it easier for servicers to get foreclosures approved by the courts. The bill (H.R. 3808) is called the Interstate Recognition of Notarizations Act and required state and federal courts to recognize paper or electronic documents with seals from out-of-state notaries.
White House press secretary Robert Gibbs said – “The President will not sign H.R. 3808…our concern is the unintended consequences on consumer protections, particularly in light of the home foreclosure issue and developments with mortgage processors. So the President is exercising a pocket veto, sending that legislation back to Congress to iron out some of those unintended consequences.”
“Tapping the brakes” on 3808 is regrettable but understandable as the industry deals with yet another unprecedented issue. However, we need to be alert to the risks associated with condemning service providers and technology providers for what are really problems of procedures and policy. We as an industry need to be looking forward to the things that validate, mitigate, and share risks. Data driven rules and workflow go a long way toward solving to issues related to poor loan quality. E-Signatures and eNotarizations are the very sorts of things that ensure efficient processes can be performed at scale without deterioration of quality or efficacy.