A closing package for a mortgage loan is comprised of many different documents that serve varying purposes. There are disclosures mandated by state and federal law or investors that are provided to inform the borrower about important terms of the transaction. There are documents that are given by custom or tradition that serve many different purposes that are usually required by the lender. Then there are the most important documents in the loan package, the promissory note, and the security instrument. The promissory note is crucial because it is the physical manifestation of the borrower’s promise to repay the holder/lender. The security instrument is important because it is the agreement that creates the property interest that gives the lender the legal right to take possession of the property or collateral if the borrower defaults on their promise to pay.
Special consideration must be given to the note and security instrument during the mortgage lending process because mortgage loans are often sold or transferred in the secondary market and packaged into mortgage-backed securities. In the traditional paper mortgage process, the security instrument is recorded, and if the loan is transferred to another party, the instrument is assigned to the new owner or the transaction is recorded in the Mortgage Electronic Registration System (MERS) which is designed to confirm which party has the right to foreclose on the property without recording a formal assignment. The promissory note is a negotiable instrument, meaning that whoever has possession of the note is entitled to receive payment, and it can be transferred to another recipient who will then have the right to receive payment from the debtor. If the original holder (lender) wants to transfer that right to another party, they may do so by endorsing the note to the new owner or holder and transferring physical possession of the note.
The mortgage lending industry is experiencing an acceleration in the transition away from traditional paper processes towards more efficient electronic mortgage loans. At the forefront of the movement towards eMortgage lending are processes and technology that have been engineered to handle the special considerations that must be given to the security instrument and the promissory note. The infrastructure for the digitization of the security instrument process has already been referenced above. MERS was created to keep a record of the entity entitled to enforce the security instrument without the need for a paper assignment each time the loan is transferred. Because the security instrument is not negotiable there is less need to keep track of the original security instrument as an electronic copy can be stored, recorded, and enforced.
The creation, storage, and transfer of eNotes is more complicated because possession of the original eNote is, in and of itself, the right to receive payment from the borrower or maker. Thus, the ability to generate, store, and identify the original copy of an eNote is of the utmost importance. Fortunately, the mortgage industry has come together and formed an electronic ecosystem to manage the eNote. This ecosystem is comprised of three key components.
MISMO® SMART Doc® eNote – A MISMO SMART Doc is an electronic document that meets specified standards set forth by the Mortgage Industry Standards Maintenance Organization (MISMO). SMART is an acronym that stands for Securable, Manageable, Archivable, Retrievable, and Transferable. The SMART doc is designed so the data and presentation of the document can be locked together and validated so the validity of the document can be guaranteed. The visual representation of the document can be in several different formats such as PDF, XHTML, or TIFF. The most important feature of the SMART doc is that it can be secured to guarantee against tampering. Thus, the content of the eNote will always be an accurate representation of the document and data that was presented to the borrower for signature at closing.
Mortgage Electronic Registration System (MERS) eRegistry – The MERS® eRegistry supports the transfer and tracking of eNotes between various stakeholders such as the originating lender, internal investor, end investor, servicer, document custodian, and others. The eRegistry is a legal system of record for eNotes. It tracks the legal owner or controller and location/custodian of eNotes.
eVault — An eVault is a technology platform that is designed to securely store, transfer, and manage eNotes. eVault technology is used to permanently seal the electronic document and the signatures to create a tamper-proof audit trail that evidences the document has not been altered and that it is an original copy. eVaults are integrated with the MERS® eRegistry so the location and controller of the eNote can easily be identified.
When choosing and implementing an eVault, there are several considerations. The first is stability and security, an effective eVault will be built to prevent downtime and data loss. A modern eVault should employ best-in-class security controls and should be backed by a SOC 2®, Type 2 certification. The data retention settings should be configurable to meet all industry and legal requirements. Also, be sure that your eVault provider has redundant architecture and is backed by a disaster recovery plan. Other important considerations include whether the eVault has been approved by investors such as Fannie Mae and Freddie Mac. The eVault should support the complete suite of functionality provided by the MERS® eNote Registry, it should also allow for customizations and separate permissions for various user types.
There are many benefits that can be gained by using a best-in-class eVault. The superior document tracking and transfer capabilities will help lenders quickly clear loans from warehouse lines and advance files to investors with fully executed eNotes. Post-closing costs can be drastically reduced because an eVault can eliminate the need for paper document scanning. eSigned documents stored in an eVault also reduce errors in loan files by reducing costly missed signatures. The eVault also improves compliance by proving an accurate and complete audit trail of the loan including comprehensive document and event information along with the signed documents. A well-designed eVault can also improve efficiency and user experience to facilitate rapid review of files with optimized workflow.
A secure, robust, eVault is needed to support electronic mortgage loan processes which help lenders condense the loan production cycle, reduce loan delivery costs, streamline processes, and increase accuracy and compliance. Many lenders are implementing electronic loan processes as they anticipate an emerging competitive landscape where efficiency and reduced costs are imperative. After implementing eSign for disclosures and lender or ancillary documents, implementing eNotes and a secure eVault is the next step in optimizing eClosing processes.
The promissory note and the security instrument are the two most crucial documents in a mortgage loan package. Processing and storing these documents is very important and is costly and inefficient in a paper mortgage process. One of the many advantages of eClosing is that these documents can be processed, stored, and transferred in a way that is secure and efficient, ultimately saving lenders valuable time and money.