Long-Awaited FHA E-Sign Policy Arrives
The Federal Housing Administration will immediately start accepting electronic signatures on all mortgage insurance endorsement and servicing documents, and will accept e-signatures on promissory notes beginning Dec. 31.
The new policy allows mortgage lenders and servicers to use e-signatures on the FHA's documents for insurance endorsements, servicing and loss mitigation, insurance claims and real estate owned property sales, according to a Jan. 30 Mortgagee Letter issued by the Department of Housing and Urban Development.
Previously, FHA only accepted e-signatures on third-party documents that are included in loan files, but aren't created by lenders, like property sales contracts.
"This extension will not only make it easier for lenders to work with FHA, it also allows for greater efficiency in the home-buying and loss-mitigation process," FHA commissioner Carol Galante said in a statement.
FHA will also begin accepting e-notes at the end of the year on forward mortgages, but not for Home Equity Conversion Mortgages. The policy allows e-signatures on all other documents for HECM loans, which are also known as reverse mortgages.
The long-awaited policy change paves the way for greater e-mortgage adoption because lenders will no longer need different policies in place for mortgages backed by the FHA and sold to Ginnie Mae, and those sold to Fannie Mae or Freddie Mac.
"The fact that another major agency is going to accept electronic signatures helps the trend toward a full e-signature and paperless environment for the industry. It eases the burden on the industry to not have different processes depending on where a loan is going to go," said Harry Gardner, president of mortgage document preparation technology provider SigniaDocs and a board member of the Mortgage Industry Standards Maintenance Organization, the industry data standards body operated by the Mortgage Bankers Association.
Lenders and technology vendors that have already implemented e-signatures for other loan programs will benefit from their existing investment and infrastructure, said Patrick Hartford, vice president of enterprise architecture at Detroit-based online lender Quicken Loans.
"The letter itself is fairly open, meaning it didn’t specify very specific or proprietary technologies, so the lenders and vendors that are already working together on e-sign can leverage their existing technologies," he said. "It's going to increase their productivity because they won't have to worry about the paper side of things and they really don’t have to increase the cost either because it's going to be part of their mainstream process now."
The policy is a welcomed change that will improve efficiency and reduce costs, said Keith Luedeman, CEO of Goodmortgage.com. The Charlotte, N.C.-based online lender originates both FHA-backed loans and mortgages sold to the government-sponsored enterprises, and the FHA's previous ink-signature requirement cost $75 to $100 more and takes three days longer to process than loans with e-signed documents sold to Fannie and Freddie, Luedeman estimates.
However, Luedeman is concerned about whether loan aggregators that bundle FHA mortgages from various lenders may not allow e-signatures or require additional requirements beyond the FHA's policy.
"The investors may have different e-sign rules and regulations than what the agencies require, so there's not consistency in what constitutes a full e-sign package," he said, adding that the situation is further complicated if different lenders each have their own sets of rules. "If they match, we're ok. But with some of the bigger banks, they may come out with different guidelines."
Freddie Mac began accepting e-signatures on documents for the mortgages it purchases in 2001, followed by Fannie Mae in 2002. In 2004, the first electronically signed promissory notes, or e-mortgages, were originated. The Internal Revenue Service began accepting e-signatures on its 4506-T forms last year, following pilot testing from 2011 to 2012. The form, also known as the "Request for Transcript of Tax Return," gives lenders permission to review borrowers' tax returns for income verification.
"Borrowers are used to doing things online and e-signatures are much more common, so this really brings the FHA in line with the times in terms of technology," said Tamara King, associate vice president of loan production at the Mortgage Bankers Association.
"HUD's energies have been focused elsewhere and they've finally had time to catch up and they're getting through their backlog of activities for things like e-signatures that weren't on the front-burner," said Joe Gormley, assistant regulatory counsel at the MBA.
The Consumer Financial Protection Bureau called the new policy a "step toward improving the mortgage closing experience for consumers."
"Electronic closing processes have the potential to reduce errors, limit unexpected surprises, and create more time and opportunity for consumers to review critical documents with the tools they need to make informed decisions, CFPB director Richard Cordray said in a statement. "HUD’s decision to accept electronic signatures for FHA loans can help jumpstart the move towards a more seamless, paperless and consumer-friendly process."