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As our society adopts driverless cars and cryptocurrencies, the time is coming for real estate settlements to be completed electronically. The risks and benefits of eClosings need to be considered as the use of eClosings expands. While eClosings are not currently commonplace in Virginia, they will become increasingly widespread in the next few years.
Consumers are demanding digital closing options.
Buyers and sellers have become accustomed to the use of electronic signatures. In most cases, the sales contract is signed electronically through services such as DocuSign and Authentisign. Even the loan application process is completed electronically. But when it comes time for settlement, electronic signatures are no longer permitted. Consumers are beginning to expect a fully digitized home buying process and eClosings are another step in that direction.
The benefits of eClosings make them attractive.
eClosings aspire to be more efficient than traditional settlements. eClosings also reduce the potential for errors such as missed signatures and incomplete documents. According to a recent Consumer Financial Protection Bureau study, borrowers who settle electronically benefit by having a better understanding, experiencing a more efficient process and feeling increasingly empowered than they would with a traditional closing. All parties to the sales transaction (buyers, sellers, real estate agents, lenders, settlement companies) will benefit from a more streamlined closing process.
Not all eClosings function in the same manner.
A full eClosing is a settlement that is conducted remotely where all documents are signed and notarized electronically. The settlement agent interacts with the consumer via video conferencing or similar means. This enables the consumer to settle from anywhere. Eventually the entire closing process will be done electronically. In the interim, most eClosings will be a hybrid closing consisting of traditional wet signatures as well as electronic signatures. Buyers and sellers will still attend an in person closing with a settlement agent present but instead of signing a stack of printed documents using traditional signatures, most documents will be digital and signed electronically. Certain important documents such as the deed, note and deed of trust will still be wet signed while other less important documents are signed electronically.
The expansion of eClosings depends upon the cooperation of the mortgage industry as well as state and local governments.
Most of our local jurisdictions now offer eRecording, a process whereby the deed and deed of trust are submitted electronically, and they are reviewed and recorded electronically by the county clerk. However, these jurisdictions still require the submitter of the electronic documents to certify that they are in possession of the original document bearing the original signatures of the appropriate parties. As a result, recorded documents cannot be signed electronically until Virginia and local clerks approve the use of electronically signed documents. Mortgages are often sold on the secondary market. This process involves the originating lender supplying a complete copy of the signed loan documentation to the investor. Until these investors express a willingness to accept electronic signatures, lenders will continue to require loan documents to be signed by traditional means so that they can be easily sold on the secondary market. In recent years, many mortgage companies have begun to accept electronic loan applications and have established platforms to fully digitize the underwriting process. These recent developments lead mortgage industry experts to believe that the transition to completely electronic loan documentation not far behind.
The risks associated with eClosings cannot be underscored.
Full eClosings conducted remotely will mean an increased potential for fraud. Attempting to verifying someone’s identity for an eClosing completed via video conferencing presents a challenge for settlement agents. As a result, consumer safeguards such as multi-factor authentication will need to be mandatory for eClosings. The mortgage industry, settlement companies and local recorders will need to work together to create a secure digital environment for eClosings.
Another concern is that signing closing documents will become akin to accepting online privacy policies without first reading them. It is imperative that consumers take the time to understand the documents that they are signing even if they are closing by electronic means because buying and selling a home is a significant event.
While fully digital remote eClosings are still years away from being implemented, hybrid eClosings will soon be commonplace in Virginia.