(As originally published on MortgageOrb)
Digital lending is looming large over the industry, and lenders are at various stages of incorporating digital processes with many not knowing where, when or how to begin such a seemingly daunting task (spoiler alert, it’s not that daunting). Very few doubt the validity and ROI of digital lending, but, at a practical level, they may question how best to tackle the mechanics of it, including how to use manageable – and realistic – steps to build a successful strategy and how to ensure the creation of compliant, fungible digital assets. The following provides an overview of digital lending and five best practices to help banks navigate the migration to a full digital process.
Let’s begin with the basics. Digital lending, at its most fundamental level, is moving from a paper-based loan process to a digital one. When we say paper based, that doesn’t necessarily mean that everything is done manually. A paper-based system, for example, might include an LOS or an electronic document system, but at the end of the process the asset that is generated—a mortgage, a HELOC, a car loan, a lease, etc.—is paper that is printed out and wet signed. Depending on the type of asset, the next step could be recording it, selling in the secondary market, putting it in a file cabinet or storing it in a fire-proof vault. But the finished product is still paper. In a digital lending environment, the finished product is an eNote if it is a mortgage, or a digital contract in the case of autos, HELOCs and other products.
In a hybrid lending environment—where the vast majority of lenders currently are—the digital transition has started and some paper is being used on the transition to digital contracting. This could be a variation in workflows or lines of business that use both paper and digital processes. It could also be a hybrid of technologies with wet ink-signed documents that are being scanned into a repository for management. Going from paper to fully digital rarely happens all at once. Most banks transition into a hybrid environment that includes both paper and digital documents and processes. The end goal in a digital transformation, however, is the ability to create, eSign, record (if necessary), trade, and store fully digital assets.
Moving from paper to digital processes has several major advantages, including competitive differentiation, enhanced borrower experience, and of course, the primary benefit of reducing time and costs in the origination process. Studies have shown that digital closings within the mortgage sector can reduce origination costs by as much as $400 per loan. Selling digital assets in the secondary market is more efficient as well. Today, leading mortgage buyers and insurers, like Fannie Mae, Freddie Mac and Ginnie Mae, accept eNotes, as do a growing number of warehouse lenders and trustees. Digital assets, such as auto and solar loans, are now mainstream in many securitizations.
Digital lending also improves the customer experience that banks can deliver. Customers appreciate the convenience of reviewing and signing documents online from their home or office. In a majority of states, these documents can be notarized remotely.
Think about the human resources and cost savings that can be realized with a digital piece of collateral that can be transitioned, sold, pledged or moved literally in seconds versus days with paper, not to mention the audit efficiencies that come with digital execution and storage.
Now that we’ve discussed why it’s beneficial to move to a digital strategy, let’s explore how.
Define the digital goals and align internal strategies
One of the biggest mistakes lenders make when they begin the digital migration process is failing to solicit input among internal stakeholders and not recognizing the importance of aligning departmental strategy. This is just as important is defining the desired goals and what the company is looking to achieve. Is it a more efficient origination process? Accelerated secondary marketing trading? Cost reduction? Or is the goal to deliver a more modern competitive customer experience? Keep in mind these don’t have to be either/or decisions.
It may take a little longer, but starting wide and getting input and buy-in across departments will make the rest of the journey a lot smoother. Consider implementing workshops and interviews with loan officers and other front-line employees to find out what their biggest complaints are, what the most time-consuming tasks are, and what would make their lives easier. Because if the loan officer’s life is easier, the customer’s life becomes easier and that’s a win all around. Don’t forget to include the processing and post-closing teams in the discussion as well as capital markets to understand how they pledge. Even beyond the benefits of implementing a digital strategy, getting this input allows you to identify ways to standardize consistent workflows across various business units and evaluate individual business unit and overall goals. Once input is received, one can align strategies and develop a plan for stakeholder sign off so that everyone feels heard and criticism down the line is minimized.
Conduct an asset inventory
For lenders that are just beginning the digital lending journey, it’s important to identify all asset classes that your bank is currently originating or considering originating—mortgages, auto, personal loans, solar, etc.— and conduct an inventory to determine how you want to incorporate digital strategies with each. Be specific in identifying how and where you want to roll out a digital strategy and then how you’ll scale it among the various asset classes, including exploring opportunities for streamlining your asset management processes. This will also give you an opportunity to validate the implementation of your processes, understand the specific digital needs within various business units and encourage adoption within your organization. While it’s one of the first steps in the digital journey, this will be a continuous process that can help bridge silos across your various lines of business and help streamline your business processes overall.
Know the rules and have a roadmap
The most important components to consider when planning your digital journey roadmap are an eSignature tool, an eVault and an authoritative document copy. These are the core components that provide asset certainty and adherence to the laws and regulations that must be followed for a successful digital strategy. Scanned images and PDFs are not compliant—or legally enforceable—under eSign law, and as a result, this can increase risk and inefficiencies for lenders that don’t follow proper protocol. Having an authoritative copy, however, provides the same protections as having a wet-ink signed document. eSignatures are the baseline in a digital strategy, and many lenders who are far from claiming to have robust digital capabilities have an eSign tool. The process of eVaulting a document within a secure, trusted environment will fulfill the legal and regulatory requirements for an authoritative copy to be used as the original and the source of truth. An eVault provides a single, secure solution where all assets can be managed, providing the highest levels of compliance with documents that are secured, encrypted, and tamper sealed. Assets can be quickly and efficiently batched up and either sold, syndicated or pledged as collateral when using an eVault. Using an eVault, like the Wolters Kluwer OmniVault, and an eSign tool, like Wolters Kluwer SmartSign, allows you to create and sign electronic originals that are stored as authoritative copy—and this is critical.
The Uniform Commercial Code Article 9 (UCC 9), the Uniform Electronic Transactions Act (UETA) and the electronic signatures in the Global National Commerce Act (eSign) allow these electronic documents and signatures to be considered as valid as paper and wet-ink documents. While various states have enacted laws to allow for remote online notarizations, there isn’t yet a federal law allowing them. In February, however, Congress introduced the SECURE Notarization Act, a bill that could have a major impact on interstate in-person electronic (IPEN) and remote online notarizations (RON) if it becomes law.
Don’t be afraid to start small
Some lenders are reluctant to start small with their digital lending and have a perception that they shouldn’t think about digital until they can go big. Starting small with one process or platform can be a great way to begin the journey sooner and grow and scale over time as one achieves success. Identify where to start to iterate into digital, where there is the most flexibility, benefits, cost savings, and potential to scale up a new process.
Securing a proof of concept in one area will allow one to continue to expand one’s digital capabilities with other processes. Most lenders make the assumption that if they’re not fully integrated or don’t have budget approval for a complete digital transition, they can’t begin. However, if one works with the right provider, these aren’t roadblocks, but merely realities that are built into the plan. Wolters Kluwer works with companies at all levels of digital integration, and we know how to meet them where they are so that, together, we can take the appropriate steps, large or small, to move them toward full integration.
One option to consider when pursuing budget allocation is tapping ESG (environmental, social and governance) resources which, in many cases are mandated by company policy. Nearly every large bank now has an ESG commitment, and as part of that, a carbon footprint reduction goal. Reducing the use of paper by going digital saves trees as well as transportation and fuel costs associated with delivering paper packages back and forth. Why not approach the ESG team and suggest how implementing digital strategies could achieve some of the company’s ESG goals?
Choose a provider that can grow
When choosing a digital lending partner, there are several things to consider, but perhaps the most important one is finding a partner that can meet you where you are and grow with you. Look for an end-to-end solution for your digital lending workflow that includes integration capabilities to scale across your various business units, even if you’re not ready for full integration at initiation. Digital lending will support operational flexibility, whether that be mostly on paper, a hybrid approach, or fully digital. Even if you start small, don’t make the mistake of not considering your long-term digital needs. Selecting a partner that has full-scale capabilities will serve you well in the long run. The Wolters Kluwer eOriginal platform not only offers end-to-end lifecycle management, but also the ability to manage all assets with one oversight through OmniVault.
Digital lending is increasingly becoming an industry standard, accelerated by the pandemic. In addition to the time and human resource cost savings for lenders, there is a growing expectation among consumers for streamlined digital origination and closing options. Don’t let the “big” of digital lending prevent you from taking the first few small steps to get there.