Background:
Nine years ago, the federal ESIGN Act passed through the legislative process to become national law. However, some federal and state agencies have been slow to adopt rules and guidelines consistent with ESIGN's intent to remove barriers to e-commerce. Among these is the U.S. Department of Housing and Urban Development (HUD), resulting in a current HUD policy yet to officially recognize electronically signed documents submitted to its mortgage insurance arm, overseen by the Federal Housing Administration (FHA). The most recent policy statement from FHA on e-signatures dates back to 2003, when the Administration announced that it would accept electronically signed property appraisals.
What has changed?
Until recently, FHA's failure to keep up with the times did not have a major impact on the real estate and mortgage ecosystem, as the FHA insured only about 2% of originated single-family home loans. Due to recent changes of the residential mortgage infrastructure, the market share of FHA-insured mortgage loans has exploded, hitting nearly 30% in early 2009. The increase in FHA's market presence and government scrutiny of lending practices has led to increased deference to FHA standards and policies.
Progress is being made
The FHA's response to the changing climate of mortgage insurance resulted from the surge in volume of electronic documents that were finding their way into insurance case binders. In January 2009, the operational arm of the Administration's single-family home loan group embarked on an effort to update systems and procedures, including guidelines for processing electronic loan packages, complete with electronic promissory notes (i.e. e-mortgages). The effort is receiving "fast track" treatment and will be released during the second half of 2009 at the earliest. DocuSign, both on its own and through its participation in Electronic Signature and Records Association (ESRA) has been at the forefront of this effort and moving it forward.
FHA does accept DocuSign today
As the real estate industry's leading provider of electronic contract execution, DocuSign has also sought to establish a clear distinction between an electronic mortgage - with process requirements and controls that must be in place at closing - and an electronically signed real estate contract, seeking appropriate treatment of electronically signed real estate contracts by lenders, the FHA, and other "downstream" recipients of these 100% valid and enforceable agreements. Largely as a result of our early efforts, the FHA in January 2009 affirmed its willingness to accept electronic signatures and instructed its Home Ownership Centers not to reject case binders containing electronically signed real estate contracts.
Challenges remain
This FHA policy has yet to be communicated to lenders in writing, as the FHA prefers that the e-mortgage guidelines and electronic signature guidelines be released concurrently to avoid further confusion. However, FHA's failure to communicate a clear policy about accepting paper case binders that include electronically signed documents, particularly paper copies of electronically signed real estate contracts, has perpetuated confusion among realtors, mortgage brokers and lenders. The compliance departments at major lenders such as Wells Fargo and Countrywide (now Bank of America) have taken steps to better understand the FHA's position. These lenders have recently adopted cautious, temporary policies that have flagged mortgage applications that included electronically signed documents. We expect these policies to be reversed or relaxed very soon, but in the meantime much confusion remains.
Frequently Asked Questions
My broker has never seen one of these signatures before. How do we know it is "real"?
Over the past five years, hundreds of thousands of real estate documents have been electronically signed by buyers and sellers using the DocuSign electronic contract execution platform, and not one of these transactions has failed for fraud or unenforceability arising from use of the electronic signature.
DocuSign is used by real estate agents in all 50 states to allow parties to real estate contracts to sign online, without paper. The DocuSign system has been identified as the electronic signature of choice by the California Association of Realtors since 2005 and is branded as "Zipform Esign" for users of the Zipform real estate form network in 34 states. More recently DocuSign has partnered with Reveal Systems to provide electronic signing of real estate forms in 10 additional states. Approximately 750,000 real estate agents and brokers have access to DocuSign for electronic execution of over 20,000 different kinds of forms used in real estate transactions.
DocuSign is also used by hundreds of mortgage brokers and correspondent lenders to execute front-end RESPA disclosures online. These include TIL, GFE, and all state-required disclosures.
My mortgage broker says the lender won't accept electronic signatures
A few lenders have some policies in place that restrict electronically signed documents, but not all documents in a mortgage application file are the same. There is a difference between a mortgage closing document (such as an electronic note) and a supporting document (such as a real estate contract, addendum or disclosure). Supporting documents represent contracts between consenting parties that have already been consummated and are not part of the closing process. It is unusual for a lender to interfere with a real estate transaction by asking for it to be re-executed. Ask the broker or lender to clarify their position and to make sure they have all the information they need to make that assertion.
If you are unable to get your lender to accept a DocuSigned contract as part of a mortgage application, please immediately send the lender name and contact info to legal@docusign.com.
Our broker/lender says FHA won't take electronically signed documents.
That is not correct. The FHA will accept DocuSigned real estate contracts, addenda, appraisals and disclosures.
FHA has affirmed its willingness to accept electronic signatures and has instructed its Home Ownership Centers not to reject case binders containing electronically signed real estate contracts. If any cases are rejected (or designated "NOR") by a HOC, the FHA take it up directly with the HOC and correct them.
If the lender receives a case binder back as NOR by a Home Ownership Center because it contains an electronically signed real estate contract, they should contact DocuSign's legal department at legal@docusign.com or call Ken Moyle at (206) 973-8187.
This is not an e-mortgage, so doesn't that mean it can't have electronic signatures?
No. An e-mortgage is an electronically closed loan. The vast majority of electronically signed real estate and mortgage documents are found in traditionally closed mortgage loans. Electronically executed real estate contracts are often emailed (or even printed and faxed) to lenders just as their paper counterparts are, but with added convenience and security. Similarly, electronic records are usually included with scanned paper images in paper or electronic case files used by lenders for conventional closing and servicing.
FHA has recently undertaken an initiative to prepare itself to accept electronic mortgages, including e-Notes. However, there is no need to wait until the e-mortgage guidelines are complete. Electronic documents and signatures can be used today in FHA case binders.
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