Why is hybrid closing still a thing?

  • By jack

  • 14 April, 2021

If COVID-19 was the No. 1 topic of conversation amongst real estate professionals in 2020, remote online notarizations was arguable No. 2, like lenders, title/settlement agents, and real estate agents all scrambled to keep their pipelines moving in the face of social distancing requirements and/or stay-at-home orders. As the pandemic extends into 2021, much remains uncertain, but with increased awareness of RON on both the business and consumer sides of the home buying process, the question that can (and should) firmly be answered this year is, “Why is the industry still pushing hybrid closing transactions?”

As the calendar rolled to Jan. 1, 2020, 22 states had enacted RON legislation or were slated to do so within the coming year, which meant nearly half the country lacked the legal authority to conduct document notarizations remotely (NOTE: Today, the number of states authorizing RON or with bills introduced stands at 30, per the American Land Title Association). The most common objections to RON centered around the security of the process and its associated technology and the perceived potential for an increase in fraud with a remote versus in-person notarization.

By March 2020, this state of affairs had quickly changed, with nearly every state rushing to issue temporary authorizations to allow some form of the socially distanced notarial act to occur. However, the misconceptions that had prevented many states from enacting permanent RON legislation prior to the pandemic were evident in these temporary authorizations, as several states opted to authorize remote ink notarization (RIN) rather than RON.

Most RIN authorizations allowed the use of general video conferencing software to enable signers to appear before the notary before then mailing or faxing the signed documents to the notary for notarization. While this certainly solved the issue of getting documents notarized while maintaining physical distancing requirements, RIN did very little to modernize or preserve the integrity of the notarial act. In fact, it created a more convoluted and less secure process for completing an activity that serves as the legal underpinning for the real estate transaction (Anyone remembers Zoom-bombing?).

In addition, most temporary RIN authorizations do not require recording of the signing ceremony or signer identity proofing/authorization beyond the presence of a state-issued ID — all of which are included in RON, and which ultimately safeguard the transaction. Without the presence of these key features, it is unlikely that title underwriters will insure these transactions, thus putting these transactions in serious jeopardy.

In many ways, the preference for RIN over RON – despite its obvious flaws and shortcomings – reflects the mortgage industry’s attitude towards digital mortgage technology as a whole. Rather than invest in future-ready technology that would enable them to deliver an end-to-end digital mortgage process at a moment’s notice, lenders took a piecemeal strategy to technology adoption – often upon the advice of their chosen vendors – adding only those components that could be utilized immediately. As a result, lenders have gravitated towards a hybrid eClosing process as the latest industry “innovation,” yet this process is anything but.

Without a clear definition of what constitutes a hybrid eClosing, most lenders have adopted a model in which the closing disclosures are delivered and signed electronically but the recordable documents are papered out and wet-signed in the physical presence of the notary. RIN fits nicely into this model if the end goal is simply to avoid physical contact with another person. However, the mere presence of eDelivery, eSignatures, and a video conference is not innovation, nor does this process accomplish what has long been held as the true goals of a digital closing transaction – convenience, increased security, multiparty access/participation (which is especially important for attorney-closing states) and an overall better borrower experience.

For those lucky enough to operate in states that have either temporarily or permanently authorized RON, those goals were achieved in spades – even without the presence of an eNote, and with nearly every major title underwriter now willing to ensure these transactions, RON is truly a 50-state solution despite the lack of permanent, nationwide RON legislation. By completing 99% of the transaction in a truly remote and online fashion, the papering-out and wet-signing of the note become merely a coda to the closing ceremony. Furthermore, it is certainly worth noting that the addition of Ginnie Mae and the Federal Home Loan Bank system to the pool of investors accepting eNotes has dramatically increased lenders’ ability to issue eNotes at scale.

Calling today’s definition of a hybrid eClosing “outdated” is being polite. Now that many borrowers are aware that RON is a possibility, demand will only grow, and those that have not made RON a priority will find themselves lagging behind their peers that have. If the pandemic demonstrated anything to the mortgage industry, it is that its capacity for innovation far outstrips its current efforts, and the adoption of stopgap processes, like hybrid eClosings and RIN, in favor of true innovation will only further serve to stunt the industry’s growth.