Real estate settlements will increasingly include more electrons and less paper if the government has its way. We’re plainly moving toward paperless closings but before celebrating it might be wise to look at the potential costs.
The movement toward electronic closings began in 2000 with passage of the Electronic Signatures in Global and National Commerce Act, also known as ESIGN. Instead of “wet” signatures — the signatures made with pen and ink — it would now be possible to “sign” closing documents electronically once new standards were established.
Almost 15 years later entirely-electronic closings are rare and with good reason: Electronic settlements have the potential to be fast and low-cost events, but are they safe?
The question of safety is not a minor matter. Forgery is a real issue in the world of “wet” signatures and electronic data is not much of an advance. Consider the recent news that personal information regarding as many as 70 million Target customers may have been exposed, an electronic intrusion which hardly inspires confidence.
Mortgage Closings and Fine Print
There’s no doubt that borrowers, buyers and sellers do not read the fine print at closing.
Former HUD Secretary Alphonso Jackson told The Washington Times that “I’m an attorney and I’ve had eight houses and I didn’t read all that mess. If I didn’t read it — and I doubt anyone around this table read it — then we can’t hold people responsible for not reading every line when they were closing their loan.”
Another former HUD Secretary, Mel Martinez told The Washington Post that “you know if I’m a lawyer and the secretary of HUD and I’m not reading this junk, you know there’s work’ to be done fixing the system.”
According to the Consumer Financial Protection Bureau paper-based closings have four “pain points” — their term — that greatly bother consumers:
- Not enough time to review documents. Consumers don’t get closing paperwork until they arrive at the closing table, where there is pressure to rush through and sign documents over and over – with not enough time to ensure that documents are understood.
- Overwhelming stack of paperwork. There is so much paper that the process of closing on a home is daunting and overwhelming. The result is that many consumers leave the closing table with a nagging feeling that something hidden in the stack might have long lasting effects on their financial well-being.
- Documents are hard to understand. Closing documents are full of legalese and technical jargon that consumers don’t understand. Also, consumers feel they often have little help from settlement providers.
- Errors in the documents. “Errors in closing documents can often lead to delays,” says the CFPB. “Even common and seemingly minor errors, such as a misspelled name or forgetting to include your spouse, require closing agents to redo the entire closing package.”
How Electronic Closings Will Help
Just for fun, let’s go with the CFPB’s four “pain points” and see how electronic closings will improve matters.
First, will there be more time to read documents? No. The time available to read documents will be exactly the same time available today. Under the Real Estate Settlement and Procedures Act (RESPA) consumers can require that settlement agents provide all closing papers 24 hours before settlement. You can sit at closing and require the settlement provider to read all the documents. The language in the documents, whether paper-based or electronic, is the same. Nothing will be easier to understand.
Second, will the stack of paperwork decline in size? No. The documents required to close are the same whether paper or electronic because lenders want their documents, sellers and buyers want their materials, the title insurance companies want their stuff, the government wants its forms, etc.
Third, will documents be easier to understand? No. The legal language will be exactly the same.
Fourth, will there be fewer errors with electronic closings? No. There is no evidence to suggest that electronic paperwork leads to fewer errors and if there are mistakes they may be very difficult to find. Consider that a few years ago the government paid reviewers almost $20,000 per file to find possible foreclosure mistakes.
Errors such as misspelled names or forgetting to include a spouse are not minor or trivial concerns. Is the property owned by Bill Smith, Bil L. Smith or Bill Smyth? They are very different people. Fail to record ownership as husband and wife and you could lose out on important protections that we give to a “tenancy by the entireties,” but not to other forms of ownership. The idea that such mistakes are somehow minor or unimportant is simply wrong.
Most important is the issue which the CFPB apparently does not consider a pain point: You need to keep your closing records for tax and estate purposes, maybe for decades. If something is in an electronic format today will you be able to access it tomorrow? Before saying yes think about how we used to save documents: Remember floppy disks? Remember 5.25-inch disks from 20 years ago? Do you have equipment which can today read such formats?
Electronic closings sound wonderful except that they offer few consumer advantages and a huge bunch of potential problems. When next you go to closing be sure to ask the closing agent for two copies of the proceedings, one electronic and the other on paper. Years from now you will be grateful to have the paper copy because the odds are overwhelming that the electronic version will be unreadable.