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.

Contact: Ken Moyle

Chief Legal Officer, DocuSign, Inc. (Seattle, WA)

Ken.moyle@docusign.com

(206) 973-8187

About DocuSign

DocuSign provides on-demand software services for electronic signature and online contract execution, empowering individuals, small business and global enterprises to operate faster, more efficiently and profitably with enhanced security and compliance. To date, more than 16 million signature events have been executed using DocuSign.

About ESRA

The Electronic Signature and Records Association (ESRA) is a national industry association established to educate business, government and the public legal, regulatory and operational issues related to the use of electronic signatures and records. ESRA’s web address is: www.esignrecords.org.

The director of the home mortgage insurance division at FHA, Jo Ann Kuczma, acknowledged the need to work in a paperless environment:   

“Our goal is to receive all mortgage documents electronically and update FHA systems with all required information so that manual input of information by lenders is not required.”   

This year, the FHA plans to pilot-test fully electronic mortgages with an FHA-approved lender and has circulated a seven-page draft of its electronic signature specifications.   

Kim Weaver, the vice president of product management for Fiserv Inc.’s electronic lending platform, noted the significance of the FHA’s willingness to work on documents across the life cycle of the whole mortgage as “huge.”   

DocuSign’s Chief Legal Officer and Electronic Signature and Records Association’s (ESRA) Public Policy Chair, Ken Moyle, noted that the FHA wants the note to be a Smart Doc, a securable, manageable, archivable, retrievable and transferable document. However, that same clarity is lacking regarding the other documents – what standards are applied to which documents?  

Moyle said one of ESRA’s goals is “keeping technology neutral. If the FHA were to adopt a position that is simply compliant” with the Electronic Signatures in Global and National Commerce Act of 2000, “and the lender can assure that it obeys those structures, that’s great. But the more FHA defines standards instead of just having the lender certify to what’s out there, the more complicated it will become to adopt. … I’m certain the Obama administration doesn’t want to be a barrier to e-commerce, but they run the risk of doing that if the standards are too specific.”   

Weaver does not believe that anything the FHA does will be too difficult for lenders to adopt: “FHA is interested in coming up with standards that can be used,” she said. “I think they’ll encourage feedback from lenders and other industry participants. … Remember, they’re keen on getting this adopted.”   

The FHA’s draft electronic signature guidelines align with the standards set forth by the Mortgage Industry Standards Maintenance Organization and confirms the validity of the MERS loan-registration system’s Mortgage Identification Number. This indicates a willingness to work from what has succeeded rather than to reinvent the wheel.   

Weaver stated: “FHA knows that it will benefit from the standards that are already in place. Where they are treading on new water is standardizing the other mortgage documents outside of the note as Category 3 or 4 Smart Docs. What FHA is doing could be a blueprint for the entire mortgage industry to automate the process from start to finish.”