Though finance is seeing its peak of online interactions, one sector still lags. Due to a complicated history of legislation, mortgage lending has taken place primarily in person since its beginning. Now, with online finance lagging in the pandemic recovery, how far does mortgage lending have to catch up?
Consider how far the process of buying a house has come in the last 20 years. Buyers can find homes as easily online as they once could with real estate agents (and at a significantly reduced cost). They can shop for a mortgage online and see their potential rates in different areas. Legal questions can be asked and answered online, saving them time and lawyer fees. So why do they still have to complete the process of mortgage borrowing mainly in person?
If you consider the history of mortgage lending and its first steps into the digital realm, the reasons become clear. Regardless of its roots, mortgage lending must catch up with its digital siblings to stay afloat. Otherwise, like many businesses affected by the pandemic and changing demographics, it will see itself replaced by other services as well.
The Origins of Online Lending
The roots of online mortgage lending go back to the late '90s. Its first obstacle to overcome was the process of signing documents. Historically, document signing took place in person only with no legal alternatives. This method of signing was the only option until the advent of the e-signature. Its invention, however, did not see the most comfortable start. Concerns of fraud led to uncertainty among states, snowballing into confusing (and sometimes even contradictory) legislation on a state level.
The biggest challenge with this method was the e-signature's validity across state lines. While some states legislation was compatible, others left both signers and lenders perplexed. For instance, what if signers lived in different states? Whose state rules took precedence over the interaction? And if brought to court, would it indeed be legal? Without proper guidance, signers were reluctant to make the shift to e-signatures on their documents. Their caution and lack of federal action held back the industry from its next step forward.
Later, e-signatures were legalized throughout the US one law, called the Uniform Electronic Transactions Act. This act eliminated conflicting regulations governing each state and made online signatures uniformly legal throughout the United States. The federal ruling overrode the conflicting individual legislations and confusing fraud protections that had scared many away from digitally signing.
Digital signatures have since allowed individuals and businesses to take advantage of the convenience of online operations. Signing contracts can take place in different parts of the country without the concern of their legality. However, the movement from a hybrid to a digital lending process is not yet complete. Now that signing could take place online, the next biggest hurdle is notarization.
While many parts of the lending process can take place online, notarization still takes place in person. Now, online loan applications are commonplace, with millennials seeking out online experiences versus in person for convenience and safety. This change means that lenders will have to move from paper operations to digital systems to keep up with the demand. If not, they risk being replaced by lenders that will.
A shifting demographic is not the only reason for lenders to push for online mortgages. Not only does it benefit their borrowers, but it reduces effort on the lenders' side. A report from the New York Federal Reserve concluded that the processing time for online mortgages and refinancing is significantly less than in-person or hybrid transactions. It stated that processing took an average of 14 days fewer when refinancing with online lenders versus the alternatives, and processing for purchases took 90 shorter on average.
Though hesitation is common among lenders, increased demand for funding and pressure to operate digitally strain their current practices. That said, their skepticism is not unwarranted. Even the most willing still exist in a landscape where legislation has not kept up with their new needs.
Naturally, many lenders are apprehensive when considering changing from their current methods. Legislation, rigid legacy software, and the perceived difficulty of change hold back businesses from keeping up with the present. However, the reduced labor and digitalized processes will no longer be optional, but critical to their businesses' survival.
Given the pressing financial landscape, reduced processing time is a significant benefit. More individuals are applying for mortgages and refinancing because of pandemic stress. Families now have to share spaces for even more time, with children only beginning to return to school and many colleges refusing to open dorms.
What Does the Future Hold?
Now, lending is bowing from the pressure to adapt to a new demographic and the pandemic's urgency. The next obstacle to overcome is the struggles of digital notarizing. Though some platforms such as QuickenLoans have found ways to navigate this, the entire industry will need to adapt.
Years from the first steps leading to online mortgage lending, notarization faces similar challenges. Currently, states have a patchwork of laws, much like those that were initially governing online signatures. This dilemma raises some interesting questions. Is it legal to have a notary reside in one state & for parties living in another? Does the notary have to be in the same state as the signers? Like the case of online signatures, lenders fearing legal repercussions still find it safer to rely on physical documents to make sure that they are compliant with the law.
An Unforeseen Development
The current landscape of mortgage lending is far beyond what we would have imagined in the late '90s. Now, a worldwide pandemic has pushed businesses either online or out of existence. Those that can adapt are those that can lend online. Many banks have based intense criticism for their lack of accommodations for their clients. Social distancing makes individuals wary of meeting in person, and hesitant lenders are sticking to the former status quo to avoid legal trouble.
Unfortunately, this puts many financial institutions at risk of falling behind. Clients are leaving their current banks for those that offer a better online experience. Even medicine has embraced telehealth to keep both doctors and patients safe. On the other end of the spectrum, finance has seen even more confusion from rushed legislation, leaving them unclear about how to comply.
The new way of life depends primarily on online interactions. Naturally, it would make sense that the remaining challenges in mortgage lending catch up with the times. In addition to the pandemic's effect on how people go about their day-to-day life, millennials are reaching home-buying age and expect a fluid online experience. They will actively choose lenders and other services that provide a better and more coherent experience. Traditional lenders and those wary of migrating their services online despite the resources available are at risk of becoming obsolete in light of the coming change.
What's Next in Online Mortgage Lending?
The final frontier for mortgage lenders is the legalization of digital notary services. While online mortgage lending has advanced by leaps and bounds over the last 20 years, this final obstacle between lenders and borrowers holds back a significant advance in how property purchases take place in the new normality.
The next change has to take place on a federal level. Mortgage lending, there must be one law unifying the requirements to notarize online. Following this, mortgage lending can join fintech in a wholly digital arena. While we wait for the legislation to come, prepare your staff and operations to embrace digital lending. When both businesses and individuals need more financial assistance than ever, lending must be there to give a helping hand.