How old were you when you first heard the term “eClosing”? You were probably younger than you realize, as the inception for digital closings happened in 1999.
In case you have forgotten how long ago that was, the average monthly rent was $645, Spongebob Squarepants made its cartoon debut, and we spent most of the year fretting that Y2K would wipe us all off the digital map.
We have been inching slowly toward a more electronic homebuying process ever since, but due to recent developments related to the COVID-19 pandemic, we’re now racing to the finish line. Social distancing, shelter-in-place orders, and business closures are providing an urgent need to take closings digital and minimize personal contact, and we’re embracing eClosings at last.
Here’s a look back at the 20-year progression toward eClosings, and an examination of how recent events are helping to finally make them a reality.
In the beginning
A true digital closing involves four main components that correspond to core events in the closing process: Electronic documents, or eDocuments; electronic signatures, or eSignatures; electronic recordings, or eRecordings; and electronic notarization, or eNotarization. Following industry consensus on the definitions and standards of these components, various federal and state laws set out to define and govern how each of these elements are carried out.
First up were eDocuments and eSignatures. Spurred by widespread adoption of the internet in the late 1990s, the Uniform Law Commission (ULC) promulgated the Uniform Electronic Transactions Act (UETA) in 1999. The first national effort to provide uniform rules to govern electronic commerce transactions, UETA sought to validate eDocuments and eSignatures – and ensure they have the same enforceability as paper documents with wet signatures.
In 2000, the U.S. Congress passed the Electronic Signatures in Global and National Commerce Act, or ESIGN. This law created a national, standard recognition of eSignatures and eRecords in interstate and foreign commerce, giving eSignatures and eRecords the same legal authority as wet-ink signatures and paper documents. ESIGN applies to federal law and preempts any inconsistent state law; if a state adopts UETA without amendment, ESIGN does not preempt it.
Once all 50 states either adopted UETA or enacted similar laws of their own, dozens of software vendors began developing eDocument and eSignature offerings. Today, most companies in the real estate sector use some form of these technologies.
eRecordings were next to get a green light in 2004, when the ULC promulgated the Uniform Real Property Electronic Recording Act (URPERA) to give county clerks and recorders the legal authority to accept eRecording of real property instruments. URPERA established that any requirement for a paper document’s originality is satisfied by an eDocument and eSignature, as well as the standards every recording office must follow.
Counties have been slow to embrace eRecording, as adoption hinges on funding for technology and training, the will of these offices’ leaders (sometimes political in nature), and the overall economic, business, and social priorities of the locality. According to the Property Records Industry Association (PRIA), a nonprofit organization that develops standards and best practices for the property records industry, as of April 30, 2020, 2,146 of the nation’s almost 3,600 recording jurisdictions – or nearly 60 percent – use eRecording. Those offices serve more than 85 percent of the U.S. population.
eClosings hit a stumbling block
This left eNotarization as the final digital closing component to be implemented. Because state laws have traditionally required individuals to physically appear before a notary public, eNotarization proved trickier to address.
In 2010, the ULC gave the Uniform Law on Notarial Acts (ULONA), an act it promulgated in 1982 to provide a consistent framework for notarial acts, a much-needed update. The result, the Revised Uniform Law on Notarial Acts (RULONA), allowed for the performance of notarial acts with respect to eRecords and eSignatures – but notably, did not address remote online transactions.
In 2011, Virginia was the first to hop on the RULONA bandwagon, enacting a law permitting notaries to use audio/visual communication technology to witness and certify signings. Unfortunately, other states were slow to follow Virginia’s lead. By 2018, only about a dozen states had enacted RULONA.
In October 2018, the ULC addressed this concern by issuing key revisions to RULONA to suggest how RON transactions may be conducted. The provisions, which can be found in Section 14A of RULONA, enabled RON without geographic limits on the signer’s location, if the notary uses “communication technology” to notarize documents – defined as “an electronic device or process that allows a notary public and a remotely located individual to communicate simultaneously by sight and sound.”
Section 14A of RULONA requires:
- The notary public signature block to state: “This notarial act involved the use of communication technology”
- Notaries to identify signers using a combination of identity-proofing methods, including knowledge-based authentication (KBA) questions, credential analysis, and biometric technology
- An audio/visual recording of the transaction to be maintained for at least 10 years
With eNotarization and RON tackled, we cleared what many industry leaders dubbed “the last mile” to digital closings. By early 2020, 23 states had enacted RON laws, and 16 other states had legislation pending. Experts agreed that full legalization and adoption would likely occur by 2025.
COVID-19 crisis accelerates legalization and adoption
RON legalization and adoption came early, if temporarily for some states, thanks to COVID-19.
On March 11, with 118,000 COVID-19 cases reported in 114 countries, and nearly 4,300 deaths worldwide, the World Health Organization declared COVID-19 a pandemic, resulting in sweeping business closures, stay-at-home orders, self-isolation measures – and significant economic instability.
Government officials quickly moved to identify “workers who support crucial supply chains and enable functions for critical infrastructure” – including the financial services industry, supported by the real estate, mortgage and settlement service sectors. In fact, as noted in a 2018 Brookings Institution report, “Lessons from the financial crisis: The central importance of a sustainable, affordable and inclusive housing market,” the housing market represents 20 percent of the total U.S. economy and is usually the sector that leads an economy out of a recession.
Digital closings – and RON specifically – held the key to keeping business flowing. However, with fewer than half of the states in the country legally authorized to perform RON closings, an American Land Title Association-led effort quickly mobilized to back the Securing and Enabling Commerce Using Remote and Electronic (SECURE) Notarization Act of 2020 – federal legislation that would permit immediate nationwide use of RON that complies with certain minimum standards, and provide for interstate recognition of RON.
Although the SECURE Notarization Act quickly gained support from a wide range of industry stakeholders, at press time, it was not expected to pass, as Congress seems to favor focusing on interstate recognition of RON instead. Meanwhile, in the ensuing weeks, nearly three dozen states have mobilized to issue emergency and temporary orders allowing for notarial acts to be conducted using audio/visual technology under certain conditions. As a result, a new eNotarization paradigm has emerged: Remote ink-signed notarization, or RIN.
In a RIN transaction, a paper closing package is delivered to the borrower. A notary uses audio/visual technology like Zoom, Skype, or FaceTime to examine the borrower’s identity credentials and witness them ink-sign the documents. The borrower returns the signed documents to the notary, who physically applies a notarial seal or stamp to the loan documents.
Although Fannie Mae and Freddie Mac have issued guidance on their acceptance of RIN-processed loans, they have cautioned that they do not expect temporary state orders allowing RIN to extend beyond the COVID-19 emergency.
Meanwhile, as the emergency continues, RON’s legal status changes almost daily. At this point, only three states have yet to enact RON/RIN laws or temporary orders: Alaska, California, and Oregon, and even then, California has temporarily allowed notaries from outside of the state to facilitate RON-enabled eClosings inside the state.
For more on RON and RIN, download our white paper, Digital Closings Clear Final Hurdles: A 20-Year Implementation Marathon Suddenly Becomes a Sprint in the Face of the COVID-19 Crisis.