Automating Lending

Now that electronic signatures clearly are legal, safe, convenient and efficient, CUs are embracing them with enthusiasm, especially for loan documents. While the benefits are impressive, there’s still reason for caution in certain situations.

The enthusiasm is evident in Omaha, Neb., where it’s full-speed ahead with electronic documents and electronic signatures at $125 million Four Points Federal Credit Union. “We do it any time we can,” says President/CEO Donnie Price, a CUES member. “And that’s for consumer loans, equity lines of credit, auto loans, RV loans, home loans—pretty much everything that doesn’t require a notary or handwritten signature.”

Price sees little reason not to press forward with e-signatures. “It’s all Web-hosted by our vendor (DocuSign, Seattle), so it takes no IT resources on our end,” he explains. “Everything is stored on their server and we can access it when we want. It was quick and easy to implement.” There is some cost, but when the savings on postage is factored in, “we will be close to break-even,” he suggests.

E-sigs on consumer loans have been an efficiency breakthrough for $58 million VA Desert Pacific Federal Credit Union, Long Beach, Calif., reports CUES member Cindy Glessner, CEO and certified effectiveness coach. “Before, we had three processors handling $400,000 of loans a month. Now one processor handles between $1 million and $1.2 million,” she reports. “We don’t have to schedule people to come in for a signing. One processor can now fund six loans at a time.”

Members love it, she reports. “We take them through the process step by step, over the phone, the first time. They discover that it is quick and easy. If we get the e-signed documents back by 5 p.m. on a Friday, they will have the money in their account that night.” About 60 percent of consumer loans are now made electronically and remotely, she reports.

“We have some old-fashioned members who resist, but we’re putting on the full-court press,” she says. The e-documents are now fully integrated, she adds. “Our e-signature vendor (Complete Data Products, Troy, Mich.) partners with our core processing and loan processing vendor, which is Fiserv (a CUES Supplier member based in Brookfield, Wis.).” But there are no plans to use it for mortgage closings at this point because of concerns about the need for wet signatures for these types of loans.

The back-end workflow is pretty slick, testifies John Hays, SVP/chief operating officer for lending at $95 million Access Community Credit Union in Amarillo, Texas. “We can archive directly into our systems. The lending associate clicks and drops the documents into archives, and we can see the audit trail in our core processing system,” he explains. “With the postage savings and the back-end efficiencies, I think the product will more than pay for itself.”

Pleasing Members

There’s also a marketing advantage. “This plays into our ability to attract new members and retain old ones,” Hays notes. “It lets a small credit union stay competitive with the latest technology. And members keep telling us it’s ‘simple and easy.’” But not all members.

“We can’t push it too hard because not everyone in West Texas wants the latest technology,” he observes. “It’s popular primarily with our online and mobile channel users. It’s becoming something they expect.”

Access Community CU has been sending loan documents to members by secure email for about seven years, but last summer introduced an e-signature program from SIGNiX, Chattanooga, Tenn., and now completes about a quarter of its consumer lending documents that way. For that segment, use of traditional snail mail or email has virtually disappeared, Hays reports. But no home equity loans get e-signed yet, for compliance reasons.

“State law in Texas requires that closing take place in a branch or title company office, so remote signing is not an option,” he says.

E-signatures bring increased interest income as well as potential cost savings, notes CUES member Danny Fuhriman, project manager at $255 million East Idaho Credit Union, Idaho Falls. “If it takes six to ten days to mail documents back and forth and get them all in order, those are days you don’t earn interest,” he notes. “With an electronic process, you fund the loan and start collecting interest on day one.”

“Accepting electronic signatures has allowed us to get some loans that we probably would not have gotten otherwise,” says CUES member Nancy M. Croix-Stroud, CUDE, SCMA, president/CEO of $46 million First Class American Credit Union of Fort Worth, Texas, a single-location CU. “Members love not having to come in.”

Starting this year, e-signatures are used for loan applications, consumer loan closings, changes of conditions to loans, new member account openings, debit card stop-payment orders, change of address orders and some of the CU’s contracts, she reports, but not home equity loans because of Texas restrictions.

East Idaho CU is not using e-signatures yet, but going through the vendor selection process. A leading e-sig vendor looked like the top prospect at first, but then another contender emerged, one that “partners with our lending platform, and we’re now considering using them for loan documents,” Fuhriman reports. The first vendor charges per signature, while the second charges a flat fee for unlimited signatures. Car loans will be included. East Idaho CU is talking with the state department of motor vehicles about just how e-docs and e-sigs will work. Again, mortgages won’t be part of the project.

“That’s another beast altogether,” he notes. “We still need wet signatures on certain documents like the deed and the appraisal.”

As all these success stories suggest, e-signatures have taken off in the past two years, reports Andrea Masterton, marketing director at Silanis, an e-signature vendor based in Montreal.

“Prices are down,” she says. “Legal questions have been answered. The technology has improved and is more accessible than ever. Having it as a software-as-a-service offering means CUs don’t have to install, manage and integrate software.”

While the hard cost savings are significant, the big driver is member experience, she points out. “Mortgages, auto loans, lines of credit and new member applications are all high-value processes,” she notes. Accepting remote, electronic signatures also extends the geographic reach of the CU, she adds.

Current adoption has left vendors feeling bullish. “The legal questions have been pretty well settled,” says John Harris, product manager for SIGNiX. “Now the attention is focused on efficiency, improving the member experience, cutting costs and satisfying compliance.

CUs, across the board, see the benefits and are eager to jump in, he reports. “It’s still leading-edge, but the uptake increases every year.” When it comes to closing a transaction, e-documents with e-signatures are the quicker, surer way to do it, he points out.

However, some CUs are wary of letting technology break the personal bond they have with members and are reluctant to give members a way to avoid coming into a branch, Harris notes.

Smart Strategy?

While it can be quick and cheap to turn on an e-signature product, there may be reasons to implement it as part of a well-thought-out operations strategy. Loan origination system vendors are helping to turn the tide in favor of e-signatures by adding Internet portals and two-way communication with borrowers so CUs no longer have to live with stand-alone websites that are not integrated, notes Michael Croal, senior director at Cornerstone Advisors Inc., a CUES Supplier member and strategic provider based in Scottsdale, Ariz.

Taking advantage of improving technology is the key to creating fully electronic processes instead of picking up pieces like stand-alone e-signature applications, he emphasizes. “Too many CUs are still printing electronic documents on paper at some point and processing and filing paper in familiar ways. To get the full value, you need to go paperless all the way. That’s a big change for many credit unions,” he says.

DocuSign-hosted e-signatures were quick and easy to implement at Four Points FCU, but they do leave some integration issues unresolved, Price admits. “We still print and scan some documents to get them into storage,” he explains. “The real efficiency will come when we can eliminate paper-handling entirely. We’re moving to a solution that feeds the electronic and electronically signed documents right into our storage.”

While Price moved quickly, some CU executives see reasons to take a slower, more gradual approach. E-signatures on loan documents are being deployed more as a tactical tool than a transforming strategy at $625 million (Canadian) Teachers Credit Union in Hamilton, Ontario. It’s only offered currently to remote members as an alternative to the expensive way the CU formerly used a third party to validate and collect signatures for loan documents.

“We needed a quicker, more cost-effective means to close those loans,” says Kathy Clark, VP/sales/service/operations. “We’re currently using electronic signatures just for certain products and only for remote members. We want to move carefully and get all the bugs out.” But so far there have been no bugs, she says.

About 80 percent of eligible documents are still signed with ink and 20 percent electronically, she estimates. “The next step will be to make it available to all members in all our retail locations to allow documentation to be electronically maintained and provide members with electronic copies. We believe the application can be used in the branch to keep the face-to-face experience with members.”

Mortgage Complications

One obvious spot where e-signatures are not a quick solution is the home mortgage loan closing. The obstacles to e-closings are not legal or regulatory, but due to “the complexity of the process and the number of players involved,” Masterton explains. “The lender, the title agent, the closing agent and the county recorder all have to accept e-signatures. E-signing will be introduced by the party that manages the documents and provides the signature capacity—usually the title agent—and all the other parties would have to accept any solution before it could fly.” E-signed mortgage applications are easier to pull off.

It’s already feasible for some credit unions to close home equity lines and second mortgages with e-signatures, Croal says. But first mortgages are still a challenge because recorders in county court houses are just getting to the point where they will record e-signed mortgages, he reports. “Now they are starting to come around.” And some CUs have started to do their own closings, which enables them to keep fees as well as control the process, he adds.

But there’s a bigger reason many CU managers don’t want their mortgage loans e-signed. Statutory law may be clear that an e-signature is the full equivalent of a wet-ink signature, notes CU attorney John H. DeLoach, president of the Williams, Gautier, Gwynn, DeLoach & Sorenson law firm in Tallahassee, Fla. The 2000 federal e-signature legislation and state versions of the Uniform Electronic Transactions Act in nearly all states officially make an e-sig just as ironclad as a traditional signature. But that does not mean that accepting e-sigs on mortgage loan documents is risk-free. In fact it carries significant risk, DeLoach says, which is why virtually no CUs are doing it, in spite of having all the technology in place to make it work.

The problem is that applied law often lags behind statutory law, especially in matters of technology. CUs could run into a lot of hassles when they try to foreclose on a delinquent mortgage that was signed electronically, DeLoach explains.

“If you have to go before an old-school judge in a rural county to enforce a foreclosure on an e-signed mortgage, you could be in for a long fight. Some judges may be reluctant to enforce a foreclosure without a traditional signature. You would likely prevail based on the statutory provisions, perhaps on appeal, but by the time you do so, the cost will probably have outrun the benefit of using e-signatures.”

Mortgages, Too, Shall Come

E-signed mortgages will become standard practice eventually, DeLoach predicts, but right now it’s the “bleeding edge,” and most CUs, painfully aware of foreclosure enforcements, are happy to let the big mortgage factories do the bleeding, he says.

Proponents will tell you that legal issues have been settled and that digital security routines make e-signatures more secure than wet signatures, but that doesn’t make them risk-free. Any CU e-signature program needs to be vetted by risk management, says Jay Isaacson, director of product management in the CU protection division of CUES Supplier member and strategic provider CUNA Mutual Group, Madison, Wis. Remote lending attracts fraud, and e-signatures can be part of an identity theft toolkit.

“When the e-signatures law was passed in 2000, we introduced an Electronic Crime Loan coverage that could involve e-signatures,” Isaacson reports. But it only covers direct (monetary) losses, so funds advanced for a fraudulent loan based on an e-signature might be covered but not areas where there is no direct loss to the credit union like an account opening. Whether a loss is covered would be “fact-specific and determined by our claims department,” he notes.

No bond policy could insure the legitimacy of an e-signature, Isaacson adds. If a person can become a CU member remotely and open accounts with an electronic signature, the CU has a big responsibility to authenticate that new member, he says. Authentication routines are layered, sophisticated and tested, but identity thieves are smart, too, and able to collect a lot of information about whomever they are impersonating.

“Risk management should be involved in any e-signature project,” he says. “It’s important to understand what risk you are taking on and what losses are covered. Run any vendor contracts by your attorney for review,” he advises.

Many e-signatures need to be durable as well as validated. “For a 15-year loan, you need a signature that lasts for at least 15 years,” Harris points out. That requires safe archiving. And it should be generated using industry standards, not proprietary ones, he cautions. “You don’t want signatures that would perish if your vendor does.”

Interestingly, e-sigs are not just for members. CUs can process contracts and other business documents that way as well. One vendor and one application can work for both. “The top ROI comes from moving beyond the initial member-based pilot and using e-signatures across the board,” Harris says.

Dick Gamble is a freelance writer based in Colorado.