On January 30, 2014, the U.S. Department of Housing and Urban Development (“HUD”) issued Mortgage Letter (“ML”) 2014-03, Electronic Signatures, announcing that the Fair Housing Administration (“FHA”) will begin accepting electronic signatures, in lieu of handwritten signatures, on documents associated with mortgage loans. FHA will begin accepting electronic signatures immediately, provided that the mortgagee complies with the standards provided in ML 2014-03.
Prior to the issuance of ML 2014-03, FHA only allowed electronic signatures on third party documents for forward mortgages pursuant to ML 2010-14, Electronic Signatures on Third Party Documents. ML 2014-03 now authorizes the use of electronic signatures on the following documents:
- Mortgage Insurance Endorsement Documents: Electronic signatures will be accepted on all documents requiring signatures included in the case binder for mortgage insurance except for the Note. Beginning December 31, 2014, FHA will accept electronic signatures on the Note for forward mortgages only. FHA will not accept electronic signatures on Home Equity Conversion Mortgage notes.
- Servicing and Loss Mitigation Documentation: Electronic signatures will be accepted on any documents associated with servicing or loss mitigation services for FHA-insured mortgages.
- FHA Insurance Claim Documentation: Electronic signatures will be accepted on any documents associated with the filing of a claim for FHA insurance benefits, including the Form HUD-27011, Single Family Application for Insurance Benefits.
- HUD Real Estate Owned Documents: Electronic signatures will be accepted on the HUD REO Sales Contract and related addenda.
Under the new policy, lenders are required to comply with the Electronic Signatures in Global and National Commerce Act (“ESIGN”). In addition, lenders opting to accept electronic signatures must adopt specific technological and operational capabilities in order to comply with requirements of ML 2014-03. These requirements include: certain technology and controls to ensure that the signer certified that the document is true, accurate, and correct; record retention controls consistent with the retention policies required of ink signature-documents; and authentication mechanisms to confirm an individual’s identity as a party in a transaction.
The progressive policy change is expected to reduce mortgage origination costs and streamline document submission processes for both borrowers and lenders. FHA Commissioner Carol Galante stated, “by extending our acceptance of electronic signatures on the majority of single family documents, we are bringing our requirements into alignment with common industry practices. This extension will not only make it easier for lenders to work with FHA, it also allows for greater efficiency in the home-buying and loss mitigation process.”
The timing of FHA’s acceptance of electronic signatures closely precedes the implementation of the Consumer Financial Protection Bureau’s (the “CFPB”) Know Before You Owe mortgage forms, set for August 1, 2015. In addition to reducing origination costs and streamlining the documentation processes for applying for and receiving a loan, in consideration of the CFPB’s increased enforcement efforts, the acceptance of electronic signatures will provide an invaluable mechanism for lenders to evidence compliance with the Loan Estimate form timing requirements (three business days after submission of an application) and Closing Disclosure form timing requirements (three days before closing). Accordingly, it is recommended that financial institutions and lenders review their technological and operational capabilities and contemplate how best to implement FHA’s new electronic signature policy.