E-Lending May Get Boost

Standard & Poor's offered guidance on e-contracts in the auto world that led to heightened e-adoption. Now S&P is considering passing similar judgment on mortgages.

"People will be looking for a more clear understanding of e- mortgages going forward," said Stephen Bisbee, president and CEO at eOriginal. "Redefining the e-mortgage as something you build vs. something you have is important.

"We work in the auto and lease world as well as mortgages and it has gone smoothly there. In those areas they look to the ratings agencies. The key issue for the rating agencies is that they need for there to be no difference between an e-instrument and a paper- debt instrument. Right now the current investors are comfortable with the legal opinions they've received. The rating agencies are willing to look at it, too, but you have to bring it to them.

"There are lenders working with the ratings agencies today. S&P issued a directive saying they'd view paper docs the same as e-docs in the auto space as long as they bring those e-docs to them for review. The concern is that you have the authoritative document, that it hasn't been altered and that you own it. All of these concerns have been met and are being executed on today."

In fact, auto lenders like Nissan Motor Acceptance Corp. here have seen e-contracting move to 30% of their volume in under three years and predict it will reach 50% by this October. "We were one of the pioneers that had to get the rating agencies comfortable," said Jeff Edwards, vice president of operations at Nissan. "Case law is established that an e-signature is entirely acceptable. We also started off with a lower percentage of the overall pool with e- signatures. As we validated and proved our e-vault and e- certification, to prove to S&P that we couldn't manipulate the actual document, this started to take off. Now we do 30% electronic today."

Mr. Edwards pointed to several efficiencies brought about by this e-method as their rationale for adopting this e-strategy. "We do this because it makes life easier for me. I'm looking for a more efficient way to do business. Prior, a dealer would fax a credit application to me and typically four other lenders got the same fax. Part of the process was who could deliver a decision faster. So, we did the data entry and got them a decision as quickly as possible, but with an e-world the dealer does the data entry for us and we can give a decision in eight seconds."

Compliance and turn time also factored into the decision. "To me, 14% of the time a credit report has to be fixed and 20% of the time there's an issue in a leasing case. So, I'm after fixing that 14% electronically in seconds. We'll never fix 100% of the errors but we'll get close," said Mr. Edwards.

"Also, dealerships have to have an agent sign the document as well as the borrower, and if they don't I can't fund that loan. However, in an e-setting, the agent is alerted to e-sign or the loan won't move on. This has increased our penetration as well because 46% to 47% of people who buy end up financing through us. The motivation for the dealer to finance with us is about cash flow and making it work for the borrower instead of waiting for the physical loan to arrive.

Why has the auto sector moved faster? "We have two dozen lenders live executing e-contracts in auto," pointed out Mr. Bisbee. "There's a transfer at closing from the dealer to the financer of choice. We've worked with the ratings agencies and legal counsel to ensure that these securities are viable. Any contract has seven to 11 signatures and several ancillary documents involved. The mortgage industry can look to their partners in the auto space. It's about getting people used to a better and slightly different process.

"At the core, auto lending is a simpler transaction. There aren't as many parties or documents, but as long as it's legal and standardized it gives everyone a framework. Also, once a dealer adopts an e-process as their default process the banks embrace better system integration and education. Once there's a lift at a dealership, banks get onboard and you have pockets of adoption. Today, 50% to 70% of some dealerships' volume is electronic. It's a grassroots movement."

"Regardless, car dealerships are traditional thinkers and are not big on changing," noted Mr. Edwards. "Nonetheless, I have some dealers doing 100% of their deals with us electronically. The more this becomes a standard process, the easier it will be for me to get dealers to do business with me."

And Mr. Bisbee sees the beginnings of this same trend now happening in the mortgage sector with both S&P and overall lender interest. "We began working on e-mortgages back in 1995. We wanted to get to e-mortgages by 2000 in a pre-Internet world. We worked with Fannie Mae and did the first e-mortgage in Broward County, Fla. After we executed these fully e-mortgages, the industry started to push standards and MISMO was formed. Beyond MISMO we saw the creation of MERS.

"The process of mainstream e-mortgage adoption in the mortgage space is beginning in 2007 as both vendors and lenders are actively looking to see what works and what will be accepted. When you see large lenders stepping out, you'll see them and others look to gain or maintain market share with e-mortgages. It's not just about return on investment anymore."