Patchwork of state laws hurts U.S. effort to modernize mortgages

NEW YORK (Reuters) - As Chuck DeBonis was wrapping up his stint as a civilian paramedic at a military base in Kuwait earlier this year, he found a home he wanted to buy in the Virginia town of Bristow for his return.

A "For Sale" sign is seen outside a home in Cardiff, California February 22, 2016. REUTERS/Mike Blake

The problem? His mortgage lender wanted him to sign paperwork, in person, in front of a notary public. So the 30-year-old flew 6,500 miles to sign on the dotted line.

“It was ridiculous and unnecessary,” DeBonis said in recounting his 14-hour trip.

His problem may be unusual in its scope, but it is one that millions of U.S. homeowners and buyers face every day – and one some U.S. lenders and state lawmakers are now trying to solve.

As it stands, nothing is official in mortgage documents until there’s a face-to-face meeting with a notary public, a person who verifies borrowers’ identities.

Lenders have long recognized notarization as a critical anti-fraud measure. But the practice – which dates back at least to Ancient Rome – is becoming passé in an era of FaceTime, Skype and live-streamed social media.

The financial industry is pressing for change in the form of “remote notarization.” The service, available through companies like Notarize Inc and NotaryCam Inc, uses secure webcams to link borrowers and notary publics. Before their virtual meeting, borrowers must answer random questions from their credit histories to prove who they are.

But adoption has been limited because a patchwork of laws in most states does not allow for the practice, and city and county governments are slow to change. Investors who buy the loans also impose restrictions, such as requiring original signatures to avoid fraud.

Some big players in the mortgage industry want to bring notarization into the 21st Century.

Quicken Loans Inc, the nation’s third-largest mortgage lender, is one of the biggest advocates for digital notarization because face-to-face meetings clash with its online business model. For USAA, which lends to U.S. military, remote notarization could help customers who move frequently, the company said.

Government-backed mortgage companies Fannie Mae and Freddie Mac are also supporting remote notarization because they say it has better safeguards against fraud, among other things.

Broadly speaking, webcam notarizations could cut expenses for lenders, notaries and borrowers. Even without webcam notaries, signing the documents electronically can save the industry on average up to $1,100 per mortgage, according to Fannie Mae.

But as it stands, more than half of the 3,600 local clerk offices across the U.S. only accept paper copies, according to the Property Records Industry Association. Many counties go a step further in requiring original ink signatures.

Although the vast majority of state laws allow for some form of electronic real-estate documentation, only two states – Virginia and Montana – expressly approve remote notarization.

Some counties, especially smaller ones, do not have the budget to install software capable of processing electronic real estate documents. For others, it’s more of a “cultural shift that’s required,” said Timothy Reiniger, who heads the digital services group for Richmond, Virginia-based FutureLaw, LLC, a law firm and consultancy.

The National Association of Secretaries of State held a conference in July that featured panels about remote notarization, and many state notary administrators were in attendance. While some were receptive to the idea, others challenged speakers on everything from fraud to whether video recording of a notary signing could be hacked.

Some administrators, sitting around tables arranged in a horseshoe, debated with a Quicken Loans speaker about if notaries would know whether a webcam signer was being held at gunpoint.

Reininger, who researched the issue while helping to draft Virginia’s legislation, could not find a case in U.S. history in which a notarized document was voided because the signer was held at gunpoint.

“It’s a red herring argument,” he said in an interview.

Another challenge for webcam notarization is storing documents and videos made of each signing, exposing them to possible cyber theft. Advocates contend that cloud-based storage is plentiful and point to the security of everyday electronic banking transactions to bolster their case.


Virginia’s webcam notaries are valid in the U.S., even if the person signing is anywhere in the world, but Montana’s law is more restrictive. In real estate, it applies only to transactions that involve Montana property, and the notary or a “credible witness” must know the signer who typically must be a Montana resident. States including Maryland and Texas are also considering the technology.

Even without a nationwide legal infrastructure, some pockets of the financial industry are charging ahead.

Quicken Loans is hoping to launch a webcam notarization pilot with Fannie Mae and Freddie Mac. Several webcam notary companies told Reuters they are testing their services with lenders, but declined to name them.

In September, the Mortgage Bankers Association will host a meeting in Washington for some of its members to discuss the technology, a spokesman for the industry group said.

Fannie and Freddie gave the concept a big boost by voicing support in a June letter to the National Association of Secretaries of State. The two companies stand behind roughly 90 percent of new mortgages issued in the United States. They buy webcam notarized loans, but in very limited instances.

Some mortgage closings are already partly electronic because documents are signed on an iPad, but with a notary present.

Webcam notary companies say their technology could slice $60 to $100 in expenses from each transaction, mainly related to printing expenses and travel.

Even so, most banks have not warmed up to the idea because of a jumble of requirements for recording and selling loans to investors, said Bob Davis, executive vice president for the American Bankers Association. Until more states adopt laws that explicitly allow for digital notarization, the process is stuck in something of a time warp.

DeBonis, the paramedic, ultimately made two trips between Kuwait and Virginia to close on the home he now owns because of his lender’s intransigence – even in a state where web notarization is formally authorized. His only other choice was trekking to a notary at the U.S. embassy in Kuwait, whose wait list stretched out for at least a week, he said.

“It bothers me,” said DeBonis, “how a lot of businesses can’t keep up with technology.”

Editing by Lauren Tara LaCapra, Carmel Crimmins and Edward Tobin