A key principle of the modern lending ecosystem is the concept of selling loans. Without this, many originators would run out of capital and be unable to provide new loans. On the investor side, without the creation of new loans, there would not be an opportunity to earn returns.
Earlier this week, the New York Times published As Paperwork Goes Missing, Private Student Loan Debts May Be Wiped Away. The article states, “Judges have already dismissed dozens of lawsuits against former students, essentially wiping out their debt, because documents proving who owns the loans are missing. A review of court records by The New York Times shows that many other collection cases are deeply flawed, with incomplete ownership records and mass-produced documentation.” As a result, more than $5 billion in loans are now at risk.
As the article points out, managing the chain of ownership of loan documents is, and has always been, vital to the integrity of a loan. So, what is the implication? If there is an issue with a document, you may discover the loan to be unenforceable. If there is an issue with a pool of loans valued at hundreds of millions of dollars, you might suffer a financial loss from which a company may not recover.
Digital Benefits: Authenticity, Transparency and Chain of Custody
A random sample of nearly 400 National Collegiate loans found not a single one had assignment paperwork documenting the chain of ownership, according to a report they had prepared. This is a perfect example of how outdated and cumbersome reliance on paper can introduce unintended and unforeseen problems.
Digital originations of loan agreements are more convenient for the borrower, more efficient for the originator, and much better for managing the loan through the secondary market. In a digital world, loan agreements can always be located and the chain of ownership is clear and unambiguous.
It is somewhat foolhardy to continue to originate and manage loans on paper when better digital methods are available. However, to reap the benefits of digital, you need the right digital instance in place, which requires a special blend of process and technology to ensure compliance and legal requirements are met and industry best practices are followed.
Lessons Learned the Hard Way
When it comes to the importance of control, transfer, legality and certainty, investor Marc Rouda recently noted, “These principles are critically important, especially as it relates to digitally-signed loans. Is the Note being assigned the authoritative original? Does the seller have rights, title and interest to the loans and the ability to transfer? Is there a process in place to properly transfer the loan? We want to be certain that every loan is properly assigned to us and that we can represent to any outside party, such as one of our creditors, that the loan is in our possession (our eVault) so that we can enforce the terms of the loan.”
eOriginal is a pioneer in the digital transaction space, and continues to be the gold-standard. For example, after the 2008 financial crisis, many companies—regardless of asset type—turned to eOriginal to ensure they would not lose control of their vital assets again.
As a result, many investors now require lenders to use a full end-to-end DTM system to improve transparency and tamper proofing. The current student loan ownership confusion would not exist in processes utilizing eOriginal’s digital transaction management platform to ensure the chain of custody.
If you have learned from the mistakes of others and are ready to make the leap to digital, we can help. Please schedule a meeting with a digital expert to get started.