For a growing number of financial institutions, mortgage lending, auto financing, and other loans follow an increasingly digitized process. Yet many lenders continue to rely on technology products not designed for digitized lending.
Generic cloud-storage offerings, in particular, aren’t intended to meet the legal, regulatory and security requirements of an end-to-end digitized workflow. The result?
Unacceptable risk, noncompliant process steps and unsatisfactory customer experiences.
eOriginal’s founder, Steve Bisbee, and Dave Campbell, Director, Digital Lending Technology, at Wolters Kluwer, share their insights into the limitations of generic cloud storage – and the power of a purpose-built digital lending solution.
Q: Many banks rely on cloud-storage services such as DropboxTM, BoxTM, and Microsoft OneDrive®. Are there legal, compliance or security shortcomings of generic cloud storage for digitized lending?
Steve: Digitized lending transactions need to be secure, transparent, auditable and compliant with relevant laws and regulations. Important aspects of a digitized loan are storage and maintenance.
Various regulatory bodies, from the Federal Reserve to the Small Business Administration, specify the rules for how loan documents are maintained. Financial institutions need to be able to demonstrate that loan documents were created with the consent of both parties, that they weren’t modified without a record of that modification, and that they’re auditable throughout their lifecycle.
Generic cloud-based storage services aren’t designed to store digitized loan documents in this way. They can allow people to share documents with version control, but that’s not the same as auditability. And it doesn’t capture all the information you need to maintain a negotiable and enforceable financial instrument.
Dave: Cloud-storage offerings encrypt documents, so they protect confidentiality. But a digitized loan isn’t just a document. It’s also a financial asset that has underlying real value. And to be compliant and legally enforceable, it requires a lot more than just protection against data leakage.
Q: Why is regulatory compliance so crucial to digitized loans?
Steve: Key pieces of legislation – such as the Uniform Commercial Code Section 9-105 (UCC 9-105), the Uniform Electronic Transactions Act (UETA), and the Electronic Signatures in Global and National Commerce Act (ESIGN) – establish rules for recognizing electronic records on an equal basis with paper records. For digitized loans to be enforceable and negotiable, they need to comply with these laws.
Regulatory compliance is particularly important if a bank wants to originate loans that can be bought and sold by third parties. Those loans need to be unique and identifiable negotiable instruments, and for that you need a system that provides an auditable chain of control and custody. That capability gives you a “Digital Original™” – the single, authoritative copy, with all the legal rights of a paper contract.
Q: Why is the data security offered by cloud-storage services necessary but not sufficient? Why is digital asset protection about more than just confidentiality?
Dave: Cloud-storage services have shortcomings when it comes to storing digitized loan documents. To start with, loan documents need to be more than just encrypted, they must also be tamper-sealed.
If a bank wants to sell a loan asset into the secondary market, it must be able to demonstrate that a loan document saying it represents a property valued at $500,000 actually does so.
Tamper-sealing ensures all actions against the document have been digitally recorded, and there were no changes made to it from the time it was signed until it was sold.
There are other issues with cloud storage. Cloud-storage providers don’t store my organization’s data in one place and your organization’s data in another place. My data is stored right alongside your – and everyone else’s – data. And in cases where records get exposed, it’s potentially hundreds of organizations’ records. So, for loan documents, financial institutions need the assurance that their data is stored separately.
In addition, cloud storage services allow for data synchronization across devices, from smartphones and tablets to laptops and desktops. And anytime the data is modified or deleted on one device, it gets modified or deleted across devices. If the data is deleted in error, it’s very difficult to undo that.
Q: What is “Digital Asset Certainty”?
Steve: Digital Asset Certainty is a concept enabled only by eOriginal solutions. It provides the assurance that your digital loans are compliant and meet all legal requirements and industry best practices. Digital Asset Certainty gives you an auditable, tamper-proof digital chain of custody for your digitally originated loans, plus the legal standing that shows these loans comply with all applicable laws.
So, you have a Digital Original that guarantees the asset is the authentic, authoritative copy. And as that Digital Original moves through the lending ecosystem, an immutable, evidentiary trail of ownership is captured, with each participant’s involvement serving as a record of the loan’s history.
Q: Why is it necessary for financial institutions to use a purpose-built solution for digitized lending?
Steve: Cloud-storage services are designed simply to store documents. Even if they do that securely, they’re not intended to meet the regulatory and legal requirements of digitized loans. For example, they don’t meet the UCC 9-105 Safe Harbor criteria, which includes ensuring an authoritative copy, assignee identification, secured party modification, copy identification and so on. Only a digital solution specifically designed to support the end-to-end loan process, from origination to sale into the secondary market, can do that.
It’s crucial for financial institutions to recognize the distinction. Because as digital transactions become the norm rather than the exception, we’re seeing some bank executives take compliance for granted. They just assume that if cloud storage is secure, it’s also compliant. But they need to realize that only a purpose-built solution can mitigate against compliance risks.
Dave: Cloud storage provides data encryption, and that prevents unauthorized users from seeing the data. But for a digitized loan document, that’s only one aspect of asset management. Again, you also must be able to demonstrate that the document hasn’t changed – or if it has changed, that the modification was authorized by the secured party or owner. You have to show who changed it, when it was changed and how it was changed. It needs to be tamper-sealed, and it needs to be recorded in an audit trail that itself is tamper-sealed.
Q: How does a purpose-built solution ensure Digital Asset Certainty, regulatory compliance and security through every phase of the loan lifecycle?
Steve: Many financial institutions don’t hold the loans they originate. Instead, they immediately package them up and securitize them. A single, purpose-built platform enables you to manage the process from end to end, from origination to sale into the secondary market.
And keep in mind that investors don’t buy a single auto loan, but an aggregation of 20,000 or 50,000 auto loans. So, you need a way to ensure that all those loans were originated, aggregated, and transferred as a bundle with a single element of control. And you can’t do that through a cloud-storage service: you need a solution expressly designed for that purpose.
In fact, a purpose-built solution becomes the foundation of your digitized lending. Some financial institutions assume they can digitize progressively and put off worrying about compliance and security until after they’ve mastered digital. But compliance and security are actually enablers. If you invest in a purpose-built platform at the beginning of your digital journey, you have the compliance and security that enable your digitization strategy.
Finally, leveraging a purpose-built digital lending solution delivers benefits beyond just compliance and security. For one thing, it gives risk officers a consolidated view of their assets in a single eVault, without the need to look at different assets in different places.
But more than that, it allows borrowers and every other stakeholder in the loan process to benefit from digitization. It provides capabilities that enable secure and compliant digitized loans, and delivers customer experiences that enable financial institutions to differentiate themselves in the marketplace and grow their business.
For a discussion on how an eOriginal purpose-built digital lending solution can benefit your business, schedule a meeting with one of our product experts here.
Steve Bisbee is founder of eOriginal and Senior Advisor Applied Technologies at Wolters Kluwer. He is a pioneer in both the technology and regulatory considerations of digital lending, and is widely regarded as one of the most authoritative voices in the field.
Dave Campbell is Director, Digital Lending Technology at Wolters Kluwer, responsible for all eOriginal technology solutions.