Virtual notary adoption surges as businesses rush to close transactions remotely
E-closings offer advantages to notaries, borrowers and lenders.
September 15, 2020, 6:15 pm By Mary Ann Azevedo
This article was written for FinLedger, HW Media’s new fintech focused news brand designed specifically for financial services professionals in banking, payments, insurance and proptech. Register for the FinLedger Daily Newsletter.
The virtual notary services industry has become increasingly popular amid the COVID-19 pandemic as businesses have adopted remote signatures to adhere to social distancing protocols while closing on mortgages and other loans.
Dealmaking in the virtual notary services space rose despite the pandemic. In July, DocuSign acquired Austin-based startup Liveoak Technologies for $38 million in an all-stock transaction. Digital notary platform Notarize also closed on a $35 million Series C round of funding in March, raising a total of $82 million with investments from real-estate focused venture capital firm Camber Creek, Boston-based Polaris Partners, and other existing strategic investors.
Companies like Liveoak, which has financial institutions as customers, utilize web-based videoconferencing, identity verification and other tools to complete an auditable transaction remotely. These remote online notarizations (RONs) avoid the traditional in-person contact. Notaries are being hired by these companies, but their work is conducted solely online.
Consumer loans such as mortgages and other financial documents require notarization. Remote online notarization allows the notary act to be performed remotely and contactlessly instead of in-person. Digital adoption has been hampered by state laws since a federal law that outlines practices for remote online notarizations does not exist. The laws related to virtual notary services are passed by individual state legislatures.
Virginia became the first state to authorize remote notarization via live audio-video technology in 2011 with the passage of House Bill 2318/Senate Bill 827. There are 27 states that have enacted a form of a RON law, including Alaska, Arizona, Colorado, Florida, Idaho, Indiana, Iowa, Kentucky, Louisiana, Maryland, Michigan, Minnesota, Montana, Nebraska, Nevada, North Dakota, Ohio, Oklahoma, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington and Wisconsin, according to a report written by law firm DLA Piper.
Remote online notarizations are digital experiences that mirror the traditional notarial act, said Pat Kinsel, CEO of Notarize, a Boston-based notary public platform. A signer such as a customer closing on a loan appears before a notary on a video call and they complete, sign and notarize the document, he said. Each video session is recorded and retained along with an audit trail of the transaction.
“Signers only connect with a notary after completing several additional security measures, including personal identity challenge questions and credential analysis of their government-issued identification,” Kinsel said.
Electronic closings supported by remote online notarization (RON) offer advantages to notaries, borrowers and lenders. The notary’s traditional “stare and compare” of the ID is further supported by credential analysis and knowledge-based authentication (KBA), reducing the risk of fraud or errors, said Camelia Martin, managing director, digital mortgage advisory with Falcon Capital Advisors, a Washington, D.C. business advisory firm in real estate, mortgage finance, digital mortgage, banking and capital markets.
“Borrowers can complete the closing from the comfort and safety of their own homes,” she said. “If the transaction is ever challenged, the lender has the ability to access an audit trail and an audio-video recording of the online notarization session.”
Since March, Notarize said its business rose exponentially – by over 500% – since the COVID-19 pandemic forced businesses and consumers to rely on remote, digital notarizations to complete critical transactions, including commercial agreements, retirement withdrawals, healthcare proxies, home closings and refinancings.
“The pandemic has fast-tracked market acceptance and business operations for Notarize and RON as a category,” Kinsel said.
Demand for Notarize’s platform rose the most for real estate transactions with over $7 billion ordered in June 2020 alone, as consumers sought to complete closings, refinance and take advantage of historically low interest rates.
“At the current rate, Notarize is on pace to close $100 billion in volume on the platform,” he told FinLedger.
Notarize opened its platform to independent notaries and title agents in 13 states since March and also hired thousands of notaries in Florida, Texas, Virginia and Nevada. The notaries worked from home and, a platform that accepts money and pays out to third parties.
A growing number of industries are turning towards utilizing virtual notary services to go fully digital. Notarize said it is now working with the top 10 U.S. insurance companies, including home and auto providers. The company also accelerated the rollout of its Ellie Mae Encompass partnership and integration “so mortgage lenders may offer online closings with minimal setup.” The company expanded the market for mortgage lenders since Fannie Mae and Freddie Mac permanently eliminated the waiver requirements for lenders to perform RON mortgage closings.
Notarize also signed dozens of partnerships in various industries, including J. D. Power & Associates in auto to conduct fully-digital car sales. Trust & Will uses the company’s software to execute wills entirely online while homebuilder Lennar uses it for mortgage closings (a strategic investor in Notarize, participating in its $20M Series B round in 2018.)
The software of companies such as Notarize is secure from cybersecurity criminals and other forms of tampering.
Notarize said its application development team built bank-grade, highly secure software systems. The data is transmitted and stored using industry-best data security practices.
“All user communications are encrypted and all data such as documents are protected using industry-specified encryption protocols such as AES-256,” Kinsel said. “All application accesses are also tracked using an audit trail. Notarize’s security policies and systems are audited and tested on a regular basis.”
The notary uses a special x.509 digital certificate. Once the notary’s digital certificate is applied to a document, it creates what’s called a digital “hash,” which is essentially a hidden record of all the bits and bytes comprising the document. If any component of the document is later changed, no matter how small, the document will show that it has been changed (or “tampered with”) after the digital signature was applied.
This enables all users to confirm that they are looking at the original document as originally signed and notarized, according to the company.
Notarize also stores a digital record of every notarization in a password-enabled “verification portal” where the customer and any legally authorized recipient can access a digital copy of the original notarized document along with key transactional information about the notarization itself. It also stores the video of the notarization session, showing both the notary and the signer as the document is notarized, in an effort to deter fraud and provide a secure record of the entire transaction.
More than convenience
Conducting transactions remotely and contactlessly is more than a convenience, said Brian Madocks, CEO of eOriginal, a Baltimore, Maryland-based digital loan processor. Vendors must conduct both data and asset protection. Data protection ensures confidentiality and privacy of data while asset protection ensures the “integrity of an asset, that it is tamper-proof,” he said.
The transactions, such as a mortgage closing, need to be performed where it produces a valid, tamper-proof digital record. This transaction needs to be recorded to provide evidence that it occurred and all elements of the transaction need to be securely stored as proof that the transaction was properly executed, Madocks said.
The use of virtual notary services has accelerated since the onset of the pandemic, he said.
“Borrowers and loan officers want and need remote capability to maintain social distancing and continue to transact business,” Madocks said.
While digital adoption accelerated prior to the pandemic, in the aftermath of March, adoption by SBA lenders grew to fulfill the demand for Paycheck Protection Program loans.
The rise grew in other businesses such as the mortgage, auto and consumer loan industries.
“The requirements for remote and contactless solutions are no longer about convenience,” he said. “It’s about changing the way we will conduct business in the Covid and post-Covid new normal.”
Lenders and investors are still looking to strike the right balance between compliance and scalability with RON, Martin said.
“The market still has a lot of work to do to reach the holy grail of a full, paperless remote eClosing,” she said. “We need much more than RON to get there.”
Lenders need the capability to generate an electronic promissory note (eNote) and an eVault to store and manage copies of eNotes.
“Today lenders are shopping for services and implementing processes that the industry does not have a lot of experience with,” Martin said. “A large part of the work we do at Falcon is helping lenders evaluate and implement the right digital mortgage technology providers. At the same time, we also help lenders establish the compliance infrastructure needed to ensure that they have adequate oversight and controls over their eClosing processes.”