Meister Seelig & Fein LLP
Author, Real Estate Financing
Retail Bank Branches Are Vanishing & Online Banking Is Growing
The number of U.S. bank branches dropped 8% (from 97,000 to 89,300) over the last 10 years, and is expected to drop even more steeply by 20% (to 71,500) over the next 10 years. Similarly, the typical bank branch is expected to decrease from 5,000 square feet to 3,000 square feet or smaller over the next decade.
This is not because of any inherent weakness in the banking industry, since, for example, bank deposits increased, from 2007 to 2016, by about 70%, to $11.3 trillion. Instead, technological innovations have radically improved the efficiency of banking transactions. For example, although it generally costs a bank about $8 for a customer to make a deposit with a teller at a bank branch, it costs only 80 cents for a customer to make a deposit at an ATM, and only 8 cents when a customer makes a deposit using a mobile phone, as more and more consumers do. From the customer’s point of view, this does have some downsides, such as the downgrading, and even disappearance in some rural areas, of the local community banker.
Impact of AI on Credit Underwriting
What further banking innovations are possible? MyBucks uses artificial intelligence (“AI”) to help calculate credit scores and make loan decisions, and it offers 15-minute, AI-based loans through WhatsApp and Facebook Messenger. When a potential borrower downloads the MyBucks’ Haraka app, the app then checks the borrower’s phone for data, such as texts, call logs and location data. MyBucks also compares the borrower’s social media feed against the information in the borrower’s mobile wallet. MyBucks made around 200,000 Haraka loans in 2017.
BankMobile, a U.S. bank, will use Upstart’s online lending software, which uses AI to assess the creditworthiness of millennials and other consumers with little to no credit history. Upstart has received a no-action letter from the CFPB for such software, which uses education data. Critics have argued that a lender’s reliance on education data may discriminate against disadvantaged borrowers that lack a college education or high school diploma.
When Will Closings Finally Be Paperless?
Consumer borrowers who participated in an eClosing pilot conducted by the CFPB “generally reported higher measures of understanding the process, increased efficiency, and a higher perception of being ‘in control’ of their closing experience, compared to borrowers who closed on their home loan just using paper disclosures.” However, lenders have found the use of eNotes and other electronic documents, and eNotarizations, to be more complicated and burdensome than the traditional use of paper documents. Therefore, there are still relatively few eClosings. In addition, the sale of eNotes and other electronic documents is difficult, even with respect to loans purchased by Fannie Mae and Freddie Mac, which have been pioneers in this area. In the case of commercial loans, paper documents are still used for most loans.
According to the CFPB, “A commonly stated obstacle to wider adoption of eClosing had been that many counties in the U.S. did not allow electronic recording (eRecording) of mortgage documents . . . . Encouragingly, almost 80 percent of the American population now lives in counties that allow eRecording.”
In 2017, Fannie Mae agreed that if any loans are secured by mortgages that have been recorded electronically and that comply with all applicable requirements under the E-SIGN and UETA laws, then any sellers and servicers – if approved by Fannie Mae to deliver such loans – may retain the mortgages and notes relating to such loans solely in electronic format, and are not required to retain paper counterparts thereof. The servicer must use an electronic note (eNote) vault that meets certain requirements. In 2017, Fannie Mae also clarified that if the electronic notarization is a remote notarization, additional requirements must be met. Freddie Mac has also authorized the use of electronic mortgage loan documents and has removed the requirement for storage of paper counterparts.
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