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MARGO H.K. TANK
RACHAEL A. SOKOLOWSKI
JUNE 1, 2010
Understanding the Rules forE-Mortgages and E-Disclosures
What We’ll Cover Today
Why go Electronic?
Legal Framework
eMortgage Framework
Implementation Considerations
Resources
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Why Go Electronic?
The goal – soup to nuts paperless transactions
Why?Consumer Accessibility –
24x7 Access
Improved convenience for loan information and document review. (Borrowers may search for loan terms which meet their needs without being exposed to high pressure tactics)
No need to spend time traveling to physical locations
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Why Go Electronic?
Better access to education and informationTime and resources for a thoughtful, informed decision
Streaming video and other multimedia presentations can be used to enhance required disclosures and notices
Better quality controlAccess and presentation of documents and information can be more carefully controlled than in a paper environment
Systems can be designed to require presentation of information in particular orders and structures, with automated methods for detecting errors, unauthorized changes and inconsistencies
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Why Go Electronic?
Enhanced transaction speedSatisfying customer needs and expectations
Time value of money – Faster recovery of expenses, and shorter time frames to payment, decrease borrowing costs and improve cash flow.
Reduced costUp front savings – Reductions in document processing costs and the automation of manual processes
Back-end savings – Reduced custodial and quality control expenses
Environmentally Friendly
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eCommerce in Mortgage Banking Today
Loan Applications
Initial Disclosures
eClosing (fully electronic or hybrid)
eVaults/Document Custodians
Secondary Market Sales
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Adoption Issues & Challenges
Not all county recorders are electronic
Security & Privacy
Legal Complexity
Lack of Integrated, Seamless Solutions
Lack of Internal Priority (or clear ROI)
Education
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ESIGN and UETA
Enforceability of electronic transactions are primarily governed by ESIGN and UETA.
Overlay statutes
Federal baseline
UETA adopted in 49 jurisdictions
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ESIGN and UETA
ESIGN and UETA address uncertainties related to meeting:
Writing requirements (paper notices and disclosures),
Signature requirements, and
Original requirements.
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General Rule of Validity – ESIGN and UETA
The general rule of validity is that a signature, contract, or other record related to any transaction in or affecting interstate or foreign commerce may not be denied legal effect, validity, or enforceability solely because it is in electronic form.
The admissibility of an electronic record cannot be denied solely because it is in electronic form.
ESIGN and UETA only affect laws imposing writing or signing requirements and do not affect:
Substantive protections of any law, including consumer protection laws; or
The content, timing or format of disclosures required by law.
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Which Law Applies
It is likely that both ESIGN and UETA will apply to the transaction.
ESIGN allows state to modify, limit or supercedeESIGN:
By adopting the official version of UETA or
By adopting a state alternative that is consistent with ESIGN.
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Electronic Signatures: The Legal Definition
ESIGN and UETA give legal force and effect to electronic signatures. The law defines an electronic signature as:
An electronic sound, symbol or process(e.g., typed names, PIN, Password, a click, a digitized picture of handwritten signature, or a digital signature)
Attached or logically associated with a contract or other record, and
Executed or adopted by a person with the intent to sign the record.
- Create a signing ceremony
- Place specific disclosures right before signature capture (e.g., by clicking “I agree” I am indicating my intent to be bound to terms and conditions . . . )
- Get a confirmation of agreement
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Purpose/Intent/Authentication
ESIGN and UETA answer the question of “Is it a signature?”
ESIGN and UETA do not answer the questions:
“Why was the signature created?” (Purpose)
“Did the signer want to create and signature?” (Intent)
“Whose signature is it anyway?” ( Authentication)
The recipient – not the signer – bears the burden of proof
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Implementing Electronic Records and Signatures: Consent
Consent required
Both UETA and ESIGN are “opt-in” statutes
For business-to-business transactions, and consumer transactions under UETA, consent may be
ExpressInferred from the circumstance
For consumer transactions under ESIGN, consent must be express in most circumstances
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Consent to the Delivery of Electronic Records to the Consumers
3 Step Process:
Disclosures
Assent
Reasonable Demonstration
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ESIGN Consumer Consent Disclosures
Prior to obtaining a consumer’s consent, the electronic record provider must deliver a clear and conspicuous statement informing the consumer of:
Any right or option of the consumer to have the record provided or made available in paper form;The right of the consumer to withdraw consent and any conditions or consequences (which may include termination of the parties’ relationship) of such a withdraw;Whether the consent applies (i) only to the particular transactions which give rise to the obligation to provide the record, or (ii) to all identified categories of records that may be provided during the course of the parties’ relationship;The procedures the consumer must use to withdraw consent and to update information needed to contact the consumer;How the consumer may after consenting, upon request, obtain a paper copy of the electronic record and whether any fee will be charged for such a copy; andThe hardware and software requirements for access to and retention of the electronic records.
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Consent to the Delivery of Electronic Records to the Consumers: Reasonable Demonstration
The consumer must consent electronically,
By reasonably demonstrating that the consumer
(e.g., self-reporting, HTML, Test PDF)
Can access the information on the electronic formthat will be used to provide the information that is the subject of the consent.
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Electronic Record
ESIGN and UETA define an electronic record as:
Information that is inscribed on a tangible medium, or that is stored in an electronic or other medium and is retrievable in perceivable form (UETA and ESIGN)
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Electronic Retention of Records: ESIGN and UETA
ESIGN and UETA allow copies of contracts and state and federal disclosures to be retained electronically so long as the contract or other record:
Accurately reflects the information set forth in the contract or other record;
Remains accessible to all persons who are entitled to access by statute, regulation, or rule of law, for the period required by such statute, regulation, or rule of law in a form that is capable of being accurately reproduced for later reference, whether by transmission, printing, or otherwise
Electronic records meeting this test can satisfy “original”requirements
Consequences for failure to retain appropriatelyImpaired enforceability
May not satisfy regulatory writing, delivery or signing requirements
May not be admissible in court
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Record Retention – Challenges
Proof of document integrity
Identification to original transaction
Freedom from alteration
Document authenticity (letterhead, logos, other indicia of reliability)
Courts will focus on systemic protections
Division of labor
Use of encryption
Activity logs
Other record control issues
Physical protection (offsite back up)
Protection from fraud/tampering (employee background checks)
Retention over time (media deterioration, migration of data over time)
Transferable Records
Transferable Record (15 U.S.C. § 7021(a); UETA § 16(a))Would be a note under UCC 3 if on paper
Issuer expressly agrees is a transferable record
Related to a loan secured by real property (ESIGN only)
Possession Control (15 U.S.C. § 7021(b)-(f); UETA §16(b)-(f))
Control: “a person has control of a transferable record if a system employed for evidencing the transfer of interests in the transferable record reliably establishes that person as the person to which the transferable record was issued or transferred”
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Safe Harbor for Control
6 part test:
A single authoritative copy of the transferable record exists which is unique, identifiable and except as otherwise provided in paragraphs 4, 5, and 6, unalterable;The authoritative copy identifies the person asserting control as
The person to which the transferable record was issued; orIf the authoritative copy indicates that the transferable record has been transferred, the person to which the transferable record was most recently transferred;
The authoritative copy is communicated to and maintained by the person asserting control or its designated custodian;Copies or revisions that add or change an identified assignee of the authoritative coy can be made only with the consent of the person asserting control;Each copy of the authoritative copy and any copy of a copy is readily identifiable as a copy that is not the authoritative copy; andAny revision of the authoritative copy is readily identifiable as authorized or unauthorized
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AN APPLICATION OF ESIGN AND UETA
Electronic Mortgages
Lending Industry Issues
Reliance on paperIntegration Problems – multiple systems on many platformsVendor Integration Issues – data from third parties and outside vendors (Title, Closing, Appraisal, Credit, etc.)Data, Data, Everywhere usually re-keyedValidation of data from systems to paperIntegrity of data on documents in the loan packageIntegrity of data for servicing and secondary investingNo consistency across the business process – enables mistakes, confusion, and makes knowledge transfer difficultEnter eMortgage …
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What is an eMortgage?
Multiple definitions in the industryDocument imaging?
Electronically signed documents?
Paper and electronic documents?
Defined by MISMO:“A mortgage where the critical loan documentation, at a minimum the promissory note, is created, executed, transferred, and ultimately stored electronically.”
Framework for Electronic RecordsTechnical specification (what formats?)
Document integrity and authoritative copy (how to identify the ‘original’?)
Retention and access (who owns/controls and where is it?)
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Safe Harbor in eMortgages
SMART DocumentsDefine the Electronic Record format
Tamper Seals provide electronic record integrity
MERS eRegistry using industry standard connectivityDefines a single authoritative copy of the transferable record which is unique, identifiable and unalterable;
Each copy of the authoritative copy and any copy of a copy is readily identifiable as a copy that is not the authoritative copy
Any revision of the authoritative copy is readily identifiable as authorized or unauthorized
Transactions identify and manage control and location of the authoritative copy
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Why go eMortgage?
Certify Notes fasterIndustry data and document standards create uniformityEliminate re-keying, “stare and compare”Transparency into depth of loan, data quality
Automatically identify non-saleable loan issuesImproved compliance reviewIncrease fraud detection opportunitiesMore time to spend on problem Notes
Process loans fasterStreamline best execution: a registered eNote can be acquired and traded in minutesFaster execution, lower risk
Industry standard Electronic Record Formats and connectivityEasier (e)Servicing, (e)Custodial setup
Instant document sharing when documents are in electronic format
Easier compliance with changing regulations
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eMortgage Process28
How to eMortgage?
Records become Electronic as MISMO SMART DocumentsDefine hybrid system, if needed
Electronic disclosure and consent process
Electronic closing and signature processHuman
Tamper Seal
MERS ConnectivityeNote registration
Transfer of control and location
Change in loan status (paid off, converted to paper)
Investor Delivery
Servicing
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Standards Landscape 30
Standards for eMortgages and Mortgage Services provideEnd-to-end data consistency from loan origination to payoff
Electronic document formats
Transmission
MISMO develops, promotes and maintains e-commerce standards for the real estate finance industry using XML, also a standard
Enables mortgage-related information to be exchanged between borrowers, lenders, service providers, investors and servicers more efficiently and economically
What is XML?
XML is a standard developed for the WebXML is a technology for describing information (the content) in Electronic Records while allowing for presentation as a PDF or a web pageXML is a set of rules for identifying and defining different parts of electronic informationXML defines a syntax that that the mortgage banking industry uses to define industry specific terms and tags:
Borrower name Property locationLoan amountMonthly hazard insurance payment amount
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XML is a Markup Language
Markup is extra information added to a document
XML separates the visual presentation of information from the content of the document
XML defines a standard syntax for markup within all types of information:
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<Title>XML is a Generalized Markup Language</Title>
<Body> Markup is extra information added to a document</Body>
XML
Markup
Format & Content33
Visual clues: font, font size and position (format)
Meaning: content/data
ABC Title Insurance Company
476,000
476,000
234756
<FULFILLMENT_PARTY_NAME>
<TITLE_INSURANCE_AMOUNT>
<ORIGINAL_LOAN_AMOUNT>
<NOTE_EXECUTION_DATE>
</FULFILLMENT_PARTY_NAME>
</TITLE_INSURANCE_AMOUNT>
</ORIGINAL_LOAN_AMOUNT>
</NOTE_EXECUTION_DATE>
SMART= Acronym
Technical framework for representing paper documents in an electronic format that binds data, visual presentation and signatures, into a single, file
Securable: ensures that Electronic Records have not been tampered with or altered: each SMART Document contains a Tamper Seal fordocument integrity
Manageable: “lights-out” processing of the Electronic Records
Archivable: Electronic Records may be retained for the length of time prescribed by the business process
Retrievable: Electronic Records and data can be electronically accessed and reviewed when necessary
Transferable: Documents can be electronically delivered from closing table to lender to recorder, vault to vault, etc.
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Parts of a SMART Document
An XML SMART Document has five sections:
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Header
SMART Document
Data
View
Signature(s)
Audit Trail
Lights-out processing ofindustry standard data<MORTGAGE_TERMSOriginalLoanAmount=
"96500.00/>"Snapshot of the computer screen
at signing“I promise to pay
Ninety six thousand five hundred dollars
…”
Information about the entire document; such as the document type and form number
History of eventsand activities for the
document
Tamper evident Signatures and other
signature information
LINK
The Tamper Seal: a Digital Signature
A digital signature is NOT an image representation of a handwritten signatureA digital signature relies on cryptographic methods and associates a calculated code “fingerprint” that may include parts of the Electronic Record or the entire Electronic RecordsThe code uses a certificate that uniquely identifies the person’s public key “passport”A digital signature is invalid if the tampering changes the Electronic Record in any way “wax seal”
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How Digital Signatures Work37
The Document
Private Key From Certificate
Receipt and Validation
Creation
Unique ValueCryptographic Hash
Encrypt
Signature
Send
The Document
Unique ValueCryptographic Hash
Signature
Decrypt
Public Key From Certificate
Unique ValueCryptographic Hash
Tamper Seal
A Tamper Seal is a special case of a digital signatureThe Tamper Seal is used to provide
Document integrity by associating a calculated code with parts of the documenta certificate that uniquely identifies the person/application/system
The Tamper Seal is appliedAs soon as possible after closingBy either a system or an individual
Uses an industry defined certificate typeA date and timestamp are requiredThe Tamper Seal specifies sections of the SMART Document included within the signature
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Electronic Records: the challenge
System must identify a single, unique, authoritative copy for the Note
How to identify electronically the authoritative copy: the equivalent to the paper “original”
restrict or control copies of an electronic document
Identify the controller and the location
Legal support for electronic contracts is in place, technology infrastructure is catching up … a case of law leading technology
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MERS® eRegistry
National registry that Retains a copy of the eNote Tamper Seal
Identifies the Controller (“Holder”) of the Authoritative Copy of an eNote
Identifies the Location (“Custodian”) of the Authoritative Copy of an eNote
Four forces came together:eSign and UETA legislation for Safe Harbor requirements created opportunity for eNotes
Secondary Investors developed requirements for eNotes
MISMO defined technical standards
MERS® developed and maintains the system to register ownership of eNotes
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MERS XML Transactions
“XML transaction” is a method of sending information to the MERS® System
MISMO standards define how the data is sent (request) and how it is received (response)
Transactions types:Registration
Transfer of Control, Location, Servicer
Changes in data and status
Inquiry (by MIN, SSN, or property address)
Delivery
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Key Terms, 1
Authoritative Copy: The copy of an eNote or other electronic transferable record over which Control can be identified and asserted by the Controller (or owner) of the eNote. Roughly equivalent to an original paper note with wet ink signatures, where physical possession is the analog of “control.”
Controller: The electronic equivalent of the Owner of a paper Note –the entity that is in Control of the Authoritative Copy of the eNote.
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April 11, 2006
Key Terms, 2
eCustodian: A legal fiduciary designated by a Controller to administer the Controllers’ eNotes on its behalf in an eVault
eVault: A secure electronic repository for eNotes. May be operated by an eCustodian or by a lender or investor to store their own eNotes. Similar to a paper vault run by the Document Custodian industry today
Transferable Record: An eNote issued in accordance with the provisions of Section 16 of the UETA and Title II of E-SIGN
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April 11, 2006
eMortgage Dashboard: eNotes
http://www.mersinc.org/MersProducts/index.aspx?mpid=19
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eMortgage Dashboard: Lenders and Investors45
eMortgage Dashboard: Vendors46
Selecting an eMortgage Approach
Group effort – IT, Legal, Security, Product Development, Business Analysts, among others.Factors that should be integrated into a business analysis and risk assessment process
Relationship between the partiesExtent to which transaction self-validates (physical presence at signing)Value of the transactionRisk of repudiation Risk of loss of access to recordsFunctionality and convenience (interoperability)
Other factorsLegal and regulatory requirementsIndustry standardsImplementation considerations: Build it or Buy it
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Resources
MISMO www.mismo.org
PRIA – www.pria.us
SPeRS – www.spers.org
MERS – www.mersinc.org
NNA – www.nationalnotary.org
USNA – www.enotary.org
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The SPeRS Objectives
SPeRS will:Permit businesses to establish a common understanding with vendors concerning design parameters for routine functions, without having to develop detailed custom specifications,
Assist in establishing industry standards for commercially reasonable, enforceable structures and processes, and
Provide the customer with a “common experience” across various online transactions, increasing the customer’s comfort level with the transactions.
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The SPeRS Structure
SPeRS is divided into five sections:AuthenticationConsentAgreements, Notices and DisclosuresElectronic SignaturesRecord Retention
Each section is composed of an Introduction and Outline and a series of Standards with supporting materials.
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The SPeRS Structure (Cont.)
Introduction and OutlinePurpose: to help orient the system design team to the subject covered and its relevance to system design.
Standards and PrinciplesPurpose: high-level guidance reflecting important design parameters.
Standard is accompanied by statement of underlying principle.
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The SPeRS Structure (Cont.)
ConsiderationsPurpose: raise a series of questions, with the answers impacting the system design.
Checklists and ExamplesPurpose: detailed, step-by-step guidance and assistance for implementing the standards.
CommentaryPurpose: legal and other support for standards.
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SPeRS Methodology
Designed to assist with identification of issues related to legal sufficiency.
Designed to assist with weighing options and strategies.
Intended to prompt questions and systematically construct answers.
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SPeRS Methodology
Consult SPeRS at the beginning of design cycle:Identify appropriate members of design team
Review 30 high-level standards
For each standard that applies –review, identify issues, resolve
Document process
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For more information contact:
Margo H. K. Tank
Rachael A. Sokolowski
1250 24th Street, NWSuite 700
Washington, DC 20037(202) 349-8000
