by Regina M. Slowey, Esq.
Orlans PC
USFN Member (DC, DE, MA, MD, MI, NH, RI, VA)

The COVID-19 pandemic made universal changes in daily expectations.  In particular, it has opened the floodgates of interest in business practices which allow parties to complete transactions without ever being in the same room. 

eMortgages, of course, are not new.  The implementation of the Uniform Electronic Transactions Act (UETA) in 1999, subsequently adopted with or without modifications in all U.S. jurisdictions^[1], and the enactment of the federal Electronic Signatures in Global and National Commerce Act (ESIGN)^[2] in 2000, insured that every state in the United States possessed the legal framework necessary to use electronic signatures in transactions, and the specific authorization to use eNotes to evidence debt secured by real property.^[3]  Fannie Mae and Freddie Mac, as early as 2005, published guidelines and modified Uniform Instruments to address the usage of eNotes.  The industry, however, did not see exponential growth in the area until 2019.  Indeed, eNote registration increased 5000% in the first quarter 2019 compared to the first quarter 2018.  The 2019 numbers were again dwarfed in 2020, with almost 40,000 eNotes registered in June 2020 alone^[4].  As of August 31, 2020, over 700,000 unique eNotes have been registered within the MERS® eRegistry^[5]. 

The explosion of eNotes may slow, but the convenience and consumer expectation will not retreat.  It is essential that all players in the default industry know and understand the concepts and terms inherent to the eMortgage phenomenon, using and understanding the terminology unique to the digitization process to insure uniformity and enforceability.

Terms and Comparison to the Paper World
First, it is noteworthy that the term “eMortgage” itself can be used differently.  Per industry standard, “eMortgage” refers to the use of electronic processes and signatures in mortgage production, where some or all of the closing documents are created, accessed, executed, transferred and stored electronically.  Based on this definition, any loan closed with an eNote is an eMortgage, without reference to the security instrument (mortgage or deed of trust) subsequently recorded in the land records (which may or may not be digital, depending on the county recording requirements).  Many players in the industry have established reliable guidelines and practices for the origination and tracking of digitized products:  the Mortgage Industry Standards Maintenance Organization (MISMO), MERS®, Fannie Mae, and Freddie Mac, to name a few. 

The eNote itself is the focus of the eMortgage.  The eNote in concept is the same as the paper note, but from inception only in the form of an electronic record.  It is not a scan of a paper Note with a wet ink signature.  The eCommerce laws’ technical term for the eNote is a “transferable record”; in the paper world, this is the “note” or the “negotiable instrument”.  The eCommerce Laws provide that a Transferable Record created in conformity with requirements is the functional equivalent of a paper negotiable promissory note and is as enforceable against the borrower as its written counterpart.  

The equivalent of the “Original Note” is the “Authoritative Copy”.  At the creation of the record, tamper-evident digital fingerprints (or a “hash”) is affixed to an eNote such that alterations can be detected. This process is known as “tamper sealing”.  Once created, the Authoritative Copy must be registered.  Though the MERS® eRegistry may not be the only electronic registration system that exists, it was expressly contemplated by the drafters of the UETA and contains the necessary reporting and controls for later evidentiary purposes.  Not surprisingly, the MERS® eRegistry is required by most investors accepting eNotes, including Fannie Mae and Freddie Mac. 

The eCommerce Laws replace the requirements for “possession” and “indorsement” of a paper promissory note with the concepts of “control” and “transfer of control” of an eNote.  The originating lender – the lender whose name is on the eNote – is the first Controller. Each subsequent transfer of the eNotes will be logged as a change of control, and the transferee as the new Controller.  The person identified as the Controller obtains rights equivalent to those granted a holder of a paper promissory note, which includes the right to enforce the eNote.

Traditionally, paper files were secured by custodians.  In the digital world, specific technology is required.  The eVault is a storage device designed to receive the processed eNote. The eNote remains in the eVault.  It is a controlled system - specialized record management designed to meet the legal requirements associated with owning and transferring eNotes and related documents.  The controller must be prepared to demonstrate that the eNote, has not been impermissibly altered since origination.  The eVault must have the ability to maintain the authoritative copy and track all modifications; it is a crucial component to enforceability.

An important distinction exists between an eRegistry and an eVault.  The MERS® eRegistry does not store the actual eNote, but instead only stores and tracks identifying information about it:  the eNote’s digital fingerprint, the name of the Controller, the location of the eNote, and each transfer of control.  However, the authoritative copies of the eNotes themselves are stored in an eVault.

Enforceability and its Challenges
The questions that always arise are whether digital records will be enforceable.  Three main attacks exist on the integrity of an eNote:  consent, attribution and standing.  However, the courts have recognized the enforceability of digital signatures given the proper evidentiary support.

The first prong of the Transferable Record Requirement is that the eNote must be signed.  Although ESIGN and UETA provide that eSignatures are legally equivalent to wet ink signatures, consent and attribution remain an issue, perhaps because it is the lowest hanging fruit.  There will be challenges to whether the borrower signed – or knowingly signed – the eNote. However, MISMO has published standards for these issues, most of which are adopted into investor requirements and have already withstood court scrutiny.  Origination standards focus on consent and attribution, incorporating consent into the Uniform Instrument, specific disclosures, and the method the signature is presented (and specifically requires borrower initiated to sign).

Attribution, or connecting a particular person to her signature on a particular document, is satisfied by one or more means:  authentication procedures, access passwords, notary, and software audit trails that establish a temporal and process link between the presentation of identity documents/identity authentication and the electronic signing of a document.  These all occur within the eClosing.

Similar to the traditional paper world, the most common attack on the ability to enforce an eNote, though, is on standing, though the moniker is control of the note.  Traditionally, the holder of the note has the right to enforce, and the failure to hold the note creates a lack of standing to enforce.  In the digital world, the Controller has the right to enforce.  Contrary to the paper world, delivery, possession, and endorsement are not required elements under ESIGN.  The eCommerce laws create a safe harbor to show control, and when challenged, the courts have repeatedly upheld the sufficiency of the chain of control records provided by the servicer or MERS, the explanation of the controls of the tampersealing at origination, and the description of the eVault.  The Controller must establish the system used to evidence the integrity and transfer of control of the record.  Given the parameters set by Fannie, Freddie, MERS, and MISMO, in many ways the widely supported infrastructure under the digital system is firmer than the paper-based system of shuffling papers between servicers and courtrooms.  Under this system, there is a reliable history and digital audit trail reflecting the eNote’s creation and ownership.

Additionally, as a practical matter, the eCommerce Laws, the Rules of Evidence and the Business Records Act allow for both the admissibility of the eNotes themselves into evidence, as well as the records attendant to the systems of record for storing and tracking transfers of eNotes.

Conclusion
This is an exciting time.  The digital transformation of the full mortgage loan is imminent.  Though we must all be prepared to educate the public and the courts about the controls and process, the increased security and audit trail of the digitization of the mortgage transaction will be a triumph for both the industry and the consumer.
 

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Fall 2020 USFN Report