Transcript Document

Legal Technology
Issues in Electronic
Records and
Signatures
A Mortgage Lender’s Perspective on
Implementing an eMortgage Strategy
MBA's Legal Issues in Mortgage Technology Conference November 30 – December 2, 2005
ESIGN and UETA
• Overlay statutes
• UETA enacted in 48 jurisdictions
• ESIGN and UETA provide solid bases to go
electronic
Federal Preemption
• ESIGN Section 102
» States may modify, limit or supercede ESIGN (Section
101) only if state adopts UETA or state alternative
consistent with ESIGN
• Which Law Applies?
» ESIGN or UETA or both
• Georgia, New York, Illinois, Washington
• California
Regulatory Authority
• ESIGN Section 104
» Filing and access
» Authority to interpret ESIGN and UETA
» Limitations
• Performance Standards
» Accuracy,
» Record Integrity, and
» Accessibility
• Retain Paper or Printed form if compelling governmental
interest relating to law enforcement or national security
Regulations
• Federal Reserve Board Interim Rules on
Electronic Communications
• OCC Bulletins on Consumer Disclosures and
Record Retention
• FFIEC Guidance on Authentication in Online
Environments
Case Law
• Courts have concluded that electronic
transactions satisfy “writing” requirements.
• Writings are not limited to ink on paper.
• Signature is a symbol or process coupled
with the intent of the party to sign the
writing.
• Electronic records can be “originals” and
printouts are admissible into evidence.
Case Law (Continued)
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Significant cases to date:
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Arizona Cartridge Remanufacturers Ass’n Inc. v. Lexmark Int’l Inc., No. 03-16987 (9th cir. Aug. 30,
2005)
Bazak Int’l Corp. v. Tarrant Apparel Group, S.D.N.Y., No. 04 Civ. 03653 (July 18, 2005)
Briceno v. Sprint Spectrum, d/b/a Sprint PCS, Fla. Dist. Ct. App., 3d Dist., No. 3D05-144 (August 30,
2005)
International Casings Group, Inc. v. Premium Standard Farms, Inc., 358 F. Supp. 2d 863 (W.D. Mo.
2005)
PFT Roberson, Inc. v. Volvo Trucks North America, Inc., Nos. 04-3100, 04-3232, 04-3841 and 04-3877
(7th Cir. September 19, 2005)
Estate of Engelhardt, 2004 WL 345941 (Ohio Prob. Ct. 2004)
Haire v. Florida Dept. of Agriculture and Consumer Services, 2004 WL 252015 (Fla. 2004)
Register.com, Inc. v. Verio, Inc., 356 F.3d 393 (2d Cir. 2004)
In re Cafeteria Operators, L.P., 299 B.R. 411 (N.D. Texas 2003)
DeJohn v. The .TV Corporation Int’l, 245 F.Supp.2d (C.D.Ill. 2003)
Medical Self Care, Inc. v. National Broadcasting Company, 2003 WL 1622181 (S.D.N.Y. 2003)
Nomura Securities International, Inc. v. E*Trade Securities, Inc., 280 F.Supp.2d 184 (S.D.N.Y. 2003)
Piranha Inc. v. Newhouse, 83 Fed. Appx. 19, 2003 WL 22922263 (5th Cir. 2003)
Roger Edwards, LLC v. Fiddes & Son, Ltd., 2003 WL 342993 (D.Me. 2003)
SmartText Corp. v. Interland, Inc., 296 F.Supp.2d 1257 (D.Kan. 2003)
Zubulake v. UBS Warburg LLC, 217 F.R.D. 309 (S.D.N.Y. 2003)
Wells Fargo & Co. v.WhenU.com, Inc., 293 F.Supp.2d 734 (E.D.Mich. 2003)
Cloud Corp. v. Hasbro, Inc., 314 F.3d 289 (7th Cir. 2002)
People v. McFarlan, 191 Misc. 2d 531, 744 N.Y.S.2d 287 (N.Y. 2002)
Shattuck v. Klotzbach, 14 Mass. L. Rep. 360, 2001 Mass. Super. LEXIS 642 (December 11, 2001)
Legal Issues to Consider
• Consumer Consent
• Effective Delivery of Disclosures
• Record Integrity
SPeRS (Standards and Procedures for
Electronic Records and Signatures)
• What is it?
• What kind of issues does it cover?
• How do I use it?
Introduction
• ESIGN and UETA make it possible to present
information and sign agreements and other
documents electronically in circumstances where a
paper document and a “wet” signature would have
been required.
• Design of systems for presenting disclosures or
signing electronic records requires understanding
of the interaction between electronic processes and
legal requirements.
• ESIGN and UETA are self-effectuating –that is, no
regulations are needed in order to use ESIGN or
UETA to present or sign records.
Introduction (Cont.)
• Tension between letting the market
develop and the need for a clear path
forward.
• SPeRS was created to fill that gap.
What is SPeRS?
• SPeRS is:
» A cross-industry initiative to establish commonly
understood “rules of the road” available to all parties
seeking to take advantage of the powers conferred by
ESIGN and UETA.
» Founded on the proposition that much of the time and
effort being invested by companies “re-inventing the
wheel” could be avoided if cross-industry standards
for these elements of electronic transactions could be
established.
What is SPeRS? (Cont.)
» Focused on the behavioral and legal aspects of
the interaction between parties to the
transaction, not on technology. SPeRS is
intended to be technology neutral.
» Standards are not necessarily legal minimums,
but implementing the standards should enhance
reliability and sufficiency.
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.
System Design Team Concept
• Standards make repeated reference to the “System
Design Team.”
• Core principle of group effort.
• System Design Team should be composed of personnel
from variety of disciplines:
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IT
Corporate Security
Product Development
Marketing
Compliance
Legal
• SPeRS designed to help make nexus between legal
process and legal requirements.
The SPeRS Structure
• SPeRS is divided into five sections:
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Authentication
Consent
Agreements, Notices and Disclosures
Electronic Signatures
Record Retention
• Each section is composed of an Introduction and
Outline and a series of Standards with supporting
materials.
The SPeRS Structure (Cont.)
• Introduction and Outline
» Purpose: to help orient the system design team
to the subject covered and its relevance to
system design.
• Standards and Principles
» Purpose: high-level guidance reflecting
important design parameters.
» Standard is accompanied by statement of
underlying principle.
The SPeRS Structure (Cont.)
• Considerations
» Purpose: raise a series of questions, with the
answers impacting the system design.
• Checklists and Examples
» Purpose: detailed, step-by-step guidance and
assistance for implementing the standards.
• Commentary
» Purpose: legal and other support for standards.
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.
SPeRS Methodology (Cont.)
• 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
Electronic Documents: Hot Topics
• Standardization (“SISAC”)
• Risk Management
• Electronic Discovery
Standardization (SISAC)
• Security Identity Services Accreditation
Corporation
» Goals
» History and Development
» Current Status
Security Identity Services
Accreditation Corporation
• Components: Based on minimum standards
for four major components of identity
management solution
» Public Key Infrastructure (Identification &
Authentication)
» Issuance
» Validation
» Publication
Security Identity Services
Accreditation Corporation
• Components (continued)
» SISAC accreditation certificate
» Federal PKI standards
» Error and Omissions insurance requirement for
AIAs
» Certificate of Policy Requirements Document
(CPRD)
Security Identity Services
Accreditation Corporation
• Implementation of SISAC
» Mortgage industry must drive standardization
• Signs of industry acceptance
› MISMO and MERS
› Fannie Mae
› Navy Federal
Risk Management
• Cautionary Tales
» LexisNexis
» ChoicePoint
» Microsoft
• FTC’s threatened $2.2 trillion fine for security
flaws
Risk Management
• Current Approaches to Security
» Applications with fewer security holes
» Patches
» General security countermeasures
• Firewalls
• Encryption
• Virus protection
Risk Management
• Traditional Insurance
» Exclusions
• Tangible vs. Intangible Property
• Accidental vs. Non-Accidental Loss
• Physical Damage vs. Economic Loss
› Impaired Property
Risk Management
• Cyber-Insurance
» Scope (non-exhaustive list of available insurance policies)
• Security breaches of websites
• Cyber-extortion
• Business interruption
• Cyber-crime
• Asset protection
• Income protection
• Electronic media liability
• ID theft coverage
• Crisis management
• Liability insurance for financial institutions
» Cost
» Availability
Electronic Discovery
• Respondents required to “obtain” or
“translate” information “through detection
devices into reasonably usable form.” Fed. R.
Civ. P. 34(a)
• Must be “reasonably accessible.” Fed. R. Civ.
P. 26(b)(2) (Proposed)
Electronic Discovery
• Preservation Duty (Zubulake v. UBS, 229
F.R.D. 422 (S.D.N.Y. 2004) (“Zubulake V”)
» Scope
» Duty to locate materials (“litigation hold”)
» Duty to monitor and supplement
» Duty to present information in appropriate form
Electronic Discovery
• Sanctions
» Entry of judgment (Computer Task Group, Inc.
v. Brotby, 364 F.3d 1112 (9th Cir. 2004);
Metropolitan Opera, Inc. v. Local 100, Hotel
Employees & Restaurant Employees’ Int’l Union,
212 F.R.D. 178 (S.D.N.Y. 2003))
» Adverse inference (Zubulake V)
» Monetary sanctions (U.S. v. Philip Morris USA,
Inc., 327 F. Supp. 2d 21 (D.D.C. 2004)
Electronic Discovery
• Document Retention Plan: In-House Counsel
» Formal document retention policy regarding the
saving and destroying of documents
» Litigation preparedness
» IT department relationship
• 30(b)(6) deposition witness
• Document destruction and back-up tape recycling
• Data storage and retrieval
Electronic Discovery
• Document Retention Plan: Outside Counsel
» Duties to preserve and produce in regards to
electronic media
» Familiarity with client information systems
• Minimizing disruption of client operations
» IT department relationship
Now That You Have Some
Background…
• Is it possible to have a fully implemented eMortgage?
• What does a lender need to think about before
implementing an eMortgage strategy?
Current eMortgage Legal
Infrastructure
• ESIGN and UETA authorize electronic records and signatures.
• Uniform Real Property Electronic Recordation Act (URPERA) and
other state laws authorize electronic recording by county clerks and
recorders.
• These laws allow notaries to use electronic signatures for
notarization.
• Federal Financial Institution Examination Committee’s (FFIEC)
Guidance on Authentication in an Internet Banking Environment.
• Federal Reserve Board’s (FRB) Interim Final Rules on the Electronic
Delivery of Disclosures.
• Comptroller of the Currency’s (OCC) Advisory Letters on Electronic
Consumer Disclosures and Notices and on Electronic Record
Keeping.
Current eMortgage Infrastructure
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Most lenders are doing at least one phase of an eMortgage transaction.
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MERS eRegistry is actively tracking the ownership interests and transfer of
those interests in eNotes.
Fannie Mae is buying eMortgages and retaining eNotes in their eVault.
Freddie Mac will be releasing an eMortgage Handbook.
MISMO data and document format standards.
SPeRS – Electronic signature and records guidelines.
Vendors – Signatures, notarizations, authentication systems, SMARTDocs,
eVaults or electronic document management systems, recording, etc.
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Electronic
Electronic
Electronic
Electronic
applications.
delivery of disclosures and other mortgage documents (i.e., appraisals).
document retention (imaging).
recording in certain counties.
Do a Pilot Project
• Determine what are your goals for going to eMortgages.
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Reduce paper.
Reduce costs of delivery and handling of paper.
Support “lights out” processing and quality control.
Improve customer experience.
• Advantages of doing a pilot project.
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Opportunity for informed risk assessment.
Opportunity to correct problems or improve processes.
More control over expenses.
Opportunity to change your mind.
Create Your eMortgage Team
• As SPeRS recommends, your System Design Team should include:
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Information technology;
Corporate security;
Product development;
Marketing;
Human Resources;
Compliance; and
Legal.
• If your eMortgage pilot project includes eNotes that you intend to
sell or securitize on the secondary market, you may want to discuss
your plans with your investors (e.g., Fannie Mae, Freddie Mac, etc.).
• Set up any necessary interfaces with MERS.
• You may need the expertise from representatives in your
origination, warehouse lending, secondary, and document custodian
departments or vendors.
Scope Out Your Pilot Project
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Determine what channel.
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Determine what loan product and/or geographical area.
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Determine which part of your mortgage process will be electronic.
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Determine whether these loans will be kept in portfolio or sold/securitized.
» Correspondent channel.
• More risk offset available.
• Less control over origination of eMortgages.
» Retail channel.
• More risk exposure.
• More control over origination of eMortgages.
» Many counties do not accept electronic recording of security instruments.
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Pre-application and application.
Disclosures.
Origination.
Recording.
Servicing.
Educate the Project Team
• ESIGN and UETA 101
» Consumer consent to electronic delivery of disclosures
» Transferable records requirements
• Privacy and data security requirements
• Electronic recording laws
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» URPERA
» California’s Electronic Recording Delivery Act (AB 578)
Status of electronic notarization
MISMO standards
SPeRS
Fannie Mae and Freddie Mac eMortgage selling/servicing
guidelines.
Do a Risk Assessment
• After determining your project scope, do a risk
assessment of your proposal. Issues to ponder:
» Can your company absorb or insure against potential risks?
» How will you handle legal and compliance requirements in the
your eMortgages?
» Will your investors buy these eMortgages?
» Will your title insurers cover these eMortgags?
» What technology would you need to build or buy from your
vendors?
» What processes will you need to change for eMortgages and how
may process changes impact your loan production?
Evaluate Your Vendors
• If a vendor will be providing critical technology (e.g.
eVaults) for your eMortgage pilot project, you should
think about:
» Vendor’s understanding of ESIGN and UETA;
» Intellectual property issues (e.g., licensing issues); and
» Financial condition of your vendor.
Servicing and Record Retention Issues
• Servicing – If your eMortgage project will include an eNote
or eMortgage, you may want to consider issues that may
arise when servicing the loan.
» State/county requirements that an “original” be returned to the
jurisdiction or to the borrower.
» Foreclosure issues
• Record Retention
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Consumer retention
Transferable record retention
Retention under applicable law
Retention for evidentiary purposes
Review SPeRS guidance on record retention
Final Thoughts
• Have a clear understanding of your goals.
• Have a clear project plan and scope.
• Understand the risks that may come up during the project
and determine how you will mitigate those risks.
• Educate your project team early in the process on ESIGN,
UETA, URPERA and other applicable laws, SPeRS and
MISMO standards, and investor requirements.
• Keep up-to-date on the changes in regulatory
requirements and industry standards.
Questions?
Margo Tank
Buckley Kolar LLP
[email protected]
Gerald J. Ferguson
Baker & Hostetler LLP
[email protected]
Grace Powers
1st Vice President, Senior Legal Counsel
Countrywide Financial Corporation
[email protected]