Transcript eMortgage Dashboard

Understanding the Rules for
E-Mortgages and E-Disclosures
MARGO H.K. TANK
RACHAEL A. SOKOLOWSKI
JUNE 1, 2010
What We’ll Cover Today
2
 Why go Electronic?
 Legal Framework
 eMortgage Framework
 Implementation Considerations
 Resources
Why Go Electronic?
3
 The goal – soup to nuts paperless transactions
 Why?

Consumer Accessibility
 24x7 Access
 Improved convenience for loan information and
document review
 No need to spend time traveling to physical locations
Why Go Electronic?
4
 Better access to education and information
Time and resources for a thoughtful, informed decision
 Streaming video and other multimedia presentations can
be used to enhance required disclosures and notices
 Better quality control
 Access 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

Why Go Electronic?
5
 Enhanced transaction speed
Satisfying 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 cost
 Up front savings – reductions in document processing
costs and the automation of manual processes
 Back-end savings – reduced custodial and quality control
expenses
 Environmentally Friendly

eCommerce in Mortgage Banking Today
6
 Loan Applications
 Initial Disclosures
 eClosing (fully electronic or hybrid)
 eVaults/Document Custodians
 Secondary Market Sales
Adoption Issues & Challenges
7
 Not all County Recorders are Electronic
 Security & Privacy
 Legal Complexity
 Lack of Integrated, Seamless Solutions
 Lack of Internal Priority (or clear ROI)
 Education
ESIGN and UETA
8
 Enforceability of electronic transactions are primarily
governed by ESIGN and UETA.
 Overlay statutes
 Federal baseline
 UETA adopted in 49 jurisdictions
ESIGN and UETA
9
 ESIGN and UETA address uncertainties related to meeting:
Writing requirements (paper notices and disclosures),
 Signature requirements, and
 Original requirements

General Rule of Validity – ESIGN and UETA
10
 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.
Which Law Applies
11
 It is likely that both ESIGN and UETA will apply to the
transaction.
 ESIGN allows state to modify, limit or supercede ESIGN:
By adopting the official version of UETA or
 By adopting a state alternative that is consistent with
ESIGN

Electronic Signatures: The Legal Definition
12
 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
Purpose/Intent/Authentication
13
 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)
 “Whose signature is it anyway?” ( Authentication)

 The recipient – not the signer – bears the burden of proof
Implementing Electronic Records and Signatures:
Consent
14
 Consent required

Both UETA and ESIGN are “opt-in” statutes

For business-to-business transactions, and consumer
transactions under UETA, consent may be
 Express
 Inferred from facts and circumstances

For consumer transactions under ESIGN, consent must
be express in most circumstances
Consent to the Delivery of Electronic Records to the
Consumers
15
 3 Step Process:

Disclosures

Affirmative Assent

Reasonable Demonstration
ESIGN Consumer Consent Disclosures
16
 Prior to obtaining a consumer’s consent, the electronic record provider must
deliver a clear and conspicuous statement informing the consumer of:




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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;
and
The hardware and software requirements for access to and retention of the
electronic records.
Consent to the Delivery of Electronic Records to the
Consumers: Reasonable Demonstration
17
 The consumer must consent electronically
 There must be a reasonable demonstration that the
consumer can access the information in the electronic form
(e.g., email, internet, word, pdf, etc.) that will be used to
provide the information that is the subject of the consent
(e.g., self-reporting, HTML, Test PDF)
Electronic Record
18
 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
Electronic Retention of Records: ESIGN and UETA
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 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 appropriately



Impaired enforceability
May not satisfy regulatory writing, delivery or signing requirements
May not be admissible in court
Record Retention – Challenges
20
 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
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 Transferable Record (ESIGN Title II; 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 (paper)  Control (electronic)
 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.”
Safe Harbor for Control
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 6 part test:
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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; or
 If 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 copy 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; and
Any revision of the authoritative copy is readily identifiable as authorized
or unauthorized
Electronic Mortgages
AN APPLICATION OF ESIGN AND UETA
Lending Industry Issues
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 Reliance on Paper
 Integration Problems – multiple systems on many platforms
 Vendor Integration Issues – data from third parties and
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outside vendors (Title, Closing, Appraisal, Credit, etc.)
Data, Data, Everywhere usually re-keyed
Validation of data from systems to paper
Integrity of data on documents in the loan package
Integrity of data for servicing and secondary investing
No consistency across the business process – enables
mistakes, confusion, and makes knowledge transfer difficult
Enter eMortgage …
What is an eMortgage?
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 Multiple definitions in the industry
 Document 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 Records
 Technical specification (what formats?)
 Document integrity and authoritative copy (how to identify the
“original”?)
 Retention and access (who owns/controls and where is it?)
Safe Harbor in eMortgages
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 SMART Documents

Define the Electronic Record format
 Tamper Seals provide electronic record integrity
 MERS eRegistry using industry standard connectivity
 Defines 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
Why go eMortgage?
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 Certify Notes faster
 Industry data and document standards create uniformity
 Eliminate re-keying, “stare and compare”
 Transparency into depth of loan, data quality
 Automatically identify non-saleable loan issues
 Improved compliance review
 Increase fraud detection opportunities
 More time to spend on problem Notes
 Process loans faster
 Streamline best execution: a registered eNote can be acquired and traded in
minutes
 Faster execution, lower risk
 Industry standard Electronic Record Formats and connectivity
 Easier (e)Servicing, (e)Custodial setup
 Instant document sharing when documents are in electronic format
 Easier compliance with changing regulations
eMortgage Process
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How to eMortgage?
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 Records become Electronic as MISMO SMART Documents

Define hybrid system, if needed
 Electronic disclosure and consent process
 Electronic closing and signature process


Human
Tamper Seal
 MERS Connectivity



eNote registration
Transfer of control and location
Change in loan status (paid off, converted to paper)
 Investor Delivery
 Servicing
Standards Landscape
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 Standards for eMortgages and Mortgage Services provide
 End-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?
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 XML is a standard developed for the Web
 XML is a technology for describing information (the
content) in Electronic Records while allowing for
presentation as a PDF or a web page
 XML is a set of rules for identifying and defining different
parts of electronic information
 XML defines a syntax that that the mortgage banking
industry uses to define industry specific terms and tags:
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Borrower name
Property location
Loan amount
Monthly hazard insurance payment amount
XML is a Markup Language
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


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:
XML
Markup
<Title>XML is a Generalized Markup
Language</Title>
<Body> Markup is extra information added to
a document</Body>
Format & Content
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
Visual clues: font, font size and position (format)

Meaning: content/data
<FULFILLMENT_PARTY_NAME>
ABC Title Insurance Company </FULFILLMENT_PARTY_NAME>
<TITLE_INSURANCE_AMOUNT>
476,000
</TITLE_INSURANCE_AMOUNT>
<ORIGINAL_LOAN_AMOUNT>
476,000
</ORIGINAL_LOAN_AMOUNT>
<NOTE_EXECUTION_DATE>
234756
</NOTE_EXECUTION_DATE>
SMART= Acronym
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 Technical framework for representing paper documents in an electronic

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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 for
document 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.
Parts of a SMART Document
35
An XML SMART Document has five sections:
SMART Document
Information about the
entire document; such as
the
document type and form
number
Snapshot of the
computer screen
at signing
“I promise to pay
Ninety six thousand
five hundred dollars
…”
Header
Data
LINK
View
Audit Trail
Tamper evident
Signatures and other
signature
information
Lights-out processing of
industry standard data
<MORTGAGE_TERMS
OriginalLoanAmount=
"96500.00/>"
Signature(s)
History of events
and activities for the
document
The Tamper Seal: a Digital Signature
36
 A digital signature is NOT an image representation of a
handwritten signature
 A digital signature relies on cryptographic methods and
associates a calculated code “fingerprint” that may include
parts of the Electronic Record or the entire Electronic
Records
 The 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”
How Digital Signatures Work
37
Creation
Private Key
From Certificate
Encrypt
The
Document
Signature
Unique Value
Cryptographic Hash
Send
Receipt and
Validation
The
Document
Signature
Unique Value
Cryptographic Hash
Unique Value
Cryptographic Hash
Decrypt
Public Key
From Certificate
Tamper Seal
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 A Tamper Seal is a special case of a digital signature
 The Tamper Seal is used to provide
 Document integrity by associating a calculated code with parts of the
document
 a certificate that uniquely identifies the person/application/system
 The Tamper Seal is applied
 As soon as possible after closing
 By either a system or an individual
 Uses an industry defined certificate type
 A date and timestamp are required
 The Tamper Seal specifies sections of the SMART
Document included within the signature
Electronic Records: the challenge
39
 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
MERS® eRegistry
40
 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
MERS XML Transactions
41
 “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
Key Terms, 1
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 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.
April 11, 2006
Key Terms, 2
43
 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 ESIGN
April 11, 2006
eMortgage Dashboard: eNotes
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 http://www.mersinc.org/MersProducts/index.aspx?mpid=19
eMortgage Dashboard: Lenders and Investors
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eMortgage Dashboard: Vendors
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Selecting an eMortgage Approach
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 Group effort – IT, Legal, Security, Product Development,
Business Analysts, among others.
 Factors that should be integrated into a business analysis
and risk assessment process
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Relationship between the parties
Extent to which transaction self-validates (physical presence at
signing)
Value of the transaction
Risk of repudiation
Risk of loss of access to records
Functionality and convenience (interoperability)
 Other factors
 Legal and regulatory requirements
 Industry standards
 Implementation considerations: Build it or Buy it
Resources
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 MISMO www.mismo.org
 PRIA – www.pria.us
 SPeRS – www.spers.org
 MERS – www.mersinc.org
 NNA – www.nationalnotary.org
 USNA – www.enotary.org
The SPeRS Objectives
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 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.
The SPeRS Structure
50
 SPeRS is divided into five sections:
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.)
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 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.)
52
 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
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 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
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 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

For more information contact:
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Margo Tank
Rachael Sokolowski
BuckleySandler LLP
1250 24th Street, NW
Suite 700
Washington, DC 20037
(202) 349-8000
[email protected]