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MARGO H.K. TANK RACHAEL A. SOKOLOWSKI JUNE 1, 2010 Understanding the Rules for E-Mortgages and E-Disclosures.

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Presentation on theme: "MARGO H.K. TANK RACHAEL A. SOKOLOWSKI JUNE 1, 2010 Understanding the Rules for E-Mortgages and E-Disclosures."— Presentation transcript:

1 MARGO H.K. TANK RACHAEL A. SOKOLOWSKI JUNE 1, 2010 Understanding the Rules for E-Mortgages and E-Disclosures

2 What We’ll Cover Today Why go Electronic? Legal Framework eMortgage Framework Implementation Considerations Resources 2

3 Why Go Electronic? 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 3

4 Why Go Electronic? 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 4

5 Why Go Electronic? 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 5

6 eCommerce in Mortgage Banking Today Loan Applications Initial Disclosures eClosing (fully electronic or hybrid) eVaults/Document Custodians Secondary Market Sales 6

7 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 7

8 ESIGN and UETA Enforceability of electronic transactions are primarily governed by ESIGN and UETA.  Overlay statutes  Federal baseline  UETA adopted in 49 jurisdictions 8

9 ESIGN and UETA ESIGN and UETA address uncertainties related to meeting:  Writing requirements (paper notices and disclosures),  Signature requirements, and  Original requirements 9

10 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. 10

11 Which Law Applies 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 11

12 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 12

13 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)  “Whose signature is it anyway?” ( Authentication) The recipient – not the signer – bears the burden of proof 13

14 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  Express  Inferred from facts and circumstances  For consumer transactions under ESIGN, consent must be express in most circumstances 14

15 Consent to the Delivery of Electronic Records to the Consumers 3 Step Process:  Disclosures  Affirmative Assent  Reasonable Demonstration 15

16 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; and  The hardware and software requirements for access to and retention of the electronic records. 16

17 Consent to the Delivery of Electronic Records to the Consumers: Reasonable Demonstration 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) 17

18 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 18

19 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 appropriately  Impaired enforceability  May not satisfy regulatory writing, delivery or signing requirements  May not be admissible in court 19

20 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) 20

21 Transferable Records 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.” 21

22 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; 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 22


24 Lending Industry Issues Reliance on Paper Integration Problems – multiple systems on many platforms Vendor Integration Issues – data from third parties and 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 … 24

25 What is an eMortgage? 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?) 25

26 Safe Harbor in eMortgages 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 26

27 Why go eMortgage? 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 27

28 eMortgage Process 28

29 How to eMortgage? 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 29

30 Standards Landscape 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 30

31 What is XML? 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:  Borrower name  Property location  Loan amount  Monthly hazard insurance payment amount 31

32 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: 32 XML is a Generalized Markup Language Markup is extra information added to a document XML Markup

33 Format & Content 33 Visual clues: font, font size and position (format) Meaning: content/data ABC Title Insurance Company 476,000 234756

34 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 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. 34

35 Parts of a SMART Document An XML SMART Document has five sections: 35 Header SMART Document Data View Signature(s) Audit Trail Lights-out processing of industry standard data { "@context": "", "@type": "ImageObject", "contentUrl": "", "name": "Parts of a SMART Document An XML SMART Document has five sections: 35 Header SMART Document Data View Signature(s) Audit Trail Lights-out processing of industry standard data 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 events and activities for the document Tamper evident Signatures and other signature information LINK", "description": "Parts of a SMART Document An XML SMART Document has five sections: 35 Header SMART Document Data View Signature(s) Audit Trail Lights-out processing of industry standard data 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 events and activities for the document Tamper evident Signatures and other signature information LINK", "width": "800" }

36 The Tamper Seal: a Digital Signature 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” 36

37 How Digital Signatures Work 37 The Document Private Key From Certificate Creation Receipt and Validation Unique Value Cryptographic Hash Encrypt Signature Send The Document Unique Value Cryptographic Hash Signature Decrypt Public Key From Certificate Unique Value Cryptographic Hash

38 Tamper Seal 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 38

39 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 39

40 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 40

41 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 41

42 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. 42 April 11, 2006

43 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 43 April 11, 2006

44 eMortgage Dashboard: eNotes 44

45 eMortgage Dashboard: Lenders and Investors 45

46 eMortgage Dashboard: Vendors 46

47 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 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 47

48 Resources MISMO PRIA – SPeRS – MERS – NNA – USNA – 48

49 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. 49

50 The SPeRS Structure 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. 50

51 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. 51

52 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. 52

53 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. 53

54 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 54

55 For more information contact: Margo Tank Rachael Sokolowski BuckleySandler LLP 1250 24 th Street, NW Suite 700 Washington, DC 20037 (202) 349-8000 55

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