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

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

3. 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

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

5. Why Go Electronic? Enhanced transaction speed Reduced cost
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

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

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

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

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

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.

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.

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

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)
“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

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 the circumstance
For consumer transactions under ESIGN, consent must be express in most circumstances

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

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.

17. 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 form that will be used to provide the information that is the subject of the consent.

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 (UETA and ESIGN)

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

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)

21. 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”

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 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; and
Any revision of the authoritative copy is readily identifiable as authorized or unauthorized

23. AN APPLICATION OF ESIGN AND UETA
Electronic Mortgages
AN APPLICATION OF ESIGN AND UETA

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 …

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?)

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

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

28. eMortgage Process

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

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

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

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:
<Title>XML is a Generalized Markup Language</Title>
<Body> Markup is extra information added to a document</Body>
XML
Markup
In printing, “markup” meant writing down the formatting information for the person who was setting the type

33. Format & Content <FULFILLMENT_PARTY_NAME>
Visual clues: font, font size and position (format)
Meaning: content/data
<FULFILLMENT_PARTY_NAME>
<TITLE_INSURANCE_AMOUNT>
<ORIGINAL_LOAN_AMOUNT>
<NOTE_EXECUTION_DATE>
ABC Title Insurance Company
476,000
234756
</FULFILLMENT_PARTY_NAME>
</TITLE_INSURANCE_AMOUNT>
</ORIGINAL_LOAN_AMOUNT>
</NOTE_EXECUTION_DATE>

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.

35. Parts of a SMART Document
An XML SMART Document has five sections:
Header
SMART Document
Data
View
Signature(s)
Audit Trail
Information about the
entire document; such as the
document type and form number
Lights-out processing of
industry standard data
<MORTGAGE_TERMS
OriginalLoanAmount=
" />"
Snapshot of the
computer screen
at signing
“I promise to pay Ninety six thousand five hundred dollars …”
LINK
History of events
and activities for the
document
Tamper evident
Signatures and other signature
information

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”

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

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

40. MERS® eRegistry National registry that Four forces came together:
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

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

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.
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
April 11, 2006

44. eMortgage Dashboard: eNotes

45. eMortgage Dashboard: Lenders and Investors

46. eMortgage Dashboard: Vendors

47. Selecting an eMortgage Approach47
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 www.mismo.org PRIA – www.pria.us SPeRS – www.spers.org
MERS –
NNA –
USNA –

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.

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.

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.

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.

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.

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

55. For more information contact:
Margo H. K. Tank
Rachael A. Sokolowski
th Street, NW
Suite 700
Washington, DC 20037
(202)