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E-Signatures and Electronic Loan

Documentation in Real Estate Finance:

ESIGN and UETA, Interplay With UCC Enforceability, Authentication and Admissibility; MERS and Transferability

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TUESDAY, FEBRUARY 20, 2018

Presenting a live 90-minute webinar with interactive Q&A

Margo H.K. Tank, Partner, DLA Piper, Washington, D.C.

R. David Whitaker, Partner, DLA Piper, Chicago

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www.dlapiper.com 5 Tuesday, February 20, 2018

Tuesday, February 20, 2018

E-SIGNATURES AND ELECTRONIC LOAN

DOCUMENTATION IN REAL ESTATE FINANCE:

ESIGN, UETA AND THE INTERPLAY WITH UCC

Margo H.K. Tank Partner

[email protected]

+1 202.799.4170

R. David Whitaker Partner

[email protected]

+1 312.368.2199

Strafford -- Live and On Demand CLE

mailto:[email protected]



Special “eConsiderations” for Digital Mortgages we will discuss:

• The Statutes: ESIGN, UETA and Federal preemption

• Presentation of Documents

Timing

Delivery

Retention Rights

• Electronic Promissory Notes (eNotes)

Special rules for transfer, ownership and custody

Special language requirements for eNotes

• Mortgages/Deeds of Trust

eNotarization

eRecordiing

Digital Mortgage Landscape: Overview of Special “eConsiderations”


State law solution for electronic records and signatures

Created by the National Conference of Commissioners on Uniform State Laws (NCCUSL)

• Overlay statute

• 48 U.S. Jurisdictions

• States add non-uniform provisions

• Authorizes replacing writings with electronic records

• Authorizes electronic signatures

Uniform Electronic Transactions Act (UETA) – An Overview


A Federal solution: • It covers state and federal laws

• It is an instant 50 state baseline for the use of electronic signatures and records

• It provides specific requirements for consumer transactions

• It sets boundaries for regulatory authority

• It is technology neutral

• Preempts inconsistent state laws

The Federal ESIGN Act – An Overview


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.

General Rule of Validity – ESIGN and UETA


ESIGN and UETA give legal force and effect to electronic signatures. The law defines an electronic signature as: • an electronic sound, symbol or process

• attached or logically associated with a contract or other record, and

• Executed or adopted by a person with the intent to sign the record.

Examples of sounds and symbols: Typed names, PIN, Password, a click, a digitized picture of handwritten signature, or a digital signature

Example of process

Electronic Signatures: The Legal Definition


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

Implementing Electronic Records and Signatures: Consent


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

Electronic Retention of Records: ESIGN and UETA


It is likely that both ESIGN and UETA will apply to the transaction.

ESIGN allows state to modify, limit or supersede section 101 of ESIGN:

• By adopting the official version of UETA or

• By adopting a state alternative that is consistent with ESIGN.

ESIGN or UETA – Which Law Applies?


Federal and State regulators can establish record retention performance standards for: • Accuracy;

• Record Integrity; and

• Accessibility.

Performance standards should generally be technology neutral

Performance standards can impose greater costs or impose higher burdens on eRecords over paper records if the requirement: • Serves an important government objective; and

• Is substantially related to achieving that objective

ESIGN Retention Standards


Federal and State agencies cannot impose or reimpose a requirement that a record be in tangible printed or paper form

Unless

• Compelling government interest relating to law enforcement or national security; and

• The requirement is essential to attaining such interest.

ESIGN Paper Requirements


Overarching focus in 2018 is moving away from understanding legal framework and to implementation

Digital Mortgage implementations are complex, requiring compliance with federal, state, and local laws, evolving industry standards and secondary market investor requirements

Questions become:

• How reliable are electronic signatures?

• How to identify and mitigate electronic transaction risks?

• Will subsequent transaction parties or the government accept electronic signatures and

records?

• What about eNotarization and eRecording?

• What about vendor due diligence? Do I build or buy?

• How do I assess and manage incoming vs. outgoing electronic signatures?

Digital Mortgages: Moving Toward Full Implementation

16


Many lenders are doing at least one phase of an Digital Mortgage transaction

• Applications

• Disclosure delivery

• Closings

• Secondary market and custody

Fannie and Freddie are buying eNotes

Investor and other third-party agreement terms and instructions for Digital Mortgages

Vendors for authentication, signatures, application disclosure delivery, eVaults, recording, notarization, etc.

Digital Mortgage Landscape: General

17


MERS® eRegistry is actively tracking the ownership and the transfer of those interests in eNotes

As of February 2017 343,489 eRegistrations eNotes registered in 2017: 2,372 Companies registering eNotes in 2017: 22 Companies with access to the MERS®

eRegistry: 70

Digital Mortgage Landscape: General

18


Legal Foundation for eNotarization

• UETA – Section 11

If a law requires a signature or record to be notarized, acknowledged, verified, or made under oath, the requirement is satisfied if the electronic signature of the person authorized to perform those acts, together with all other information required to be included by other applicable law, is attached to or logically associated with the signature or record

• ESIGN – 15 U.S.C. 7001(g)

Adopts UETA rule for transactions in or affecting interstate or foreign commerce

• URPERA – Section 3(c)

A requirement that a document or a signature associated with a document be notarized, acknowledged, verified, witnessed, or made under oath is satisfied if the electronic signature of the person authorized to perform that act, and all other information required to be included, is attached to or logically associated with the document or signature. A physical or electronic image of a stamp, impression, or seal need not accompany an electronic signature

Digital Mortgage Landscape: eNotarization

19


Long-distance Video eNotarization

• Virginia Notary Act – Code of Virginia Title 47.1

• Montana Revised Uniform Law on Notarial Acts – Montana Code Annotated 1-5-601 et seq.

• Additional laws adopted in Texas and Nevada

• Iowa adopts statute rejecting remote notarization

• Revised Uniform Law on Notarial Acts (2010) – Section 11 (Recognizes legality of documents notarized under laws in other states)

• U.S. Constitution – “Full Faith and Credit” Clause

• Freddie Mac FAQ Statement

In states that permit remote electronic notarization, loans in which the borrower’s electronic signature on an electronic Security Instrument or other electronic documents is remotely and electronically notarized are eligible for sale to Freddie Mac. The notary public must be licensed and domiciled in the state in which the mortgaged premise is located and the electronic notarization law was enacted.

• NASS Remote Notarization Task Force

Digital Mortgage Landscape: eNotarization

20


Graphic courtesy of the Property Records Industry Association (PRIA)

Digital Mortgage Landscape: eRecording

21


Over 1887 counties are now permitting eRecording in some form

Over 82% of the U.S. population resides in counties where eRecording is available

In 2017, an estimated 20 million documents were recorded electronically

“eRecording” means different things in different recording offices

The major obstacle to continued growth is the uncertainty around eNotarization, and especially remote eNotarization

Statistics courtesy of Mark Ladd at Simplifile and the Property Records Industry Association (PRIA)

Digital Mortgage Landscape: eRecording

22


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”

Digital Mortgage Landscape: Transferable Records/eNotes


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

Digital Mortgage Landscape: Transferable Records/eNotes


Electronic Delivery

Closing

Selling to Investors

Custody

Digital Mortgage: Key Issues to Address

25


Questions?

2

6

Margo H.K. Tank Partner

+1 202.799.4170

[email protected]

R. David Whitaker Partner

+1 312.368.2199

[email protected]

4




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