For some consumers, purchasing a home can be a daunting task. House-hunting fiascos and heroics aside, the mortgage-closing process itself can be a drawn-out and overwhelming journey through mountains of paperwork. In 2014, the Consumer Financial Protection Bureau (CFPB) issued a report identifying key issues in the mortgage-closing process and positioning electronic mortgage closing as a solution. The CFPB went on to conduct a four-month eClosing pilot program to test its theory. Looking back now, it is unsurprising that the study found that “eClosing borrowers in our pilot scored higher than paper borrowers on our measures of empowerment at closing, perceived understanding, and efficiency.”
Indeed, there are many efficiencies resulting from an eClosing process, much easier access to documents prior to closing, a reduced number of days between approval and closing, and the ease of proving compliance with the numerous regulatory requirements, just to name a few.
So, how do we escape paper closing and evolve to eClosing platforms? The bland answer is federal and state legislation and the mortgage industries’ response. But it’s really more interesting than that.
First, cue existing statutes that make eClosings possible. In fact, the legal basis for establishing the equivalence of electronic records and signatures to traditional paper records and wet-ink signatures already was available: the federal Electronic Signatures in Global and National Commerce Act (ESIGN) and the various state adaptions of the model Uniform Electronic Transactions Act (UETA). These statutes provide that records and signatures relating to transactions cannot be denied legal effect, validity, or enforceability solely because they are in an electronic form or because an electronic signature or electronic record is used in their formation. Once the “eNote” has been electronically created and signed by the borrower at the eClosing in compliance with ESIGN and UETA, it is tamper-sealed, deposited into a secure electronic vault (called the “eVault”). That eNote is then referred to as the “Authoritative Copy.”
Second, to make eClosings a viable option, the mortgage-backed securities industry (the ultimate source of funds for many mortgage loans) had to be on board. This industry was built in reliance on the negotiability of paper promissory notes and the ability to take title free of claims or defenses by previous holders in the chain of title. Luckily, ESIGN/UETA come to the rescue again. These statutes create a new type of payment intangible called “transferable records.” Under ESIGN/UETA, a “Transferable Record” (also called the eNote) is an electronic record that would be a promissory note under Article 3 of the Uniform Commercial Code (UCC), if it was in writing, and for which the issuer (i.e., the borrower) has expressly agreed is a Transferrable Record. Like a paper promissory note, a Transferable Record can be freely and unconditionally transferred. It even is possible for an owner to achieve the coveted super-priority status of a holder in due course. ESIGN/UETA accomplishes this by creating a new concept of “control.” Control of a Transferable Record is used as a substitute for traditional (UCC) “possession” of a written promissory note. A person having control of a Transferable Record (called the “Controller”) is afforded the same rights and benefits of a holder under the UCC of a paper promissory note. Most importantly, the Controller is entitled to enforce the Transferable Record/eNote and, provided certain requirements are met, can take title free and clear of all other claims.
Third, to make the eClosing process fit within the existing industry framework, where loans regularly are bought and sold, there had to be an efficient way to keep track of the Transferable Record. MERS addresses this need via the MERS eRegistry. The MERS eRegistry is the authorized, centralized system of record for evidencing the transfer of interests in a Transferable Record, which can readily and accurately establish the identity of the person entitled to payment. Specifically, eNotes are registered in the MERS eRegistry at origination. The MERS eRegistry identifies the party that has Control of the Transferable Record/eNote, the location of the Authoritative Copy of the eNote, and stores the unique digital signature (hash value) of the eNote.
Fourth, eClosings never would be accepted in the industry unless the courts agreed that an eNote was enforceable after default. There are only a few reported appellate decisions on this topic. The key takeaways are that a plaintiff seeking to enforce an eNote must establish, with evidence: (1) that it is the Controller (or acting on behalf of the Controller); (2) it has control of the Authoritative Copy of the eNote; and (3) the transfer history of the eNote from origination to the current Controller (typically reflected on the MERS eRegistry). Litigants also will need to convince courts that this new type of evidence is sufficient, in lieu of the longstanding evidence necessary for the enforcement of a paper promissory note (delivery, possession, and endorsement).
This article provides a high-level overview of the primary statutes and industry efforts which, taken together, make eClosings possible. However, certain holes need to be filled before the eClosing process can be fully digitized, including state-wide remote online notarization (RON) and county-wide e-recording. Currently, only 22 states have statutes permitting RON and many counties do not recognize or accept electronic records. Once these final steps are completed, fully digitized eClosings could be a reality for consumers, as well as for the industry as a whole.