Clarifying Mortgage Letter 2014-03

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KenMoyleMembers of The Electronic Signature and Records Association (ESRA) were very pleased when the Department of Housing and Urban Development (HUD) announced its support of broader adoption and acceptance of electronic signatures and records in January 2014. When the Mortgagee Letter 2014-03 shared HUD’s’ updated policies with the mortgage industry, it represented a big step forward for an industry eager to take 100 percent of its business digital with full assurance of legal force.

Since the Federal Housing Administration’s (FHA) policy change in 2010 to extend the acceptance of e-signatures on third-party loan documents that weren’t created by lenders (purchase and sale agreements), ESRA was encouraged by the intent behind the words of FHA commissioner Carol Galante earlier this year, who stated, “This extension will not only make it easier for lenders to work with FHA, it also allows for greater efficiency in the home-buying and loss-mitigation process.” With the support from the federal department with a strong influence in mortgage lending, we expect every lender to start commonly integrating electronic signature into their processes to accelerate transactions, reduce complexity and eliminate regulatory compliance risks.

While creating new opportunities for efficiency, Mortgage Letter 2014-03 had the unintended side effect of creating new questions about the role of electronic signatures in the mortgage process. There are five areas ESRA hopes will be addressed as a future statement from HUD as well as encourage everyone in the mortgage industry to move with confidence to a paperless future.

Attesting to Accuracy

The Mortgage Letter 2014-03 states that a lender must be able to prove that the signer “certified that the document is true, accurate, and correct at the time signed.” This creates an inconsistency between the responsibilities of people who are electronically or hand-signing mortgage documents. Within a mortgage package, there are many types of documents that require signature for various reasons, such as acknowledgment, agreement, receipt, etc. Certification of the contents is more often not the reason signatures are obtained, and even if it were, we would hope that this additional burden would not be borne on borrowers based solely on the method they used to execute their signature.

Intent to Sign

Wording in Mortgage Letter 2014-03 can be read as requiring every instance of an electronic signature to be accompanied by a notation that states the purpose for signing. Electronic signatures are currently only valid under the ESIGN Act if they are “executed or adopted by a person with the intent to sign the record.” Any lender is aware that many documents are signed electronically by multiple parties in a transaction, and that their purpose for signing varies widely by both the document and the role the party plays in the transaction. Even on a single document, signers may add their signatures for completely different purposes. Surely adding a notation of intent next to every last e-signature could not have been FHA’s motive here.

Authentication and Attribution

Two sections of Mortgage Letter 2014-03 reflect conflicting indications of whether the lists in each section are meant to show examples of, or limits to, measures that can be taken by mortgagees to comply with these sections. For example, knowledge-based authentication is listed as a method of attribution, but can also be used as a method of authentication. It is unclear whether one instance of this method can be used to meet both criteria. In addition, the Letter does not mention whether these lists are meant to be illustrative examples or the complete set of attribution methods for annotating facts and circumstances surrounding the transaction.

Integrity of Records

The concept of Authoritative Copy under ESIGN, UETA and the Uniform Commercial Code (UCC) is unique to specific documents, such as electronic chattel paper and electronic equivalents to negotiable promissory notes. The term “Authoritative Copy” has no legal definition or significance outside of that context. The term is used with “electronic originals” solely because they require special treatment to establish ownership by transfer or assignment—including extensive watermarking of all viewable or printable copies.

The use of an “Authoritative Copy” in the ordinary course of signing other documents is contrary to the provisions of ESIGN and UETA (which provide that except where an “Authoritative Copy” is required, any accurate copy of an electronic record is an “original” for all legal purposes) – the requirement is also unnecessary, unusual and burdensome.

Given that the Letter specifically excludes promissory notes for the moment, it would be helpful to gain clarification on the origin or purpose of the reference to “Authoritative Copy.” Do mortgagee systems need to “be designed so that the signed document is designated as the Authoritative Copy” or does the requirement refer solely to electronic promissory notes or other records subject to an “authoritative copy” requirement under the law?

Records Retention and Inspections Requirements

ESRA members agree that audit log, controls and documentation should be readily available for inspection for the same periods as records signed in ink. It is critical that systems have the ability to “reproduce electronic records as accurately as if they were paper records when printed or viewed.”

Many readers of Mortgage Letter 2014-03 were surprised to find that these requirements were extended to include inspection of computer systems (including hardware and software) and preserving the hardware and software with which contracts are executed. Under current guidelines, systems may not be required to produce reliable records that would otherwise meet record retention and inspection requirements, and given the pace of technological change and the record retention periods already imposed by other regulations, preserving the physical software and hardware used to create the original record will be quite burdensome. We think ultimately this new requirement will only apply if there is no other way of producing reliable and accurate electronic records.

This also intervenes with how electronic signatures are executed—which is from cloud providers whose businesses are based around keeping system hardware and software maintenance out of the purview of their users. Most modern, current security practices and predicate rules at governing lending institutions do not readily accommodate physical inspection of lender hardware and software. If this provision is taken literally, no mortgagee could comply without violating its own security policies, which typically limit physical access to their servers housing sensitive customer data and debt obligations. Based on these factors, we don’t believe it was the intent of the Department to require lenders to allow physical inspections of lender hardware and software, and expect this will be changed in a future Letter.

Overall, ESRA members are thrilled with FHA and HUD’s new active support of electronic signature technology and standards. We think lenders will have a heightened interest in adoption as well; electronic documents not only streamline and ease mortgage processes, but provide significantly limit regulatory compliance risk. We are hopeful that the questions posed here are addressed quickly and represent just small a bump in the road on the way to full industry adoption of electronic signature technology.

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