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Why Can’t I Just Slap an E-signature on a PDF Note?

With the industry ramping up their use of remote online notarization, emergency video notarization and remote ink-signed notarization for security instruments, the natural question is when will we see new legal authority to make it easier to electronically sign mortgage notes? The answer is not likely anytime soon.

EnotesigDigital transactions got a big boost in the early 2000s with the passage of the federal Electronic Signatures in Global and National Commerce Act (15 USC 7001) and the state Uniform Electronic Transactions Act (UETA). UETA has been passed in 48 states, as well as Washington, D.C. and the U.S. Virgin Islands (New York and Illinois have non-conforming electronic transactions laws). These two laws adopt a simple legal principle that electronic signatures and records should be accorded the same legal status as ink signature and paper records.

These laws also allow a basic requirement for what constitutes a valid electronic signature. E-Sign defines an electronic signature as, “an electronic sound, symbol, or process, attached to or logically associated with a contract or other record and executed or adopted by a person with the intent to sign the record.” It leaves it up to businesses to set higher business requirements concerning security and certainty of the signature.

Why Can’t I Just Slap an E-signature on a PDF Note and Call It a Day?

While both UETA and the E-Sign are fairly broad, they both exclude some transactions from their scope, including transactions under most of the Uniform Commercial Code (UCC), other than Article 2 and 2A. Promissory notes (the legal term for a mortgage note) are creatures of the UCC. Most promissory notes used in the mortgage space are intended to fall under the legal scheme of negotiable instruments, which is governed by article 3 of the UCC. This contrasts with mortgages, deeds of trust or liens which are creatures of real property law. Thus, mortgages can follow the basic ESIGN or UETA framework while notes are not covered.

What Makes Promissory Notes Special?

Under 3-104 of the UCC, a negotiable instrument is defined as “an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order, if it: (1) is payable to bearer or to order at the time it is issued or first comes into possession of a holder; (2) is payable on demand or at a definite time; and (3) does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money, but the promise or order may contain (i) an undertaking or power to give, maintain, or protect collateral to secure payment, (ii) an authorization or power to the holder to confess judgment or realize on or dispose of collateral, or (iii) a waiver of the benefit of any law intended for the advantage or protection of an obligor.” Other types of negotiable instruments can be cashier’s checks, bearer bonds and traveler’s checks.

There are a host of rules that go along with the creation and enforcement of a notes and liability for irregularities in the process. In addition, there are many rights granted to people that qualify as holders, holders in due course and persons entitled to enforce a note. Because paper promissory notes are meant to be “negotiable instruments,” having “possession” of the “original” signed note is legally significant. To simplify things, possession is 9/10th of the law when it comes to who can enforce a note.

With eNotes, possession of an original note does not work the same way. Imagine someone applies a simple digital signature to a PDF document. They then email that file to 30 people. Which one is the original? How do we determine which recipient has the right to enforce the note?

EnoteHow is an eNote Created?

Given this problem about possession of the original note, UETA and ESIGN created a special category for negotiable instruments called transferable records. To simplify matters, people seeking to create an eNote must first establish a control system that houses an authoritative copy of the digital document. If they do this, the eNote qualifies as a “transferable record.” Transferable records can be transferred and assigned like negotiable instruments by transferring rights to control the record in the system.  Under these rules, a person with “control” of the transferable record has the same legal rights as a person who has physical possession of a traditional paper note.

This requires a complex system for creating authoritative records and control systems that correlate to the basic concepts of holders, persons entitled to enforce and possession in the law of paper notes. Under this framework a system must:

  • Securely maintain and label a single authoritative copy of each eNote
  • Identify the person with exclusive control of the authoritative copy
  • Create a chain of control marking transfers of control of the authoritative copy
  • Track and label non-authoritative copies of each eNote

To execute this process, industry developed “electronic vaults” of authoritative copies of eNotes and related consumer documents.

Fannie Mae and Freddie Mac have a series of requirements that loan originators must go through to be able to sell eNotes to those government sponsored entities (GSEs). This includes using the Uniform Fannie Mae/Freddie Mac form of eNote, creating an audit trail to link a specific borrower to their electronic signature, use tamper evident technology and encryption of the signature and document, use of an authorized eVault and registering the note with MERS.


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