Mortgage Daily

Published On: October 10, 2007
Ensuring Electronic Enforceability

White paper discusses validity of digital loan documents

October 10, 2007


photo of Coco Salazar
Mortgage lenders who close mortgages electronically are required use special technology that validates the authenticity of loan documents. A new study details steps lenders can take to ensure digital documents hold up in court.

Electronic vaulting technology provides the lender with proof the electronic mortgage is valid, according to The Advanced Electronic Vaulting Solutions: Conquering the Final Frontier. Such solutions are critical in the paperless processes to create and process digitally signed contracts that ensure legal enforceability and negotiation of the contracts.

The white paper cited a 2005 case involving American Express and a cardholder where a judge held the proof of accuracy and authentication of e-documents in question to a decidedly higher standard than traditional paper documents. This, despite that the Electronic Signatures in Global and National Commerce Act of June 2000 established the federal validity of using e-signatures in financial transactions, with the intent of giving electronic signatures and records the same legal weight as their paper counterparts.

American Express had attempted to collect a debt outside of a cardholder’s bankruptcy filing, according to the report produced by eOriginal Inc. — which is in the business of providing electronic vaulting solutions. The credit card company had a set of electronic documents alleging a different amount for dispute than the documents the debtor held. A judge dismissed the case after American Express was unable to prove the unaltered status of its electronic documents because it could not properly demonstrate what happens to documents held in its electronic record keeping system.

“Had American Express presented proof of controlled access to their database, as well as an audit trail with a secure log of activity, the case might have had a different outcome,” eOriginal wrote. “This case stands as a stark reminder of the need for electronic contracts and other financial services documents to be managed and maintained effectively, no matter the industry segment.”

The use of electronic vaulting has been in place and working successfully for years in other industries with similar needs and requirements as the mortgage industry, mostly in automotive finance and equipment leasing, according to the author — which claims its platform is the advanced electronic vaulting standard for those two industries.

As e-mortgages become more prevalent, the requirement for lenders to have secure, electronically-closed loan packages that can be accessed by many parties throughout the life of the loan becomes more critical, especially considering the significantly larger dollar amounts at stake and document lifecycles, eOriginal noted.

“Strict controls must be in place every step of the way to track an original document and prove its unaltered authenticity and uniqueness,” the paper stated. “It is essential for lenders to manage discreet documents and their access rights, as well as to perform ongoing audits and establish legally recognized controls.”

Only use of electronic vaulting can bridge those requirements, according to the paper. However, using “advanced electronic vaulting solutions, on their own or as part of a third party registry system, provide the only proven and accepted manner” of establishing “iron-clad protection and maintenance” of e-documents and proper procedures to meet all legal requirements, eOriginal said.

Document and content management systems are not vaults, noted eOriginal, which said it has managed around 500,000 electronic contracts for more than $10 billion in originations, of which more than $1 billion has been pooled and securitized without a single error or legal challenge. It also emphasized that the Mortgage Electronic Registration System enables and maintains the industry registry of eNotes but that MERS itself requires the lender have the ability to store eNotes and transfer them to investors.

Advanced electronic vault technology not only provides irrefutable proof that the document in the lender’s possession is the original, unaltered document, it also enables the transfers of ownership and location without altering the original or invalidating its tamper seal, the report indicated. This technology also allows lenders to permanently destroy or remove the original, or Authoritative Copy, from the vault while creating an enforceable paper version; produce legally admissible packages, including print copies and audit trails of the electronic original documents; and pool and securitize eNotes for resale.

Thus, when considering a vault, a lender should look for a solution with vault-to-vault transfer capability; that supports the new Transfer of Location of Electronic Contracts ANSI X-9 standard; can easily interface and/or adapt to existing systems already in use; meets compliance and security needs in a cross section of industries, particularly integration with available e-signature vendors and their technologies; and incorporates MERS submission for loans that will be registered while being able to equally handle those that will not be registered. Lastly, “the electronic valuation solution vendor should be able to show documented credit rating agency acceptance of validity as well as similarly documented third-party legal opinions supporting secondary market sale,” the paper said.

“Standard & Poor’s and other ratings agencies have accepted eContracts as equivalent to paper so that a properly maintained and secured eContract is rated no differently when sold on the secondary market,” according to eOriginal .

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