LenderNews by Rob Chrisman
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Feb. 18: Legal stuff: title companies & blockchain, electronic notarizations, when are signatures required; is an e-mail a contract?

February 18, 2017

Folks always wonder where the money goes when the CFPB penalizes companies. What about the money that hackers steal? And how are they stealing it? Here’s a story that only an IT person would savor about hackers pinching bitcoins using phone numbers.
 
What about wrongdoing via forgery… what are the trends in the legality of documents & signatures? Electronic signatures and automatic signature verification are crucial yet often overlooked components of check fraud detection. A single signature clearly has far-reaching ramifications. A direct correlation exists between front-office operations such as capturing customer signatures, and back-office operations such as confirming signature authenticity and check verification to prevent forgery, one of the top three types of check fraud.
 
This week the American Land Title Association (ALTA), the national trade association of the land title insurance and real estate settlement industry, sent a letter to the National Association of Secretaries of State (NASS) offering support of efforts to promote the understanding of remote electronic notarizations. ALTA offered eight suggestions to help guide the development of clear statutes, regulations and standard practices that authorize and recognize remote electronic notarization. The guidance is necessary to give certainty that remote and video notarizations will be accepted as valid transactions by county recorders, state courts and bankruptcy trustees.
 
“’The title insurance and settlement industry seeks assurance that a remotely electronically notarized document will receive the same legal certainty, and provide effective constructive notice, under state law as a traditional, wet-signed, face-to-face, personal appearance notarization,’ said Michelle Korsmo, ALTA’s chief executive officer. ‘Though states have long accepted traditional notarizations conducted in other states, it is currently unclear as to whether remote electronic notarizations will receive the same treatment.’”
 
“ALTA believes the following elements should be included in remote electronic notarization statutes: Adequate safeguards to protect the public and the parties relying on notarization from fraud. Proven methods of authenticating identity of the signer through a multi-factor identification process. Confidence that a remotely electronically notarized document is recordable in the local land records, and that once recorded will serve as effective constructive notice upon which the public can rely. A determination of whether the state will recognize remote notarial acts performed by out-of-state notaries. Require an indication on the notarized document to specify how the signer appeared before the notary. Tamper-evident technology is used to assure the integrity of a remotely electronically notarized document. Require the retention of records for a remote electronic notary for a period of at least seven years. Clarity and consistency within statutes that require the use of notaries and witnesses to give guidance as to the impact of remote notarization on these other processes.” For more, you may download ALTA’s letter.
 
And this note on signatures in general. “We are constantly worrying about getting consumer signatures on our TRID disclosures. In fact, we are unsure of signatures on several consumer disclosures. It seems like a minefield at times to determine if we should be getting disclosures signed. Here’s our question: what are some of the disclosures that we need to get signed by the consumer?”
 
Jonathan Foxx with the Lenders Compliance Group opined, “At Lenders Compliance Group, we get this question regularly, especially when there is a transition to a new disclosure protocol. It can be confusing. Here are a few disclosures on which consumer signatures may or may not be required.
 
The Loan Estimate (initial or revised): Not required. Optional. [1026.37(n)(1) & (2)]
The Closing Disclosure: Not required. Optional. Signature(s) for documenting receipt of the Closing Disclosure is at the lender’s option, in order to evidence receipt by borrower three (3) business days prior to closing. [Commentary ¶37(n); Commentary ¶38(s)]
Loan Estimate with signatures versus Intent to Proceed: Signature(s) for confirming receipt of the Loan Estimate may not be used as replacement for signature(s) required by Intent to Proceed. [§1026.37(n); 78 FR 79813]
Closing Disclosure (non-borrowing spouse) three (3) business days prior to closing and at closing: Not required. Optional. Signature(s) for documenting receipt of the Closing Disclosure is at the lender’s option, in order to evidence receipt by borrower three (3) business days prior to closing. [Commentary ¶37(n); Commentary ¶38(s)]
 
“There are many caveats, but here are a couple to consider. You should determine if consumer signatures are required by a specific loan program or investor. Also, the Loan Estimate or Closing Disclosure can be transmitted in accordance with E-Sign compliance standards; but, there is no regulatory requirement that either the Loan Estimate or the Closing Disclosure must actually contain signature(s). [§1026.37(o)(3)(iii); §1026.38 (t)(3)(iii); 15 USC 7001 et. seq.] To appropriately implement the E-Sign process for consumer signatures, and to review other caveats, it is a good idea to seek the guidance of a compliance professional.”
 
In addition, Mr. Foxx wrote, “The Electronic Signatures in Global and National Commerce Act (E-Sign Act) provides a general rule of validity for electronic records and signatures for transactions in or affecting interstate or foreign commerce. The E-Sign Act allows the use of electronic records to satisfy any statute, regulation, or rule of law requiring that such information be provided in writing, if the consumer has affirmatively consented to such use and has not withdrawn such consent.
 
“Prior Consent is required from the consumers in order to implement the E-Sign Act procedures. Prior to obtaining their consent, financial institutions must provide consumers, a clear and conspicuous statement informing the consumer: of any right or option to have the record provided or made available on paper or in a non-electronic form, and the right to withdraw consent, including any conditions, consequences, and fees in the event of such withdrawal; whether the consent applies only to the particular transaction that triggered the disclosure or to identified categories of records that may be provided during the course of the parties’ relationship; that describes the procedures the consumer must use to withdraw consent and to update information needed to contact the consumer electronically; and that informs the consumer how the consumer may nonetheless request a paper copy of a record and whether any fee will be charged for that copy.”
 
Jeff R. asks, “How does the title industry view blockchain technology? Perhaps I’m missing something obvious, but it seems that blockchain’s ability to create a digital, public ledger that is inherently resistant to alteration and is ultimately transparent could and should remove the need for title insurance in the future. But will it happen? Will local politics and lobbyists get in the way? 
 
“Title insurance – of all verticals within the greater real estate industry – seems to be the slowest to react to change and is perhaps, in fairness, the hardest to change due to the very decentralized and localized nature of insurance. Take Texas, for example, where title insurance rates are set by regulators, presumably to ‘protect’ consumers (or, rather, to protect title company margins). Ironically, Texas title insurance rates are among the highest in the nation.  Will such "consumer protection" strategies employed by local regulators get in the way of disruptive blockchain technologies that could ultimately make title insurance obsolete and thereby dramatically reduce the cost of borrowing, buying, and selling?
 
“Ultimately, it will be up to individual counties to decide how they’re going to participate in blockchain technologies that could transform the industry. Will counties be smart enough to leverage some type of standardized platform for the recording of all instruments so that the cost of maintenance of the network could be shared by all? If so, who will create that? Here’s hoping that regulators and lobbyists under the guise of ‘consumer protection’ don’t get in the way of such advancements.” Thank you, Jeff!
 
I sent this note along to Andrew Liput with SecureInsight who responded with, “This is an excellent point and it highlights the perception that title industry insurance premium pricing, despite massive improvements in technology and changes in buying habits, has not changed with the times. Thirty years ago, searches were done manually, visiting clerks’ offices and reading through massive recoding books.
 
“Today the availability of online property data makes searches much more convenient and expeditious. In addition, whereas most people stayed in their homes for 20 years or more in the 1960s, 1970s and even 1980s, today people are moving constantly and so properties are changing hands on average every 5 years. This means that title searches are not as extensive and are repetitive. Finally, the accuracy of electronic recording and public databases means fewer errors. I read somewhere that title claims (not claims or litigation regarding settlement errors and theft) represented only 5% of overall policies written. These changes are not reflected in the cost of title insurance today. In New Jersey, a loan for $300,000 will on average cost the buyer and seller approximately $4,000 in insurance and related fees this year. Any solution that reduces the expense of title insurance while maintaining the reliability of property records is great…you just have to convince ALTA and the state insurance regulators.”
 
And are thoughts about signatures & legal contracts changing? Law firm BucklySandler reports that, “On December 22, in an unpublished decision, a Texas Court of Appeals held that an email exchange constituted an executed contract between two individuals under the state’s enactment of the Uniform Electronic Transactions Act (‘UETA’). Khoury v. Tomlinson, No. 01-16-00006-CV (Tex. App. Dec. 22, 2016). The dispute involved an email sent from Appellant to Appellee, which outlined terms of an agreement to repay investment funds. Appellee responded to the email, stating ‘We are in agreement,’ but did not type his name or include a signature block at the end of his message. A jury found that an electronic contract was formed by this exchange, but the trial court granted the Appellee’s motion for judgment notwithstanding the verdict on the basis that the electronic contract violated the state statute of frauds. On appeal, the Appellant invoked the UETA, arguing that the email satisfied the writing requirement of the statute of frauds because it was an electronic record and that the header, which included a ‘From:’ field bearing the Appellee’s name, constituted Appellee’s signature because that field serves the same ‘authenticating function’ as a signature block. The appellate court agreed that the email was an electronic record sufficient to satisfy the writing requirement in the statute of frauds.”
 
BuckleySandler reported that, “On February 17, a U.S. District Court held that home sellers who use contracts for deed are required to comply with CFPB Civil Investigative Demands (CIDs) asking for information about possible illegalities in selling or collecting residential property purchase loans. CFPB v Harbour Portfolio Advisors, LLC et al., [Order] No. 16-14183 (E.D. Mich. Feb. 17, 2017). Specifically, the Court found that the Bureau is not “plainly lacking” in jurisdiction to look into contracts for deed, and the CIDs were not unduly burdensome. Back in November, the CFPB had petitioned the court to enforce CIDs served on Respondents. At issue before the Court was whether the Bureau’s investigative authority extends to the selling, marketing, and servicing of a financial product called an Agreement for Deed (“AFD”), otherwise known as a “contract for deed” or a “land installment contract.” Respondents thereafter petitioned the Bureau to set aside the CIDs, offering three reasons why the CIDs should not be enforced: (i) the CFPB exceeded its authority in issuing the CIDs; (ii) the companies had not been given fair notice that contracts for deed could be covered by federal financial consumer protection laws; and (iii) the CIDs were unduly burdensome and should be modified.
 
 
Every day I receive hundreds of e-mails asking me how I get fired up to send out the commentary. Okay, I don’t receive any e-mails asking me that, but if I did, I would answer that I hop in my wind tunnel and do some calisthenics. Or throw my cat Myrtle in and really let the fun begin…
 
 
Visit www.robchrisman.com for more information on our industry partners, access archived commentaries, or to subscribe to the Daily Mortgage News and Commentary. If you’re interested, visit my periodic blog at the STRATMOR Group web site. The current blog is, “Are You Sure that Rates are Going Higher?” If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what’s going on out there from the other readers.
Rob
 
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