MReport May 2020

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Page 38 of 67

M R EP O RT | 37 FEATURE 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 hold- ers in the chain of title. Luckily, ESIGN/UETA came 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 is even possible for an owner to achieve the coveted super priority status of a holder in due course. ESIGN/UETA accomplish this by creating a new concept of "con- trol." Control of a Transferable Record is used as a substitute for traditional (UCC) "posses- sion" 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 prom- issory note. Most importantly, the Controller is entitled to enforce the Transferable Record/eNote and, provided certain require- ments 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® eReg- istry 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 signa- ture (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 ap- pellate 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 origina- tion 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-lev- el overview of the primary stat- utes and industry efforts which, taken together, make eClosings possible. However, certain holes need to be filled before the eClos- ing 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 eClos- ings could be a reality for con- sumers, as well as for the industry as a whole. . LAURA BAUCUS is the head of Dykema's Financial Services Litigation Practice Group. Baucus represents financial institutions in litigation involving loan servicing, credit card and mortgage products, escrow and insurance proceeds, and note and collateral enforcement. Her practice includes defending claims under the Fair Credit Reporting Act, the Real Estate Settlement Procedures Act and Regulation X, the Truth in Lending Act and Regulation Z, and the Telephone Consumer Protection Act, among other federal and state statutes and regulations. 7 See Good v. Wells Fargo Bank, N.A., 18 N.E.3d 618, 624-25. (Ind. Ct. App. 2014) (Wells Fargo would have standing to enforce the eNote if it could prove, on remand, that: (1) it held the Authoritative Copy of the eNote, and (2) the transfer of control to Wells Fargo, as reflected on the MERS® eRegistry, happened before the date the foreclosure suit was filed); New York Community Bank v. McClendon, 29 N.Y.S.3d 507 (N.Y. App. Div. 2016) (plaintiff, which was seeking to enforce an eNote, need only supply "reasonable proof that the [plaintiff] . . . is in control of the transferable record," which "may include access to the authoritative copy of the transferable record and related business records sufficient to review the terms of the transferable record and to establish the identity of the person having control of the transferable record." Id. at 807 (quoting 15 U.S.C. § 7021(f)); Wells Fargo Bank, N.A. v. Benitez, No. 13-15433, 2016 N.Y. Slip. Op. 32564(U) (N.Y. Sup. Ct. 2016) (To enforce the eNote at issue, the plaintiff must to prove that the control of the eNote has been transferred to plaintiff, via a reliable system showing the transfer of interests.) 8 See e.g., New York Community Bank v. McClendon, 29 N.Y.S.3d 507 (N.Y. App. Div. 2016), where the New York court applied ESIGN and found that "[d]elivery, possession, and endorsement are not required to obtain or exercise any of the rights" of a holder of an electronic note. Id. at 806-07 (quoting 15 U.S.C. § 7021(d)). See also Rivera v. Wells Fargo Bank, N.A., 189 So. 3d 323, 329 (Fla. Dist. Ct. App. 2016) (applying Florida UETA), which held that physical delivery, possession, and endorsement are not necessary for enforcement of an eNote. There are many efficiencies resulting from an eClosing process, such as easier access to documents prior to closing, 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 quick answer is: federal and state legislation and the mortgage industry's response.

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