Digital Evidence – Testing Document Authenticity

Proving “Originality” and Ownership of Electronic

Mortgage Notes

Grace Powers, 1st Vice President, Sr. Legal Counsel

Countrywide Financial Corporation
June 1, 2007

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Digital Evidence – Testing Document Authenticity

From Paper to Electronic Notes

The mortgage market’s continued ability to lend money relies

on the liquidity of promissory notes secured by real property.
Paper promissory notes are endorsed “in blank” so that
whoever has “possession” of the note is considered a holder,
holder in due course, or purchaser.
Electronic Note (“eNote”) challenges:
There is no such thing as an “original” note.
You can’t take “possession” of an eNote.
How do you prove that you’re the owner of an eNote?
How do you prove that the eNote has not been altered?

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Current eMortgage Infrastructure

ESIGN and UETA legalize the use of electronic records and

signatures.
Overlay statutes
Uniform Real Property Electronic Recordation Act
(URPERA) and other state laws authorize electronic
recording by county clerks and recorders.
Industry standards and utilities:
MERS® eRegistry
Mortgage Industry Standards Maintenance Organization
(MISMO)
Standards and Procedures for Electronic Records and
Signatures (SPeRS)
Secure Identity Services Accreditation Corporation (SISAC)

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State eCommerce Law – UETA

The Uniform Electronic Transactions Act (UETA) was

introduced in 1999. Thus far, 46 states plus DC have
adopted UETA in some form.
UETA’s Objective: Ensures that transactions in the electronic
marketplace are as enforceable as transactions memorialized
in paper.
Section 7 of UETA provides:
A record or signature may not be denied legal effect or
enforceability because it is in electronic form.
A contract may not be denied legal effect or enforceability
because solely because an electronic record was used in its
formation.
Any law that requires “a writing” will be satisfied by an electronic
record.
Any signature requirement in the law will be met if there is an
electronic signature.

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Federal eCommerce Law - ESIGN

For those states that have not passed a uniform version of

UETA, the Electronic Signatures In Global and National
Commerce Act (ESIGN) would control.
ESIGN’s Relationship to UETA:
If state adopts uniform UETA, ESIGN may be superceded in
whole or in part.
If there are non-uniform amendments to UETA that conflict with
the main provisions in ESIGN, ESIGN would preempt UETA.
Whether or not a state has passed UETA, ESIGN requires
consumer consent before one can deliver disclosures that are
required to be “in writing” to consumers.

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ESIGN / UETA Transferable Record Treatment for

Negotiable Notes

An electronic record that would otherwise be a

negotiable promissory note under UCC Article 3
may be a “transferable record”.
The transferable record concept creates a structure
that allows for the transfer or assignment of an
electronic promissory note.

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Establishing Control of an Transferable Record

The concept of “control” under ESIGN and UETA establishes
a parallel structure for the transfer and negotiability of an
electronic promissory note to a third party so that the third
party transferee has the same rights and defenses that are
held by a “holder,” or “holder in due course,” under the UCC.
Can be thought of as equivalent to possession of a paper
note plus delivery and endorsement.
A person has “control” of a transferable record, meaning the
exclusive right to enforce or transfer ownership of the
underlying debt obligation if a system “employed for
evidencing the transfer of interests in the transferable record
reliably establishes that person as the person to which the
transferable record was issued or transferred.”
Standard stands on its own, but there is a safe harbor.

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Safe Harbor for Meeting Control Requirement

Six safe harbor elements:

Single authoritative copy exists that is unique, identifiable and
unalterable without detection.
Authoritative copy identifies the person asserting control as
either to whom the transferable record was issued or the issuer.
- Example: MERS eRegistry was designed as the industry
utility serving as the central location to identify the current
person in control and the location of the authoritative copy of
the promissory note.
Authoritative copy is communicated to and maintained by the
person asserting control or its designated custodian.
Copies or revisions that add or change an identified assignee of
the authoritative copy can be made only with the consent of the
person asserting control.
Each copy of the authoritative copy and any copy of a copy is
readily identifiable as a copy that is not the authoritative copy.
Any revision of the authoritative copy is readily identifiable as
authorized or unauthorized.

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MERS® eRegistry

Provides ESIGN / UETA Safe Harbor compliance

infrastructure for negotiable instruments
Identifies the Controller and Location of the Authoritative
Copy of the eNote
Does not store the eNote itself
In production as of April, 2004

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Definition Translation

Paper World Electronic World

Negotiable Instrument Transferable Record (“eNote”)

Original Note Authoritative Copy of eNote
Possession Control
Investor/Holder Controller
Custodian Location (eVault)
Endorsement Transfer of Control
Holder in due course Transferable Record Audit trail
Servicer Controller’s Delegatee

*Source: MERSCORP, Inc. Used with permission.

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Importance of SISAC- for eMortgages

MISMO eMortgage Closing Guide recommends that a tamper-
evident digital signature be applied to an electronic document to
preserve the document’s integrity.
The certificate used to implement a tamper evident-digital signature
should be an organizational certificate obtained by a SISAC
accredited issuer.
See www.mismo.org for Closing Guide and other guidance.
SISAC-accredited digital certificates may provide assurance
of:
A signer’s identity;
That the signature is valid; and
That the electronic document has not been tampered with after a
tamper-evident digital signature has been affixed.
Goal - Secure, reliable and enforceable eMortgages

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Tamper-Evident Seal

A "digital fingerprint" or "hash“ that consists of a

series of letters and numbers that uniquely describe a
document.

If the document is altered in any way, the "hash" for

the altered document will be different from that of the
original document.

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Tamper-Evident Seal Process

The process of digitally signing a document with a valid digital certificate such that
if such a document is modified, it can be systematically detected.
Creating a seal Electronic Record Verifying a seal

Document Document

Hash Function Hash Function

Public Key
Digest
Private Key
Decrypt
Encrypt
Tamper-Evident Seal
Signature Value Expected Actual
Signature (Digital Fingerprint ) Digest Digest

If there are the same,

the tamper-evident seal is verified.
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