It’s no secret that digital is overtaking the finance industry, and mortgage is no exception. However, while end-to-end digital mortgage solutions exist that ensure secure management of documents and loans throughout the entire process, from loan execution through post-lifecycle management, adoption continues to be slow throughout this industry. Among the common justifications for the delay has been a lack of confidence in these processes and documents to withstand legal challenges.
Hopefully, these excuses can finally be put to rest. Two separate court decisions have recently set the precedent that electronically signed promissory notes secured by real property (eNotes) are legally enforceable by lenders. These decisions address many concerns held by investors about buying eNotes and suggests further clarity may have to come from case law as the digital mortgage industry matures.
Embracing the Shift and Meeting Demands
Deeply traditional, the mortgage industry is rooted in hard-copy, multi-party financial service processes, causing the adoption of digital to be sluggish and restricted. However, demand by the key players and regulators for digital capabilities are spurring the advancement of digital transaction management (DTM), which, as noted in a study conducted by Aragon Research, is expected to grow into a $30-billion market by 2020.
In addition to the demand for digital, a recent white paper from PwC states, “As regulatory expectations for mortgage originations continue to evolve in scope and complexity, the digital mortgage and its data-driven processes can provide the required transparency and accessibility to consumer data. Lenders who adopt a digital mortgage platform can more easily automate many aspects of their quality control (QC) and compliance program, enabling them to strengthen and streamline their processes and examination outcomes.”
It is worth noting that the first all-digital paperless home purchase and mortgage transactions in the United States was performed in July of 2000 and showed how the entire home-buying process from closing the loan, recording the documents and delivering the package to the secondary mortgage market took less than three hours to complete.
A Florida District Court of Appeals issued a decision confirming a final judgment from a lower court in favor of Wells Fargo Bank, N.A. in a foreclosure against borrowers who signed an eNote. The court ruled that the bank provided “competent, substantial evidence that Fannie Mae owned the eNote and authorized the bank to pursue foreclosure.”
The New York State Supreme Court, Appellate Division, Second Department reversed a court decision dismissing a foreclosure against a borrower who signed a mortgage eNote. The bank was aiming to foreclose on a loan involving an eSignature that was originated by now-debunked AmTrust Bank. As the final decision noted, “The transfer history, together with the copy of the e-note itself, were sufficient to ‘review the terms of the transferable record and to establish the identity of the person [or entity] having control of the transferable record,’” the court outlined in its April 13 decision.
The ruling continued, “the evidence was sufficient to establish the plaintiff’s standing as the holder of the e-note and rendered the lack of proof of valid assignment irrelevant.”
These cases reinforce the inevitability of the eMortgage industry. To date, the courts have been fairly silent on the enforceability of eNotes and the rulings paved the way for full acceptance of electronic equivalent of promissory notes and reinforces and illustrates the legal baseline that has been in place since 1998.
National Mortgage News highlights the significance of this win for the adoption of electronic mortgage technology and notes, “Importantly, the decisions applied existing law and legal precedent related to paper documents to the question of eSignatures, and found in the mortgage industry’s favor. And while the decisions occurred at the state level, they still can act as a guide post for judges in other jurisdictions in how they should approach these matters.”
These decisions highlight the fact that good systems and good controls can and will enable the enforceability of the electronic equivalent of the promissory note. The precedent has been set and it is time for the mortgage industry to shed its traditional paper roots, and embrace the DTM movement.
Guest Blogger: Margo Tank, Partner, BuckleySandler LLP