– Vinod Kothari
Paperless lending based on e-agreements and electronic documentation seems to be the future. The mortgage market is seeing the emergence of electronic mortgage note called ENotes. ENotes, which are issued as electronic negotiable instruments, have become popular in the US mortgage market. The COVID pandemic has given strong push the popularity of contactless and paperless lending format in the mortgage market too.
Like the transfer of shares and bonds world-over has been replaced by demat trades, the replacement of paper mortgages may be replaced by electronic version, sooner than one can imagine.
Electronic documentation has been given legal validity in most countries world-over. The USA passed the Uniform Electronic Transactions Act (UETA) way back in 2000, and Electronic Signatures in Global and National Commerce Act (commonly known as the ESIGN Act) in the year 2000. Most countries have similar enabling laws. These laws grant legal validity to electronic mortgage documentation too. Armed with this power, US national mortgage depository MERS® introduced electronic mortgages almost 16 years ago. The Mortgage Industry Standards Maintenance Organization® (MISMO) eMortgage Community of Practice was formed in 2001 to develop standards for efficient eMortgage processes, transactions, and XML data protocol. However, eNotes surged during the pandemic months. It is reported that by end of May, 2020, there were 597,139 eNotes, with the numbers for Q1 of 2020 being 300% of the corresponding quarter in the previous year.
Concept of ENotes
The typical mortgage creation process in US practice, based on a loan for purchase of a house (“purchase money loan”) involves the creation of promissory note whereby the borrower passes possession/control of property documents to the lender, for the purpose of securing a loan. If the mortgage is transferred by the original lender, the promissory note is “indorsed” to the transferee. Under the ENote format, the mortgage is electronically signed and registered with MERS. The electronic mortgage is stored in an electronic vault maintained by MERS. As the mortgage changes hands by way of transfer of the mortgage, the original lender’s name is replaced by transferee – as would have happened in case of dematerialised shares.
UETA and E-Sign laws facilitated the creation of electronic negotiable instruments by the concept of “transferable records”, which was intended to be an electronic version of the mortgage promissory note. The transferable record methodology involves a depository called “controller” of the note, who is responsible for recording, registering and evidencing the transfers of interest in the note.
Judicial recognition of ENotes
Rulings such as New York Community Bank v. McClendon, 29 N.Y.S.3d 507 (N.Y. App. Div. 2016), and Rivera v. Wells Fargo Bank, N.A., 189 So. 3d 323, 329 (Fla. Dist. Ct. App. 2016) have recognised the right of an assignee of an eNote in taking foreclosure action. Courts have held that the assignee needs to establish that it is either the controller of the authoritative copy of the ENote or is the beneficiary thereof, and produces the paper trail of the transfers leading up to the right of the assignee.
Market acceptability of ENotes
Fannie Mae and Ginnie Mae started accepting ENotes. Ginnie Mae has started accepting ENotes only recently and as part of the initial phase, issuers may apply to participate as e-Issuers and begin securitizing government-backed mortgages comprised of digital collateral with Ginnie Mae approval.
However, it is stated that the real push to ENotes came in 2018 when Quicken Loans initiated a complete process of end-to-end electronic mortgage closing, called e-closing. Quicken Loans launched a digital mortgage product called Rocket Mortgage, in November, 2015, presumably one that allows closing a mortgage in less than 10 minutes. In less than 2 years, Quicken Loans became the largest mortgage lender in the USA.
Remote Notarisation – the other part of the digital mortgage eco-system
To prove that a document is authentic in all its aspects, notarization is necessary. The new system of Remote Online Notarization (“RON”) was adopted back in 2010.
RON typically allows documents to be notarized in electronic form with the signer signing with an electronic signature and appearing before a commissioned electronic notary online via audio-video technology. This allows anyone with an Internet connection to get documents signed and notarized online.
This process has several benefits in terms of security and fraud prevention. RON has had growing acceptance in the US.
It is said that before Covid-19, ENotes were growing at a modest pace as the industry collaborated on solutions to facilitate broader adoption, including acceptance of RON.
Other Benefits of ENotes
Apart from the benefits already discussed above, the growing acceptance of ENotes has much to do with several other benefits as well, such as, reducing the operational costs, faster turnaround times, faster signing process, improved data quality and validation, etc.
These give ENotes the push towards a completely paperless mortgage process apart from the convenience factor.
Considering the more than $9 trillion size of US mortgage industry, digital mortgage lending is still a long way to go. Digital mortgages are still less than 5% of the total mortgage originations, whereas digital personal loans are close to 60% of the total loan originations.
The growing acceptance of ENotes is certainly providing the push required from the traditional to a completely “e” driven mortgage process.
 The eIDAS Regulation (Electronic Identification and Authentication and Trust Services) is the e-sign law in the EU. The Personal Information Protection and Electronic Documents Act (PIPEDA) is a similar law in Canada. The Electronic Transactions Act 1999 is the governing law in Australia.
 For a white paper on the ENote methodology, see here: https://www.mersinc.org/publicdocs/eNote_White_Paper.pdf
 See section 15 of UETA