CFPB Announces EClosing Pilot Participants

On August 21, the CFPB announced the companies that have been selected to participate in its residential mortgage eClosing pilot program. The program is intended to explore how the increased use of technology during the mortgage closing process may affect consumer understanding and engagement and save time and money for consumers, lenders, and other market participants. Specifically, the program seeks to aid the CFPB in better understanding the role that eClosings can play in addressing consumers’ “pain points” in the closing process, as identified by the CFPB in an April 2014 report. The three-month pilot program will begin later this year, and the participants include both technology vendors that provide eClosing solutions and creditors that have contracted to close loans using those solutions.

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Minnesota Appellate Court Holds Email Signature Not Necessarily Evidence Of Intent To Sign Attachments

On June 2, the Minnesota Court of Appeals held that under the Uniform Electronic Transaction Act (UETA), an electronic signature in an email message does not necessarily evidence intent to electronically sign an attached document, and that whether the sender has electronically signed the attachment is dependent on certain facts and circumstances. SN4, LLC v. Anchor Bank, No. A13-1566, 2014 WL 2441343 (Minn. Ct. App., Jun. 2, 2014). A multifamily real estate purchaser sued a bank after negotiations between the parties over the sale of two properties held by the bank fell through. The purchaser claimed that the bank breached its contract by refusing to sell at a price the purchaser claims was established through a series of emails between the parties. The trial court rejected the buyers’ argument that the bank electronically subscribed to the agreement under the UETA and held that the purported agreement did not satisfy the statute of frauds because only the buyers subscribed to it. The appeals court affirmed, holding that under UETA each transaction must be examined to determine whether the parties agreed to conduct the transaction by electronic means. Here, the court held, there was no express or implied agreement between the parties that the bank would electronically sign the agreement. Further, the court held that even assuming the parties agreed to conduct the transaction electronically, the bank did not electronically sign the agreement. The court explained that “whether a sender has electronically signed an attached document depends on the circumstances, including whether the attached document itself contains the sender’s electronic signature and whether the attached document is intended to be a draft or final version.” In this case, the purported agreement the buyers sought to enforce was attached to an electronically signed email, but the signature lines in the attached agreement lacked the bank’s handwritten or electronic signature. The court added that the subject email and subsequent emails indicated that neither party considered the agreement to be final.

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Transportation Regulator Proposes Allowing Electronic Records And Signatures

Recently, the Department of Transportation’s Federal Motor Carrier Safety Administration published a proposed rule to allow the use of electronic records and signatures to satisfy the agency’s regulatory requirements. The rule would permit the use of electronic methods to sign, certify, generate, exchange, or maintain records so long as the documents accurately reflect the information in the record and can be used for their intended purpose. The proposal seeks to implement the Government Paperwork Elimination Act (GPEA) and the Electronic Signatures in Global and National Commerce Act (E–SIGN), and would apply only to documents that the agency’s regulations obligate entities or individuals to retain—it would not apply to forms or other documents that must be submitted directly to the agency. Comments on the proposal are due by June 27, 2014.

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Special Alert: CFPB Supports Mortgage eClosings and Announces Pilot Program

On April 23, in conjunction with its “Know Before You Owe” initiative, the CFPB hosted a mortgage closing process forum, which featured remarks from Richard Cordray, HUD Secretary Shaun Donovan, consumer advocates, and industry representatives, including BuckleySandler’s David Whitaker.  The Bureau published a report summarizing the results of its Request for Information about the challenges consumers face when closing on a home.  The Bureau identified several “pain points” consumers regularly experience during the closing process.  Consumers reported being frustrated by:

  • The short amount of time they have to review a large number of closing documents, even when they did not understand the terms;
  • The lack of resources capable of providing explanations about closing documents, which are often full of legalese and technical jargon; and
  • Minor errors in paperwork resulting in long delays affecting multiple parties.

The CFPB’s Know Before You Owe rule, which combines the current TILA and RESPA mortgage disclosures, seeks to address several of these concerns by requiring that the new closing disclosure be provided at least three business days prior to closing.  The new rule will be effective August 1, 2015.

At the forum, the CFPB expressed the view that more comprehensive use of electronic records and signatures in residential mortgage closings, or “eClosings”, also have the potential to significantly ameliorate these “pain points.”  To that end, the Bureau released guidelines for an upcoming eClosing pilot project to study how eClosings can benefit consumers and address some of the challenges borrowers face at closing.  Because eClosings offer both benefits and risks, the CFPB’s pilot project will evaluate whether they can increase efficiency and consumer understanding while minimize surprises and delays at the closing table.  The guidelines list the minimum functional requirements of an eClosing platform including capabilities related to data security, workflow, and electronic signature collection.  The Bureau is also interested in testing advanced functionality that will empower consumers to better understand and engage in the closing process, enable and reward early document review, and facilitate the detection and correction of errors in closing documents.  Potential pilot participants must submit proposals as a partnership between a technology vendor providing an eClosing platform and a lender that has contracted to close loans utilizing that platform.

The CFPB was joined at the forum by representatives by the VA, FHA, FHFA, USDA, Ginnie Mae, Freddie Mac and Fannie Mae, all of whom voiced support for expanding the use of electronic records and signatures in mortgage closings.  All of the agencies and GSEs expressed their willingness to collaborate with industry and the CFPB on the eClosing pilot project.

An audio and video recording of the forum will be available at consumerfinance.gov shortly.

For more information on the pilot program and eClosings, call Margo Tank at 202-349-8050, or David Whitaker at 202-349-8059. For more information about the TILA-RESPA integrated disclosures rule, please see BuckleySandler’s Special Alert.

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South Dakota Adopts Uniform Real Property Electronic Reporting Act

On March 31, South Dakota enacted SB 68, becoming the 30th jurisdiction to adopt the Uniform Real Property Electronic Recording Act (URPERA) with the enactment. URPERA, promulgated by the Uniform Law Commission in 2004, gives county clerks and recorders the legal authority to prepare for electronic recording of real property instruments. Among other things, SB 68 (i) establishes that, for any law requiring that a document be an original as a condition for recording, an electronic document satisfying certain specific conditions will qualify; (ii) establishes an electronic recording commission to adopt uniform standards to implement procedures for recording electronic documents with the register of deeds; and (iii) requires the register of deeds to comply with standards set by the commission, including accepting electronic documents for recording. The law takes effect July 1, 2014.

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IRS Revises Handbook For Authorized E-File Providers

On March 11, the IRS updated Publication 1345, Handbook for Authorized IRS e-file Providers of Individual Income Tax Returns, with new electronic signature guidance for Forms 8878 and 8879 (IRS e-file Signature Authorization). The update includes guidance on currently acceptable (i) electronic signature methods; (ii) identity verification requirements; and (iii) electronic record requirements.

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Special Alert: FHA Announces It Will Accept Electronically-Signed Mortgage Documents

On January 30, HUD issued Mortgagee Letter 2014-03, announcing that FHA will now treat electronic signatures as equivalent to handwritten signatures for certain mortgage documents. The announcement sets forth FHA’s first authorization of electronic signatures on mortgage documents (other than certain third party documents – see Mortgagee Letter 2010-14) and applies to FHA Single Family Title I and II forward mortgages and Home Equity Conversion Mortgages. The announcement is consistent with other government agency initiatives to promote a more streamlined and efficient mortgage process for consumers, particularly through the use of technology such as electronic signatures. Earlier this month, for example, the CFPB issued a request for information containing a questionnaire focused on improving the home loan closing process. “By extending our acceptance of electronic signatures on the majority of single family documents, we are bringing our requirements into alignment with common industry practices,” said FHA Commissioner Carol Galante. “This extension will not only make it easier for lenders to work with FHA, it also allows for greater efficiency in the home-buying and loss mitigation process.”

The announcement indicates that, effective immediately, FHA will accept electronic signatures on (i) any documents associated with servicing or loss mitigation; (ii) any documents associated with the filing of a claim for FHA insurance benefits; (iii) the HUD Real Estate Owned Sales Contract and related addenda; and (iv) all documents included in the case binder for mortgage insurance except the Note.  FHA will begin accepting electronic signatures on the Note for forward mortgages, but not Home Equity Conversion Mortgages, on December 31, 2014. FHA already allows electronic signatures on documents originated and signed outside of the lender’s control, such as the sales contract.

FHA requires lenders that accept electronic signatures to comply with the ESIGN Act (15 U.S.C. §§ 7001-7006). The ESIGN Act mandates that the signer be presented the document before the electronic signature is obtained, that the document is true and correct at the time it is signed, and that the signature is attached to, or logically associated with, the documents being electronically signed. Lenders must also take steps to confirm the identity of the signer as a party to the transaction and to establish that the signature may be attributed to the purported signer. Lenders must have systems in place to ensure that information generated to confirm the identity of signers is secure and that electronically signed documents cannot be altered without detection.

In addition to citing the requirements of ESIGN, FHA sets some more specific requirements for certain elements of the signing process. These include requirements for establishing attribution of the signature and authentication of the signer.  FHA also sets requirements for maintaining audit logs, computer systems, controls and documentation, and making them available for FHA inspection.

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Questions regarding the matters discussed in this alert may be directed to any of the lawyers in our Electronic Signatures and Records practice, or to any other BuckleySandler attorney with whom you have consulted in the past.

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Russia Joins International Convention On Electronic Communications In International Contracts

On January 17, the Russian Federation became the fourth party to the United Nations Convention on the Use of Electronic Communications in International Contracts, joining The Dominican Republic, Honduras, and Singapore. The Convention will take effect for Russia on August 1, 2014. It is intended to enhance legal certainty and commercial predictability where electronic communications are used in relation to international contracts, including by addressing, among other things, (i) the determination of a party’s location in an electronic environment; (ii) the time and place of dispatch and receipt of electronic communications; and (iii) the use of automated message systems for contract formation. The Convention builds on the fundamental legal principles and provisions contained in the UNCITRAL Model Law on Electronic Commerce by providing criteria for establishing functional equivalence between electronic communications and paper documents, as well as between electronic authentication methods and hand-written signatures. Fifteen other states have signed the Convention but have not yet ratified it.

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Ninth Circuit Invalidates Online Marketing Company Consumer Contract, Arbitration Agreement

On December 16, the U.S. Court of Appeals for the Ninth Circuit held that an online marketing company cannot compel arbitration in a suit brought by a putative class of consumers who claim they were improperly charged for a subscription service they never intended to purchase. Lee v. Intelius, Inc. No. 11-35810, 2013 WL 6570899 (9th Cir. Dec. 16, 2013). The named plaintiffs sued a company that performs background checks after noticing regularly monthly charges for a report they allegedly did not intend to purchase. The background check company added an online marketing firm as a third-party defendant, arguing it was that firm whose subscription service the consumers were allegedly misled into purchasing. The district court explained that the background check company provided the marketing company space on its website and used the now illegal “data pass” method of sharing credit card information to assist the marketing company in enrolling consumers in free trial subscription offers, which converted to a monthly billed subscription without cancellation. The district court held that the consumers entered into a contract for the subscription service, but denied the marketing company’s motion to compel arbitration. On appeal the Ninth Circuit disagreed, determining that the subscription service website to which consumers were directed after purchasing background reports was designed to deceive consumers. The appellate court reasoned that under Washington law, a contract requires mutual assent to its essential terms—including the names of the parties—in order to be binding, and in this case the web page through which the consumers allegedly purchased the subscription service did not sufficiently identify the marketing company as the contracting entity. The court expressed skepticism that the consumers assented to the contract by providing their email addresses and clicking a “yes” button, but given that Washington law is not settled on whether a website “click” can constitute an electronic signature, the court did not rest its conclusion on whether the consumers objectively manifested consent to the contract. Further, the court held that even on the assumption that consumers did enter a contract to purchase the subscription service by clicking on the “yes” button, they did not agree to arbitration because the arbitration terms were included in a separate hyperlink that consumers did not click.

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Alabama State Appellate Court Upholds Electronically Executed Agreement

Recently, the Court of Civil Appeals of Alabama upheld an agreement executed electronically, overturning a trial court’s order invalidating a divorce agreement on the grounds that the agreement filed with the court was executed electronically. Ex parte Mealing, No. 2120973, 2013 WL 5776053 (Ala. Civ. App. Oct. 25, 2013). In this case, a husband asked the trial court to vacate a divorce agreement he had willingly entered without legal representation, claiming that his wife’s attorney orchestrated an agreement more favorable to the wife. The trial court decided that the divorce agreement was invalid because it was signed electronically. The appellate court disagreed and held that the trial court erred in relying on an alternative basis—one not even presented by the husband—in an attempt to create for itself an opportunity to render equitable judgment of the matter. The court explained that relevant court rules allow for electronic signatures, and that there was no contention from the husband that the electronic signatures were shams or false. The appellate court directed the trial court to set aside its order and reinstate the electronically signed divorce agreement.

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New TCPA Express Written Consent Requirement Takes Effect

On October 16, new rules took effect that require businesses to obtain express written consent before making certain telemarketing calls to customers. The rules arise from a February 2012 Report and Order issued pursuant to the Telephone Consumer Protection Act (TCPA), in which the Federal Communications Commission (FCC): (i) required that businesses obtain prior express written consent for all autodialed or prerecorded telemarketing calls to wireless numbers and residential lines, (ii) allowed consumers to opt out of future robocalls during a robocall, and (ii) limited permissible abandoned calls on a per-calling campaign basis. While the consumer opt-out and abandoned calls limitations are already in effect, compliance with the express written consent requirement was not mandated until now. The rules require that the written consent be signed and be sufficient to show that the customer: (i) receives “clear and conspicuous disclosure” of the consequences of providing the requested consent and (ii) having received this information, agrees unambiguously to receive such calls at a telephone number the consumer designates. In addition, the rules require the written agreement to be obtained “without requiring, directly or indirectly, that the agreement be executed as a condition of purchasing any good or service.” The FCC rule allows electronic or digital forms of signatures obtained in compliance with the E-SIGN Act—e.g. agreements obtained via a compliant email, website form, text message, telephone keypress or voice recording—to satisfy the written requirement. The FCC also removed an exemption that allowed businesses to demonstrate consent based on an “established business relationship” between the caller and customer.

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Oregon Updates Notary Regulations, Allows Electronic Notarization, Journals

On October 1, the Oregon Secretary of State published a final rule to implement numerous changes to the state’s notaries public regulations, including providing for electronic notarizations and electronic journals. The Secretary also released a summary of the changes. Notaries may notarize documents electronically after informing the Secretary of State of the format the notary will use by submitting notice via email, using the Electronic Notarization Notice form, along with an example of an electronic notarization. Any change to the way a notary conducts electronic notarizations—e.g. new vendor, new technology, changed appearance—requires a notary to provide notice of the change to the Secretary of State. A notary also may document an electronic notarization in either a paper or electronic journal, or both. The new rules took effect on September 1, 2013.

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NIST Releases Minor Updates to Digital Signature Standard

On July 23, the National Institute of Standards and Technology released a revised digital standard used to ensure the integrity of electronic documents and the identity of the signer. The revised standard includes no major changes, but does update the standard to align it with other publications so that all NIST documents offer consistent guidance regarding the use of random number generators. Another revision concerns the use of prime number generators, which requires random initial values for searching for prime numbers.

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Fourth Circuit Relies on E-Sign Act to Hold Electronic Agreement May Effect A Valid Transfer of Copyright

On July 17, the U.S. Court of Appeals for the Fourth Circuit held that under the E-Sign Act, an electronic transfer may satisfy the requirements for transfer of a copyright under the Copyright Act, even though the Copyright Act itself does not define the “writing” or “signature” required to effectuate a transfer. Metro. Reg. Info. Sys., Inc. v. Am. Home Realty Network, Inc. No. 12-2102, 2013 WL 3722365 (Jul. 17, 2013). In this case, the company that operates the online real estate listing service MLS sued a competitor real estate referral service, contending that the referral service collected and used information without authorization – including photographs of listed properties – that MLS compiled for its customers. In order to submit photos to the MLS, customers are required to click a button and agree to certain terms of use. The court agreed with the MLS operator that its customers’ acceptance of the terms of use operated as a transfer of copyrights in any photograph provided to the MLS, and that as such the competitor service may have violated the Copyright Act through its unauthorized use of the materials. Noting the paucity of case law applying the E-Sign Act to instruments conveying copyrights, the court looked to cases in which circuit courts have applied the E-Sign Act to the Federal Arbitration Act’s protections that pertain only to written arbitration agreements, including the Second Circuit’s holding in Specht v. Netscape Comms. Corp., 605 F.3d 17 (2nd Cir. 2002). Based on the analysis in those cases, the court explained that “[t]o invalidate copyright transfer agreements solely because they were made electronically would thwart the clear congressional intent embodied in the E-Sign Act.” The court held that an electronic agreement may effect a valid transfer of copyright interests under the Copyright Act.  As such, the court affirmed the district court’s preliminary injunction prohibiting MLS’s competitor from displaying the MLS photographs.

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Texas Appeals Court Affirms Holding that Certain Emails Read Together Can Be Construed as One Contract

On March 7, the Texas Court of Appeals of the Thirteenth District affirmed a trial court’s holding that the essential terms of an option contract for the purchase of real estate were present when three e-mail messages exchanged by the parties were read together. Dittman v. Cerone, No. 13-11-00196-CV, 2013 WL 865423 (Mar. 7, 2013). The defendant sued for specific performance pursuant to the terms of the three emails, and the trial court ultimately concluded that the e-mails constituted a valid option contract and ordered the plaintiffs to convey the property. The Texas Court of Appeals affirmed the trial court’s holding that the option contract complied with the statute of frauds because (i) the emails construed together provided the essential terms of the contract, (ii) the property was sufficiently identified and confirmed by extrinsic evidence, (iii) the parties’ actions evidenced an intent to conduct certain business electronically, and (iv) the real estate broker had authority to act for the sellers.

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