Special Alert: CFPB Reports On The Findings From Its “Know Before You Owe” eClosing Pilot Project

In 2014, the Consumer Financial Protection Bureau (“CFPB”) initiated an eClosing pilot program. The eClosing pilot was intended to assist the CFPB in evaluating the use of electronic records and signatures in the residential mortgage closing process. The pilot program has now been completed and on August 5, 2015 the Consumer Financial Protection Bureau (“CFPB”) released a report detailing its findings (“Report”). In the Report, the CFPB indicates that eClosings present a significant opportunity to enhance the closing process for both consumers and the mortgage industry.

The pilot program focused on the mortgage closing process and measured borrowers’ (i) understanding (both perceived and actual) of the process, (ii) perception of efficiency, and (iii) feelings of empowerment. The program also sought to quantify objective measures of process efficiency. The program was conducted over four months in 2014 with seven lenders, four technology companies, settlement agents, and real estate professionals. About 3000 borrowers participated in the study – roughly 1200 completed the CFPB’s survey.

The CFPB sought to determine if an electronic closing process improved the borrowers’ (i) understanding of the transaction, (ii) perception of efficiency, and (iii) feeling of empowerment. These three criteria were measured in multiple ways. To gauge understanding, the borrower was asked about their perceived understanding of the terms and fees, costs, and their rights and responsibilities. To determine the borrower’s actual understanding of their mortgage, they were given an eight question quiz. Five questions were about mortgages generally and three about their mortgage, specifically. To evaluate the efficiency of the transaction, the CFPB measured the difference between eClosings and paper closings in terms of delays, errors in documents, and the time required between steps in the process. Borrowers were also asked about their perceptions concerning efficiency. Finally, in order to gauge the borrower’s feeling of empowerment, the CFPB asked about the borrower’s feelings of control, his or her role, and the role(s) of others in the process. Read more…

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Court Holds That Evidence of Clickwrap Assent Not Always Sufficient When Evidence Disputing Assent is Presented

On June 29, in Jim Schumacher, LLC v. Spireon, Inc., Civ. Action No. 3:12-cv-00625-TWP-CCS, a Tennessee federal judge denied the motion for partial summary judgment as to the breach of contract claim because there was evidence that the plaintiff did not use the defendant’s portal or authorize an agent to use the defendant’s portal to manifest assent to the modified contract terms even though the defendant had digital evidence of such assent to the clickwrap agreement, thus creating a factual dispute. In 2005, the plaintiff became a reseller of the defendant’s vehicle location devices.  In 2009, the defendant modified its agreement, and placed the modified agreement on its customer portal website through which resellers manage purchases, sales, and customer data.  Visitors to the portal were required to click “I Accept” or “I Decline” before being permitted to access any other information on the portal.  The defendant produced digital evidence demonstrating that someone with the correct login and password accepted the 2009 agreement, and further digital evidence that someone with the correct login and password accepted an agreement in 2010 as well.  The plaintiff claims that he did not use the portal after the defendant placed the 2009 agreement on the portal, and thus could not have assented to the clickwrap agreement.  During this time, the plaintiff also did not authorize his representative to agree to the terms of the 2009 amendment, nor did he give any other users the ability to execute the agreement on his behalf.  The plaintiff filed a lawsuit alleging a breach of contract claim and a fraud claim based on the 2005 agreement.  Read more…

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Indiana Court of Appeals Reverses “E-Mortgage” Decision

The Indiana Court of Appeals reversed and remanded for further proceedings a trial court’s grant of partial summary judgment and held that because the plaintiff did not show that it controlled the electronic mortgage note (“Note”) for purposes of 15 U.S.C. § 7021(b) as of the date the foreclosure was filed, it had not established that it was the party entitled to enforce the Note as of that date.  The plaintiff was not the original lender, and instead, received the mortgage by assignment. The plaintiff filed a complaint to foreclose the mortgage shortly after taking assignment. The Note stated that the only authoritative copy was the copy within the Note Holder’s control.  15 U.S.C. § 7021 provides conditions under which a party can have control and the court found that the evidence put forward by the plaintiff in support of the motion for summary judgment did not properly address satisfaction of those conditions. Specifically, the court stated that the plaintiff did not present evidence demonstrating that control over the Note had been transferred to the plaintiff in accordance with the requirements of 15 U.S.C. 7021. The court specifically noted in the decision that the plaintiff, upon demonstrating it had received a transfer of control, would be entitled to the same rights as the holder of a written promissory note under UCC Article 3, and that delivery, endorsement and possession of a physical note were not required. Good v. Wells Fargo Bank, N.A., No. 20A03-1401-MF-14 (Ct. App. Ind. 2014).

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Software Company Releases New E-Signature Product

On January 8, Kofax Limited, a California-based software company, released SignDoc Enterprise, a product that allows lenders to capture and process electronic signatures. The software gives consumers the ability to sign and return documents securely from their personal computer or mobile device. The software also supports “click to sign” and handwritten signatures, and can capture biometrics at the time of signing for greater security and authentication.

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SBA Encourages Greater Use Of Electronic Signatures

Recently, the SBA issued a procedural notice highlighting the acceptance of electronic signatures in its 7(a) and 504 Loan Program. The notice, which outlines various performance standards, is intended to encourage more lenders and agencies to accept electronic signatures. The announcement comes only weeks after the House Small Business Committee introduced legislation intended to “streamline and simplify the loan application process.” The ESIGN Act, enacted in 2000, made valid the use of electronic signatures in signing contracts and documents online, thus streamlining business operations and eliminating paper burdens for consumers.

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Virginia AG Endorses Electronic Signatures for Voter Registration

On September 26, Virginia Attorney General Mark Herring issued a letter declaring that the Virginia State Board of Elections is not legally precluded from directing general registrars to accept voter registration applications with electronic signatures. “It is my opinion that, although no law requires the acceptance of mailed voter registration applications with electronic signatures, the State Board of Elections is not precluded from directing that general registrars accept such applications, and the State Board, in its discretion, may do so[.]” The letter also stated that the Board of Elections also has authority to establish standards to ensure the security of voter information and to verify the authenticity and validity of the electronic signatures. The letter validates the Board of Election’s decision to accept electronic signatures during the 2013 gubernatorial election.

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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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