The legal landscape around the world for electronic signatures and digital records is constantly evolving. ESRA gathered Margo Tank and David Whitaker from BuckleySandler and Ken Moyle from K6 Partners to look at the state of e-signatures at the end of 2016 from a legal and public policy perspective.
Tank started off by explaining: “E-notes are enforceable, which is great news for mortgage industry. It’s the most complex record that needs to be entered into evidence, if there’s a dispute. While ESIGN and UETA enable them, there’s still concern about enforceability. How will the courts interpret it? They’re starting to look at the legal provisions and break them apart.”
She continued: “How do you demonstrate that the system employed for evidencing transfers of interest reliably establishes the person as the person to which the transferable record was issued or transferred to that person? What is reasonable proof for that and are there systems that can meet those requirements?
“And proof of control: Courts are focused on that too. How do you establish that you have the authoritative copy of a document that it is indeed the authoritative copy when you are challenged?”
Tank then added: “The courts are also focusing on the system reliably establishing proof of control, which copy is the authoritative one, and record integrity, rather than the six Safe Harbor prongs. You have to have a transferable record, as required by law, and you need to include language in the note that’s about pointers: Where, if challenged, do people go to look to see who owns the note and where it’s located? The mortgage industry has used the MERS e-note registry for that purpose.”
She concluded: “You need a chain of custody. Evidentiary documentation that indicates where a note is and who owns it. In all the current legal cases, they use certificates of authentication and transfer history to be able to document who owns the note and where it is. You need a record management system that has controls on it that focus on integrity, so you can tell if something is changed, and that there’s only one copy.
“Those cases establish the baseline for what courts will be looking for as far as evidence required to establish control. As far as looking at the law and worries about whether Safe Harbor is required, these cases are saying it’s not required.”
The Latest Case Law
Whitaker then took the reins of the discussion and continued from Tank’s remarks. “Everyone wants to comply with Safe Harbor to the fullest extent possible,” he explained. “In UETA is a little section, Section F, that says when you have to prove this stuff, you just have to prove that it’s the current copy, you have control, and it has integrity, and you’re good. But the courts went to Paragraph F and said they’re looking for that as proof in those 3 cases. In a case against Wells Fargo, the lawyers tried to prove it as a paper note and the court said it was a transferable record.
“In two other cases, no one was challenging evidence showing the party that was in control had executed the true and correct copy. There was no basis for a challenge. There was no reason to think that something was tampered with.
“The interesting part from my point-of-view is that while we’re concerned with Safe Harbor, the courts won’t go there unless you challenge the evidence.”
Whitaker went on to discuss the latest e-signature cases and their implication for the industry, starting with In Re Mayfield. “With regard to that one,” he started, “some may have seen notices that the court said you can’t use e-signatures and panicked about it, but the truth of the matter is, the court is saying that you’re trying to submit records to the court and it has very specific rules, one of which is that you still have to have a signed paper document when the e-document is sent in. And you have to be able to produce it on demand.
“In that case, the demand was made and the lawyer couldn’t produce the paper document. Some might say that the rule is silly, which is what that lawyer said, but the court replied, basically, ‘What’s your point?’
“Mayfield does illustrate one ongoing lesson: When it comes to submission of things to public record holders, they call the tune. That’s already in the regulations and statutes. When you submit something to a government instrumentality, you have to follow their rules. And ESIGN rules don’t apply.”
Whitaker then continued with a discussion of Mikhak v. Univ, of Phoenix: “That’s a fun case because it illustrates several things that we’ve been saying for years. What happened is that a university sent out a new faculty contract with mandatory arbitration. There was a link in the email, which Mikhak, an adjunct faculty member, admits she received. Then she received another document and admits she signed it too. She sued for harassment and claimed she didn’t understand what she had agreed to.
“Then the argument was made that the document was delivered through an unacceptable process, which the court said no to: They said that she’s an adult and knew full well what she was signing. And then she argued that she didn’t agree to signing electronically, which the court didn’t accept either. And it wasn’t a consumer e-signature situation, so this wasn’t a situation where there was concern over possible deception.”
The next case Whitaker discussed was Espejo, a follow-on to the Ruiz case: “The Ruiz case caused a lot of consternation,” he explained. “It was a California case where Ruiz e-signed an employment agreement, but the employer didn’t prove up the enrollment credentials with a proper audit trail. The court said they didn’t give four audit trail elements and tossed the employer’s argument out. That caused some people to think that you couldn’t use e-signatures with HR contracts.
“Espejo had the same issue. The employee cited the Ruiz case, but employer demonstrated audit trail and the court sided with them.”
Moyle interjected to note: “Those last two cases are the revenge against people who say there’s no case law on e-signatures. They’re fantastic cases. There are many of them in California courts that tell you what to do and what not to do with e-signatures, especially with regards to HR matters.”
Whitaker went on to discuss Moton: “Moten is the same as Espejo: It proved an audit trail. Moton, Espejo, and Ruiz give road map for dealing with e-signatures in a credential-based environment.”
Then he segued to the St. Johns Holdings, LLC vs. Two Electronica, LLC case, which he said, with amusement, “continues the Massachusetts tradition of ignoring ESIGN and UETA. In that one you have two companies negotiating the purchase of real estate over email. The last letter of intent goes out and the person who receives it sends a text message that says the other party should sign a letter of intent and then they will. The other party signs and then the seller gets a better offer and reneges on the deal. So the court looked at this: Does a text message constitute intent to buy real estate?
“In this situation, though, the court was deciding if there was enough to go to jury, not to make a decision. They cited Shattuck case and said that a text message constitutes a writing. They ignored ESIGN and UETA and said it was a writing. They’re not following the path laid out by the legislature.”
The next case Whitaker discussed was O’Connor vs. Uber Technologies: “That’s an interesting one,” he said, “because it’s the first reported decision saying that even though the contract was on a mobile device, it’s still enforceable. When Uber deals with drivers, it’s a commercial transaction, but the driver claimed that since contract was presented on a mobile device, it wasn’t effective. The court said that a mobile device wasn’t an impediment to enforcing the contract.”
Whitaker then moved on to talk about remote notarization. He said: “Virginia has created a stir because technically, it’s not clear that you couldn’t, for example, notarize a document for someone in California using Virginia law, and then the document wouldn’t be eligible for filing in another state. Montana has restricted remote notarization within the state. Indiana stayed with UETA but allowed video teleconferencing for notarizing documents.”
He continued: “There’s a sub-industry with secretaries of state not liking remote notarization. RULONA has been amended to allow remote notarization when the signer is in a foreign country. The Uniform Law Commission invited us to get involved with the RULONA case. Believe me, remote notarization is coming like a freight train. While the secretaries of state have something to say, they have little authority legally if, for example, a Virginia remote notarization can be recorded in their state.”
New White Papers
Tank then discussed some new white papers. She said: “The National Consumer Law Center issued a white paper in March. It’s been discussed a lot. It’s “Paper Statements: An Important Consumer Protection.” It’s about how consumers should be offered paper as a choice because forcing them into electronic-only can be deceptive.
“Don’t skip the step of getting consent. You can’t take away the right to get a paper copy. ESIGN says you can withdraw consent, but you have to disclose the consequences for doing that. Not sure it passes the fairness test, but disclosing consequences is a mitigating factor.”
She added: “The Digital Chamber of Commerce has done a white paper on smart contracts. And Joint GSE Outreach has done a white paper on the state of industry adoption. It talks about 16 myths that apply to the mortgage industry, but everyone should read it because it applies to many industries.”
The Latest With the CFPB
Whitaker then talked about the latest news coming from the CFPB. “They’ve put out disclosures for prepaid cards,” he said. “It has formally used its authority to waive ESIGN consent requirements for prepaid cards. That’s an indication of things to come because the justification they used has broader application. They also make the point that they’ll allow prepaid card disclosures to be made on mobile devices.”
Regarding TRID disclosures, Whitaker, said: “The CFPB has said consent does matter with loan estimates and will still matter. Consent has to be obtained at the right time in the transaction. There’s a lot of confusion about the requirement that the loan estimate has to have a date issued on the loan estimate itself. It does have to be there. As an example, if you post a loan estimate on Monday and the date issued is Monday, you have three days to deliver. If the customer doesn’t pick up on Monday, you have to change the date to Tuesday if that’s when they come in.
“In the paper world, you have mailbox rule: It has to be in the mailbox within three days. There’s no e-mailbox rule. To prove you’ve sent and it’s been received, you need acknowledgment under TRID. You can shut down the three-day rule in an electronic environment by getting an acknowledgment of receipt. It seems simple but the timing of getting consent has tripped some people up.”
States and Other Countries
Regarding state and international news, Whitaker said: “Many states are allowing e-signatures but setting up own their rules. On the international front, England adopted a law 16 years ago that said e-signatures were good, but no one used them for 16 years. Then this year, the England Wales Law Society says e-signatures are okay.
“Within weeks, two of the biggest law firms in England announced the creation of their electronic signature and record practice. The lesson there: Pay attention to culture, not just the rules. E-signatures were valid under the law for 16 years but it took a law society to give the final okay.”
The Public Policy Front
Moyle then discussed the latest with public policy. He said: “Australia is one of the most clear, statutorily, it’s the model law. It’s a simple standard for doing e-signatures there, but there’s some resistance, mostly from law societies, there.”
He continued: “We have a public policy committee at ESRA that’s active. There are cases in California from the past 12 months, what we’re trying to do with life insurance documents. ESRA members worked with the legislature and people in the life insurance industry to create something new.
“California’s e-signature law is an anomaly. It was adopted before UETA was baked and it has a lot of exceptions around consumer issues. ESRA trying to put those things back in with ESIGN.
“Five statues were added back in to allow life insurance products to be handled and managed online. ESRA is working on getting rid of all exceptions. The Secretary of State and others are working on legislation that clarifies two competing statues, one that predated UETA that told all state entities in California that they could use e-signatures but they had to be a specific kind of digital signature.
“Then UETA came along and the two were never tied together. Government infrastructure couldn’t figure out if they could use e-signatures. ESRA helped figure it out so cities and counties could do what they needed to do without without the secretary of state’s premission.”
He concluded: “Electronic recording: in California there’s ERDS, the electronic recording system. There’s been confusion about using third parties to do things electronically. Electronic recording was falling out of records and counties didn’t know what to do. We helped fix the problem to make e-recording easier in California.”