There are two scenarios for originators of eNotes to interact with the MERS® eRegistry, one is direct, and the other is through a trading partner.
In the first scenario, you close loans with eNotes that contain the eNote clause and a Mortgage Identification Number (MIN), and register them on the MERS® eRegistry.
This requires you, or your vendor, to have:
In the second scenario, you close loans on eNotes that contain the eNote clause and a MIN, and immediately sell them to an investor who will do the registrations for you. This is called a Broker/Delegatee relationship. MERSCORP will set up your profile (as the Broker) on the MERS® eRegistry so that it allows another party (your Delegatee) to name you as the initial Controller and then do a transfer of control to itself.
Whichever scenario you choose, or role you play (lender, broker, investor) we will help you integrate and set up procedures and do any necessary transaction testing.
There are at least six components that need to work together to prove control of eNotes: eCommerce laws, investor requirements, e-closing platform, an eVault provider, eNote language within the eNote the borrower is going to sign and the MERS® eRegistry. We call this the ecosystem.
When designing a project team to go fully “e,” we recommend lenders create a subject matter expert team that includes technical, operational, compliance and legal to ensure your ecosystem is working.
Typically, an eNote is created using information from your LOS or ULDD, information from your LOS or the ULDD file is used to populate the information that's needed on the eNote. After closing is completed, the eNote information is registered on the MERS® eRegistry creating an eNote record. The eNote record identifies the Controller and the Location as well as Servicing Agents and others who will have access to the eNote record if needed. The tamper evident digital signature is stored as part of that eNote record.
Your eVault vendor or your Smart Doc eNote provider can provide more technical details.
Once an eNote has been signed and the closing is complete, that tamper-evident digital signature (also known as tamper seal, hash value or thumbprint) is applied to the document. The tamper seal is a calculation based on that specific document, in this case the electronic note. It takes into consideration all the aspects of that document – characters, punctuations, spaces – and creates a string of data to represent that specific document. Any changes made within that document (e.g. someone adds a period or takes out a space) will result in a completely different tamper-evident digital signature upon recalculation.
After closing, the tamper seal is applied and the eNote is registered on the MERS® eRegistry. This is typically handled via the lender and the lender's eVault platform. That transaction creates a registration record on the eRegistry that includes the tamper- evident digital signature. When downstream business partners get a copy of the eNote, they can submit a transaction to the MERS® eRegistry to validate the tamper seal that they've generated based upon the copy of the eNote they received matches the tamper seal of the eNote that was generated and stored at the time the eNote was registered on the MERS® eRegistry.
In essence, the tamper seal is a fingerprint and can prove the document hasn't been altered without detection.
In the mortgage industry, people often use the term eMortgage to mean different things. As a result, the answer to this question might differ depending on how it's being used.
If you mean, can you have an eNote without having an electronic mortgage document or security instrument? The answer is yes, you can close a loan with an electronic note or eNote and a paper security instrument.
On the other hand, eMortgage is also defined as a mortgage loan where the closing documents – through an eClosing process that includes, at a minimum, the Promissory Note – are created, accessed, presented, executed, transferred and stored electronically. Based on this definition, any loan closed with an eNote is an eMortgage by default.
Being in control of the authoritative copy of the eNote is the equivalent of having possession of a paper promissory note and thus the right to enforce it. The original lender or payee on the eNote must be the initial controller named when an eNote is registered on the MERS® eRegistry.
Post registration, control may be transferred to a variety of other MERS® eRegistry participants. For example, a warehouse lender could be named as the controller for an interim period of time until a loan is sold to an investor. When a loan is sold, the new investor will be named as the Controller. For loans in default, the servicer or other party foreclosing on the loan would need to be named as the Controller.
The Location field is used to identify the MERS® eRegistry participant that maintains or stores the authoritative copy of the eNotes. Often the participant named as the Controller will also be named as the Location. However, if that participant does not have an eVault of their own, they may choose to store their copy of the eNote in a trading partner’s eVault, such as their document custodians.
The elements to prove control of an eNote are found in what are referred to as the eCommerce laws - the Uniform Electronic Transactions Act known as UETA, and the Electronic Signatures In Global And National Commerce Act referred to as E-SIGN, which is the federal law.
The starting point to prove control to enforce an eNote is if a system employed for evidencing the transfer of the interests in the eNote reliably establishes that the person claiming to have control is the person to which the eNote was either issued or transferred to. The eCommerce laws set forth six conditions which are collectively known as the Safe Harbor Provision that if met establishes a system satisfies the elements need to show control of an eNote. The MERS® eRegistry is a needed component of the ecosystem that is required to work together to meet all these conditions of control.
The MERS® eRegistry’s role is to identify in the controller field the party in control of the eNote and in the location field the party that is maintaining the authority copy of the eNote.
The registration of an eNote on the MERS® eRegistry is a needed component of the ecosystem that is required to work together to meet the conditions of control established in the eCommerce laws.
The concept of control of an eNote designed around a system employed for evidencing who has the rights to enforce an eNote is utilized because unlike with a paper promissory note, there is no way to have physical possession of an electronic file like you can do with a paper note. The MERS® eRegistry is the component of the system that identifies the party that is in control of the eNote and thus has the right to enforce it. A registry is not needed for paper promissory notes because by having the original paper promissory note with a wet signature in your possession gives you the rights of a holder of that document with the right to enforcement.
To be registered on the MERS® eRegistry, an eNote must be a transferable record as defined by the eCommerce laws. It must contain a valid unique Mortgage Identification Number or MIN and language identifying MERSCORP Holdings as the entity maintaining the registry used to identify the Controller and the Location of the eNotes.
There are certain types of electronic notes, such as a home equity line of credit, that may not meet the definition of a transferable record. We recommend you consult with legal counsel to ensure that specific products meet the requirements of a transferable record. Additionally, there are technical requirements that must be met, such as your ability to capture the borrower's electronic signature and apply the tamper seal.
Your ability to generate an eNote that meets all the technical requirements for certain types of loans may vary depending upon your technology provider. All of the technology providers listed here are required to complete testing to ensure eNotes they are generating can be registered on the MERS® eRegistry. Also, organizations who plan to sell their eNotes should consult with their investors because they may have requirements limiting the types of eNotes that they will purchase.
There are two main components to MERS® eRegistry QA requirements.
First is the QA plan. If you're already a MERS® System Member, you're probably familiar with the online submission of the QA plan. When you're an eRegistry participant, that eRegistry QA plan is submitted in the same year. It happens once a year, but it’s an additional plan, separate from your MERS® System plan. When you submit your MERS® System plan through the EQA process, you’ll be asked if you're an eRegistry participant.
The second part of the QA policy is data reconciliation. If you're a MERS® System Member, you may already be familiar with the requirements for that process. The eRegistry is a bit different because the field data that gets populated, like the borrower's name and the address, is coming from the Smart Doc eNote. We don't ask you to reconcile those individual fields but to make sure you’re named where appropriate. You will be using a reconciliation report retrieved from the MERS® eRegistry user interface. MERS® eRegistry records will not be included on your Monthly Reconciliation Extract (MRE).
The eRegistry report must be compared to your internal records, which is typically your LOS or servicing system. Although we don't require it and it's not included as part of our QA plan, we do think it's best practice to include your eVault in your reconciliation process. The eRegistry, your internal records, LOS or servicing system and your eVault should all be compared.
There is one more component that applies to Controllers only. Our QA team completes data reviews for parties named as the controller. This process requires a data file to be provided to the QA team by the controller identifying all active eNotes from the Controller's internal records and must identify the eRegistry participants their internal records reflect the Servicing Agent and the Location. Our QA team then compares this data file to data from the MERS® eRegistry.
If you have questions or you want more information regarding the MERS® eRegistry QA requirements, review the MERS® eRegistry Procedures Manual. We also have a tutorial available about this topic in the MERS® Learning Center.
Participants must have the capability to store electronic documents and report life of Note events to the MERS® eRegistry. There have been some specific business models put into place that authorize a specific rights holder to report transactions on another's behalf. Most often these scenarios use the Delegatee for Transfer fields, which typically apply to a warehouse lender/custodian relationship. In a subservicer relationship, it is possible only the subservicer would have access to an eVault.
One benefit of eNotes is reduced errors due to automated data input. Errors can be categorized as minor or major. Minor errors, like typographical mistakes, don’t change the intent or the effect of the note.
With paper notes, lenders often strike over minor errors and make corrections directly on the face of the note and then place initials next to the correction on the Note. Others may use a modification form. For major errors, investors often don’t purchase the note and will require the lender to reclose the mortgage with a replacement note.
With eNotes, for minor errors, some lenders may opt to convert the eNote to a paper promissory note and continue with the process outlined above. Attempting to correct the eNote for any errors will alter the eNote making the tamper seal placed on the eNote immediately after the borrower has signed the eNote no longer a match to the tamper seal calculated for the altered eNote. For major errors that would require a replacement note, the same process should be followed with an eNote: re-close with a new eNote, create a registration reversal of the registered eNote with the error and register your new eNote using the same MIN.
Primarily, the difference is that a paper note is a negotiable instrument as defined in the Uniform Commercial Code and is a written document and an eNote is a Transferable Record as defined in the eCommerce laws UETA and ESIGN that would be a note under the Uniform Commercial Code if the electronic record were in writing and the issuer has expressly agreed it is a Transferable Record.
With a paper note, it must be transferred by physical delivery of that original instrument with the endorsement in order for the transferee to be considered a holder. In the eNote world, the eCommerce Laws requires the use of a system or registry that reliably establishes the identity of the party who is in control (holder) of the eNote entitled to enforce the note and collect on the debt (i.e. the Controller).
The other big difference is you don't have the endorsements and delivery as you would with a paper note. Instead, there is a transfer of control of the eNote that is performed on the MERS® eRegistry.
The Controller of the note may convert an eNote into a paper based promissory note. With the electronic signing and delivery of the eNote, the borrower is agreeing that the eNote may be converted to a paper based promissory note that will be an effective, enforceable and valid negotiable instrument governed by the Uniform Commercial Code, the electronic signing and delivery of the eNote will be deemed issuance and delivery of the paper based promissory note, and the electronic signature associated with the eNote, when evidenced on the paper based promissory note, constitutes a legally valid and binding signature. The borrower is agreeing that their obligations as evidenced in that eNote will also survive this conversion to paper. In addition, you must deactivate the eNote on the MERS® eRegistry to reflect that it has been converted to paper.
You should also attach a schedule of all the transfers of control to the paper Note to show the equivalent of the endorsements.
We've developed a checklist, Preparing for MERS® eRegistry Integration, to use as a guide. It includes information specific to your internal processes, technology needs and information about your trading partners.
It's important that all your business partners and vendors understand the basic “e” concepts, including eVault providers, custodians, servicers and subservicers. You should have a plan in place to address all the items that apply to your organization.