Legal Technology Issues in Electronic Records and Signatures

1. Legal Technology Issues in Electronic Records and Signatures A Mortgage Lender’s Perspective on Implementing an eMortgage Strategy MBA's Legal Issues in Mortgage Technology Conference November 30 – December 2, 2005

2. ESIGN and UETA • Overlay statutes • UETA enacted in 48 jurisdictions • ESIGN and UETA provide solid bases to go electronic

3. Federal Preemption • ESIGN Section 102 • States may modify, limit or supercede ESIGN (Section 101) only if state adopts UETA or state alternative consistent with ESIGN • Which Law Applies? • ESIGN or UETA or both • Georgia, New York, Illinois, Washington • California

4. Regulatory Authority • ESIGN Section 104 • Filing and access • Authority to interpret ESIGN and UETA • Limitations • Performance Standards • Accuracy, • Record Integrity, and • Accessibility • Retain Paper or Printed form if compelling governmental interest relating to law enforcement or national security

5. Regulations • Federal Reserve Board Interim Rules on Electronic Communications • OCC Bulletins on Consumer Disclosures and Record Retention • FFIEC Guidance on Authentication in Online Environments

6. Case Law • Courts have concluded that electronic transactions satisfy “writing” requirements. • Writings are not limited to ink on paper. • Signature is a symbol or process coupled with the intent of the party to sign the writing. • Electronic records can be “originals” and printouts are admissible into evidence.

7. Case Law (Continued) • Significant cases to date: • Arizona Cartridge Remanufacturers Ass’n Inc. v. Lexmark Int’l Inc., No. 03-16987 (9th cir. Aug. 30, 2005) • Bazak Int’l Corp. v. Tarrant Apparel Group, S.D.N.Y., No. 04 Civ. 03653 (July 18, 2005)  • Briceno v. Sprint Spectrum, d/b/a Sprint PCS, Fla. Dist. Ct. App., 3d Dist., No. 3D05-144 (August 30, 2005) • International Casings Group, Inc. v. Premium Standard Farms, Inc., 358 F. Supp. 2d 863 (W.D. Mo. 2005)  • PFT Roberson, Inc. v. Volvo Trucks North America, Inc., Nos. 04-3100, 04-3232, 04-3841 and 04-3877 (7th Cir. September 19, 2005) • Estate of Engelhardt, 2004 WL 345941 (Ohio Prob. Ct. 2004)  • Haire v. Florida Dept. of Agriculture and Consumer Services, 2004 WL 252015 (Fla. 2004) • Register.com, Inc. v. Verio, Inc.,  356 F.3d 393 (2d Cir. 2004) • In re Cafeteria Operators, L.P., 299 B.R. 411 (N.D. Texas 2003) • DeJohn v. The .TV Corporation Int’l, 245 F.Supp.2d (C.D.Ill. 2003) • Medical Self Care, Inc. v. National Broadcasting Company, 2003 WL 1622181 (S.D.N.Y. 2003) • Nomura Securities International, Inc. v. E*Trade Securities, Inc., 280 F.Supp.2d 184 (S.D.N.Y. 2003) • Piranha Inc. v. Newhouse, 83 Fed. Appx. 19, 2003 WL 22922263 (5th Cir. 2003) • Roger Edwards, LLC v. Fiddes & Son, Ltd., 2003 WL 342993 (D.Me. 2003) • SmartText Corp. v. Interland, Inc., 296 F.Supp.2d 1257 (D.Kan. 2003) • Zubulake v. UBS Warburg LLC, 217 F.R.D. 309 (S.D.N.Y. 2003) • Wells Fargo & Co. v.WhenU.com, Inc., 293 F.Supp.2d 734 (E.D.Mich. 2003) • Cloud Corp. v. Hasbro, Inc., 314 F.3d 289 (7th Cir. 2002) • People v. McFarlan, 191 Misc. 2d 531, 744 N.Y.S.2d 287 (N.Y. 2002) • Shattuck v. Klotzbach, 14 Mass. L. Rep. 360, 2001 Mass. Super. LEXIS 642 (December 11, 2001)

8. Legal Issues to Consider • Consumer Consent • Effective Delivery of Disclosures • Record Integrity

9. SPeRS (Standards and Procedures for Electronic Records and Signatures) • What is it? • What kind of issues does it cover? • How do I use it?

10. Introduction • ESIGN and UETA make it possible to present information and sign agreements and other documents electronically in circumstances where a paper document and a “wet” signature would have been required. • Design of systems for presenting disclosures or signing electronic records requires understanding of the interaction between electronic processes and legal requirements. • ESIGN and UETA are self-effectuating –that is, no regulations are needed in order to use ESIGN or UETA to present or sign records.

11. Introduction (Cont.) • Tension between letting the market develop and the need for a clear path forward. • SPeRS was created to fill that gap.

12. What is SPeRS? • SPeRS is: • A cross-industry initiative to establish commonly understood “rules of the road” available to all parties seeking to take advantage of the powers conferred by ESIGN and UETA. • Founded on the proposition that much of the time and effort being invested by companies “re-inventing the wheel” could be avoided if cross-industry standards for these elements of electronic transactions could be established.

13. What is SPeRS? (Cont.) • Focused on the behavioral and legal aspects of the interaction between parties to the transaction, not on technology. SPeRS is intended to be technology neutral. • Standards are not necessarily legal minimums, but implementing the standards should enhance reliability and sufficiency.

14. The SPeRS Objectives • SPeRS will: • Permit businesses to establish a common understanding with vendors concerning design parameters for routine functions, without having to develop detailed custom specifications, • Assist in establishing industry standards for commercially reasonable, enforceable structures and processes, and • Provide the customer with a “common experience” across various online transactions, increasing the customer’s comfort level with the transactions.

15. System Design Team Concept • Standards make repeated reference to the “System Design Team.” • Core principle of group effort. • System Design Team should be composed of personnel from variety of disciplines: • IT • Corporate Security • Product Development • Marketing • Compliance • Legal • SPeRS designed to help make nexus between legal process and legal requirements.

16. The SPeRS Structure • SPeRS is divided into five sections: • Authentication • Consent • Agreements, Notices and Disclosures • Electronic Signatures • Record Retention • Each section is composed of an Introduction and Outline and a series of Standards with supporting materials.

17. The SPeRS Structure (Cont.) • Introduction and Outline • Purpose: to help orient the system design team to the subject covered and its relevance to system design. • Standards and Principles • Purpose: high-level guidance reflecting important design parameters. • Standard is accompanied by statement of underlying principle.

18. The SPeRS Structure (Cont.) • Considerations • Purpose: raise a series of questions, with the answers impacting the system design. • Checklists and Examples • Purpose: detailed, step-by-step guidance and assistance for implementing the standards. • Commentary • Purpose: legal and other support for standards.

19. SPeRS Methodology • Designed to assist with identification of issues related to legal sufficiency. • Designed to assist with weighing options and strategies. • Intended to prompt questions and systematically construct answers.

20. SPeRS Methodology (Cont.) • Consult SPeRS at the beginning of design cycle: • Identify appropriate members of design team • Review 30 high-level standards • For each standard that applies –review, identify issues, resolve • Document process

21. Electronic Documents: Hot Topics • Standardization (“SISAC”) • Risk Management • Electronic Discovery

22. Standardization (SISAC) • Security Identity Services Accreditation Corporation • Goals • History and Development • Current Status

23. Security Identity Services Accreditation Corporation • Components: Based on minimum standards for four major components of identity management solution • Public Key Infrastructure (Identification & Authentication) • Issuance • Validation • Publication

24. Security Identity Services Accreditation Corporation • Components (continued) • SISAC accreditation certificate • Federal PKI standards • Error and Omissions insurance requirement for AIAs • Certificate of Policy Requirements Document (CPRD)

25. Security Identity Services Accreditation Corporation • Implementation of SISAC • Mortgage industry must drive standardization • Signs of industry acceptance • MISMO and MERS • Fannie Mae • Navy Federal

26. Risk Management • Cautionary Tales • LexisNexis • ChoicePoint • Microsoft • FTC’s threatened $2.2 trillion fine for security flaws

27. Risk Management • Current Approaches to Security • Applications with fewer security holes • Patches • General security countermeasures • Firewalls • Encryption • Virus protection

28. Risk Management • Traditional Insurance • Exclusions • Tangible vs. Intangible Property • Accidental vs. Non-Accidental Loss • Physical Damage vs. Economic Loss • Impaired Property

29. Risk Management • Cyber-Insurance • Scope (non-exhaustive list of available insurance policies) • Security breaches of websites • Cyber-extortion • Business interruption • Cyber-crime • Asset protection • Income protection • Electronic media liability • ID theft coverage • Crisis management • Liability insurance for financial institutions • Cost • Availability

30. Electronic Discovery • Respondents required to “obtain” or “translate” information “through detection devices into reasonably usable form.” Fed. R. Civ. P. 34(a) • Must be “reasonably accessible.” Fed. R. Civ. P. 26(b)(2) (Proposed)

31. Electronic Discovery • Preservation Duty (Zubulake v. UBS, 229 F.R.D. 422 (S.D.N.Y. 2004) (“Zubulake V”) • Scope • Duty to locate materials (“litigation hold”) • Duty to monitor and supplement • Duty to present information in appropriate form

32. Electronic Discovery • Sanctions • Entry of judgment (Computer Task Group, Inc. v. Brotby, 364 F.3d 1112 (9th Cir. 2004); Metropolitan Opera, Inc. v. Local 100, Hotel Employees & Restaurant Employees’ Int’l Union, 212 F.R.D. 178 (S.D.N.Y. 2003)) • Adverse inference (Zubulake V) • Monetary sanctions (U.S. v. Philip Morris USA, Inc., 327 F. Supp. 2d 21 (D.D.C. 2004)

33. Electronic Discovery • Document Retention Plan: In-House Counsel • Formal document retention policy regarding the saving and destroying of documents • Litigation preparedness • IT department relationship • 30(b)(6) deposition witness • Document destruction and back-up tape recycling • Data storage and retrieval

34. Electronic Discovery • Document Retention Plan: Outside Counsel • Duties to preserve and produce in regards to electronic media • Familiarity with client information systems • Minimizing disruption of client operations • IT department relationship

35. Now That You Have Some Background… • Is it possible to have a fully implemented eMortgage? • What does a lender need to think about before implementing an eMortgage strategy?

36. Current eMortgage Legal Infrastructure • ESIGN and UETA authorize electronic records and signatures. • Uniform Real Property Electronic Recordation Act (URPERA) and other state laws authorize electronic recording by county clerks and recorders. • These laws allow notaries to use electronic signatures for notarization. • Federal Financial Institution Examination Committee’s (FFIEC) Guidance on Authentication in an Internet Banking Environment. • Federal Reserve Board’s (FRB) Interim Final Rules on the Electronic Delivery of Disclosures. • Comptroller of the Currency’s (OCC) Advisory Letters on Electronic Consumer Disclosures and Notices and on Electronic Record Keeping.

37. Current eMortgage Infrastructure • Most lenders are doing at least one phase of an eMortgage transaction. • Electronic applications. • Electronic delivery of disclosures and other mortgage documents (i.e., appraisals). • Electronic document retention (imaging). • Electronic recording in certain counties. • MERS eRegistry is actively tracking the ownership interests and transfer of those interests in eNotes. • Fannie Mae is buying eMortgages and retaining eNotes in their eVault. • Freddie Mac will be releasing an eMortgage Handbook. • MISMO data and document format standards. • SPeRS – Electronic signature and records guidelines. • Vendors – Signatures, notarizations, authentication systems, SMARTDocs, eVaults or electronic document management systems, recording, etc.

38. Do a Pilot Project • Determine what are your goals for going to eMortgages. • Reduce paper. • Reduce costs of delivery and handling of paper. • Support “lights out” processing and quality control. • Improve customer experience. • Advantages of doing a pilot project. • Opportunity for informed risk assessment. • Opportunity to correct problems or improve processes. • More control over expenses. • Opportunity to change your mind.

39. Create Your eMortgage Team • As SPeRS recommends, your System Design Team should include: • Information technology; • Corporate security; • Product development; • Marketing; • Human Resources; • Compliance; and • Legal. • If your eMortgage pilot project includes eNotes that you intend to sell or securitize on the secondary market, you may want to discuss your plans with your investors (e.g., Fannie Mae, Freddie Mac, etc.). • Set up any necessary interfaces with MERS. • You may need the expertise from representatives in your origination, warehouse lending, secondary, and document custodian departments or vendors.

40. Scope Out Your Pilot Project • Determine what channel. • Correspondent channel. • More risk offset available. • Less control over origination of eMortgages. • Retail channel. • More risk exposure. • More control over origination of eMortgages. • Determine what loan product and/or geographical area. • Many counties do not accept electronic recording of security instruments. • Determine which part of your mortgage process will be electronic. • Pre-application and application. • Disclosures. • Origination. • Recording. • Servicing. • Determine whether these loans will be kept in portfolio or sold/securitized.

41. Educate the Project Team • ESIGN and UETA 101 • Consumer consent to electronic delivery of disclosures • Transferable records requirements • Privacy and data security requirements • Electronic recording laws • URPERA • California’s Electronic Recording Delivery Act (AB 578) • Status of electronic notarization • MISMO standards • SPeRS • Fannie Mae and Freddie Mac eMortgage selling/servicing guidelines.

42. Do a Risk Assessment • After determining your project scope, do a risk assessment of your proposal. Issues to ponder: • Can your company absorb or insure against potential risks? • How will you handle legal and compliance requirements in the your eMortgages? • Will your investors buy these eMortgages? • Will your title insurers cover these eMortgags? • What technology would you need to build or buy from your vendors? • What processes will you need to change for eMortgages and how may process changes impact your loan production?

43. Evaluate Your Vendors • If a vendor will be providing critical technology (e.g. eVaults) for your eMortgage pilot project, you should think about: • Vendor’s understanding of ESIGN and UETA; • Intellectual property issues (e.g., licensing issues); and • Financial condition of your vendor.

44. Servicing and Record Retention Issues • Servicing – If your eMortgage project will include an eNote or eMortgage, you may want to consider issues that may arise when servicing the loan. • State/county requirements that an “original” be returned to the jurisdiction or to the borrower. • Foreclosure issues • Record Retention • Consumer retention • Transferable record retention • Retention under applicable law • Retention for evidentiary purposes • Review SPeRS guidance on record retention

45. Final Thoughts • Have a clear understanding of your goals. • Have a clear project plan and scope. • Understand the risks that may come up during the project and determine how you will mitigate those risks. • Educate your project team early in the process on ESIGN, UETA, URPERA and other applicable laws, SPeRS and MISMO standards, and investor requirements. • Keep up-to-date on the changes in regulatory requirements and industry standards.

46. Questions? Margo Tank Buckley Kolar LLP mtank@buckleykolar.com Gerald J. Ferguson Baker & Hostetler LLP gferguson@bakerlaw.com Grace Powers 1st Vice President, Senior Legal Counsel Countrywide Financial Corporation Grace_Powers@Countrywide.com