MBA White Paper Examines Legal Underpinnings Of E-Mortgages In The Warehouse Lending

October 24, 2007

“This paper provides detailed and relevant legal information and a framework which addresses the key issue of eNote ownership rights in warehouse lending,” said Harry Gardner, MBA’s senior director of industry technology. The MBA’s eMortgage Adoption Task Force (a subgroup of the Residential Technology Steering Committee) has published a new white paper focusing on the warehouse lending process.

The white paper, entitled “Security Interests in Transferable Records Evidencing Residential Mortgage Lending Transactions and the Rights of Warehouse Lenders: An Analysis and Proposal,” examines the legal underpinnings of e-mortgages in the warehouse lending sector under the Uniform Electronic Transaction Act (UETA) and the federal Electronic Signatures in Global and National Commerce Act (ESIGN), both of which lay the legal foundation for the industry’s transition to electronic loan files.

“This paper provides detailed and relevant legal information and a framework which addresses the key issue of eNote ownership rights in warehouse lending,” said Harry Gardner, MBA’s senior director of industry technology.

Because paper notes are usually negotiable instruments, warehouse lenders have protected themselves against unauthorized sales by taking possession of the original notes and delivering them to investors, pending payment, according to the MBA.

The white paper proposes a new strategy that takes advantage of the rights and protections built into UETA and ESIGN to ensure the same rights when funding and transferring electronic notes.

Along with a proposed solution, the paper analyzes the following issues:

  • The special rules associated with negotiable promissory notes;
  • The creation of “transferable records” as an electronic equivalent to negotiable promissory notes under UETA and ESIGN; and
  • The interplay between the UETA, ESIGN and Revised Article 9 of the Uniform Commercial Code (UCC) with respect to transferable records