Within the last decade, the electronic marketplace for lower-priced consumer goods has grown exponentially. In the real estate industry, concern about the high costs involved in mortgage transactions has led to consumers shopping for mortgage products on the Web. However, that shopping does not produce many electronic originations. Why is this?
Contract laws, and state real property laws in particular, simply did not contemplate the business reality that is developing today. Electronic communications have raised particular issues for real property transactions. For example, the statute of frauds, which requires that many documents be in writing, clearly is inconsistent with current trends. The changes that this new technology will engender for the title insurance industry are dramatic. In the words of Charlie Foster, ALTA®'s President, and Chairman of the Board & CEO of LandAmerica, "If the world really needs another new beginning, here it is." Will the title industry be ready to cope with this new world? ALTA® believes that it will, and in fact, ALTA® members participating in the ALTA® Federal Conference this past March lobbied to achieve inclusion in Federal legislation of several of the provisions described below to facilitate electronic real property and insurance contracts.
A Review of the Bill
This article reviews the key elements of the federal Electronic Signatures in Global National Commerce Act, P.L. 106-299, (hereafter the Electronic Signatures Act), affecting real property and title insurance transactions. The Act was signed into law by the President on June 30, and is the new beginning the Federal government is bringing to the title insurance industry. In addition to the key provisions covering the contract transaction, this article also reviews the Federal bill's relationship to state laws, and describes some possible effects on industry developments. The Federal bill is based on a model act - the Uniform Electronic Transactions Act (UETA) - developed by the National Conference of Commissioners on Uniform State Laws (NCCUSL) in 1999. In conjunction with real estate industry participation, NCCUSL developed a model law covering sales of many different types, ranging from simple e-mail sales to EDI transactions. In the last 100 years, NCCUSL has drafted more than 200 uniform laws on a variety of subjects. Their work on commercial law, most notably the Uniform Commercial Code, promotes uniformity in state law to advance interstate commerce. Similar to the National Association of Insurance Commissioners' model acts, these model acts are not effective until enacted by a state or Federal legislature.
Coverage of Real Property Transactions
The Electronic Signatures Act essentially preempts state laws to provide for the validity of interstate contracts conducted by electronic means using electronic signatures and "records." As with most legislation, the key to the issues are the terms in the definitions. Under the Act, electronic signature is very broadly defined as electronic records, which simply means a contract or other record which is created, generated, sent, communicated, received, or stored by electronic means. Thus, the act has a very broad definition of the types of communication which will qualify as an electronic signature. Electronic "records " are a contract or other record which is created, generated, sent, communicated, received, or stored by electronic means. Again, this is a very broad interpretation of the possible coverage of electronic contracts. The term "transaction" as defined in the Act means an action or set of actions relating to the conduct of business, consumer, or commercial affairs between two or more persons including, of most interest to us - the sale, lease, exchange, or other disposition of any interest in real property, or any combination thereof Again, a very broad, and specific provision covering many forms of real property transactions. Several other provisions in the bill address issues which are key to real property transactions. One section of the bill specifically allows electronic notarization for transactions relating to interstate commerce. It specifies that a state statute, regulation or other rule of law requiring a notarization, acknowledgment, verification, or oath, may be satisfied if the electronic signature of the person authorized to perform those acts, with all other required information is attached to or logically associated with the signature or record. In addition, the legislation gives those in control of electronic records the same rights as holders in due course under the Uniform Commercial Code, which will facilitate efficiencies in the mortgage securitization processes. But as we all know, the title insurance industry serves a dual role in the real estate process. While real property transactions are the basis of our business, the product that we offer is insurance, and we are regulated as insurance. As a result of the McCarran-Ferguson Act, insurance is state-regulated. Thus, there was some concern that the new statute would not apply to insurance policy contracts or the operations of insurance companies. Therefore, the insurance industry sought provisions in the legislation to make clear that the new Federal law applies to the business of insurance, including title insurance. In addition, the good news for the title insurance agent is that insurance agents will not be liable for any deficiency in the electronic procedures if they are not negligent, were not engaged in the development or establishment of the electronic procedures, and did not deviate from the electronic procedures used for the transmission of the information.
But what about the consumer? The statute specifically provides that the content and timing of consumer disclosures, such as the good faith estimate or the Truth in Lending Statement in the mortgage transaction, are not affected. However, it does preempt existing Federal and state statutes to allow consumer disclosures to be provided electronically. However, the consumer consents to the process, or confirms his or her consent electronically, and is notified of the hardware and software requirements for access to and retention of the electronic records and any fee charges that might be applicable for paper copies. Consumers must be notified if a change in the hardware or software requirements needed to access records creates a material risk that they would not be able to access records. However, any bad news that would be delivered to consumers, such as notices of default, acceleration, foreclosure and eviction notices, would still have to be provided in paper form.
State Laws vs. Federal Bill
While the scope of this article does not allow for a detailed discussion of preemption of state laws, the Electronic Signatures Act sets standards that apply to all 50 states, but defers to states that adopt the Official Text of the Uniform Electronic Transactions Act (UETA). Thus, while the Federal bill is based on UETA, UETA remains important. When this Federal bill was under consideration, several states had already enacted or had under consideration in their state legislature a version of UETA. Consequently, Congress provided that under the Federal Act, if a state had enacted the model UETA, the state law will control.
However, if a State had excluded bodies of state law other than those specifically listed by the UETA drafters, the Federal law controls. For example, the Kentucky version of UETA excluded coverage for real property transactions, while the Federal bill (Section 106(13)) specifically covers real property transactions. Consequently, the Federal law would control. Further, a separate "technology and procedure" provision in the Federal statute preempts state laws which give greater legal effect to use of a specific technology or technological specification. This provision is intended to pre-empt state laws which are not technology neutral, as in, for example, Utah. Thus, it is likely that any inconsistent, nonuniform provisions of a state law, would be preempted while the consistent provisions of the state law would, in all likelihood, survive.
Some state laws still apply. For example, Section 9 of UETA specifically provides that an electronic signature is to be attributed to that person if it was the act of the person. The Federal bill, on the other hand, contains no provision addressing attribution of electronic signatures, so in states where UETA has not been enacted, state law would apply. UETA also defers to state law for several other substantive determinations, so questions of authority, agency, forgery, and contract formation, are still determined by state law. Further, there are some gaps in state electronic transaction law. For example, states may want to enact legislation providing for validity of intrastate electronic contracts. In real estate, this might apply, for example, to cash transactions.
As Title News goes to press, one provision of the law which is very important to the practical reality of the real estate transaction is subject to interpretive controversy. Section 104 of the Electronic Signatures Act, which states the applicability of the Act to Federal and state governments, has been interpreted to require county recorders to accept electronic documents by October 1, 2000 - the effective date of the Act.
ALTA® has asked a law firm to perform a detailed legal analysis of this issue. Nevertheless, it appears unlikely that a court would require county governments, some of whom are several weeks behind in recording paper documents, to develop and pay for systems to accept county documents electronically. Further, the Federal bill does not limit or supersede any requirement by a Federal or state regulatory agency that records be filed in specified standards or formats. It also provides that performance standards issued by these entities may be specified, but may not be technology specific.
States may also require private records to be retained in tangible printed form only if there is a compelling governmental interest relating to law enforcement or national security. In general, the legislation is effective October 1, 2000. Consequently, conventional mortgages (those purchased by Fannie Mae and Freddie Mac) can be completed electronically after that date, and in fact, as noted in the articles in this issue of Title News, have occurred. However, the Federal bill also delays applicability to Federal loan guarantees and insurance, such as FHA insured and VA guaranteed loans, to make them effective one year after enactment of the bill, namely, June 2001. With respect to state law requirements for records retention, the statute is generally effective March 1, 2001, although it may be delayed under certain circumstances until June 1, 2001.
What Does this Mean to Us?
So what can the bill mean for the title insurance industry? On a business to business level, opportunities are now legally available to take advantage of the new technologies to develop a new real estate paradigm. However, several practical issues may prohibit the move to a truly electronic real property world.
First, the title insurance industry will face the practical realities of technological capability. While many lenders do have the capability to transmit information electronically, many more may only have e-mail capacity, and some may not even have that. In addition, many consumers may not have the capability to receive electronic communication, and there are likely to be even fewer who have enough confidence in electronic procedures or their service providers - such as the mortgage originator - to want to participate in a fully electronic mortgage transaction.
In fact, it will be necessary for more widespread adoption of these opportunities for the mortgage finance industry to adopt technologies and procedures that will provide the necessary assurances of attribution, non- repudiation, data integrity, and reliability. For instance, safeguards are necessary to assure that the record is accurate - in other words, that the buyer and seller have electronically "signed" the same contract. While the Federal bill does specify that electronic notarization is allowed, there is some debate that the physical presence before the notary is required. While some parties may be willing to rely on a "chat room" notarization by an electronic notary, as our industry knows all too well, that reliance may disappear when problems arise subsequent to the closing. The Act does not eliminate the risk associated with electronic documentation, and does not preempt state law regarding attribution.
As noted by John Hollenbeck of First American, a member of ALTA®'s Technology Task Force, "The enactment of the Federal digital signature legislation is a critical step to enabling many exciting technology and process-oriented initiatives certain to improve the real estate closing process. It will be important in the months to come for the title industry, in cooperation with the mortgage finance industry as a whole, to develop technology standards necessary to implement digital signatures in a meaningful way."
ALTA®'s Involvement ALTA® is actively participating in a standard setting process - the Mortgage Industry Standards Maintenance Organization, (MISMO). This group is developing the common electronic standards that will allow lenders, title companies and agents, and county recorders to communicate mortgage information in a standardized XML manner. Further, technology is developing, and will develop, that will allow parties to the contract, and their arbiter, the courts, to actually, not just legally, rely on each other's "electronic" signatures. Public and private key infrastructures ("pki") allow for the creation of "digital" signatures. These systems use symmetric or asymmetric "keys" to encrypt and decrypt messages. Further levels of security can be provided through the use of digital "certificates," based on a process of registering keys with a third-party agency. It is the evolution of the technology, the law, and the ability of the industry to change with all these developments, that will actually bring us into this new world.
Ann vom Eigen is ALTA®'s Legislative Counsel. She can be reached at email@example.com or 1-800-787-2582.
To Learn more... ALTA® is offering a telephone seminar on Electronic Real Property Contracts, September 27, from 3:00-5:00 p.m. EST. Cost is $200 for members and $250 for non-members. To register, call KRM at 1-800-775-7654 and refer to code# ALT 5847-0. Or register on the ALTA® Web site, www.alta.org .