Proving “Originality”and Ownership of Electronic Mortgage Notes

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August 24, 2007 Version 1.0 PAGE 1

Digital Evidence – Testing Document Authenticity

Proving “Originality” and Ownership of ElectronicMortgage Notes

Grace Powers, 1st Vice President, Sr. Legal Counsel

Countrywide Financial Corporation

June 1, 2007





From Paper to Electronic Notes

The mortgage market’s continued ability to lend money relieson the liquidity of promissory notes secured by real property.

Paper promissory notes are endorsed “in blank” so that

whoever has “possession” of the note is considered a holder,holder in due course, or purchaser.

Electronic Note (“eNote”) challenges:

There is no such thing as an “original” note.You can’t take “possession” of an eNote.

How do you prove that you’re the owner of an eNote?

How do you prove that the eNote has not been altered?





Current eMortgage Infrastructure

ESIGN and UETA legalize the use of electronic records andsignatures.

Overlay statutesUniform Real Property Electronic Recordation Act(URPERA) and other state laws authorize electronicrecording by county clerks and recorders.

Industry standards and utilities:MERS® eRegistry

Mortgage Industry Standards Maintenance Organization(MISMO)

Standards and Procedures for Electronic Records andSignatures (SPeRS)

Secure Identity Services Accreditation Corporation (SISAC)





State eCommerce Law – UETA

The Uniform Electronic Transactions Act (UETA) wasintroduced in 1999. Thus far, 46 states plus DC haveadopted UETA in some form.

UETA’s Objective: Ensures that transactions in the electronicmarketplace are as enforceable as transactions memorializedin paper.

Section 7 of UETA provides:

A record or signature may not be denied legal effect orenforceability because it is in electronic form.

A contract may not be denied legal effect or enforceabilitybecause solely because an electronic record was used in itsformation.

Any law that requires “a writing” will be satisfied by an electronicrecord.

Any signature requirement in the law will be met if there is anelectronic signature.





Federal eCommerce Law - ESIGN

For those states that have not passed a uniform version ofUETA, the Electronic Signatures In Global and NationalCommerce Act (ESIGN) would control.

ESIGN’s Relationship to UETA:If state adopts uniform UETA, ESIGN may be superceded inwhole or in part.

If there are non-uniform amendments to UETA that conflict with

the main provisions in ESIGN, ESIGN would preempt UETA.

Whether or not a state has passed UETA, ESIGN requiresconsumer consent before one can deliver disclosures that arerequired to be “in writing” to consumers.





ESIGN / UETA Transferable Record Treatment forNegotiable Notes

An electronic record that would otherwise be anegotiable promissory note under UCC Article 3

may be a “transferable record”.

The transferable record concept creates a structurethat allows for the transfer or assignment of anelectronic promissory note.





Establishing Control of an Transferable Record

The concept of “control” under ESIGN and UETA establishesa parallel structure for the transfer and negotiability of anelectronic promissory note to a third party so that the thirdparty transferee has the same rights and defenses that are

held by a “holder,” or “holder in due course,” under the UCC.Can be thought of as equivalent to possession of a papernote plus delivery and endorsement.

A person has “control” of a transferable record, meaning theexclusive right to enforce or transfer ownership of theunderlying debt obligation if a system “employed forevidencing the transfer of interests in the transferable recordreliably establishes that person as the person to which the

transferable record was issued or transferred.”Standard stands on its own, but there is a safe harbor.





Safe Harbor for Meeting Control Requirement

Six safe harbor elements:Single authoritative copy exists that is unique, identifiable andunalterable without detection.Authoritative copy identifies the person asserting control aseither to whom the transferable record was issued or the issuer.

- Example: MERS eRegistry was designed as the industryutility serving as the central location to identify the currentperson in control and the location of the authoritative copy ofthe promissory note.

Authoritative copy is communicated to and maintained by theperson asserting control or its designated custodian.Copies or revisions that add or change an identified assignee ofthe authoritative copy can be made only with the consent of theperson asserting control.

Each copy of the authoritative copy and any copy of a copy isreadily identifiable as a copy that is not the authoritative copy.Any revision of the authoritative copy is readily identifiable asauthorized or unauthorized.





MERS ® eRegistry

Provides ESIGN / UETA Safe Harbor compliance

infrastructure for negotiable instrumentsIdentifies the Controller and Location of the AuthoritativeCopy of the eNote

Does not store the eNote itself

In production as of April, 2004





Definition Translation

Paper World Electronic World

Negotiable Instrument Transferable Record (“eNote”)Original Note Authoritative Copy of eNote

Possession Control

Investor/Holder Controller

Custodian Location (eVault)

Endorsement Transfer of Control

Holder in due course Transferable Record Audit trail

Servicer Controller’s Delegatee

*Source: MERSCORP, Inc. Used with permission.





Importance of SISAC- for eMortgages

MISMO eMortgage Closing Guide recommends that a tamper-evident digital signature be applied to an electronic document topreserve the document’s integrity.

The certificate used to implement a tamper evident-digital signature

should be an organizational certificate obtained by a SISACaccredited issuer.

See www.mismo.org for Closing Guide and other guidance.

SISAC-accredited digital certificates may provide assurance

of:A signer’s identity;

That the signature is valid; and

That the electronic document has not been tampered with after a

tamper-evident digital signature has been affixed.Goal - Secure, reliable and enforceable eMortgages





Tamper-Evident Seal

A "digital fingerprint" or "hash“ that consists of aseries of letters and numbers that uniquely describe a

document.

If the document is altered in any way, the "hash" for

the altered document will be different from that of theoriginal document.

Di it l E id T ti D t A th ti it





Tamper-Evident Seal Process

Document

Hash Function

Digest

Encrypt

Signature

Private Key

Tamper-Evident SealSignature Value(Digital Fingerprint )

Document

Hash Function

Decrypt

Expected

Digest

Public Key

Actual

Digest

If there are the same,

the tamper-evident seal is verified.

Electronic RecordCreating a seal Verifying a seal

The process of digitally signing a document with a valid digital certificate such thatif such a document is modified, it can be systematically detected.

Proving “Originality”and Ownership of Electronic Mortgage Notes

Documents

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