E-Sign (Paperless Transactions)

FAQs: Paperless Transactions

E-SIGN WHITE PAPER (Paperless transactions)

Published by OAR’s Legal Services Group on October, 2000

E-SIGN and UETA : Another Step Toward Paperless Transactions1
by Mary Catherine Pelini Grillo2

Part One: Introduction

Business-to-business Internet companies have been using electronic signatures, or e-signatures, for some time. But the lack of any laws addressing e-signatures, and the resulting uncertainty about their enforceability, on both the state and national levels have kept e-signatures out of most transactions. Ohio (among other states) and the federal government have each taken steps to clear the uncertainty surrounding enforceability of e-signatures and electronic records, or e-records. On June 14, 2000, Governor Taft signed the Ohio Uniform Electronic Transactions Act, or UETA, which became effective September 13, 2000. On June 30, 2000, President Clinton signed the federal Electronic Signatures in Global and National Commerce Act, or the federal E-SIGN Act, which became effective (as to most provisions) on October 1, 2000.
For the time being, as new as these laws are, they haven’t begun yet to affect how REALTORS do business with their clients, i.e. most REALTORS, at least in Ohio, haven’t begun yet to enter into contracts and exchange other documents, with their clients online. (When this begins to happen, we’ll summarize the details in a follow-up paper.)

So how are these laws affecting real estate right now? Lenders involved in real estate transactions are in fact already taking full advantage of the new laws. Here is a description of a completely paperless, entirely electronic mortgage loan transaction facilitated by the new laws:

A couple decides to purchase a new home from a homebuilder. They apply online for a mortgage loan from an online lender that underwrites, processes and approves mortgage loans using electronic technology. The online lender prepares the loan documents in electronic form. The title company then prepares the closing documents, also in electronic form. The homebuyers, the homebuilder and other parties to the transaction execute all documents using e-signatures. The title company then transmits the electronic deed and the mortgage to the county recorder. In turn, the county recorder verifies the deed and mortgage and collects its fee by electronic funds transfer. The mortgage and the deed are instantaneously available on the county recorder’s internet site for public search. Later, the title company issues its title policy, also in electronic form. Even later, the online lender sells the mortgage loan and transmits the electronic documents electronically to the mortgage loan purchaser. The mortgage loan purchaser transfers the servicing rights for the loan to a servicing company that also receives all closing documents electronically. The entire transaction can take place in as little as three hours.

How do E-SIGN and UETA affect the transaction? Although technology makes the transaction technically possible, E-SIGN and UETA reassure all parties to the transaction that the electronic transaction is legally enforceable. The purpose of this white paper is to summarize the key provisions of UETA and E-SIGN.

Part Two: Overview of UETA and E-SIGN

1. Why Both Laws?

The overlap of the laws raises the question, “Why both?” UETA validates electronic transactions at the state level. However, not all states have adopted UETA. Moreover, each state’s version of UETA varies to some extent from the model statute. Therefore, E-SIGN validates electronic transactions at the national level. As a federal law, to ensure national uniformity in the treatment of electronic transactions, E-SIGN closely parallels UETA’s model statute and provides expressly that it preempts both (1) a state’s version of UETA to the extent it is inconsistent with E-SIGN and (2) other inconsistent state law.

2. It’s Okay to Conduct Business Transactions Online

Prior to E-SIGN and UETA, the homebuyers in the example above could have signed an e-note but the dot-com lender could not have freely transferred the note without losing the benefits of laws available for paper documents – and therefore would likely not accept an e-note. Under E-SIGN and UETA, however, the dot-com lender can accept an e-note and may transfer it without losing legal benefits available to paper transactions. Because the dot-com lender could transfer such legal rights to a purchaser of the mortgage loan, the purchaser of the mortgage loan was willing to make the purchase.

Both UETA and E-SIGN reassure businesses and consumers that it is, in fact, okay to conduct business transactions online. At the heart of both UETA and E-SIGN are two pronouncements: (1) an e-signature or e-record is not unenforceable simply because it is in electronic form and (2) an e-contract may not be denied enforceability solely because an e-record was used in its formation. Put another way, UETA and E-SIGN put e-signatures, e-records and e-contracts on the same footing as written signatures, records and contracts.

3. It’s Okay to Use Electronic Promissory Notes

As UCC Article 3 hasn’t been revised yet to accommodate electronic notes, both UETA and E-SIGN authorize the use of electronic promissory notes by including “transferable record” provisions which give legal effect to transferable records. The UETA provision applies to all notes (and to all documents of title). The E-SIGN provision applies only to notes secured by real estate.

4. It’s Okay to Use Any Technology

Both UETA and E-SIGN are “technology neutral.” That is, neither law requires the use of any specific language or technology to create a signature. Instead, each law lets developing technology and the free market dictate the preferable method for an electronic transaction. Ultimately, therefore, the parties to the transaction have the freedom to specify the technology–and accompanying security measures–to accomplish the transaction. Therefore, simply typing your name at the bottom of an email or clicking on an “I accept” button may suffice.

5. It’s Okay to Conduct Consumer Transactions Electronically – But Beware of the Special Protections for Consumers

Many consumer protection laws, such as the federal Truth in Lending Act, require disclosures to consumers to be in writing. E-SIGN and UETA provide that an e-record satisfies the writing requirement. However, in response to consumer advocates’ concerns, each law contains certain “consumer friendly” provisions under which the writing requirement is only satisfied if certain conditions specified in that law are met.

6. It’s Okay To Notarize Documents Electronically

Currently, forms recorded in real estate transactions and other formal documents must be notarized in accordance with state law. E-SIGN permits electronic notarization if the document bears the e-signature of the notary together with the other required information and is “attached to or logically associated with a signature or record.”

7. What About Record Retention and Originals?

Under the laws, if an existing statue or regulation (including the record-keeping requirements imposed on brokers by the Division of Real Estate) requires records to be retained–or to be retained in their original form, an e-record of the information satisfies either requirement as long as the e-record “accurately reflects” the information in the record and “remains accessible” in a form capable of being “accurately reproduced for later reference, whether by transmission, printing or otherwise.”

8. Exclusions from Coverage Affecting Real Estate

E-SIGN and UETA exclude from their coverage, with respect to real estate, both foreclosures and default relating to a primary residence.

Part Three: UETA and E-SIGN in Practice

1. Risks

What are some of the potential traps of UETA and E-SIGN?

It may be difficult to confirm or prove that a typed name or mark was (or was not) intended to be an e-signature.

It may be difficult to confirm or prove that an informal exchange of e-mails was (or was not) intended to be an e-contract.

It may be difficult to confirm or prove that the person to whom an e-mail was sent (and not a third party with access to such person’s computer) was the person who responded with an e-signature.

It may be difficult to prove that the other party to the e-contract altered it after its execution.

To date, there are no published cases discussing what constitutes an “e-signature” under the laws and, as such, the boundaries are still blurred, so REALTORS (and lenders and other businesses) need to exercise care in their electronic transactions with customers to avoid being (or to ensure they are) contractually bound.

2. Protective Measures

What are some possibilities for avoiding the traps of E-SIGN?

Choose as technology, at least for now, if practicable, digital signature technology. A digital signature is an encrypted code attached to an electronic message verifying the identity of the sender to the recipient. Although digital signatures may be complicated and expensive, the encryption guarantees the confidentiality, authenticity and integrity that other electronic signatures lack.

Express in any e-contract the parties’ desire that it be enforced.

Acknowledge expressly in any e-contract that each party has “signed” it, that it has been confirmed electronically, that each party has the ability to communicate electronically, and that the e-contract is compatible with the parties’ respective hardware and software systems. Alternatively, consider adding a provision to require a password-protected disclaimer to accompany the typed signature.

Include a merger clause in any e-contract.

Restrict access to your computer and other electronics, including fax machines, making sure they are password protected and locked up.

Add a legend to your e-mails stating expressly that it is not intended to be a legally binding agreement and is not legally binding, valid and enforceable.

Consider a policy mandating use of the above legend and outlining the circumstances under which e-contracts will be used and authorization for e-contracts will be granted.

Confirm by telephone the other party’s intent to enter into a binding e-contract.

Send a confirmatory e-mail to the other party after the e-contract is completed and request the other party to respond.

If your business is considering a vendor to supply transferable record technology, the vendor should provide a detailed description of its systems and the agreement with that vendor should include warranties from the vendor that the system satisfies the control requirements in the laws and should require the vendor to have sufficient insurance to back up the warranties if there are any problems.

Part Four: FAQs

Part Five: Conclusion

E-SIGN and UETA have removed a huge barrier to paperless transactions and paperless closings are likely to become routine in real estate and in other commercial and consumer transactions. The fact that lenders have already begun to take advantage of these laws’ “seal of approval” of paperless transactions suggest REALTORS may begin to consider the internet as a viable way of conducting business, especially once REALTORS have found a way to maintain the personal relationships so key to real estate sales while they are conducting paperless transactions online.

1 The information presented in this article is not intended to be–and should not be construed as–legal advice. Any REALTOR who is contemplating using electronic signatures in real estate transactions should first consult with his or her own legal counsel and E&O insurance carrier and with the legal department of the Ohio Division of Real Estate.

2 Ms. Grillo is an attorney in the Columbus, Ohio office of Baker & Hostetler LLP, where she practices in the area of corporate and commercial (including real estate) law. Ms. Grillo can be contacted at mgrillo@bakerlaw.com, 65 East State Street, Suite 2100, Columbus, Ohio 43215, (614) 462-4756.