ESIGN and transferable records

With the need for social distancing during the current COVID-19 pandemic, you have probably heard a lot about eClosings and eMortgages. As explained in frequently asked questions (FAQs) prepared by Fannie Mae, “[a]n eClosing is the act of closing a mortgage loan electronically.” The Fannie Mae FAQs describe the term eMortgage to generally refer to an eClosing process that involves the note and mortgage being executed through the use of electronic signatures. The eClosing process could ultimately result in a note and mortgage signed electronically –an eMortgage—or the note and mortgage might require wet-ink signatures while disclosures are provided electronically to the applicant and signed electronically by the applicant. The Fannie Mae FAQs note that this latter process ending with electronic disclosures and a physical note and mortgage is often referred to as a hybrid closing.

Your credit union might already be using a hybrid closing process and might be interested in moving toward an eMortgage process involving an electronically signed note and mortgage. Today’s blog will solely focus on the statutory requirements that must be satisfied to have an enforceable electronically signed note. A later blog will address requirements that affect whether an electronically signed mortgage is permissible under state law.

Wait, ESIGN Permits Electronic Signatures on a Promissory Note Governed by Article 3 of the Uniform Commercial Code?

A promissory note executed by a borrower evidences the borrower’s written promise to repay a loan received from a credit union. A promissory note, in general, is governed by Article 3 of the Uniform Commercial Code (UCC). The scoping provisions of the Electronic Signatures in Global and National Commerce (ESIGN) Act, suggest that the general rule of validity related to electronic records and electronic signatures does “not apply to a contract or other record to the extent it is governed by . . . the Uniform Commercial Code, as in effect in any State, other than sections 1–107 and 1–206 and Articles 2 and 2A.” See, 15 USC § 7003(a)(3). But a different section of the act, section 7021 of title 15 of the United States Code, provides the framework for using an electronic record like a promissory note governed by Article 3 of the UCC. That section explains that the key concept in facilitating an electronically signed note is the transferable record.


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