The Regulatory Challenges With Digital Closings

In a recent report aimed at identifying improvements to the regulatory landscape that will better support financial technology and foster innovation, the U.S. Department of the Treasury offered three key recommendations to improve the electronic closing and recording process.

In drafting the report, Treasury consulted with a wide range of stakeholders—including the American Land Title Association (ALTA)—focused on consumer financial data aggregation, lending, payments, credit servicing, financial technology and innovation. The Treasury said its recommendations should enable U.S. firms to more rapidly adopt competitive technologies, safeguard consumer data and operate with greater regulatory efficiency.

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The benefits of digital real estate closings

“We appreciate Treasury’s thoughtful approach, understanding the hurdles that exist in the market and for providing recommendations to improve electronic recordings and closings,” said Cynthia Blair NTP, past president of ALTA and founding partner of the law firm Blair Cato Pickren Casterline LLC. “As digital closings continue to evolve, ALTA and its members will continue to help lead the effort to improve the closing experience for consumers. Finding the right balance between convenience, security and risk are all issues we must consider as we build a road to smarter closings.”

To improve the electronic closing and recording process, Treasury offered these recommendations:

1. States that have not authorized electronic and remote online notarization (RON) should pursue legislation to explicitly permit the application of this technology and the interstate recognition of remotely notarized documents. Treasury recommends that states align laws and regulations to further standardize notarization practices.

2. Congress should consider legislation to provide a minimum uniform national standard for electronic and remote online notarizations. The Treasury believes such legislation would facilitate, but not require, this component of a fully digital mortgage process and provide more legal certainty across the country. Federal legislation is not mutually exclusive with continued efforts at the state level to enact a framework governing the use of electronic methods for financial documents requiring notarization, according to the Treasury report.

3. Recording jurisdictions that don’t recognize and accept electronic records should implement the necessary technology updates to process and record these documents and pursue digitization of existing property records.

Treasury said that while the Uniform Electronic Transactions Act (UETA) and Electronic Signatures in Global and National Commerce Act (ESIGN) e-commerce laws establish the validity of electronic signatures on consumer credit transactions, “additional legal clarity is needed to ensure compliance with state notary laws for use of electronic notarizations, specifically the sanctioning of digital notarizations in lieu of a physical signature and notarization.”

To date, 39 states have enacted laws establishing the legality of such e-notarization. In 2010, the National Conference of Commissioners on Uniform State Laws (also known as the Uniform Law Commission, or ULC) promulgated a revised model statutory framework for notarial acts, updating its original 1982 model act, aimed at facilitating interstate recognition of various types of notarizations.

Additionally, during its annual meeting in July, the Uniform Law Commission approved updates to its model state notarization law—the Revised Uniform Law on Notarial Acts (RULONA)—to allow remote online notarization. ALTA and the Mortgage Bankers Association (MBA) worked closely with the ULC drafting committee to ensure consistency between the RULONA amendments and the model RON bill.

Remote online notarization (RON) is one type of technology innovation that has become more prevalent in the industry. RON allows notaries to conduct notariziations using audio-visual technology over the internet instead of being physically present. Currently there are 22 states that have passed remote notary laws. Out of those states, 10 have laws that are in effect and six have fully implemented their remote notarization procedures. Arizona’s RON legislation goes into effect June 30, 2020.

“These electronic notarization statutes, enabling digital notary signature for in-person notarizations, provide insufficient legal certainty for the use of remote notarization conducted electronically via webcam, with the latter permitting both signatory and notary to be in different locations,” Treasury concluded.

The report mentioned the model legislation ALTA developed in 2017 with the Mortgage Bankers Association to provide a framework for states to use in adopting remote online notarization for real-estate transactions. ALTA does not specifically endorse online notarization, but wants to ensure any legislation that is passed is safe for consumers, that transactions are insurable and technology neutral. ALTA believes that without a model bill to help guide legislative discussions, different state standards are likely to result. That outcome is the last thing consumers and the industry need, as it will lead to inefficiencies, additional costs and a poor customer experience.

As more transactions are handled electronically, it’s important to ensure that documents are validly executed and in a recordable format. To ensure that the title insurance and settlement industry can protect property rights, a reliable land records system is needed that is free of any contamination of unlawfully executed and/or recorded documents.

In its report, Treasury said, “Despite state-level progress toward wider recognition of electronic notarization, the absence of a broad statutory acceptance across the country and uneven standards for remote and electronic notarization implementation has created confusion for market participants, slowing adoption of digital advances in mortgage technology by limiting the ability for lenders to complete a digital mortgage with an e-closing.”

The Treasury report noted that non-uniform state rules create a cost barrier for electronic notarization system vendors developing their platforms as well as uncertainty for investors considering purchasing digital mortgages.

“County-level acceptance of digital security instruments is a key determinant of whether a lender will pursue an electronic closing, as lack of acceptance of these documents renders such critical e-mortgage components, such as electronic notarization, moot,” according to the report.

In 2004, the Uniform Law Commission promulgated the Uniform Real Property Electronic Recording Act (URPERA), representing a model statutory framework to provide county clerks and recorders the authority to accept electronic recording of real property instruments.

To date, 36 states and U.S. territories have enacted URPERA. Arizona was among the first states to pass this legislation in 2005. Implementation has picked up pace over the past few years. Through 2019, more than 2,000 of the 3,600 recording jurisdictions in the U.S. offer electronic recording.

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