I recently made my first visit to Nashville while attending an industry conference.  If I learned two things about the city, it’s that life starts after midnight and Johnny Cash maintains a strong presence in Music City.  As I strolled through the Johnny Cash gift store, I was reminded of one of his classic songs, Folsom Prison Blues.  The song was an immediate hit and over 60 years later its’ theme remains familiar both in life and in business – make bad decisions and you’ll be left behind.    

This theme is driving a quiet surge within the mortgage industry to move primary mortgage origination to a completely digital consumer experience, prompting investors, servicers, and service providers in the secondary market to explore how to be ready for the long-anticipated upswing in electronic or “eNote” and “eMortgage” adoption.

This development has been building for years, and most market participants agree its momentum was blunted as the industry responded to the financial crisis in 2007. Fortunately, today the secondary mortgage market infrastructure is better positioned to process digital loans with greater confidence, at scale, and with more legal certainty.  

With this momentum in mind, MERSCORP Holdings, Inc. (“MERS”) recently engaged legal experts in the digital mortgage domain to debunk common misconceptions about eNotes and to provide the industry with a powerful tool -- the factual basis to advance eNote adoption. 

The resulting white paper, authored by Margo Tank and David Whitaker of Buckley Sandler LLP, is entitled “ENABLED BY LENDERS, EMBRACED BY BORROWERS, ENFORCED BY THE COURTS: WHAT YOU NEED TO KNOW ABOUT ENOTES”.  The paper explains how eNotes deliver clear and demonstrative benefits to lenders through greater convenience, quality control and transaction speed. 

[Download this white paper by clicking here.]

Despite these clear benefits, eNote adoption has been hampered by uncertainty and misunderstanding of the legal rules applicable to the creation, enforceability and transferability of eNotes. The white paper addresses these areas in detail with the intent of providing a sound level-setting for anyone moving forward with eNote adoption, regardless of where they are in the process.

The rigorous legal framework for eNotes, combined with the MERS eRegistry and various platforms supporting e-Signatures, provide a robust industry infrastructure that protects the integrity of eNotes, evidences control, and offers a detailed audit trail that has proven effective in court proceedings should the loan be challenged.

In addition to having the ability to transfer the eNote from one Controller (akin to holder in the paper world) to another instantaneously, eNotes are less expensive to transmit than a paper promissory note.  While lower costs and easier delivery are valuable to the lender and consumer, an eNote can be effectively protected against undetected alteration and can eliminate uncertainty concerning the identity of the organization entitled to enforce the eNote (the entity reflected as the Controller on the MERS eRegistry) as well as when that organization became entitled to enforce it.

As the white paper makes clear, the use of a registry for identifying the party in control of an eNote was expressly contemplated by drafters of the Uniform Electronic Transactions Act (“UETA”).  Because the eNote itself references and points to the MERS eRegistry, any person reviewing a copy of the eNote is on inquiry notice that the MERS eRegistry is the legal system of record for identifying the current Controller. 

Use of the MERS eRegistry to identify the location of the authoritative copy works in much the same way–a person reviewing any copy of the eNote is on notice that the location of the authoritative copy is identified by the MERS eRegistry.

In nearly every instance, this widely-supported infrastructure provides more controls and better risk management than the historical paper-based systems which could not clearly evidence key lifecycle events of a loan and its documentation, nor provide a digital history and audit trail of note production.

In the final verses of his song, Johnny Cash compares his subject’s frustration with the consequences of poor decisions to people on the outside of Folsom Prison by writing, “…but those people keep on movin’, that’s what tortures me.”  The benefits of adopting eNotes are beyond apparent, so act now and avoid the Folsom Prison Blues.