What is an eNote and why is it important?
The American Bankers Association projects the total value of digital loans will jump to $200 billion by 2025 as more businesses leave behind paper-based and manual processes to meet the changing expectations of a modern customer who demands enhanced speed, greater convenience, and security from their lenders.
While digital loans aren’t new, the pandemic has accelerated demand for technology-enabled digital assets, like eNotes. An eNote is the electronic version of a paper promissory note to investors. Since an eNote is electronic, it needs to be created, stored, and assigned in a specific way to ensure the same legal enforceability as paper. This is the most critical document for all parties in the mortgage ecosystem, including originators, warehouse lenders, custodians, investors, and servicers, as the validity of an eNote is essential for the downstream life of the loan on the secondary market.
A digital asset must be labeled as the authoritative copy to be negotiable and transferable. This “digital original” provides proof of an immutable chain of custody and is evidence of how the asset was created, transferred, and maintained.
Loan compliance certainty provides the assurance of an auditable and tamper-proof digital chain of custody for loans originated electronically, as well as legal standing proving these digital loans comply with the three enabling laws that govern digital lending:
- The Uniform Electronic Transactions Act (UETA);
- The Electronic Signatures in Global and National Commerce Act (ESIGN); and
- Uniform Commercial Code Section 9-105 (UCC 9-105), including their Safe Harbor provisions.
All digital loans should also comply with various technical requirements and standards specific to their industry to establish the burden of proof for ownership of an authoritative copy of a loan. Loan compliance certainty guarantees all loans have the highest level of legal enforceability and, specifically, shifts the burden of proof from the lender to the borrower.
eNotes are easily incorporated into the closing process, just like other lending documents. However, an eNote can also be the foundation of a complete eClosing strategy. The advantages of eNotes for your business include a better borrower experience, expedited sales to the secondary market, and a faster replenishment of capital.
eNote formatting and registration considerations
The mortgage industry has agreed on a technology ecosystem that stipulates how the eNote is formatted, stored, and registered. The Mortgage Electronic Registration System (MERS® eRegistry) outlines:
It is the authorized registry that identifies the current Controller (holder) and Location (custodian) of the Authoritative Copy of an eNote. The Controller of an eNote can have the equivalent rights as that of a “Holder in Due Course” of a paper negotiable promissory note. The MERS® eRegistry is the mortgage industry’s “system of record” for holders of eNotes.
A national eNote registry is part of the industry’s response to develop systems that rely upon UETA and the ESIGN Act to establish the legal effectiveness of eNotes for mortgage loans.
MISMO, the standards body for the mortgage industry, established the eNote format and mandates that you must store eNotes in an eVault. As interaction with the document occurs throughout its lifecycle, the eVault also enables the owner or secured party to control the access rights to the eNote and tracks all activity regarding the asset. This includes the signing, maintenance, sale, pledging, collateralization, and securitization through to an eNote’s ultimate disposition or destruction.
To navigate these requirements, lenders need to work with a knowledgeable and experienced technology partner that offers a comprehensive eClosing platform. Wolters Kluwer’s digital mortgage solution enables the creation of eNotes for a digital closing and the ability to securely store and manage eNotes in an eVault to support mortgage servicing and the movement of the eNote to the secondary market.
Embracing digital transformation
The benefits of shifting from paper to eNotes are tremendous, especially given the digital lending scenarios that emerged during the pandemic. eNote technology enables a remote and contactless digital loan experience that is executed with speed, accuracy, data quality, and transparency.