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Freddie Mac



Conversation with Freddie Mac




November 16, 2000




Featuring
Jerry Buckley
And
David Whitaker

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John: Todays Freddie Mac program welcomes two excellent speakers today, David Whitaker and Jerry
Buckley. David Whitaker is an assistant general counsel at Freddie Mac in McLean, Virginia. Mr. Whitaker is
a member of the American Bar Associations Business Section and the Business Sections Committee on the
Uniform Commercial Code, Committee on the Law of Commerce in Cyberspace, and the UCC subcommittee
on Letters Of Credit. He has appeared as a speaker on banking law and e-commerce at more than 40
conferences and seminars across the country.
Jerry Buckley is from the Electronic Financial Services Council. The EFSC is an association of
companies involved in providing electronically based financial services. The EFSC played a key role in
enactment of the federal ESIGN legislation that makes it possible to provide fully electronic financial services.
Mr. Buckley is executive director of the EFSC and a partner in the Goodwin, Proctor, and Hoar Law Firm in
Washington, DC. An expert on legal, consumer, and technology issues in financial services, Mr. Buckley
served as chairman of the American Bar Associations Committee on RESPA. He speaks and writes frequently
on financial service issues. Jerry, welcome to the program today.
Mr. Buckley: Thank you. Well, and Id like to welcome our guests on the teleconference as well on
behalf of both the Electronic Financial Services Council and Freddie Mac. For those of you who are not
familiar with the Electronic Financial Services Council, its an organization thats been in existence for about
two years now. Its founding members were Microsoft and Intuit, General Electric and Countrywide. And its
mission is to update those laws and regulations, which need to be changed to facilitate electronic delivery of
financial services.
Securing enactment of ESIGN legislation was a major focus of the group over the last year. However,
issues such as privacy, state barriers to entry, clarification of RESPAs impact on electronic transactions and a
number of other issues are on the Councils agenda as well.
Like other trade associations, which...Unlike other trade associations which tend to focus on a particular
industry or whose members have a common charter or license, the common bond among the members of the
Electronic Financial Services Council is their interest in using electronic medium to deliver financial services.
And as such, its members include both traditional financial services firms and technology companies. We hope
to continue to expand our membership and keep the issues on which we focus at the forefront of public policy
debate.
Now Ive been asked to pause and have John ask polling questions as we go through here because it
takes some time, a little bit of time for tabulation. So Im going to pause and allow John to ask the first polling
question.
John: Thanks, Jerry. And our first question today is, were curious about how many people are
listening in at your site today. And using your touch-tone keypad this is how polling works. If you are the only
one listening in your room today just simply press one on your touch-tone keypad. If there happens to be two of
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you in the room, press two. If there happens to be three, press three. And so on up the line. If by chance there
are nine or more listening in at your site, simply press nine. And go ahead and press the corresponding number
at this time. And we will have several other polling questions throughout todays program. Jerry, Ill turn it
back over to you for a little bit.
Mr. Buckley: Thank you John. Well having succeeded in securing the enactment of legislation
authorizing electronic signatures and records at the federal level, our group has begun to focus on the ways in
which these new powers can be implemented. Both the federal ESIGN legislation and UETA, the Uniform
Electronic Transactions Act, are overlay statutes. That is they overlay the laws and regulations which require
signatures of records. Simply stated, these statutes make electronic signatures the equivalent of ink signatures
and electronic records the equivalent of paper records.
But these simple changes in law bring significant operational questions. Neither the Federal ESIGN Act
nor UETA rely on regulations to be implemented. Rather they leave it to the participants in consumer and
commercial transactions to establish the ways in which they will do business.
A major focus of the Electronic Financial Services Council over the last few months has been a
discussion about what guidelines and business conventions need to be developed to facilitate e-commerce in
financial services. And we have been pursuing these issues through our regular working group meetings and
now through this teleconference session.
John, how about your next question?
John: Alright, Jerry. Our second question, polling question is, how would you rate your knowledge of
this topic today? Press one if high. Press two if some. Press three if low. Again the question, how would you
rate your knowledge of this topic? Press one if high. Press two if some. Press three if low. And Jerry, Ill now
turn it back over to you.
Mr. Buckley: Thank you. Freddie Mac is a valued, active member of the Electronic Financial Services
Council. It has taken a leading role in our discussions regarding guidelines for electronic financial transactions.
Freddie Macs Preliminary Specifications For Electronic Loan Documentation, which were issued in a
discussion draft on November 1
st
of this year, address some of the most important issues that will be faced. Not
only in the mortgage industry, but in other financial services industries, as we seek to establish guidelines to
effectuate transactions electronically.
The Council is pleased to have the opportunity to join with Freddie Mac in sponsoring this
teleconference and explore these issues, to explore these issues and to secure the views of industry participants.
This is an educational process for us all. And no one purports to have all the right answers. Provisions
have been made for receiving your questions as has been mentioned earlier and in sending in your comments by
facsimile. And we have reserved time to respond to them at the end of the latter part of the session.
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We will begin with David Whitaker walking us through the principle revisions of the draft specifications
explaining issues which the draft seeks to address. We are all fortunate to have David involved in this process
because of his long time involvement both with UETA Drafting Process and with the enactment of ESIGN
Legislation. His experience with an understanding of these issues is both broad and deep. And we are fortunate
to have him as our guide as we walk through the many issues raised by the process of electronically originating
and servicing home mortgages. David, take it from here.
Mr. Whitaker: Thank you, Jerry. Thank you, John. Id like to welcome all of you to the conference.
Just to manage to give you some idea of how we plan to proceed so that you know what to expect. For roughly
the balance of the next hour, through roughly 3:30 eastern time I will be taking you through both the underlying
thought process that produced the preliminary Freddie Mac specifications and highlighting for you certain
things within the specifications themselves. At the end of that time we will shift to the question and answer
format. And Jerry will be going over the questions that have been faxed in to us. We already have, in fact, a
couple that have arrived. And well be trying between us, Jerry and I, to do our best to answer those questions.
In the event that we dont get to all of them, and its possible that we wont, we will be trying over the next few
days to respond to the additional questions directly back to those who have asked them. Now with that
background in mind, well begin.
As kind of a general proposition, statutory law, regulations and contracts are all about controlling future
behavior. They are essentially rules that are either imposed on us or that we agree to, that provide for the way
we are to comport ourselves in the future. And they provide, one way or another, for penalties if we fail to do
so. In the case of statutes and regulations, the penalties may run from incarceration to fines. In civil contracts
and agreements they tend to run more along the lines of damages or other types of remedies. But in all those
cases, the idea is you agree to abide by a set of rules and when you fail to abide by that set of rules there are
consequences.
Now about 4,000 years ago some folks in a place called Sumeria got the bright idea that they would take
some of those rules and set them down in a tangible form on stone tablets. So that they could go back and
check later to make sure that they all remembered what they had agreed to.
In about 1750 BC, the code of Hammurabi was set down on stone tablets and became what we know
today ,at least we believe today, to be one of the first fairly extensive codifications of law and regulations in a
written form.
In about 500 BC, papyrus began to come into use for recording rules, largely religious rules, in some
cases civil rules.
And in about 150 AD the Chinese invented what we call today vellum paper. And we began to see
rules, regulations, and agreements laid out for future reference And for checking against our memory in a paper
form.
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The bottom line is that our culture, our world has accepted for 4,000 years the concept of placing things
down in tangible form for future reference. And in particular for placing down in tangible form those rules that
guide our behavior and a description of the penalties that result for failing to meet our agreement. It is as
natural to all of us as breathing. It is part of our world and we take it for granted.
On October 1
st
, 2000, TheUnited States made the conscious decision to abandon that process, in favor
of using electronics, at least in commercial transactions and to a certain extent in other kinds of transactions via
the Electronic Signatures In Global And National Commerce Act, otherwise known as ESIGN. Incidentally the
g is in there so that they can make the acronym. Theres really nothing global about it. It is a federal law. It
applies in the United States but they needed the g for ESIGN. So there you have it.
In addition to ESIGN we have Uniform Electronic Transactions Act, which really preceded ESIGN and
was enacted by 19 states largely in a uniform manner and by three more states in a partial enactment with some
significant variations. But in at least 19 states we had a comprehensive enactment prior to ESIGN. And in fact,
ESIGN draws most of its principle provisions from the UETA. These two statutes attempt to lay down a set of
rules for how we will make this conversion from a paper to an electronic environment. And how the electronic
environment is supposed to behave from a legal perspective.
There are an awful lot of parts of the paper infrastructure that we use today that we simply take for
granted. We simply assume the existence of procedures for establishing the authority to sign a document or the
purpose for which a signature is used in a particular case or how the documents will be stored or retrieved or
how we will maintain document integrity. These are all things that we have come to take for granted. They are
so much part of our business process, of our functional process to address these issues, that in many cases we
dont even realize we are addressing them.
Our challenge now as an industry as we attempt to move into an electronic loan documentation
environment is to try to consciously build an infrastructure and convention for transposing these concepts into
an electronic environment.
Now over the last several months Freddie Mac has encountered over and over again expressions from
industry participants of a desire for guidance on the appropriate processes for originating, closing, selling,
servicing, storing, and managing electronic loans. This requires an amalgamation of legal requirements under
ESIGN and UETA in addition to compliance with rules of evidence in place within US courts and also with best
practices for audit purposes and for purposes of implementing technology. In other words, it isnt enough
simply to ask what does ESIGN or the UETA say? One has to in addition ask, and what will be required in
order to establish the integrity of these documents at the courthouse and what internally will our auditors and
technologists require of us in order to establish these systems in an effective and a reliable manner?
The preliminary specifications are a first stab at gathering all of these kinds of rules in one place. A
chance to gather the industry together. To gather Freddie Mac, to gather together sellers, servicers, title
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insurers, hazard insurers, technology vendors, the settlement service providers. And to ask the question, what
do we expect from our vendors? What do we expect from each other? And what do we expect of the borrowers
in this process? And perhaps most importantly, what are the borrowers entitled to expect from us? And what
are they entitled to experience as part of a process in which they interact with their loan documentation
electronically instead of on paper.
Weve been asked over the last few weeks, why is Freddie Mac doing this? Basically there are four
reasons. First of all ultimately, the loan documentation evidence is a debt obligation that we own if weve
bought it. And that means that its our asset and we securitize it to investors and were responsible for those
investors and to the public at large to make sure that we understand what we own and that what we own is
enforceable. We have the obligation and the right to be fully satisfied with the documentation that we are
obtaining as part of that process. And making sure that everyone understands what their role is and that the
documents are in fact effective, valid, and enforceable is part of our obligation to control and mitigate risk.
Number two, we think it is awfully important as we move into this new environment if we have to go
down to a court house to be able to demonstrate to a judge not only that the documents are technically and
legally enforceable. But also that the documents are in fact a good public policy choice, that the use of
electronic records reflects an improvement in the process. An opportunity to better deliver information to our
customer, to establish better efficiencies in the marketplace, to lower the cost of doing business in such a way
that not enforcing these new kinds of documents and this new environment, not supporting the new
environment constitutes a public policy error.
Number three, we feel that everyone in the process from Freddie Mac to the lenders and the vendors and
the settlement service providers and the title insurers and the hazard insurers all need to understand what is
expected. And we need to understand whats expected of each other. We need to understand whats expected
of our business partners. And were hoping that the specifications, when they are fleshed out by the industry,
will constitute a consensus on the kind of checklist that the industry needs to use in order to establish that these
documents are being effectively prepared and effectively utilized.
So some of the specifications are implementations of law and some reflect our first cut at what we think
constitutes good public policy. Now I want to pause here to emphasize for you we dont think weve got it
right. In fact, were sure we dont have it right. And were sure that we havent thought of everything. We are
absolutely dead serious when we say, as we have said on our website, as we have said when we have contacted
industry members to discuss this issue, as we are saying now, that we are very interested in getting back any
kind of comments anyone on this call or anyone else who has taken a look at these preliminary specifications
cares to send to us. Because the bottom line is that we are looking to establish a set of specifications that the
industry is comfortable with, not just a set of specifications that were comfortable with. And were convinced
that we need the entire industry to work together to make sure that weve got this process right. We want to
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know what you think weve got right. We want to know what you think weve got wrong. We want to know
what you think weve missed. And we want to know what you think we have not made clear.
Now I also want to say just a quick word about the Fannie Mae guidance letter that was issued a couple
of weeks ago. We have had some inquiries from people who have asked, how do these two things fit together?
If you look at the Fannie Mae letter its basically in two parts. There is an extensive recap of the basic rules of
law under the ESIGN and the UETA. And then theres an indication of some initial technical specifications and
preferences that Fannie Mae believes are appropriate, including a reliance on XHTML. Youve probably
noticed that the preliminary specifications we have issued are technology neutral. They will work with
XHTML. Theyll probably work with a lot of other things. They do not make any judgments concerning
technology and therefore are in no way contradictory to anything we have seen from Fannie Mae at this point.
In a lot of other ways when you look at the other parts of the Fannie Mae guidance, the Preliminary
Specifications compliment that guidance essentially by promoting an industry dialogue concerning what the
significance of the rules in UETA and ESIGN. And underlying and surrounding rules are in connection with
the kind of processes we need to have in place in order to make this effective.
Now with that kind of background in place, let me start to take you through the Preliminary
Specifications themselves. If you actually have a copy in front of you and you care to follow along the page
Im actually going to start on is page 12. Were going to jump over the introductory materials and talk directly
about the specifications themselves.
You will note that in this first section we have a number of definitions. I am very interested, we are very
interested in learning what might be wrong or right about those definitions. And in particular, what we havent
defined that we probably need to. What the industry thinks needs definition, either out of the statute or out of
practice, that we have not yet effectively identified. A couple of these definitions I want to draw to your
attention.
The first one is in Section 1.2 where I want to draw to your attention the definition of authoritative
copy. This is an undefined term in ESIGN and in the UETA. And we think that for purposes of understanding
what is required particularly with respect to an electronic equivalent of a negotiable promissory note, its
important for the industry to have a common understanding of what is meant by authoritative copy. We do
not have a firm notion at this point of exactly what it should mean. But I can tell you under the statute generally
what it is understood to mean is a copy that has been identified, either through technology or through agreement
as the primary reference copy of a document.
And an important thing to note here is that you will spot, I think, almost immediately the absence of the
word original from just about any of the provisions in the specifications. This is because in an electronic
environment the concept of original really has no application. There simply are copies of an electronic record --
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there can be a first copy or a second copy or fifty copies but there is not in any real sense an original of the
electronic record. And so the UETA and ESIGN avoid that concept and so do the specifications.
Another one of these definitions that I want to particularly bring to your attention is procedure or
process. This is a phrase that is used a number of times inside the specifications. There are a number of
references to procedures or processes in the specifications themselves. Id like you to note that when we say
procedure or process we are not talking about particularly or necessarily an entirely technological procedure
or a technological process. A procedur or process may be as we understand it in the specifications something
that is technological, or something that happens in the physical world, such as checking a drivers license for
identity, or it may be a combination of the two. And there is nothing in the standards themselves that makes a
judgment at this point concerning whether the procedure is technological or nontechnological. And incidentally
thats at Section 1.13 on page 13 of the specifications.
Finally I want to point out to you among the definitions, most of which are self explanatory, the concept
on page 14. Its Section 1.21 on System Rules. There are a lot of questions that ESIGN and the UETA do not
answer. Particularly with respect to the relationship among the parties who execute or may own an electronic
equivalent to a promissory note or an electronic mortgage. Those issues have been left to a large extent for
agreement by the parties. And our reference here to System Rules is to the concept that as the systems of
document control and document management develop, the participants in that system will need to enter into a
common understanding on a large number of issues including access rights, distribution of system risk, what
constitutes sending and receipt, and dispute resolution. We think that probably those things are effectively
handled through the use of system rules with respect to these kinds of loan document management products.
But we are open to the concept that there may be other ways to respond to this set of issues and were certainly
interested in your comments on what should be included or excluded or how system rules might be effectively
implemented.
Now having talked a little bit about some of the more mystifying definitions on page 14, we begin really
the meat of the specifications by talking about what is one of probably the most important issues that we have to
address in an electronic environment. And that is consent to move from a paper environment to an electronic
environment where there is an existing legal requirement that something be provided or delivered or maintained
in writing.
Both the UETA and ESIGN are opt in statutes. That means that you dont gotta play unless you wanna.
What that means in turn is that if there is now a requirement that something be in writing, before it can be taken
electronic, the people who are directly involved, the people who are either giving or receiving that document, or
who are entitled by law to rely on that document, are entitled to consent. And if they do not consent then the
document may not be taken electronic. In Section 2.1 we talk a little bit about some of the folks who might be
expected to have to consent as part of a real estate transaction.
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Now one of the things that has already been pointed out to me is that at this point the consent procedures
and the consent provisions are a little too 2-dimensional, if I can use that phrase. They need to be more 3-
dimensional in the sense that in some cases these are documents in which more than two parties are at one time
or another involved. An example would be hazard insurance, where both the borrower and the hazard insurer
would need to be consenting to the concept of having the hazard insurance policy delivered electronically. And
then, in addition, since the lender is relying on the delivery of the hazard insurance policy to establish one of its
requirements for the loan it would also have to consent as well. But the consent there is different because its
not a consent that effects the document or the effectiveness of the policy itself but rather effects its introduction
into the lending transaction, after it has been made effective by the consent of the borrower and the consent of
the hazard insurer.
Our view at this point, based on a reading of UETA and ESIGN, is that consent for commercial parties
may be obtained on a blanket basis. That is to say if you are a particular lender or seller/servicer who is
maintaining an electronic loan document management system and you have a certain number of title insurers
who are participating in that system and they have all given you their electronic consent to deliver documents
into that system that otherwise would be required to be in writing and to receive those kinds of documents, then
once youve obtained that consent on a blanket basis you can go forward.
We are also aided here by the fact that again, except with respect to certain kinds of consumer
transactions, that consent may be construed from the circumstances. In other words, if you jump in the pool we
expect that you wanted to swim. UETA and ESIGN both provide that if you start flashing electronic documents
all over the country that probably you meant to engage in electronic commerce and you meant to consent to the
electronic delivery of the documents. We expect the consent to be informed. We expect folks who are
consenting to be told they are consenting. And we expect them to be given the opportunity to decide whether to
consent in a clearer, straightforward and effective manner. And that brings us of course to the most important
party from whom we must obtain consent, and that is the consumer, or the borrower if you like.
And at this juncture what Id like to do is to ask Jerry to rejoin us here for a few moments and talk
briefly about the federal ESIGNs expectations and rules with respect to consumer consent in a transaction
where a writing would otherwise be required. Jerry, could you give us a hand?
Mr. Buckley: Yes. Thank you David. As part of the process of enacting ESIGN there was a need to
respond to consumer concerns. The consumer advocacy community raised questions about the understanding
of consumers and what types of transactions they were getting into and their ability to get out of such
transactions if they find they couldnt effectively operate in that medium. And that was a barrier to passage of
legislation in the House of Representatives unless consumer rights were more clearly defined.
Congressman Jay Insley of Washington State took the lead in this area. Hes a new democrat and a
member of the house banking committee. And he proposed an amendment, which was called the Insley
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Amendment. And it spelled out the rights that the consumers have in connection with electronic transactions,
be they financial services transactions or others. And really the requirements are fairly understandable although
they will be something that has to be done on each transaction. Prior to obtaining consent an electronic record
provider must deliver a clear and conspicuous statement informing the consumer of any right or option of the
consumer to have the record provided or made available in paper form.
They also have to provide disclosure that tells the consumer about their right to withdraw consent and
any conditions or consequences, which may include termination of the partys relationship, if the consumer
withdraws.
They also have to let the consumer know whether the consent applies only the particular transactions
that give rise to the record or to all identified categories of records provided during the course of the parties
relationship.
They also have to let them know the procedures the consumer must use to withdraw consent or to update
information needed to contact the consumer. They have to let the consumer know how the consumer may, after
consenting and upon request, obtain a paper copy of electronic record. And whether any fee will be charged for
such a copy.
And they have to let the consumer know what the hardware and software requirements will be to access
or to retain records.
The consumer consent may be given electronically by reasonably demonstrating that the consumer can
access the information in electronic form in the form that is going to be used to communicate with the
consumer. There might be the consumers e-mail confirming that the consumer can access the electronic
records or there may be another form of acknowledgement. The consumer may by some affirmative response
indicate that they are able to obtain the disclosures or other documents or agreements in the form that the
financial services provider or other commercial entity is providing them.
After the consumer has consented, if there is a change in heart or a software requirements needed to
access or retain electronic records that creates material risks that the consumer will not be able to access or
retain subsequent records, the consumer must be provided with a statement of revised hardware and software
requirements. Moreover the provider of the electronic records must again comply with the axis verification
provisions which I discussed earlier.
And so thats the, thats the boiler plate thats in the statute and will be required in connection with any
consumer transaction, presumably all home mortgage transactions. David?
Mr. Whitaker: Thank you, Jerry. If you look on pages 17, 18 and 19 in Section 2.3.1 of the
Specifications, youll find our first stab at trying to implement these requirements under ESIGN. We have
made a couple of policy choices at this point, which once again are open to discussion. The first is that we
dont intend in our view to make a distinction between, which would be a fine distinction, between those items
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for which a consent involving the Consumer Consent Provisions under ESIGN would be required and those
parts of the process where the consumer's consent would not necessarily require compliance with ESIGN. It is
a highly technical analysis to determine when exactly an ESIGN consent, or a non-ESIGN consent under
perhaps the UETA, is applicable in the appropriate state. And our view is that for the most part as you work
through the ESIGN Consent Provisions For Consumers most of them are simply common sense provisions.
Things that in any event it seems to us the consumer would need to know anyway.
However there are a few policy choices made as you work your way through the Specifications in
addition to strict compliance with the law and the question of exactly how consent should be approached with
the consumer. Well, it is an area in which once again we are quite sure we dont have all the answers. I
encourage all of you to take a close look at what we envision as the potential consent process and to provide us
with your insights on how we might improve what we have written here, what weve missed and what we might
want to add or subtract. For other participants of course we have set some standards but theyre fairly
abbreviated. The notion is of course that commercial parties are largely able to take care of themselves so long
as they know that theyre consenting to something.
Finally youll note that we have observed that it seems that it should be perfectly appropriate to be able
to give someone a power of attorney to consent. So that if you are an individual and you wish to consent to act
electronically you would be in a position to execute a power of attorney granting that right to consent to another
person. We can see no objection to that legally. If any of you happen to think of one please let us know.
Moving on then. I want to hit just briefly on page 20, the timing of consent issue. There have been
some questions about this. I encourage your thought on this subject and your responses. When should the
various parties consent? And in particular, given the fact that we must have consent before delivery of most
documents to consumers, what is the right moment for the consumer to consent in this process? And if its
going to vary depending on circumstances, what kind of circumstances? And what does that variance mean as a
practical matter for us in terms of how we evaluate the transaction?
On page 20 we move onto another topic that is of course near and dear to everyones heart in this
process, and thats execution. That is to say the signing of documents. One of the core concepts in ESIGN and
UETA is the notion that we can do away with the pen and the ink, and with the X or even if you like, with the
spitting on the page. All of which would be signatures under existing law and instead we can go to a signature
in an electronic environment.
As weve begun to have conversations with vendors and lenders and other parties to the transaction, we
have noticed here as much as anywhere a tendency to take for granted certain processes that happen almost
unconsciously in the physical paper world that we think we need to be careful to pour over into the electronic
environment. First of all we need to be paying careful attention to the question of authority to sign. Of course
in the case of an individual were largely thinking in terms of being of an age of majority, having capacity to
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contract, not being mentally ill, or otherwise incapable of making decisions for yourself. For representatives of
legal entities, corporations, partnerships, trusts, were looking at the question of from where do they derive their
authority to act on behalf of their principal. And I think that one of the questions that is important to ask here is
for which parts of the mortgage lending transactions do we simply take authority for granted currently? In
which case we may be justified in taking it for granted in an electronic environment? And where do we actually
check currently?
A good example might be with hazard insurance. Where if you think about it today if the hazard
insurance policy arrives on a preprinted form, ostensibly signed by an authorized representative of the insurance
company, usually in facsimile, we usually simply take that for granted as an effective signature and do not
further inquire. On that theory is it appropriate for us to take the same basic position in an electronic
environment? That if the policy is in fact delivered and we know it has been delivered by the insurance
company that signed up to engage in the process or participate in the loan origination system, are we then
entitled to inquire no further concerning the authorization of the signature? Thats an area in which we would
be very interested in the thoughts of the parties in interest concerning what should or shouldnt be required.
And its simply one example among many of the questions that need to be asked.
And for those of you who would be settlement service providers, I ask you the question, what kind of
check on authority are you accustomed to now and would you expect or want to have happen in an electronic
environment?
Today we also expect to see evidence of intent to sign. This is usually expressed either through a
statement in a document itself concerning what the signature accomplishes or through surrounding
circumstances. We think we need to be conscious in electronic environment of reproducing that experience and
making sure that everyone who is signing a document understands what theyre signing and understands what
their signature signified with respect to that document. Is it an agreement to the terms of the document? Is it an
agreement that theyve received the document? Is it an agreement that the document has been sent? Or an
indication that you are the sender? These are all things one might use a signature for and usually the context
currently supplies us with an understanding of what that purpose is.
So as you look on pages 21 and 22, looking at Sections 3.1.2 and the subsections underneath that section
on pages 22 and 23, think about those questions and ask yourself how we might flesh out these rules in order to
make it clearer to the parties what they are engaging to do when they sign.
If you look on page 23 and 24 you will see essentially two items, 3.1.3 and 3.1.4 that are technological
in their nature. They are essentially inquiries to our friends on the vending side of the fence concerning whether
or not their systems have been devised in order to accomplish certain things that appear to be required by
ESIGN and the UETA. We would welcome comments from vendors as to whether or not we have expressed
that correctly, gotten it right or wrong. Let us know.
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Attribution of course is the concept of attaching a signature to an individual. And this is a subject where
of course technology provides us with an opportunity to potentially improve the process of establishing our
confidence with respect to the identity of the individual who affixes the electronic signature. On the other hand
there is the chance for overkill, the opportunity that we may actually require too much in the way of attribution
compared to what we are requiring today. You might look through that section with an eye towards the balance
it tries to strike and ask yourself whether or not you think that balance is correct. And ask yourself what kind of
additional guidance as either seller servicers, or vendors, or other participants you might care to have
concerning the level of attribution or the level of security one would need to have associated with a signature
attached to a particular type of document.
That brings us to Section 3.2, notarization. The UETA and ESIGN provide that a notary can sign a
document electronically. It provides that the stamp and seal goes away. There does not have to be a stamp and
a seal although the information that was on an embossed seal or on the stamp has to be included in the
notarization. But beyond that UETA and ESIGN do not change any other state law requirements with respect to
notarization. And so at this point we, at Freddie Mac, are feeling very cautious about the concept of changing
the requirement for personal appearance before a notary for the notary to either witness each document as its
being signed or to witness the acknowledgement personally of those signatures by the signer.
We are a little reticent at this point concerning proposals to use, for example, public infrastructure or
dual-key encryption as an alternative for the notary process. To begin with, in most states we dont think it
meets current legal requirements and we also have a serious policy issue. If in fact as the National Notaries
Association maintains and the American Society of Notaries maintains the notary actually serves both a
ceremonial function and a protective function by establishing an absence of duress and the existence of self
awareness and awareness of the document. Are we going to produce an authentic analog for that by going to
any type of remote public key infrastructure based equivalent for notarization?
Our approach at this point is to address this with caution and to at least the beginning of this process, to
still be looking even when were having an electronic closing in the sense of electronic loan documentation
prepared to expect that there will be a physical appearance with a notary for the purposes of executing
documents.
Jerry, at this point Id like to pause for a moment and ask you to talk in connection with the notary issue
about the question of filing down at the county clerks office, which is not something that we address in detail
in the standards. You might talk for just a few moments about what we currently see the situation to be and
how we expect things to develop.
Mr. Buckley: Well, we have had questions raised shortly after the ESIGN legislation passed. Both the
American Bar Association and some of the elements of the academic community and at the county recorders
association as to whether the ESIGN act would require a county recorder to accept an electronic filing. And its
14
understandable that, given the large number of recorders who would not be ready to do that with the effective
date being October 1
st
, 2000, there was some consternation in that community that if that were the case they
wouldnt be ready. And there are fines or other penalties for failure to accept a document that is presented for
recordation. Our law firm, Goodwin & Proctor, was called upon by the American Land Title Association, the
Consumer Mortgage Coalition, and the Electronic Financial Services Council to render an opinion on this. And
while the statute is subject to various interpretations we think that the clear intent of Congress and the intent of
the statute is that the recorders are not compelled to accept an electronic filing. That having been said, we are
anxious to work with recorders toward achieving electronic filing. And a number have been done. And we
think that progress in this area, given the disposition of many of the recorders to move in this direction, will be
more rapid than one might have thought a few years ago. David?
Mr. Whitaker: Alright. With those things then behind us, and the good news is were about to pick up
the pace a little because the concepts of consent and signature are perhaps the most important core concepts that
we wanted to lay out in detail for you during the first part of this presentation.
Well move on to Section 4, which is on page 27 if you happen to have the printed copy. And if you
dont, if you look for Section 4 and Sections 4.1 and 4.2 we are trying to figure out the knotty question of
document format and delivery. This is particularly of interest because the UETA and ESIGN do not change the
existing formatting requirements. If theres a requirement right now that a document be in bold face or that it
be in a particular size font those requirements do not change. Now an interesting thing to note is that if youve
agreed to move into an electronic environment the document that has to meet those requirements is the one
thats displayed electronically. It would not necessarily be true that you would have to preserve that formatting
if you were to print out a copy of that document for reference. In fact the UETA and ESIGN both make
reference to the fact that the copy you are able to access needs to preserve the information but not necessarily all
the formatting. But that does, I am told, raise some interesting technological questions because of differences
with respect to how consumers have their equipment formatted (end of tape 1, side A)...own equipment.
And we are very interested in input from all parties, in particularly the technology vendors concerning
the appropriate standards that should be set and the way in which these standards should be expressed. And
what is and is not technologically possible. And what we will have to tell consumers about the configuration of
their equipment in order to effectively deliver these documents in conformity with law. We are also of course
trying to set some standards for delivery methods. At this point we have simply addressed a legal question,
which is the issue of using electronic delivery where the law currently requires postal delivery or hand delivery
of documents. Both the UETA and ESIGN leave in place existing rules that may require a document to be
delivered by mail. If there is in fact a requirement that says that you have to deliver this by hand or you have to
deliver it by first class mail postage prepaid that is not changed. And that means for all intents and purposes
that particular documents are going to have to stay on paper for the time being, except under the federal ESIGN
15
act under some circumstances it may qualify for delivery electronically even if theres an existing state or
federal law mandating postal requirement.
Now the question for all of you is what else do we need to say about delivery issues? Do we need for
example to talk about the concept of delivering documents by say, for example, sending an e-mail to which
there is or in which there is included a hot link to a website at which the document itself is located. Are these
subjects on which we need to address the issues more deeply or in more detail than we have at this point.
Now in Section 5, document integrity. On page 29 if you happen to have the printed book in front of
you. We start to talk about the question of trying to maintain the documents over time so that we have
confidence that if the documents must at some point be taken down to a courthouse they will be enforceable.
One of the most significant issues we think is tracking alterations and versions. We all know that in the
course of preparing a loan package for closing that there are any number of variations and any number of
changes that get made to documents that the documents themselves go through a number of iterations. In order
to provide confidence at the end of the day to a court that the document has not been tampered with once it has
been executed, we think its important for the systems that are put in place to keep track of the versions and the
changes as one comes up to closing. So its possible to demonstrate how the document was modified as
negotiations and plans continued and changed and so that at the end of the day the court can have confidence
that they have seen the process by which the final document package was created and put together.
We are particularly concerned of course with preventing the later alteration of signed documents. In a
paper world, when you sign a piece of paper the concept is that after that date its not supposed to be messed
with. And in fact having the signature on the document is supposed to essentially be a signifier that changes to
the document that happen afterwards would require a revisiting to the document by the signer, and either an
initialing of a change or perhaps an amendment to the document itself. In the same vein we think it would be
very important to be able to demonstrate to a court that once these documents have been executed the loan
management system is designed such that it will not be possible to change those documents without those
changes being detected.
The question then is, what kinds of standards should be set in this kind of document? How should the
specifications address that issue? What kinds of sub-issues do we need to address which are not yet addressed
in Sections 5.2 and 5.3?
Finally in Section 5.5 we talk about identifying the authoritative copies. And remember I talked earlier
about the definition of authoritative copies. In Section 5.5 we attempt to carve out or we like kind of flesh out
the concept of what constitutes an authoritative copy. We are extremely interested in the industrys take on
whether or not we have the concept right. And from the technology point of view whether or not what we
described is achievable. And whether or not what we have described is clear. On this subject, as much as any
other, we are extremely interested in your feedback so that we can start to develop a good solid industry
16
consensus on what constitutes an authoritative copy. This is a central concept under transferable record and
therefore one we have to pay a great deal of attention to.
Section 6, which begins on page 31 if youve got the book in front of you, talks at a very high level
concerning records management issues. These are issues that almost all of you are probably familiar with at
some level through your IT departments or through your third party providers of electronic data services. The
FFIEC as is mentioned here actually has a huge, two-volume examination set on data management and
information systems that the FFIEC uses when examining financial institutions. The real question is at what
level should specifications address this issue? What level of guidance is necessary and to what extent should
this be left to other sets of standards? What other standards are there out there besides the FFIEC standards,
which are the ones we are most familiar with? And what would be the appropriate level of application of those
standards to this process? We are looking for your input with respect to those standards and with respect to the
kinds of rigor that should be applied to the management of electronic loan documentation.
There is also the question of overkill. To what extent, given the way in which those documents are
managed today, are the kinds of issues that are raised for example in Section 6.1, concerning physical
environment or 6.2 concerning processing or 6.3 the technical environment. To what extent are those overkill
given current circumstances and unnecessary in the view of industry participants as part of a mandatory
specification?
I also want to point out to you in Section 6.4 that we have attempted briefly to address the question of
hybrid transactions. And by that I mean the kind of transactions I expect to happen a lot. That is to say a
transaction where some of the documentation occurs electronically but there may very well also be
documentation which occurs in a paper form. We have provided here some brief guidelines concerning how we
think those kinds of systems, or how a loan management system should interact with a hybrid transaction, how
we think it should manage the relationship between the electronic documents and the written documents. We
are very interested in insight concerning what we may have right and wrong here. And in particular we are
interested in trying to get a better feeling for how these two different sets of documents, written documents and
electronic documents should be related to each other and how we should describe the process by which they are
related in the specifications.
One thing thats very important I want to point out to you is at the end of Section 6.4 you will notice that
despite the fact that we contemplate that most documents that begin on paper might eventually end up being
electronic, that we dont mean it with respect to the written promissory note. If there is anything in the world
clear under the UETA and ESIGN is that once a promissory note is executed on paper it stays on paper. And if
you were to digitize it and then shred it theres a very good chance youve forgiven the debt. So for heavens
sakes whatever else we might do lets not start talking about shredding paper promissory notes.
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On page 35, Section 7, document access. This is another area I think I mentioned this briefly earlier
where were quite sure we dont have it right yet. The question is who needs to have access to documents in
electronic loan package, when and how? And when their need for access ends how do we terminate that
access? And when a new participant comes into the transaction, after all Freddie Mac will not be involved until
the transactions ready to be smoothed into the secondary market, when do those new parties first obtain their
access to the documents? And perhaps most importantly since there is a clear legal requirement in UETA and
ESIGN that a consumer who has elected to accepted and use electronic documents have the opportunity to have
continued access throughout the life of the transaction to those documents, how do we provide access for
consumers?
We are very interested in the insight you can provide to us concerning the proper way to describe and to
establish access rights. What in this particular set of standards is not yet clear as you read through these? Are
there portions of this that are confusing? Are there portions of this where you dont think weve got it right
concerning who should have access and how? And from the technology vendors in describing the changes in
status of access, what kind of specificity, what kind of clarity do you need concerning our expectations that is
not yet provided concerning when and how and who has access to the transaction?
We are also very concerned about data survivability. Obviously this is a we refer to this as a 30+7
transaction. Its a 30-year mortgage in most cases and then theres 7 additional years for the IRS, producing the
potential for a need to be able to reproduce these documents for 37 years. This once again is a question largely
to the technology vendors and the IT people. What do we do, or what do we have to say in order to establish or
in order to set standards for the future survivability and access to these records as part of this process?
If youll move to page 38 to Reps, Warranties, And Contract Terms which is in Section 8. This is our
very first cut at what it looks like to us, the relationship should look like among the vendors, the sellers, persons
who are administering these loan management systems, if they are different, document custodians if that is yet a
different person. What relationships should these parties have to each other and what warranties should they be
providing to each other? And what warranties should they be providing into the secondary market?
Once again we stress nothing in here is written in stone; we are very interested in input from the industry
concerning what we may have right here, what we have wrong here, what is reasonable to expect, what is not
reasonable to expect. And we are open to discussions concerning who should be accepting responsibility for
what parts of the specifications and compliance with which portions of these specifications?
I want to particularly draw to your attention Section 8.3, which is on page 39 and 40 if you have the
printed book in front of you. Section 8.3, titled Systems Administrators and Document Custodians, talks about
what is, from my point of view, one of the most important issues that has to be addressed in this space. One
thing that almost anyone knows who has worked with legacy systems is that at the point at which you have a
large amount of data and a large amount of value stored on that system you can find yourself in a difficult
18
position, vis-a-vis a provider of that system who is looking at a license renewal or who has control of your data
and you are attempting to maintain control or you are attempting to negotiate a renewal of that license. And
they are in a position to hold that information hostage. This is of deep concern to us because in the case of loan
documentation we are talking about the asset itself. The loan documentation is the evidence, the physical
manifestation if you will, of what we own.
We are quite clear on one point, and that is that these systems must be constructed so that it is clear to all
parties that no matter what else may happen, that no matter what other disputes may be ongoing, that no matter
what kind of arguments or negotiations may be in process, that there will never under any circumstances be
steps taken to prevent the owner of the debt obligation from having access to the electronic records, access to
the data underlying the electronic records. This is probably the only thing in this set of our initial specifications
that is close to non-negotiable. The notion is that no matter what else may happen, if the owner of that note
needs access to those records they get access to those records. And one of the things that I am suggesting as
part of this process is the concept of the bifurcated license, the notion with respect to software providers that
with their licensing of software to the participants in the system that theres a difference between the license for
a loan that has closed and a license for a loan yet to be entered into.
With respect to a closed loan, our expectation is that the right to access the software and utilize the
software in order to manage that document becomes perpetual.
Although its certainly possible that with respect to new transactions as it comes time for license renewal the
parties would negotiate with respect to the continuing use of the system for the generation of new loans.
Once again we invite comment on this subject. We are particularly interested in the suggestion of
alternatives. If in fact this concept is not palatable to some of the players then we are certainly open to the
notion of an alternative approach. But what we will emphasize is we expect the approach, whatever it may be,
to secure the right to the data and to secure the right to the documents until such time as the loan is paid in full.
Finally, beginning on page 40 in Sections 9 of the document you have some guidance concerning
transferable record. At this point the guidance concerning transferable record is largely limited to a repeat or
recitation of the requirements in the law. It is our belief that this will need to be fleshed out.
And we are particularly interested, once again from the perspective of the technology providers, to learn
what additional guidance they need concerning compliance with what I refer to as the six control provisions in
the UETA and ESIGN, which you will find as bullet points under Section 9.2. Do the technology providers
think at this point that they have those issues knocked? And if they do not, what kind of additional guidance or
what kind of additional industry consensus is necessary for the industry to be comfortable that these six
requirements have been addressed?
Now, just about exactly on time Im pleased to note, that brings us to the end of an overview of the
consent of provisions and the other preliminary specifications in the preliminary document. And at this point,
19
Jerry, I think what wed like to do, I know weve gotten a number of questions in, is to have you start to take us
through some of the questions and perhaps also through some of Johns additional polling questions.
Mr. Buckley: Maybe it would be a good idea to pause now and let John...By the way, thank you David
that was a good tour of the specifications. And the thinking that went into them. John would you like to ask
another polling question at this point?
John: Yes, certainly, Jerry. And our next polling question is this. Another multiple choice question.
Will your company offer electronic mortgages in the next; press 1, six months; press 2, in the next year; press 3,
if two years; press 4, if undetermined. Again our polling question is, will your company offer electronic
mortgages in the next; 6 months, press 1; in the next year, press 2; in the next two years, press 3; and press 4 if
undetermined. And Ill turn it back over to you now, Jerry.
Mr. Buckley: Thank you, John. And in fact I think that, having reviewed the people participating here,
probably that question would apply to anyone who is providing a settlement service. Will you provide
electronic settlement services in those time frames? Not only mortgages because you may be in other
businesses related to the origination of home loan.
Let me go to the first question which I can answer myself. It was a question about which is
administrative in nature. Can we obtain a transcript of the question and answer session? In fact of the entire
program I think is what the questioner had in mind. And the answer is yes. It will be online next week and will
be available through either emortgage@freddiemac.com or through the www.effcouncil.org. site of the Electronic
Financial Services Council where therell be a link as well.
There was also a question about can we obtain a recording of the session? That had not been anticipated
and we will have to look into that.
Finally someone wanted to know if they could have a list of the participants. And the answer is,
participation is confidential. As are the askers of these questions confidential. So we will not be disclosing a
list of participants to the public.
Now to a more substantive question. There was a question that we received that says, How does the,
how can a lending institution verify that technology applications they choose for supporting electronic mortgage
transactions are compliant with ultimate specifications? Is it enough for the technology vendor simply to certify
their compliance to the lending industry? And David Im gonna let you.
Mr. Whitaker: Youre gonna let me field that one, huh?
Mr. Buckley: Yeah.
Mr. Whitaker: OK, what the heck. Heres what I think the way I think this plays out in the real world.
Our hope is that when these specifications are completed that they will be in such a form that it will be possible
for a technology vendor to sit down or an internal IT department, for those of you who may be trying to develop
this capacity or this capability internally, that you will be in a position to sit down with the specifications and
20
essentially use them as a type of extended checklist. To go through and say, OK weve got X covered and Y
covered and Z covered. Oops, we still need to work on M. We dont have M covered yet. And that what will
happen probably from a flow point of view with respect to warranties is that Freddie Mac, as a secondary
market participant, will look to the seller and servicer, and particularly to the seller, and will say, We are
looking to you just as we ask you today to warrant to us that the documentation is prepared, has been prepared
and executed appropriately. We will be looking to the seller to warrant that with respect to the electronic
documentation.
Now at that point the question becomes, from a best practices and a due diligence point of view, what
will the seller/servicer then require of the vendor and of its internal auditors and its internal process owners as
they vet the technology system, be it an internal system or an externally provided system? If I were still in-
house at a bank, as in-house council, which I once was, my answer to that question would be that I would
expect to sit down with those who are providing the technology, either in-house or out of house, and to go
through the final specifications with some rigor, in order to make sure that I was at some level satisfied that in
fact all these issues had been addressed in a way that I viewed as appropriate. Obviously just as with a paper
system there is no absolute certainty. Those of you who rely on outside document providers today are relying
on them of course, in the different states in which you operate, to provide you with documents that are
appropriate to that state. And you ask certain questions and you check certain things but you also, of course to a
certain extent, rely on them to provide you with comfort on this subject. I expect the same kind of dynamic to
work in this environment.
And once again what will play into this is the industrys general reaction and approach to the issues
raised by Section 8 of the preliminary specifications. Where we get hopefully a better view for what the
different parties in the transaction view their appropriate role as, particularly with respect to certifying to those
of the chain as to what has and has not happened. Jerry, I hope thats pertinent to the question. Do you think
we need to address that further or can we move on?
Mr. Buckley: I think youve covered it. Another question, one that you did touch on briefly but this
questioner wants to know, How will documents with a potential life of 37 years remain accessible as
technology changes in the future?
Mr. Whitaker: If I had a complete answer to that one I would be vying with Bill Gates for ownership of
his home in Washington. I think that the short answer is that, that you see the concern on that issue reflected in
the Fannie Mae guidance letter in which they indicate that their first preference at the moment for a technology
solution is the use of XHTML. As I have had it explained to me, XHTML is essentially a hybrid of extensible
markup language and hypertext markup language and is ASCII-based. That is to say it is based on an extremely
old and venerated system of character-based information. And that, that makes it extraordinarily portable
across platforms. It will, Im told, work for example today on UNIX, on LINUX, on Windows, on an old MS-
21
DOS system, and on a Macintosh system as well from Apple. So that it appears that the initial thoughts from
the technical folks at Fannie are that this kind of format presents a more reliable and robust method for
maintaining the documents over time.
I also know that there are a couple of technology vendors that have specifically addressed this question
of survivability in their systems development. And that they at least at the moment are holding themselves out
as having accomplished that. Of course we make no endorsements at this point concerning that subject. But I
can tell those of you who are on the purchasing end that you will undoubtedly have contact with some vendors
who have had their eye on this ball and who believe they can convince you that they have got an appropriate
solution.
Mr. Whitaker: John, let me ask John. Great, David. Do you have another question here thats one of
your polling questions youd like to insert at this point?
John: Yeah, I do and if I ask it wrong, Jerry, correct me. The question is, Do you perceive electronic
mortgages as a benefit or a negative to; press 1, your cost of doing business; press 2, or complexity of doing
business? Is that how that should be asked, Jerry?
Mr. Buckley: I think so. I think youre asking really is it gonna be a plus or a minus to your, in either of
those categories.
John: OK, so Ill ask it again. Do you perceive electronic mortgages as a benefit or a negative to: press
1, if your cost of doing business; press 2, to the complexity of doing business. And go ahead and vote now.
And Jerry, Ill turn it back over to you.
Mr. Buckley: Thank you, John. Heres one that, What happens if you lose authoritative copy of a note?
How does a lost note, how would a lost note affidavit be done in an electronic mortgage context?
Mr. Whitaker: That is an interesting question on a couple levels. And Im having to pause for a second
not because I dont, believe it or not, not because I dont know the answer, but because I do. Because Im
trying to decide how to approach it.
First of all one of the things one has to understand is the concept of authoritative copy as it is contained
in UETA and ESIGN does not necessarily mean that the same copy is the authoritative copy from one point in
the transaction to the next. In other words, all UETA and ESIGN require is that at any given moment there be
an authoritative copy that the management system is able to identify. It does not at any given moment have to
be the same copy it was five years ago. So that, for example, if one were to have a server failure that resulted in
say the elimination of the authoritative copy of the note. It is my view, and I am of course very interested in
alternative or opposing views at this point, its my view that it would be completely within the construct of the
UETA and ESIGN to do a restoration from a backed up copy of that note and to establish a new authoritative
copy. But lets suppose that that were not possible or that backups were not maintained or that something
disastrous happened to the backups as well. The UETA and the ESIGN both provide that the holder of a
22
transferable record has all of the rights of a holder of a promissory note under Article 3 of the Uniform
Commercial Code. One of the rights of the holder of a promissory note under Article 3 of the Uniform
Commercial Code is the right to enforce a lost promissory note. Essentially your lost note affidavit would be
almost identical, perhaps in some except in some small details, to your lost note affidavit today. The rights
would exist just as they exist today to enforce that obligation. Really all you lose is the same thing you lose
today and that is the right to further negotiate that note. If you were to lose the authoritative copy and be unable
to restore it you would not be able to negotiate the note further to a new holder in due course. Just as today you
could not negotiate the note to a new holder in due course after you had lost the written original.
And in fact in some ways therefore it is possible that this could be an improvement in that respect. The
good news is also that, in an electronic environment, except for things like physical crashes the chances are that
the rate of note loss would be far less than it is today. Simply because a lot of our problems today with loss of
notes has to do with physical mishandling. And without that as a problem as part of this process we would
actually anticipate a significant reduction in the need to ever pull out the old lost note affidavit. Jerry?
Mr. Buckley: OK, heres another one. Does the authoritative copy have to be available to be displayed
to the owner or can it be securely stored in a designated location? Identifiable unique identifier with only
mirrored copies available to the authorized party?
Mr. Whitaker: My interpretation of the UETA and ESIGN is that the use of a mirrored copy would be
acceptable. They are entitled to access to the authoritative copy for two purposes. One is to reestablish its
terms and number two is to check the ownership registry so they know who the note holder is. The registry
does not have to be part of the debt obligation itself. It has to be logically associated with the debt obligation.
And with respect to the authoritative copy itself, what theyre entitled to is to view the authoritative copy. But I
see no reason from a technological point of view why that could not be accomplished through a mirroring
process.
Now again, that is another issue on which thats a matter of opinion. Its not a matter on which I think
there is complete consensus in the marketplace at the moment or among legal scholars. So Im definitely open
to being corrected on that subject. And if there are folks out there listening who think that Ive got that wrong
and think they know why I think it would be a very good idea for you to let me know. Because I believe we
will, in the final specifications, address the question of whether or not they have to have access to the
authoritative copy itself or whether a mirrored copy outside a firewall would be acceptable.
Mr. Buckley: OK, now. Does the age check or legally incompetent requirement need to be fulfilled by
the signing act itself or simply the process around accepting a signature?
Mr. Whitaker: The answer would be the same as it is today. Its part of the process surrounding the
signature. You dont establish mental capacity or majority when the person puts a pen on a piece of paper and
signs it. That happens as part of the process surrounding the actual act of signing. And that ties directly back
23
into the definition that appears for process or procedure in Section 1 of the specifications. The idea is that the
signature process will probably include both electronic and non-electronic elements. I could conceive for
example of a process for signing where in fact you still have everyone gather together in a closing room as they
do today. And the documents are signed electronically after the customary display of a drivers license and a
major credit card, which is what I got asked for the last time I bought a house in Maryland. These are processes
that we may find electronic analogs for over time. They may already be out there, in which case were very
interested in knowing about them. But they are also perfectly capable of being accomplished just as they are
today and they would not have to be part of the signature process.
Mr. Buckley: Now heres an illustration related to Section 3.1.2.3.
Mr. Whitaker: I want to get that out then. Somebody got specific on me.
Mr. Buckley: The electronic signature is created once but then associated with each electronic record
independently by affirmative act of a signer confirming the intention to sign electronic record. Could you
please clarify this example?, says the questioner.
Mr. Whitaker: OK. Thats a good question. Heres the concept. What we ran into... This is worth a
couple of minute explanation. I actually ran into someone who was demonstrating a document execution
system. And in demonstrating the document execution system they showed me how neat it was that you could
sign your name, either using a scribble pad or typing the name out once. And then they pressed the button and
that signature was attached to fifty documents all at once. And they said to me, Isnt that wonderful? And of
course as a banking lawyer I clasped my hands over my chest and had to reach for the nitroglycerine pills.
Signing of a document is intended to perform one of about four functions. I agree to it, Im sending it, Ive got
it, Ive had a chance to look at it. And if you apply a signature to 40 documents at once or 25 documents at
once I think youve got a real problem with your process when you go down to the courthouse. And thats a
personal opinion. It may not turn out to be true. Im real skeptical. What I think though is important is that the
party actually have a chance consciously to say, Yes I want my signature on this document. Not that they
slavishly reproduce whatever youre using as an electronic signature 40 times.
So for example, lets say I was using a process where I was actually signing my name on a scribble pad
and then I have a graphic, which may be burned into the electronic documents as my signature. I could actually
sign my name on that scribble pad 45 times. Or I could sign my name once and then as each document is
presented I believe it would be perfectly effective to say, Look weve got the graphic of your signature. This
constitutes an electronic signature. Heres the next document heres what it is. Heres what it does. Heres
your intent in signing it. Are you ready to go? Yes or no? And you can either click, Yes, I want my
signature attached to this document. Or you can click, No, I dont want my signature attached to this
document. Im not ready yet. But what you dont have, I think, is to slavishly reproduce that scribbled
24
signature or that typed signature 45 times but you do have to consciously attach it to every document in the
package. Jerry?
Mr. Buckley: Alright. Heres one. Is Freddie Mac going to address authorization certification
requirements stating what requirements Freddie Mac would be comfortable with?
Mr. Whitaker: I gotta admit thats a stumper. I thought thats what we were doing. I think the
answer.... Lets try to clarify a little bit. We are hoping that when we get finished with these specifications that
they will provide guidance. If the question is at this point is, Are we planning to certify vendors?, to say this
vendor is a Freddie Mac certified loan technology vendor. At this moment we have no specific plans to do such
a thing. However if the industry thinks it would be valuable and if the technology vendors think it would be
valuable, its certainly something we could take under consideration. But I would say at this point, we do not
have such plans.
Why? Were concerned about the fact that we do not want to create an anti-competitive environment of
any kind. You know our perspective on this is, Let a thousand flowers bloom. And if there are three or four
or five or ten providers out there that can meet these specifications it would take us an awfully long time to
plow through those ten and with the resources weve got available we could probably not do it on a parallel
basis. It would be sequential. And that means that we potentially might be certifying one person ahead of
another person when both have perfectly competent systems. So we are very reluctant at this point to get into
the certification business because were not sure that it is a fair approach. But we are certainly open to the
thoughts of the industry concerning whether or not we have the right take on that.
Mr. Buckley: Heres one regarding timing. Theyre interested in, When will Freddie Mac purchase
electronic mortgages in significant volume?
Mr. Whitaker: Thats another one that if I knew the answer to Id be preparing to retire. I will say this,
it is our expectation that given what we know today concerning the status of the technological solutions that are
out there, given what we know today about the infrastructure status of the industry and of the settlement service
providers, that we expect this to happen gradually. In other words its not going to be one of those things I
think where one flips a switch and suddenly there are a gazillion loans coming, flowing into Freddie Mac
electronically. I believe that what will happen is that production will start slowly, both because of consumer
concerns and because of the question of bringing the appropriate industry players online, getting them
comfortable with their role in the process. I think at this point I would say it would be our hope to see loans
coming in electronically on a production basis at some level of volume that is at least, at least beyond pilot stage
by the middle of 2001. Possibly a little earlier depending on developments. Possibly a little later depending on
developments. But certainly in the middle 2001 time frame we would hope to see these in on a production
basis. How quickly this moves is to a large extent gonna be up to the folks on the other end of this telephone
call. It can move real fast or real slow. Because in case you havent all noticed, were out there in front
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cracking the whip and leading the charge. So when yall are ready and weve got all the pieces put together and
weve got the clear consensus in the industry concerning whos supposed to do what, when and how, Freddie is
ready to get marching. So well see how the industry approaches this and how quickly we can as a group gather
ourselves together and head out onto the playing field.
Mr. Buckley: Well, now that youre marching, theyre wondering how far youre gonna march.
Mr. Whitaker: A lot of mixed metaphors. Im sorry about that.
Mr. Buckley: Heres one. Strike up the band. Will Freddie Mac be converting electronic mortgages into
mortgage backed securities and is there any greater risk with this type of investment?
Mr. Whitaker: Number one, I cannot imagine taking these in on any kind of production basis and then
not converting them into mortgage backed securities cause thats what we do. Seriously, kidding aside, yes, I
believe there is every intention to turn these into mortgage backed securities. Clearly I think one of the
questions that has to be, to be answered is the perspective of the bond rating agencies and the various and
sundry regulatory authorities toward these loans vis-a-vis paper loans.
My personal view of this is that if we get the specifications right and if we, in fact, as an industry resolve
to approach this effectively and in a sober manner, that we will be able with an absolute straight face to look at
the regulatory authorities and at the rating authorities and say, This isnt just as good as getting this stuff on
paper, its actually better. And so my view is that no, I do not think that this will constitute a larger risk to the
investing public as they look at mortgage backed securities. So long as the industry takes a resolution now to
do it right. Jerry?
Mr. Buckley: OK. Well, now here is the question about, To what degree have regulatory authorities
rated into electronic mortgage fray?
Mr. Whitaker: The answer ...
Mr. Buckley: Regarding specifications. I think we can both answer that.
Mr. Whitaker: Jerry, why dont you take a crack at that? You know as much about that as I do.
Mr. Buckley: Well, really not at all so far. There hasnt been as we mentioned at the beginning, this act
is a self-effectuating act. It does not require regulations to become effective. It relies on the agreements and
modes of doing business that are developed among the parties. So there isnt a requirement for regulations.
Now regulations under the ESIGN Act are permitted from either the state or federal level. But there are certain
hurdles thatll have to be met by a regulator if theyre gonna do anything that is in anyway contradictory to what
is permitted under the ESIGN legislation.
And certainly the questions gonna arise over time that we dont have the answer to. That is Are
regulators going to feel the need to supplement ESIGN with additional guidance? And will such guidance be
sought by the industry? To this point we are unaware of any regulatory guidance thats being, going to be put
out there by the federal regulators and/or state regulators. But there is the possibility that they would come out
26
with guidance, which helps to explain how to do business in this area. We arent looking for it in the near
future though.
Mr. Whitaker: Let me add just a though to that, Jerry. Thank you. I think that thats certainly in
keeping with my understanding. Let me suggest to those of you who are out there listening as industry
participants, and particularly to those of you on the sellers/servicers side, that in some respect there are areas in
which the industry might very well feel that some additional regulatory guidance might be valuable. And
particularly what I have in mind is the question of the presentation of required disclosures and formatting
requirements.
The truth is that some of the current requirements in the paper world, while they are capable of
compliance in an electronic world, if I can put it that badly, are very rigid. And the truth is that with a little
maneuvering room the industry might very well be able to come up with better ways to deliver information.
One of my favorite examples is the notion of the truth in lending disclosure boxes, what are sometimes called
the four fed. boxes, where one sees for example, the total finance charge. You know, those particular
disclosures are not well understood by the public. Im not too sure theyre well understood by me. And it
seems to me that it would be a really neat thing when you are presented with those disclosures to have, for
example, available to you a hot link with the disclosure that takes you to a voice, a video streaming
presentation. One of my examples of the kind of thing Im talking about, for those of you who may have used
one of the tax packages thats available, is the notion of the tax expert who appears in a little window on your
screen to explain to you your home office deduction. One could do the equivalent (end of tape 1, side b)...at
your total finance charge, have a friendly little person appear in a box and explain over the computer to the
consumer exactly what the total finance charge is all about.
These kinds of opportunities I think give us a chance once again to establish the public policy preference
for moving forward into an electronic environment. But we could use some regulatory help, I think, in terms of
giving us the freedom to experiment with some of these alternative delivery methods with the confidence that
by attempting to establish an improved process we are not exposing ourselves to spurious claims down the road.
That we have somehow not complied with the strict letter of a disclosure requirement.
Jerry at this point do we still have John hanging on with some more questions?
Mr. Buckley: Thats a good point. John, you know weve been trying to answer questions, taking
incoming fire here. How about, do you have anything else to lob out at our audience?
John: Yeah, I do have another polling question. And our next question again is a multiple-choice
question. In your opinion how would we best influence consumer receptivity or adoption of electronic
closings? Press one, if education. Press two, if price break. Press three, if other incentives, give-aways, etc.
Or press four, if industry supplied chain adoption of e-commerce. Ill ask that question again. In your opinion
how would we best influence consumer receptivity or adoption of electronic closings? If education, press 1. If
27
price break, press 2. If other incentives or giveaways, press 3. And press 4 if industry supplied chain adoption
of e-commerce. Jerry, turn it back over to you.
Mr. Buckley: OK. The next question is one that is, relates to the relationship between Fannie and
Freddie. How will the specifications which were discussing today become a standard for the industry if they
arent congruent with those adopted by Fannie Mae? And I think I know the answer there David, but its
probably better that you answer that.
Mr. Whitaker: Alright, Ill take that one. And I pause for just a second because obviously this is an area
where phrasing can be everything. I think the answer to that question is that Freddie Mac is fully committed to
the concept that we should have an open process inside the industry to determine how to approach electronic
loan documentation. We are very sensitive to the fact that the industry highly values the fungibility of loan
documentation packages between Freddie and Fannie. We continue to fully support that concept.
At this point based on the guidance provided so far by Fannie and based on our preliminary
specifications that we have in front of us we do not see any conflict. However, if a conflict were to arise our
hope would be that it would be regarded as part and parcel of the uniform instrument process and we would be
able to establish a joint understanding concerning what was acceptable. Our basic position here at Freddie is
that we have laid out specifications on the table for the entire industry. And incidentally a copy of these
documents was sent to Fannie Mae the day they were made public. And weve laid this out on the table with
the hope that the entire industry will participate and that the entire industry will reach a consensus. I think at
this point the question of maintaining fungibility is where we are four square behind a commitment to do so.
And we are now waiting for other secondary market players to indicate what their intention is.
Mr. Buckley: Alright. Now heres one thats a very lawyerly question. How does the electronic
signatures act effect the UCC, the Uniform Commercial Code?
Mr. Whitaker: Well, youre right. That is an interesting question. Lets start with what we know for
sure. The ESIGN Act exempts from its coverage large portions of the UCC. It exempts Articles 3 and 4, which
are...concern payment systems, checks, and promissory notes. Article 4A funds transfer, Article 5 letter of
credit, Article 6 which is bulk sales, Article 7 which has to do with bills of lading and warehouse receipts, a
kind of negotiable document for the storage of, for the transportation of goods. Article 8, which is securities
transactions, that is to say securities in the sense of market securities, investment securities. And Article 9,
which is secure transactions in personal property. That is to say for example, the security interest your bank has
in your automobile. Or the security interest that a lender has in the accounts receivable or the general and
tangibles or the equipment or the inventory of a business.
Now there are two sect parts of Article 2 of the UCC that are covered by ESIGN in a non-UETA state.
Thats Article 2, which is the sale of goods and Article 2A which is the leasing of goods. Those two particular
parts of the UCC are covered by ESIGN. They are also covered by the UETA. And the ESIGN defers to the
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UETA in a state that has adopted the official text version. That is to say a largely unmodified, unamended
version of the UETA. Now I dont want to get too deep into the federal preemption issue because its a
quagmire of its own. But thats roughly how 2 and 2A would be effected by ESIGN. They would be covered in
a non-UETA state. They would probably not be covered in a UETA state. But the UETA would produce the
same result and they would be covered.
Now Articles 3 and 4 having to do with checks and drafts used by the banking system were completely
left out, largely at the request of the federal reserve. Promissory notes are addressed indirectly through the
creation of the Transferable Records Section.
Article 4A, Funds Transfers, already provides for the electronic creation of a funds transfer agreement
and for commercially reasonable security procedures. Thats why it was left out. It was left out because it
didnt need to be included. It has its own set of rules.
The same for revised Article 5, Letter of Credit, which allows for an electronic letter of credit and
electronic documents.
Article 6 has been recommended for repeal by a recusal. Nobody pays any attention to it anymore.
Article 7, negotiable documents of title and warehouse receipts are once again addressed under the
Transferable Records Section through their separate approach in transferable record. Article 7 is excluded but
you can get to the same kind of concept, and the same kind of functionality by using transferable record.
Article 8, revised Article 8, concerning securities, once again has its own scheme for electronic
communications. It has a basically complete waiver of the statute of frauds incorporated within it. There are
really no writing requirements except with respect to certificated securities inside revised Article 8.
And revised Article 9 has its own complete self-contained set of rules for electronic security agreements,
financing statements, and notices of just about every other kind in stripe. So that it becomes very complex
when you say on the one hand, the UCC is basically left out of ESIGN and the UETA. But on the other hand
the reason for that is that most of it is already covered. Or most of it already covers electronics within the
context of the act itself.
Now theres a longwinded answer to a short question.
Mr. Buckley: But its a very good, thorough review of the landscape. And for those lawyers on the
phone, tour de force. Heres another one. And this is simply one. Why was the federal ESIGN act
necessary?
Mr. Whitaker: Well, now thats been a subject of some debate. And in fact its kind of funny that one
should come because Jerrys kind of tweaking my nose here because he and I actually arent necessarily fully
on the same side on that. So hes ribbing me a little.
Heres the kind of the if you like the general answer to that question, question. What happened with the
UETA is the UETA was promulgated by NCCUSL in July of 1999. Immediately thereafter a very heavily
29
modified and truncated version was enacted in California. And California is a very large part of the financial
services market.
In addition to which, it became apparent that while in some states, roughly the ones that have adopted
the UETA so far, that the UETA would move quickly that it was going to move much more slowly in a lot of
other states.
Thirdly, it became apparent that even in the states that were largely enthusiastic about the UETA as
written, there was still the undeniable temptation or the almost unavoidable temptation to twiddle. And there
was a lot of twiddling that went on. So that with respect to state law, I believe the thinking in Congress was that
by providing a federal baseline and some limits to the extent to which states could individually modify the basic
rules of the game that Congress was adding value to the electronic environment and facilitating the process of
moving to electronic loan documentation.
Beyond that of course youve got the whole question of federal law because after all the UETA is a state
law. And it doesnt touch the truth in lending act or the equal credit opportunity act or the regulation M rules
concerning automobile leasing. All those issues the federal arbitration act... Yeah, go ahead Jerry.
Mr. Buckley: Or RESPA.
Mr. Whitaker: Or RESPA, thank you. I knew I was leaving a big one out. All of those laws would not
be affected by the UETA at all. So at the federal level there was a deep, deep need for ESIGN. At the state
level there was a deep belief among policy makers in Washington that a more consistent uniform playing field
was necessary to nurture the electronic environment than it turned out was going to be provided by the UETA
particularly given what happened in California. Jerry, if you want to add anything to that.
Mr. Buckley: A summary of what the Congressional thinking was. I think that they, the thought that we
might have variations which were beginning to emerge in California and Iowa and also the thought that it would
take quite a while before UETA would be adopted across the country and this borderless medium required
something faster was a strong motivation. And I, you know, its also true I think people in Congress wanted to
get out in front on this because there is a disposition to try to really facilitate electronic commerce. And its
some indication of the fact that despite the fact that there was a presidential veto at one point based on consumer
objections, Congress did get this passed last year. And it shows that electronic commerce has a cachet and has
friends in Congress.
Theres another question here about in order to, I guess lets see, if you have, lets see, Do mortgages
that are originated electronically have to be closed electronically? I assume that when the questioner wrote
that they were asking, If you do the opening package electronically do you have to close electronically?
Mr. Whitaker: The short answer to that question is, No. There is nothing that prevents one portion of
the transaction from being conducted in writing and another portion of the transaction from being conducted
electronically so long as youve obtained clear consent from the parties involved, concerning the part of the
30
transaction that is to be electronic. But there is nothing in the world that prevents a hybrid transaction. And in
fact thats really what Section 6.4 of the preliminary specifications are all about, is the question of What do
you do when youve got pieces of it on paper and youve got pieces of it electronic? And I do expect that to be
a world that were going to have to live in for some time. Were going to live in a world where not necessarily
everything will be one or the other. There will be bits and pieces of each.
Mr. Buckley: And the corollary question is in order to electronically close a loan do you have to do the
opening package electronically? And I think the corollary answer is no.
Mr. Whitaker: No, I would not see any reason why you had to. Again the important issue will be when
does the effective consent occur and does it cover the right portions of the transactions? But theres nothing in
the law that says you cannot do a transaction partially electronic and partially in writing. There is nothing to
prevent that.
Mr. Buckley: OK. Heres one regarding consumer reaction. How will consumers really ultimately
benefit from this capability? If lenders have to make use investments and technology changes then consumers
may not immediately realize the cost reductions of such advancements.
Mr. Whitaker: I think that one of the challenges we face as an industry is that we are being asked in this
electronic environment to create out of a whole cloth an infrastructure equivalent to one we have built up over
years and years in the physical environment. We buy filing cabinets. We build storage facilities. We have our
Fed Ex accounts. And we have our mail management offices, where people sort the mail that comes into the
company everyday. We have already seen American businesses make a very, very large investment in
converting to electronic communication for business to business purposes. And as near as we can tell, based on
the latest productivity numbers that Im seeing and the numbers that are being discussed I think on a fairly
regular basis in Washington, we have now got pretty clear evidence that over time the efficiencies that have
resulted from these infrastructure investments have been enormous. And that the benefit of many of those
efficiencies have in fact accrued to the bottom line of the companies that have enacted them and to their
customers who have seen either prices drop or have seen prices hold the line. And I think we see a lot of the
success of this infrastructure construction in the fact that we have a very, very historically low inflation rate we
have had for a number of years. What that means I think is that the industry is going to make this happen
successfully, have to belly up to the bar and say OK its time for another round of infrastructure creation,
recognizing that theres going to be significant long term benefit.
At the same time, just as with the automated teller machine theyre going to have to be prepared for a
gradual roll out and a gradual building of consumer acceptance. I once heard somebody say, and I wish I could
give you the attributio, I cannot remember who said this, I once heard a gentleman say that itbis a truism about
technology in the financial services industry, that the industry tends to overestimate its impact in the short-run
and underestimate its impact in the long run. And I think this is another opportunity for us to prove that to be an
31
almost universally applicable rule. I think well see this start out slowly. I think therell be some courageous
folks out front who make the investment. And I think that well see the first adopters on the consumer side
prepared for the fact that there will not be at the beginning perhaps so much savings as there will be for the
larger number of consumers later.
Mr. Buckley: And it was estimated at the time, I think it was Cameron King of E-loan who estimated at
the time that we were considering this legislation, that simply being able to do the opening package online
would significantly reduce costs because it would be an opportunity for a real time conversation with the
consumer. And you would be able to tell much more quickly whether the consumer whose mortgage rate was
locked and with the corresponding hedging going on those costs. Those hedging costs for loans that werent
gonna go through could be avoided because youd have an earlier knowledge of whether the consumer wanted
to proceed with the transaction or not. Youd be able to provide the consumer with the disclosures in a real time
basis and get their reaction to them. And he had estimated that the time that there might be as much as a quarter
point savings on the origination side. I dont know whether thats right or not. But that side of the transaction,
the opening package side, may be a place where therell be earlier savings and it will be maybe later before we
see as many closings occurring electronically. But I really dont know the answer. Maybe the closing will
come off quickly too.
Mr. Whitaker: And I think youre right, Jerry, to think that the initial impact may be with the initial
contact as opposed to the closing itself.
Mr. Buckley: And the opportunity to shop and to shop, which they have now you know 24 by 7. But on
top of that there will be anability, as you have indicated, and I hope well be able to develop it, to give more
meaningful disclosures to the consumer. Well have to work with the regulatory agencies to provide more
meaningful disclosures. So that the consumer really goes ahead at their leisure but when they feel comfortable
with the transaction and they dont have to worry. I mean the idea that you can ask these questions
electronically and not have to be embarrassed to ask them. And you can drill down with hyperlinks and popup
boxes and so forth. And really find out what youre getting may make consumers who have become
electronically savvy, quite comfortable and feel that they have been able to have a better shopping experience.
So I think that there will be consumer benefits in that area. And as well as savings in the near term.
Mr. Whitaker: No, I think that, and Im actually gonna take another minute on this despite the fact that I
know were coming down close to the end because I think that this is an important point that youve raised,
Jerry.
To some extent I think that this is going to become a competitive advantage issue as much as a cost
savings issue for the industry. Because there are, I think, a significant number of intangible benefits to
consumers once they start to become comfortable with this. Just as the ATM has produced an enormous
number of intangible benefits for consumers. And online bill payment and online account management have
32
produced an enormous number of intangible benefits. To begin with you have the whole question of
accessibility. You know, one of the things that I see as a potential here is the potential for the vision impaired
and for the physically handicapped, for them to have far more effective access through a combination of having
home access to documentation on an effective real time basis. And also having the ability, particularly in the
case of the vision impaired, to perhaps convert those documents into an oral form using text-reading programs.
You have the whole question of convenience. The ability of a consumer who before has... for the first
time a closing presented with a stack of documents, eight inches tall... To instead put the children to bed at 9:00
at night three or four days before the closing, take the Pepsi in hand, slippers on the feet, go sit in front of the
computer, dial into the website through their ISP provider and at their leisure go through the documents they
think are significant in case they have questions, in case they want to understand the documents better. We
have the real potential to improve the quality of this transaction. And I think that what you may find as just as
with the ATM that as consumers come to appreciate the value of whats being provided to them on an
intangible basis that they come to start to demand it. And you come to find it to be a competitive issue.
Just as I remember in the 1980s where I was counsel in house at a bank, it became a real competitive
issue within the region which that bank was located whether or not you had the broadest possible disposition of
ATMs across that region. And the more ATMs you had and the larger number of locations you had available,
the more likely you were to bring in customers who were fence-sitting concerning which financial institution to
place their accounts with. It became a real, a real question. I think that will happen here too as consumers start
to realize what kind of benefit they can take away from this process.
Jerry, I wonder as we come here closer to the end if John had any more polling questions left he needed
to get through.
John: Yeah, actually I have two more questions. And we do have six minutes left in the program. So
maybe Ill ask one question, and then we can do maybe another faxed question, Ill ask my final polling
question, and then well see how much time we have and well give the results of those polling questions.
Mr. Buckley: Very good, John. Carry on.
John: Alright. The next one is another multiple choice question. The question is How would you
define an electronic mortgage? If a mortgage originated and was at least preliminarily underwritten
electronically, press 1. Press 2, if a mortgage where all application and documentation interaction is done via
the web. Press 3, if a mortgage that is closed in an electronic environment and signed electronically results in
electronic note and recording. Press 4, if none of the above. Press 5, if all of the above.
Again on the question, how would you define an electronic mortgage? If a mortgage was originated and
at least preliminarily underwritten electronically, press 1. A mortgage where all application and documentation
interaction is done via the web, press 2. A mortgage that is closed in an electronic environment and signed
electronically which results in electronic note and recording, press 3. Press 4, if none of the above. Press 5, if
33
all of the above. Go ahead and push the right button now. And Jerry, Ill turn it over to you for maybe another
faxed question.
Mr. Buckley: OK, and lets see if I have a quick one here. Are some digital identities better than
others? How and when will the consumer decide to obtain the digital certificate in order to electronically sign?
And let me take a quick cut at this one.
Mr. Whitaker: Oh, please do.
Mr. Buckley: And then, really as weve had press inquiries and so forth about electronic signatures there
is... because your physical signature is your ink signature, is created by you, and its perceived to be yours and
you can treat it as your own, it is the expectation of some people of the press that really your electronic
signature is something which you adopt. You go and get an electronic signature and youll use that. And
clearly that is not the case. The signature is for the benefit of your counter-party so that they know that youve
agreed. And they are gonna, and the counter-party is gonna have to determine what will constitute a signature
for the purpose of the transaction. So you will have many signatures. And those signatures will be determined
in the context of each transaction in which you engage electronically. And youll, you know, have to determine
in some transactions simply pushing an I Agree button will constitute a signature. In others youll have to go
through the full PKI process. And it will really be a question of what degree of security is required by your
counter-party. Not what degree of what security youve decided to have with respect to your own signature.
Now David, I invite you to amend that a little bit further if you want.
Mr. Whitaker: I think, Jerry, youve hit it right on the head. I will say that one of the things that Im
concerned about in this space at the moment is that there seems to be a tendency, with respect to some types of
documents, to engage in overkill with respect to signatures. And to require something far more rigorous than
we actually require at the moment...than we actually require at the moment with respect to electronic signatures.
I think thats where. I think we may have to pause for one more question, John. I hope that...
John: Weve got three minutes left and well try to get it in. How would...we asked this question
earlier, again now. How would you rate your knowledge of this topic now? Press one, if high. Press 2, if
some. Press 3, if low.
Again we asked this at the top of the show, How would you rate your knowledge of this topic now?
Press one, if high. Press 2, if some. Press 3, if low. And Ill have the results for you in a little bit, Jerry.
Mr. Buckley: Alright. And finally heres one that just came in, just handed to me. Has Freddie Mac
been involved in an electronic mortgage pilot program? Are there any plans in the works to do so? If so have
partners or platforms been selected?
Mr. Whitaker: We were involved in one mortgage pilot program. We did take in a mortgage in early
October that was done electronically. The deed was executed and filed electronically. And the mortgage and
promissory note were executed and filed electronically. We are at the moment looking at the prospect of doing
34
additional work for purposes of our further education and edification. Beyond that I dont know that weve
particularly gotten into any specifics.
I think, Jerry, with that just before we go back to John for the last word on the polls, I would just say to
all of those who have participated, one, thank you. And two, if youll go back and check the Freddie Mac
website where we have given you the instructions on how to comment, you can also, I believe, find those, a link
to those instructions through the EFS Council website. I would ask you to, if you would, to utilize those
instructions and in particular pay attention to the format we have requested for comments. It would be
immensely helpful to us if your comments came into us utilizing the format we have requested.
Now with that last word John, perhaps weve got just enough time for you to squeeze in the poll results.
John: OK. And Ill first thank both of you for an excellent presentation. Im also going to quickly
remind everybody that we encourage you to fill out and fax in your evaluation sheet. Youll find that that
phone number is listed on your evaluation form. Your comments and suggestions are important to us and help
us to provide you with future quality programming.
Quickly here are the results for those of you scoring in your office. On the question, How would you
rate your knowledge of this topic? asked at the beginning of the program: 32% voted high; 44% voted some;
24% voted low.
And of course, How would you rate your knowledge of this topic now at the end of the session: 44%
voted high; 53% voted some; and only 3% voted low.
On the question, Will your company offer electronic mortgages in the next six months?, 24% voted
for that. 19% voted for one year. 3% voted for 2 years. And 54% voted undetermined.
On the question, Do you perceive electronic mortgages as a benefit or a negative to your cost of doing
business? 53% voted for that, 47% voted for complexity of doing business.
On the question, In your opinion how would we best influence consumer receptivity of electronic
closings? 24% voted education. 49% voted for price break. Nobody voted for other incentives. And 27%
voted for industry supplied chain adoption of e-com voted for industry supplied chain adoption of e-commerce.
And the final question on, How would you define an electronic mortgage? Nobody voted for a
mortgage originated at least preliminarily underwritten electronically. 6% voted for a mortgage where all
application and documentation interaction is done via the web. 42% voted for a mortgage that is closed in an
electronic environment and signed electronically. Nobody voted for none of the above. 52% voted for all of
the above.
And with that, gentlemen, we are out of time. And I just need to thank all of our participants for
listening today. And since we are out of time we need to say goodbye. Again thanks to both our speakers,
David and Jerry, for an excellent presentation. Enjoy your evening everyone and you may now disconnect.
Bub-bye.
35

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may not be reproduced in part or in whole without the expressed written permission of Freddie Mac.