CUNA Comment Letter

Draft Electronic Mortgage Guidelines

April 16, 2001

Freddie Mac
Attn: Electronic Mortgage Task Force
MS 210
8200 Jones Branch Drive
McLean, VA 22102

Re: Draft Electronic Mortgage Guidelines

Dear Sir or Madam:

The Credit Union National Association (CUNA) appreciates the opportunity to comment on Freddie Mac’s latest draft of proposed guidelines for the use, delivery, storage, and retrieval of electronic mortgages used in connection with mortgages that are offered for sale to Freddie Mac. CUNA represents more than 90 percent of our nation’s 10,400 state and federal credit unions. This letter reflects the opinions of those credit unions and the opinions of CUNA's Consumer Protection Subcommittee, chaired by Kris Mecham, CEO of Deseret First Credit Union, Salt Lake City, Utah.

These comprehensive guidelines for electronic mortgages address issues such as consent, execution of the electronic signature, document format and delivery, document integrity, records management, and document access. As requested in your materials that accompany the draft guidelines, the following comments are grouped under the section of the guidelines that they address.

Section 2.3.1 – Requirements for Consumer Consent

We would appreciate clarification regarding the policy requirement that the consumer be provided a paper set of copies of all documents upon request. The guidelines merely refer to “all documents-- while Freddie Mac’s Analysis of Comments Received in Response to the Draft of November 1, 2000 refers to “closing documents,-- which typically include a specific set of documents, such as the settlement sheet, deed of trust, and promissory note. We believe the guidelines should specifically refer to these “closing documents,-- as opposed to “all documents,-- which could be interpreted to include other extraneous information.

Providing a paper set of the closing documents without charge is reasonable and will help credit unions meet their responsibility of providing full and fair disclosure to their members. However, if additional paper copies are requested or if someone other than the borrower requests paper copies, such as a closing agent, then we believe credit unions should have the ability to charge a reasonable fee for this additional service.

Section 3.1.5 – Attribution

Freddie Mac believes that is not possible to provide detailed guidance to establish that an electronic signature is attributable to the person who has purported to have signed the electronic record. We generally agree with this approach.

In a paper-based transaction, it is up to the parties requiring the written signature to verify and validate the identity and capacity of the person signing the requested documents. There should be similar expectations for electronic signatures. As long as the parties requiring the electronic signature have sufficient safeguards in place to ensure the identity and capacity of the person signing the document, then those parties should have the flexibility to develop and utilize the system that meets their needs. This is important considering that the party requiring the signature is the party that has the burden of proof if the electronic signature is challenged.

Flexibility is also necessary because technology is rapidly evolving and current practices are likely to become obsolete relatively quickly. We also believe that standards will eventually be developed in the marketplace by bonding agencies and by the significant participants in the secondary market.

However, it would be helpful if Freddie Mac were to provide possible minimum standards. This could help ensure that effective electronic systems are not overlooked or underutilized because of a perception that such systems are not secure or do not have sufficient safeguards to identify those involved in each transaction. These examples could also serve as safe harbors that would minimize frivolous lawsuits.

Possible examples here could include digital image technology and dual key encryption, which can identify the signer and determine if the signature is accurate, even with some variance that may inevitably occur with image signatures, such as when the signer may be nervous or otherwise preoccupied. This software will only improve as technology evolves.

Section 5.1 – Tracking Alterations or Versions

The guidelines require that the electronic records must have the capability to track any changes to the records. We believe there should be recognition that certain electronic records systems do not allow for any changes to the forms once they are finalized, such as when the electronic signature is affixed to the document and the document has been placed in an electronic storage medium. The guidelines should clarify that parties are relieved of the requirement to track changes when using such systems, since none could occur under normal circumstances.

Section 6.1 – Physical Environment of the System

Credit unions are concerned about the policy requirements regarding the physical environment of the electronic records system. Some of these requirements will be very burdensome for credit unions and other small financial institutions, specifically the requirement to provide back-up systems, such as power, connectivity, heating/air conditioning, telecommunications, and generators. Complying with these requirements will be very expensive and most credit unions do not currently have such back-up systems.

We believe these policy requirements should be more flexible to allow credit unions and other small financial institutions to adopt safeguards that are specifically tailored to their needs and budget constraints. For example, all financial institution regulators recently issued rules on safeguarding consumer information. These rules require financial institutions to establish appropriate standards relating to the administrative, technical, and physical safeguards for consumer records and information.

Under these rules, the security program must include such administrative, technical, and physical safeguards that are appropriate to the size and complexity of the credit union and the nature and scope of its activities. We believe the Freddie Mac guidelines should also allow the industry to design flexible approaches regarding the protection of mortgage data. Also, consistency among the rules on safeguarding consumer information and the Freddie Mac guidelines should help credit unions and other financial institutions in their efforts to ensure compliance with both sets of requirements.

If the policy requirements regarding the physical environment of the electronic records are unchanged, the result will be that nearly all credit unions will need to rely on third party vendors. This is not the result that credit unions would prefer.

We also need additional clarification regarding the requirement of “24 hour, 7 day a week operation,-- specifically as to whether this means that the consumer must have full-time access to the records. In a paper-based system, consumers are welcome to request information but this is restricted to regular office hours. We believe that even in an electronic environment, credit unions and others should have the flexibility to restrict access to the same timeframe.

Section 6.4 – Hybrid Transactions

Hybrid mortgage loan transactions are those that contain both electronic and paper records. Freddie Mac requested comments at to which party should be responsible for establishing the proper cross-references between electronic and paper records.

We generally agree with Freddie Mac that the sellers are the appropriate parties to establish the proper cross-references between the electronic and paper records that they either generated initially or that come under their control during the transaction. However, once the loan is sold, this responsibility should shift to the purchasers, as they would now have the means to ensure that the original cross- reference system is maintained or another is implemented in its place. This is based on our view that whoever has full control and “ownership-- of the electronic and paper records should be responsible for the cross-referencing system.

Section 7 – Document Access

Freddie Mac has requested comments on improved methods for managing the document access process. Again, technology is dynamic and will evolve rapidly in the future. Although the current methods do not appear overly burdensome, the guidelines should recognize this evolution by clearly and specifically identifying the rules and guidelines to be followed while providing sufficient flexibility for other technological alternatives for meeting these requirements. Freddie Mac should also continuously provide updates and suggestions to help inform the industry about new technologies that will allow for the streamlining of these access procedures without sacrificing legitimate security needs.

Also, privacy of member information is of paramount concern to credit unions and is also a significant legislative, regulatory, and public policy issue. Direct access to loan records should be limited to the lender, regardless of whether it is a paper-based or electronic transaction. Requests for any of the documents or other information involved in the transaction should be made to the lender who will then have the responsibility of verifying the identity of the requester and whether or not they should be authorized to view the requested information.

Also, each lender should strictly control a core database of information relative to each loan transaction. While it will be necessary for others involved in the transaction to have access to certain documents and to update or revise such documents, the lender should have complete control of the information that enters and exits this database and to whom it should be provided.

General Comments – Periodic Review of the Guidelines

Electronic mortgages and the related technologies will evolve rapidly in the future. For this reason, we suggest that these guidelines be reviewed and updated on a periodic basis. Freddie Mac should solicit industry comments at each review. We believe these reviews should occur at least once every year.

Also, any innovative practices that are developed should be incorporated into the guidelines as soon as possible, with comments from interested parties, and should not wait until the next periodic review. Freddie Mac should encourage the industry to submit these practices and ideas on an ongoing basis for review. These practices should then be submitted to the industry for comment if Freddie Mac believes that they should be included in the guidelines.

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Thank you for the opportunity to comment on Freddie Mac’s proposed guidelines for electronic mortgages. If you or other staff have questions about our comments, please give Associate General Counsel Mary Dunn or me a call at 202-218-7795.


Jeffrey Bloch
Assistant General Counsel