CUNA Comment Letter

Draft Electronic Mortgage Guidelines

VIA E-mail:

December 8, 2000

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

Re: Draft Electronic Mortgage Guidelines

Dear Sir or Madam:

The Credit Union National Association (CUNA) appreciates the opportunity to comment on Freddie Mac’s 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 10,500 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. Our comments primarily address certain issues that were raised during the November 16th Educational Teleconference that was sponsored by Freddie Mac. 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 1.2 - Definition of "Authoritative Copy"

Section 1.2 provides a definition of "authoritative copy," which is equivalent to the "original" copy that is referred to under the current paper-based system. As noted during the Educational Teleconference, the term "original" is absent in the guidelines because it is not possible to have an "original" copy under an electronic system.

Comments were requested on whether the use of the term "authoritative copy" instead of "original" would be confusing. We believe that there may be some confusion initially, but that this confusion should dissipate over time as more and more mortgage transactions are conducted electronically. For this reason, we prefer that the term "authoritative copy" be used to describe the controlling reference copy.

Section 3.1.2 - Evidence of the Intent to Sign

Our concern here is that these provisions may not adequately address situations in which there is a signature that is either made by mistake or the consumer wants to retract his or her signature. In a paper-based transaction, this situation can often be resolved by destroying the document that is mistakenly signed. Our members feel consumers are generally comfortable with this approach, especially if they witness the destruction of the document.

This situation of a mistaken signature may be more problematic in an electronic transaction. For this reason, it may helpful if the guidelines include provisions that address these situations, which could include provisions that require the consumer to be notified, either electronically or by paper, that the electronic record containing the mistaken signature has been erased.

Section 3.1.4 - Symbol or Process Used as an Electronic Signature

We recognize that technology is constantly changing and that the examples listed in this section may become archaic over time. With regard to electronic signatures, intent and evidence are the key considerations when analyzing present and future types of electronic symbols or processes that may be used.

However, we do have a few general observations with regard to the examples outlined in the current draft of the guidelines. We believe that digital signatures and dual key encryption are the most effective and least intrusive examples that are listed. The other examples may pose problems.

For example, the use of PIN numbers may present security concerns, and such systems may be corrupted or accessible by those with unauthorized access. Certain biometric measurements, such as retinal scans, may be secure but consumers may perceive these as overly intrusive. As member-owned, not-for-profit cooperatives, credit unions are primarily concerned with providing the highest level of service for their members. Credit unions want to do everything possible to ensure that their members are not offended, violated, or subject to security risks.

Section 3.1.5 - Attribution

We recognize that it is crucial to obtain the identity of the signer and to attribute, or associate, that person with the electronic signature, even if such a process is more burdensome than what is now used in the paper-based system. Although we have no specific comments on these provisions, we believe that the additional burden does not have to be overly intrusive. Software currently exists, such as digital image technology and dual key encryption, that 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 involves.

The Electronic Signatures in Global and National Commerce Act (E-Sign) and the Uniform Electronic Transactions Act (UETA) stress that the surrounding facts and circumstances must be analyzed in order to determine the most effective means for proper identification. In general, the purchase of real estate is often the most significant financial transaction that a consumer will be involved in during his or her lifetime. Because of this significance, real estate transactions have always been surrounded with more protections than transactions in which a consumer is purchasing an item in a store or on the Internet. Regardless of whether the real estate purchase is conducted electronically or by paper, it is an involved process that includes submission of numerous documents, such as W-2 forms, tax returns, wage statements, and account statements from financial institutions. For these reasons, it may be unnecessary to include identity provisions that are significantly more burdensome than what is currently required in a paper-based system.

Section 5.5 - Identifying Authoritative Copies

The guidelines provide the following methods for the designation of the "authoritative copy:"

Both of these options appear reasonable. We believe the second option may be preferable because it specifically allows for copies without jeopardizing control over the authoritative copy.

Section 7 - Document Access

Section 7 of the guidelines includes a requirement to provide borrowers access to electronic records after closing "from the time an application for a loan is approved until such time as the loan is paid off or foreclosed, plus seven years." The specifications state that "access" includes:

We believe this proposed access requirement may impose unnecessary burdens on lenders because it appears to require the use of the same technology for an extended period of time. This is unreasonable and impractical in light of the frequent and significant changes that are expected in the future and this could seriously hinder the mortgage industry's efforts to implement e-mortgages. As technology evolves, providing continued electronic access to records through outdated media could become problematic and expensive to both lenders and consumers.

With regard to the other provisions addressing document access, credit unions are concerned about maintaining the ability to restrict access from non-credit union competitors and to ensure that any nonpublic information will not be publicly available on the Internet. Privacy is a significant legislative, regulatory, and public policy issue and all financial institutions are sensitive to these concerns, including the prevention of identity theft. The Gramm-Leach-Bliley Act that was passed by Congress last year has, to some extent, addressed these concerns, and we believe that Congress may very well look into these issues again next year. We emphasize these concerns to ensure that they are adequately addressed in the next draft of the guidelines.

Section 8 - Representations, Warranties and Contract Terms

With regard to Section 8 of the guidelines, it is our understanding that the guidelines will not require lenders to buy back any loan if there is a breach of a representation and warranty, unless it is otherwise required under law. We urge that no changes to the guidelines be made that would change this understanding.

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 me a call at 202-218-7795.

Jeffrey Bloch
Assistant General Counsel
Credit Union National Association