Advanced Electronic Vaulting Solutions

ADVANCED ELECTRONIC VAULTING SOLUTIONS Conquering the final frontier of the eMortgage Though we specifically discuss the requirements and nuances of the mortgage industry in this white paper, the need for secure management of electronically signed contracts and other electronic documents exists across many industries. Advanced electronic vaulting is a technology designed to protect and mange these documents in the most robust, compliant and secure manner. An advanced electronic vault may be used in any industry for any electronic document where legal admissibility, enforceability, and/or negotiability are a critical business requirement.

I Executive Summary Legally enforceable electronic mortgage documents must be maintained and able to be Executive Summary ......................1 The Burden of Proof is Yours......2 A Brief Background .......................2 Electronic Vaulting – The Final Frontier ..........................3 Advanced Electronic Vaulting for eMortgage ............................4 What is it?...................................4 eVault Access and Connectivity.................................5 Why do I need it? ........................5 Success In Action ...........................6 Finding the Best Solution .............7 What to look for........................7 Standard vs. Advanced Electronic Vault Features.........8 Make sure it plays well with others ..................................9 Which model is best? ...............10 eOriginal Vaulting Solutions ........10 Conclusion .......................................11 About eOriginal ..............................12

transitioned throughout the life of the loan. Controls and security around post-closing processes, in particular, therefore assume much greater importance. These and other concerns must be addressed by those forward-looking mortgage companies who have made the strategic decision to incorporate eMortgages into their operations As adoption of eMortgage processes becomes more prevalent, the requirement that electronically closed loan packages remain protected yet accessible to many parties throughout the extended life of the mortgage becomes more critical. This requirement has resulted in infrastructure conflict, risk management issues and process complexity for many organizations. Original documents must remain transferable, with copies forwarded to multiple downstream participants after closing and throughout the lifecycle of the loan, which can potentially stretch over decades. Strict controls must be in place every step of the way to track an original document and prove its unaltered authenticity and uniqueness. It is essential for lenders to manage discreet documents and their access rights, as well as to perform ongoing audits and establish legally recognized controls. These critical requirements in the eMortgage chain can only be bridged through the use of electronic vaulting. “Advanced” electronic vaulting capabilities – such as transfer of ownership and the ability to provide legally admissible copies of electronic original documents – provide added protection for

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electronic mortgage and other financial documents (See Standard vs. Advanced Electronic Vault Features, page 8).

The Burden of Proof is Yours

In the following pages, this paper will explore the need for, and the benefits of, such electronic vaulting solutions. While we’ll be focusing specifically on electronic vaulting in relation to mortgage banking, the real solution for financial institutions is truly a single

A high-profile 2005 legal decision involving American Express points to the risks lenders assume when they fail to properly maintain electronic documents in a protected closed system. In a bankruptcy proceeding involving a cardholder and the company, American Express attempted to collect a debt outside of the defendant’s bankruptcy filing. There were also two different sets of documents – one the company’s, the other the debtor’s – each alleging different amounts in dispute.

horizontal electronic vaulting infrastructure that can provide substantial benefits across

The judge asked American Express to provide evidence of the integrity of their electronic records, and held the proof of accuracy and authentication of the electronic documents in question to a decidedly higher standard than traditional paper documents. When asked, American Express was unable to provide sufficient evidence to convince the court of the documents’ integrity.

II A Brief Background

Ultimately, the judge refused to award judgment to American Express and dismissed the case. What’s interesting is that the case never needed to turn out the way it did. The case came down to the witnesses for American Express and their inability to properly demonstrate what happens to a document held in their electronic recordkeeping system. Had American Express presented proof of controlled access to their database, as well as an audit trail with a secure log of activity, the case might have had a different outcome.

legislation. Basically, E-SIGN enacted on a federal level many of the core concepts of the

This case stands as a stark reminder of the need for electronic contracts and other financial services documents to be managed and maintained effectively, no matter the industry segment. Today’s financial institutions should be actively pursuing the technologies and solutions necessary to protect themselves. Advanced electronic vaulting solutions exist today that build in such protection in a legally admissible format while increasing overall operational efficiency. In mortgage lending – with significantly larger dollar amounts at stake and document lifecycles that can span as much as 40 years – the matter assumes even greater importance.  

the market segments and products of the entire financial institution enterprise, meeting the needs of multiple business segments such as mortgage, automotive finance, leasing, student loans, commercial lending, etc.

When President Clinton signed the E-SIGN (Electronic Signatures in Global and National Commerce) Act into law in June of 2000, the legislation established the federal validity of using electronic signatures (and therefore electronic contracts as well) in financial transactions. To underscore the point, the President electronically signed the Uniform Electronic Transactions Act (UETA), which had already been adopted in some form or another by various state governments across much of the country. The intent of the legislation was to establish that electronic signatures and records carry the same legal weight as their paper counterparts. The first section of E-SIGN (101.a) states that a contract or signature “may not be denied legal effect, validity, or enforceability solely because it is in electronic form.” However, as evidenced by the ruling against the credit card company mentioned in the sidebar, in practice this is not always the case. The fact is, legal challenges to electronically originated loans have – fortunately – thus far been exceedingly rare, leaving the financial services industry waiting anxiously for precedents to be set. Financial institutions need to both take advantage of the benefits afforded by electronic signatures and documents (including, of course, eMortgage documents and eNotes) while still protecting themselves against any potential litigation. They must establish ironThe Warehouse at Camden Yards, South

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clad protection and maintenance of these documents and have the proper procedures in place to meet any and all legal requirements or challenges. Advanced electronic

Authoritative Copy The copy of an electronic record that is designated by agreement of the parties to the transaction, system rule, or system design as the controlling reference copy. In the case of a promissory note, the Authoritative Copy is the electronic equivalent to the original negotiable paper promissory note. (Source: MISMO, 10/05/01)

vaulting solutions, on their own or as part of a third party registry system, provide the only proven and accepted manner of doing so. Already widely used in other industries with similar business needs (including automotive finance and equipment leasing – see Success in Action sidebar for more), electronic vaulting affords the financial institution the necessary protections to securely manage eMortgages. The very same legal counsels and ratings agencies that support mortgage backed securities have already established and accepted advanced electronic vaulting solutions as meeting all of their requirements for securitization purposes.

III Electronic Vaulting – The Final Frontier Having established the necessity for financial institutions to manage, maintain, and protect electronically signed documents and that advanced electronic vaulting is the

MERS Mortgage Electronic Registration System. MERS was created by the mortgage banking industry to streamline the mortgage process by using electronic commerce to eliminate paper. www.mersinc.org

means to that end, it’s important to understand the concept behind the solution. In order for the validity of any electronic document to be upheld in a court of law, or for any electronic document to be sold or transferred to a new secured party, the financial institution must be able to show the documents under its control to be the legally binding Authoritative Copies. For example, there must be a unique copy of the eNote, which can be proven to be unaltered since the time of signing. Once an electronic mortgage has been closed and the eNote electronically signed, a percentage of lenders will then register the ownership of that loan with MERS. While MERS does an outstanding job of enabling and maintaining the industry registry of eNotes (and the other functions MERS has traditionally served) for the financial institution, there is still more work to be done to both ensure compliance and legal protection as well as meeting the often more stringent requirements for resale within the secondary market. In fact, even MERS itself requires the lender have the ability to store eNotes and transfer them to investors. This is where the electronic vault comes into play.

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For an eMortgage to remain enforceable, admissible and negotiable, specific processes must be followed. Pre-settlement services generate PDF documents which are prepared for an electronic closing. Parties to the transaction sign electronically, either at a settlement office using an electronic signature device or software, or via their computer by logging into a secure portal and applying their electronic signatures to the mortgage documents. Either way, once the signatures are applied, an Authoritative Copy or “Electronic Original®” is created and is instantly deposited into an electronic vault, where it is held and managed via controlled access by the vault administrator throughout its lifecycle. All activities and functions affecting the documents are controlled via and logged by the vault. This includes any Print, Copy or View requests, the pooling and securitization of the eNote for sale on the secondary market, generating legally admissible copies for use in a court of law, transferring the eNotes to another vault, and the ability to export the Electronic Original documents to paper permanently.

What is it? Before defining exactly what an electronic vault is, it’s important to know what it isn’t. File systems and e-mailed copies of documents most definitely do not meet the criteria of an electronic vault, or the requirements of the secondary market. Copies created by

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or stored in such systems are vulnerable to tampering and hacking and hold no verifiable proof of their point of origination, legal validity, uniqueness or authenticity. The mortgage industry’s understanding of what constitutes an electronic vault has

eVault Access and Connectivity

evolved over the years. Today’s advanced electronic vaulting solutions have developed

Reprinted from MERS “Integration Series: Business Overview”, Dec. 18, 2006.

documents. Document and content management systems, for example, while facilitating

If you close loans using eNotes, buy eNotes, or offer custodial services for eNotes, you must have an eVault in which to store them. You must also have a process for moving eNotes between your eVault and others. Physically moving eNotes happens outside the MERS® eRegistry process, but when an eNote changes location that change must be reported to the MERS® eRegistry (as a Transfer of Location). Some investors will only accept a transfer of Control for an eNote after they have received the eNote in their eVault.

far beyond the traditional means for securely storing or working with electronic the ease of access and sharing of electronic documents, are not vaults. There is a world of functionality electronic vaults possess which eclipse the abilities of even the most robust of these systems. So what then is an electronic vault? An electronic vault manages the legally binding, Authoritative Copy of an electronically signed contract or other document, and possibly its related transaction documents, in a secure location where it is held and transitioned during the entirety of its lifecycle. To ensure that an electronic contract remains negotiable and legally enforceable, the electronic vault permanently binds electronic signatures to the document and creates a tamper-evident audit trail demonstrating ownership (control) and compliance. As document interaction occurs throughout multiple stages along the mortgage lifecycle,

While the eVault itself does not communicate with the MERS® eRegistry, the Location of the eNote is a required field on the system. Therefore, the owner/operator of the eVault will be reflected in this field, and is required to respond to transfer requests and receive notification messages sent from the MERS® eRegistry.

the vault controls access and tracks all document activity from closing, through

Your MERS Business Integration Resource will work with your eVault provider to ensure it is compliant with the MERS® eRegistry.

electronic original. It also ensures compliance with the various legislative requirements.

www.mersinc.org

also allow privileged access to the documents without compromising the integrity of the

Copyright © MERS, 2006

servicing, and finally to sale or payoff.

Why do I need it? Holding eNotes and other loan documents in an electronic vault bolsters legal enforceability – of both the electronic original and properly certified paper copies of the A true electronic vault should provide irrefutable proof that the document in the institution’s possession is the original, unaltered document. The electronic vault should originals. Additionally, secondary market requirements dictate that such documents reside within a secure, closed system, and the leading ratings agencies have determined – along with their legal counterparts – that electronic vaulting meets this requirement. A robust

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Success in Action While its use is just beginning to penetrate mortgage finance, electronic vaulting has been in place and working successfully for years – to say the least – in other industries with similar needs and business requirements, most notably in automotive finance and equipment leasing. Each of these two segments has, like mortgage, electronic document legislation in place (in this case, UCC Revised Article 9-105). Unlike mortgage, neither segment has the sort of recognized safe harbor of MERS,, but that hasn’t stopped the pervasive adoption of eContracts and electronic vaulting solutions for their maintenance and management. Equipment leases and auto loans are originated and then bought and sold, securitized and sold in pools, as are tangible-property backed assets. All of the same post-closing requirements found in mortgage apply equally to these industries – if not more so due to the lack of a centralized registry. The eOriginal platform is the advanced electronic vaulting standard for these industries, having done some 300,000 eContracts, $10 billion in originations, and more than $1 billion in pooled securitizations. eCore™ auto finance customers electronically originate more car loans in a single week than there have been eMortgages to date. It’s a proven management and protection method, as testified to by the mass adoption of eCore™ in automotive finance, as well as eOriginal’s record of providing its vaulting services to these players for years without a single system error or legal challenge.

electronic vault also meets secondary market needs by providing the ability to indicate the new owner of a loan post-sale. Advanced electronic vaulting technology can perform transfers of ownership and location without altering the original or invalidating its tamper seal. If a mortgage loan has been registered with MERS, the financial institution would benefit from locally mirroring the control activities as they occur within MERS. This serves the institution’s own record-keeping purposes as well as providing a safeguard against unforeseen events that may require proof of such controls outside the auspices of MERS. Such information should obviously be tied to the eNote and other loan documents, and become part of an ongoing document-specific audit trail. Regardless of whether the loan is registered with MERS or not – and there will be many loans which will never touch the registry – the institution must ensure several needs are met: 1.

eCore®

The major ratings agencies and legal counsels – the same who evaluate mortgage-backed securities – have acknowledged and asserted the validity of the eOriginal eCore® electronic vaulting solution.. Many of the postclosing processes in these industries are very similar to those in mortgage:: the same lenders, the same ratings agencies and the same law firms, with loans sold through the same brokers on Wall Street. The model translates very easily from one market to another.

Document(s) should be protected, encrypted, and time-date stamped a.

The documents should be wrapped in a tamper-evident seal that will instantly identify and reject any changes to the document since signing

2.

Privileged access rights to documents must be granted and maintained

3.

An extensive audit trail must be kept on each document, tracking several factors:

4.

a.

Any and all access to the document

b.

Any copies made, by whom and for what purposes

c.

Any transfer of ownership or custody of the document

d.

Any transfer of location of the document

e.

MERS registration activities (if registered)

Regular integrity checks of the documents must be performed, ensuring that, byte-for-byte, there has been no alteration or degradation since signing

5.

There must be some manner to destroy an electronic original while creating a paper document which will thereafter be recognized as the Authoritative Copy

6.

Likewise, destruction of the electronic document after predetermined periods of time or status changes must be addressed as well

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In the next section, we’ll examine these and other specific criteria financial institutions should be looking at when evaluating an electronic vaulting solution.

IV Finding the Best Solution Given the pressing need to secure, manage, maintain and track privileged financial documents, particularly those signed with electronic signatures, institutions should be actively seeking out an electronic vaulting solution. But the fact is that all vaulting solutions are not created equal. In fact, many solutions which purport to serve electronic vaulting needs are not vaults at all. As already stated, document and content management systems, while not without their benefits to certain tasks, are not vaulting solutions. Much of the high level functionality vaults offer is simply not available in such systems, and would have to be designed, developed and integrated at a greater expense of time, effort and money. It makes much more fiscal and operational sense to look to established, true vaulting solutions instead.

What to look for Having established what does not constitute an electronic vaulting solution, what then should an institution expect from an actual electronic vault? Secondary market investors require those loan documents which are transferable records to reside in a closed system, with no non-differentiated copies existing anywhere outside of the secure environment. Copies of loan documents must be clearly marked as a copy of an authoritative original. A tamperevident audit trail should track any and all access or copying. Lastly, the investors require the capability of electronic pooling and securitization of loans and their documentation, something a true electronic vault should perform as a matter of course. An electronic vault should provide a secure environment that will ensure that a document remains negotiable, transferable and legally enforceable.

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Above all else, the vault should: 1.

Facilitate the identification, handling and holding of legally admissible Authoritative Copy/Electronic Original® documents.

2.

Allow the documents to be transitioned as necessary throughout each document’s lifecycle.

3.

Protect documents using robust encryption, with documents time-stamped and wrapped within a tamper-evident seal.

4.

Keep audit trails on every document, providing thorough access and transaction histories.

Though securing and tracking the documents is of primary importance, the vaulting solution can ensure the negotiability and transferability of eMortgages and strengthen lenders’ ability to sell them in the secondary market.

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An advanced electronic vault also: 5.

Gives the institution the ability to produce legally admissible print copies of electronic original documents

6.

Allows for the transition of documents based upon status changes, cancellations, sales, foreclosures and other events

7.

Allows the institution to permanently destroy or remove the Authoritative Copy from the vault while creating an enforceable paper version

8.

Integrates retention policies into the solution, with documents held, transitioned or destroyed as is called for by status

9.

Allows the pooling and securitization of eNotes for resale

Make sure it plays well with others To prepare for the widespread transition to eNotes, any vault under consideration should include vault-to-vault transfer capability. Vault-to-vault transfers facilitate the transfer of ownership upon sale of the loan. This transfers not only the Authoritative Copy itself, but also may register the new legal control of the eNote with MERS. An electronic vault should also support the new TOLEC (Transfer of Location of Electronic Contracts) ANSI X-9 standard for moving the electronic original Authoritative Copy of non-real-estate items of property from one vault to another. It’s also in the institution’s best interest to choose a vaulting solution that can easily interface and/or adapt to existing systems already in use. The provider should make available developer toolkits and the necessary application programming interface (API) calls that will allow for interfacing or integration with existing systems. A single vaulting solution should meet compliance and security needs in a cross section of industries. Since the electronic signature is the key to a completely electronic process, the electronic vault must support integration with available e-signature vendors and their technologies. The solution also needs to work with all the various front-end esigning approaches at use in the industry today, including: • Electronic signature pads • Online click-thru – “I Agree” The Warehouse at Camden Yards, South

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eOriginal® Vaulting Solutions eOriginal eCore® advanced vaulting technology is offered through a trio of platform options, all of which integrate with the most popular front-end signing services and technologies: eCore™ Enterprise – provides the most complete advanced electronic vaulting functionality on the market for all lines of business. This infrastructure software resides behind a finance source’s firewall and includes electronic signature integration for eClosings and complete post closing management including pooling, securitization and vaultto-vault transfers.

• Online e-signature services • Digital signatures (PKI) • Tablet PC signature support As discussed above, the electronic vaulting solution should be able to incorporate MERS submission for those loans the institution wishes to register, but should also handle those which will not be registered with equal ease. Documents stored within the vault should meet E-Sign, UETA, AFSA/ANSI, MISMO, MERS, UCC Revised Article 9-105 and other requirements as applicable to the individual document/package. Lastly, but of extreme importance, the electronic vaulting solution vendor should be able to show documented credit rating agency acceptance of validity as well as similarly documented third-party legal opinions supporting secondary market sales. Electronic mortgages are still in their infancy but criteria to ensure the validity and enforceability of eNotes has been established in other industries and put into use in mass volume.

eCore™ Vault-in-a-Box® – is a pre-configured eCore advanced electronic vault that resides at a finance source’s data center to accept and manage in-bound electronic original documents transferred from various internet origination channels. Includes hardware and software delivered in one system. eCore™ On Demand – is an On-Demand web service with eCore™ Enterprise advanced electronic vaulting functions available on a pay-per-use transaction basis. This ondemand vault is accessed via the web and documents are securely controlled. eCore™ On Demand has low implementation costs and the ability to upgrade to eCore™ Vault-in-a-Box® or eCore™ Enterprise.

The same rating agencies and legal counsels that have signed off on electronic vaulting in automotive finance and equipment leasing (see “Success in Action” sidebar) – both of which have similar secondary market needs and business requirements – have come to the same conclusion with regard to mortgage as well. Therefore, the groundwork is already laid for transitioning electronic mortgages into the secondary market and throughout the mortgage lifecycle.

Which model is best? Electronic vaulting solutions are available in several different implementation models depending upon individual client needs. These generally fall into two broad categories: company-hosted vaults and on-demand, web-hosted electronic vaults. Depending upon the size of an organization and the scope of its activities, it may make more sense to go with one over another. 1.

Enterprise Solutions – a company-wide electronic vaulting solution installed behind the institution’s firewall and integrated to existing processes. This solution offers larger institutions the ability to maintain control of the vault inhouse. It provides customizable options for integration into existing business

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processes and is ideal for higher volume eMortgage or eContract processing. 2.

Turn-Key Vaulting Solutions – a preconfigured vaulting solution packaged with the software and hardware necessary for its use. A turn-key solution establishes an in-house managed electronic vaulting solution for an institution based upon accepted best practices. It eliminates the need to “build it yourself” while providing basic key vaulting functionality immediately accessible to the business. Implementation is significantly less involved than with an enterprise solution, but does not reach the same level of customization, functionality and integration.

3.

On-Demand Vaulting – a web-based electronic vault with a transactionbased fee structure. This software as a service is a turn-key solution that can be “switched on” as a web-service, providing true electronic vaulting capabilities with a minimum of effort. The transaction-based fee structure means that institutions pay only according to use, eliminating barriers of cost and eliminating complex implementation plans entirely. This solution is best for the smaller organization, or for those that wish to achieve the benefits of electronic vaulting in an easier, more immediately affordable manner.

Again, depending upon the individual organization’s size, needs and scope of operations, one model might prove a better fit than the others. The expertise and best practices of the electronic vaulting provider can be of great assistance to the institution as it decides from among the options.

V Conclusion The case for electronic vaulting is abundantly clear in all aspects of financial services, particularly given the intricacies and demanding requirements of mortgage lending. Choosing an advanced horizontal electronic vaulting solution can serve every business segment in which the institution operates.

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By providing irrefutable proof of a document’s originality and systematically tracking any and all access, copying, or other use of eNotes and other electronic loan documents, the financial institution ensures its compliance with the various legislative statutes governing electronic contracts and signatures, while also protecting its electronic evidence. Tamper-evident seals, robust encryption and detailed audit trails all establish both compliance and the legal veracity of documents. Advanced electronic vaulting solutions go far beyond merely managing or even securely storing electronic documents. The aforementioned controls, in conjunction with the blessing of ratings agencies and legal counsels and coupled with the ability to produce legally admissible print copies of documents when necessary, provide the institution with the greatest possible level of protection. Seamlessly integrated with existing systems and processes, a true electronic vault brings electronic post-closing processes and procedures in line with both paper-based and electronic origination functions.

About eOriginal eOriginal Inc.’s advanced electronic vaulting solutions enable lenders and investors to eliminate paper while legally protecting their assets as electronic mortgage documents are managed and transitioned throughout their lifecycle. eOriginal eCore® technology and processes create electronic finance documents that are tamper-evident, legally enforceable, admissible and negotiable. eOriginal solutions are compliant with ESIGN and UETA, and support the MERS registry. eOriginal® technology has managed approximately 500,000 electronic contracts representing over $10 Billion in originations, with over $1 Billion pooled and securitized – all without a single error or legal challenge. For more information about how to turn eOriginal’s experience into your advantage, visit www.eoriginal.com or call us at 410-895-7699.

Copyright © 2007, eOriginal, Inc. Electronic Original, eOriginal eCore, Vault-in-a-Box, Certified Print and Paper Out are registered trademarks of eOriginal, Inc.

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