Bank Notes

Q: Rebecca, I understand that you are to retire shortly. First of all, congratulations! 

Thank you! The mortgage industry has been a passion of mine, but I am looking forward to discovering many new interests in retirement. 

Q: You have been our subject matter expert  on the topic of eNotes and have worked diligently with the FHLBank System and this Bank’s internal teams to adopt eNotes, to the point that, as of March 31, the Bank is fully ready to accept eNotes from members. But for members who may be just beginning to explore adopting eNotes, let’s start with the basics. 

Put simply, an eNote is a promissory note created, signed, and stored electronically, according to the standards for transferrable records under the Electronic Signatures in Global and National Commerce Act (ESIGN ) and Uniform Electronic Transactions Act (UETA), collectively known as the “eSignature Laws.” 

To be considered a transferrable record, an eNote must:

1. Have the same terms and conditions as a paper promissory note would have under the Uniform Commercial Code – Article III.
2. Be electronically signed.
3. Reliably establish the identity of the entity/person who has the authority to control the eNote in a sale or pledge as collateral.
   1. Control of an eNote is established if the eNote is created, stored, and assigned in a manner that ensures a single authoritative copy of the eNote exists.
4. Be signed using an eSignature process and secured by a Tamper-Evident Signature and Version 1.02 MISMO Category 1 SMART Doc. 

But, you might ask: what is an eNote vs. an Electronic Note? There are several situations where you might have an Electronic Note that does not qualify as an eNote, as defined by the eSignature Laws and the GSEs (Fannie Mae, Freddie Mac, and the FHLBanks). Examples include:

1. A scanned copy of a paper Note.
2. Situations where the borrower did not consent to an eNote up front.
3. An electronically signed Note without a single authoritative copy (that is to say, creating copies that are not easily differentiated from the original).
4. An electronically signed Note that is not stored in an eVault or not listed on an eRegistry, such as MERS® eRegistry.
5. An electronically signed Note that is not a SMART Docâä. 

Q: Can you also explain the difference between eNotes and eSignatures? My fellow Relationship Managers and I, along with colleagues in our Collateral department, are getting an increasing number of inquiries, and there seems to be some confusion on this point.

Documents with eSignatures are documents that are signed electronically, per the ESIGN Act. eNotes, on the other hand, are Promissory Notes that adhere to the eSignature Laws, both ESIGN and UETA. So, while eNotes are electronically signed, too, there are other loan documents (disclosures, for example) that may have an eSignature without having to comply with both eSignature Laws.

A lender’s origination process may include eSignatures even if the process does include eNotes, or they may do hybrid closings in which borrowers electronically sign some closing documents, while wet-signing other documents, like the Promissory Note. So, it’s important to be very clear about the difference between the two.

Q. Are major industry participants in agreement on how eNotes will function?

Fannie Mae and Freddie Mac implemented eNotes in 2003, with the enactment of the eSignature Laws. The eNote requirements for FHLBanks were developed to align with those of the other GSEs, to ensure there was one standardized process for lenders to sell, hold, or pledge eNotes. The FHLBanks then worked with the MERS® eRegistry to establish the FHLBanks as a secured party when lenders pledge eNotes to us as eligible collateral. 

Q. Can you bring us up to date as to where the Bank is in its journey to accepting eNotes as collateral?

More than that, I can tell you that as of March 31, the Bank is fully ready to accept eNotes from members who are ready to pledge them! 

The last phase of our implementation journey started in in late 2020, when we partnered, on a pilot basis, with a member who already had the key required eNote components in place to begin pledging them to the Bank. This member had:

1. Selected and implemented their eClosing system.
2. Become a member of MERS eRegistry and completed set up and testing with MERS.
3. Selected and engaged an eVault provider.

The pilot was designed to enable the Bank to develop and test critical procedures for accepting eNotes. These included:

1. For the member to provide detailed reporting of their pledged and depledged eNotes. 
2. For the member to transfer eNotes to the Bank’s eVault with the Bank as a secured party. 

Following the success of the pilot, we are now live with eNotes, and all members interested in using eNotes can find information and resources, including our detailed eNote Collateral Acceptance Requirements and Guidelines, on the eNotes page in the Member Solutions section of our website at fhlbsf.com.  

Q. What are the advantages that the industry attributes to eNotes? I presume that the COVID-19 crisis heightened interest in this digital solution?

eNotes continue to evolve. Use of eNotes is rapidly becoming a standard part of the residential lending production process and more and more lenders are including eNote implementation in expense planning. Proving the point, from January through March of 2021, 165,729 eNote loans were registered, compared to just 59,015 e-Note loans in the same months of 2020. And as of the end of March this year, over 1 million individual eNotes have been registered on the MERS eRegistry by 92 mortgage originators. 

And there is good reason for the uptick in eNote adoption, since key are greater convenience for consumers, lower costs for lenders, and quicker transfers of ownership. More specifically, use of eNotes can mean:

1. A faster and easier signing process
2.  Flexibility in signing locations
3. Reduced shipping and storage fees
4. Fewer signing errors
5. Less paper
6.  Improved audit capabilities
7. Elimination of lost paper Notes

Q. What advice would you offer to members interested in exploring their eNote choices? Are there good industry sources of information that you would recommend?

I encourage Bank members at whatever stage of adoption they might be to learn more about eNotes and to explore opportunities to make the transition away from wet-signature notes. On our website, members will find a variety of helpful eNotes resources, from a “What is an eNote?” video to our eNotes Readiness Checklist, designed to guide FHLBank San Francisco members who are ready to take the next step. 

Q. Are there major up-front costs associated with a transition to eNotes?

Both the MERS eRegistry and the eVault providers charge individual loan transaction fees to register an eNote or to transfer a loan to an eVault. In addition, eVault providers may have a onetime or annual fee.

Q. Lastly, if we have just piqued a member’s curiosity about eNotes, who should they call to explore further?

The Bank’s Member Business and Collateral Review teams are our eNote subject matter experts. They’re ready to help members understand and explore the opportunities of pledging eNotes to the Bank.

Contact your Relationship Manager or Collateral Asset Manager today to get started pledging eNotes to the Bank!