Like Winter, eNotarization is Coming
September 5th, 2017
Game of Thrones, Season 7, airs July 16, 2017. Before this series ends, it’s possible that we will have true eClosings capability in all states – closings in which all the documents are both signed and notarized electronically. Nearly as quickly, we are likely to see a steep growth in online closings using remote notarization.
With Ohio adopting HB 49, it became the most recent state to authorize (almost) remote notarization. Just recently, Texas passed HB 1217, effective July 1, 2017, which not only allows electronic notarization, it also provides for remote notarization via two-way video and audio technology. Nevada just passed AB 413, which permits notarial acts to be performed by audio-video communication. These two states join Virginia, Nebraska and Montana in allowing remote notarization for a real estate closing. Kentucky and Minnesota are enacting remote notary laws for signers outside the U.S. under the Revised Uniform Law on Notarial Acts (RULONA) while Washington is looking to adopt RULONA. Florida has a statute permitting remote notarizations only for certain law enforcement and correctional officers. Maryland, Oklahoma, Louisiana and Washington D.C. are each considering legislating some form of remote notarization.
We expect this trend to not only continue, but hasten, because both the lending industry and consumers are supporting the change. Consumers, especially the growing number of millennials entering the housing market, expect an online process. The numerous documents and notices involved make the present closing process cumbersome. Remotely executing the entire closing document package electronically depends entirely on the ability to have remote notarization.
For the lending industry, a remote closing can reduce risk for both originators and investors. eClosings can provide near instant collateral documentation receipt while recognizing the lender’s security interest. This means it costs less to process and handle documents, too. It can also help demonstrate regulatory compliance and speed up loss mitigation efforts.
Ohio’s HB 49 was more of a prospective attempt to allow remote notarization. The good news is there will be a clearly acceptable computer format as the bill provides that the Secretary of State shall approve the “electronic communications devises” that will be used. The unfortunate parts are that:
- The provision are very incomplete regarding what will be the standards for any security requirements, deferring to the IT Department to advise the Secretary;
- What methodology beyond just a visual inspection of an identifying document will be required to verify identity;
- A lack of any requirement for a recording of the process and for storage of the recording; and
- The bill is ambiguous on whether the person executing the document must be within the State of Ohio or not.
The National Association of Secretaries of State is currently reviewing the Model Electronic Notarization Act of 2017 (MENA) published by the National Notary Association; it would authorize remote notarizations. In the foreword to MENA, the drafters explain the double-edged sword presented by remote notarization:
“There is no doubt that remote electronic notarization can solve certain problems that flow from a signer’s lack of geographic proximity to an available notary. It, however, also is clear that remote electronic notarization carries a high potential for fraudulent exploitation and legal challenge unless the governing rules are carefully crafted and enforced.”
There are two essential likely sources of challenges to eNotarization, and these exist in both on-site and remote scenarios:
- Identity verification
- Information handling, i.e. collection and storage
Chapter 5A of MENA deals exclusively with by video – remote notarization. The drafters’ intent was to find a standard that protects consumers as well as notaries. The traditional methods for identity verification are either the notary knows the person or the individual presents an identification document such as a passport or driver’s license. The model act provides some untraditional forms for identity verification, namely a “dynamic knowledge-based authentication assessment” (DKBA) as well as a “public key certificate.” The DKBA consists of challenge questions created from the individual’s life history, circumstances, and credit information. Public and private “keys” are a computerized source that assists in verifying identity. A public key certificate is issued to a person based upon a coupling with a private key. The private key information is used for signing while the public key is used to validate the private key. This information, in addition to any other specifics stored on the recorded audio-video session, is expected to produce a high-level of reliability when determining identity.
The acts permitting remote notarization require recording and storing the video session involving the notary and the signers. MENA requires that the audio-video communication be reasonably secure and of sufficient quality. The recording quality and duration must allow the notarial act to be assessed. In addition, the parties, notary, and executed documents need to be identifiable. The audio-video session must be stored, protected and available to both the public and officials. The stored content must be maintained for 10 years under MENA.
Computer records and audio-video recordings are not completely new ground for legal and evidentiary analysis, but the arena of eNotarial acts is somewhat unchartered, as cases challenging standing and validity of documents are just now being reported.
Recording the act of execution provides a body of evidence about the notarial act that has not typically been available before. The recording may create evidence that helps conclusively establish identity and execution, but it may open up a Pandora’s box of other issues. To avoid legal challenges to note and mortgage execution, lenders will need to be ready to deal with entities that can independently verify the warehoused records. Lenders will likely need to be familiar with demonstrating private key information validity – for example, evidence from the certificate of authority that created the person’s private key.
MENA contemplates having the recording and other information in the notary’s exclusive control. It relies on reasonable interpretation of Section 9-5 to allow for secure online information storage. Secure cloud storage will likely turn out to be the preferred method, but the necessary safeguarding and authentication standards are not set out in MENA and could provide challenges to the custody, control and any potential alteration of those records apart from state laws defining those standards. Those same challenges can exist to the notary’s own record storage, but it will add a layer of testimony from the online storage provider to refute such challenges. Lenders should have a plan in place to readily provide the security and authentication proof as part of discovery and even when seeking judgment on a defaulted obligation that was electronically executed.
With any computer storage, there is also potential for data corruption. While there could be other means of proof, if a stored remote notarization file becomes corrupted, it may also be fatal to proving proper document execution.
There are a host of economic benefits to electronically executed and stored documents that must be weighed against what may be infrequent legal challenges. Still, the added electronic sophistication needed to understand the validity of the notarial acts combined with differing interpretation of video evidence can make for a more difficult case when an electronically executed and notarized document’s validity must be proven. With good planning, however, the necessary information for proof should be easily obtainable and become routine for both lenders and notaries.