E-Sign UCC Article 3 - Negotiable Instruments 2010

UETA UCC Article 9 – Secured Transactions

E-Sign Act Electronic Promissory Notes

Electronic Security Instruments
15 U.S.C. § 7001 : US Code - Section 7001: General
A Promissory Note can either be a Negotiable
rule of validity
Instrument or Non-Negotiable Instrument. E-Sign
(a) In general and UETA both exclude Negotiable Instruments
governed by UCC Article 3.
Notwithstanding any statute, regulation, or other rule The Security Instrument securing the Negotiable
of law (other than this subchapter and subchapter II Instrument is governed by UCC Article 9 which is
of this chapter), with respect to any transaction in or also listed as excluded under E-Sign and UETA.
affecting interstate or…
The process of converting a paper negotiable
(1) a signature, contract, or other record relating to instrument into an electronic negotiable instrument
such transaction may not be denied legal effect, lacks basic laws to support its existence. Same is
validity, or... true for an electronically created Negotiable
Instrument. (Henceforth Electronic Promissory
15 U.S.C. § 7003 : US Code - Section 7003: Specific
Note or as MERS refers, “E-Notes”)
exceptions
Common practice involves MERS being named as
(a) (3) the Uniform Commercial Code, as in effect
Nominee for a lender and lender assigns on the
in any State, other than sections 1–107 and 1–
Security Instrument in public records and to remain
206 and Articles 2 and 2A.
as such while the Electronic Negotiable Instrument
is conveyed through multiple parties to be offered
as collateral to a Secondary Market offering.
UETA
Two facts emerge from these actions; Investors that
purchase Certificates backed by Electronic
Promissory Notes as collateral have in fact
UETA - SECTION 3. SCOPE. purchased a Certificate in which the Electronic
(a) Except as otherwise provided in subsection (b), Promissory Note’s do not lawfully exist.
this [Act] applies to electronic records and The second fact is the Security Instrument that once
electronic signatures relating to a transaction. secured the Original Paper Note at the conception
(b) This [Act] does not apply to a transaction to the of the indebtedness has been rendered nullity by
extent it is governed by: actions of the lenders and therefore even if the
Electronic Negotiable Instrument did exist, a Null
(2) [The Uniform Commercial Code other than Security Instrument has been offered up as part of
Sections 1-107 and 1-206, Article 2, and Article 2A. the Collateral purchased by Investors.

j.mcguire@swbell.net P O Box 1352, Bedford, Texas 76095-1352

Texas Statutes Texas Property Code 2010
⌂ Texas Local Government Code

TEXAS TEXAS LOCAL

PROPERTY CODE GOVERNMENT CODE
CHAPTER 13
CHAPTER 192
EFFECTS OF RECORDING
§ 13.001 INSTRUMENTS TO BE RECORDED
VALIDITY OF UNRECORDED INSTRUMENT BY COUNTIES
§ 192.007
(a) A conveyance of real property or an interest in
real property or a mortgage or deed of trust is void RECORDS OF RELEASES AND OTHER
as to a creditor or to a subsequent purchaser for a ACTIONS
valuable consideration without notice unless the
instrument has been acknowledged, sworn to, or (a) To release, transfer, assign, or take another

proved and filed for record as required by law. action relating to an instrument that is filed,
registered, or recorded in the office of the county
clerk, a person must file, register, or record another

TEXAS LOCAL instrument relating to the action in the same manner

as the original instrument was required to be filed,
GOVERNMENT CODE registered, or recorded.

CHAPTER 192

INSTRUMENTS TO BE RECORDED
BY COUNTIES

§ 192.001
GENERAL ITEMS

The county clerk shall record each deed, mortgage,

or other instrument that is required or permitted by
law to be recorded.

j.mcguire@swbell.net P O Box 1352, Bedford, Texas 76095-1352

Electronic Promissory Notes Federal Reserve Bank of New York 2010
⌂ E-Mail

Federal Reserve Bank

New York
“From: ucclaw-l-bounces@lists.washlaw.edu However, computer records are not stably
On Behalf Of Joseph.Sommer@ny.frb.org associated with any particular piece of matter.
Sent: Friday, March 26, 2010 11:15 AM Instead, they are stably associated with a
To:xxx-xxx-xxx system, which contains many pieces of matter
Subject: Re: [Ucclaw-l] Electronic Promissory amongst which the record may be sitting, at any
Notes given moment. Or the record could be sitting
in 12 places in the system; it makes no
If I were confronted with an "electronic difference. You don't need a unique piece of
promissory note", I would walk very slowly matter to uniquely identify an obligation--there
away and break into a run as soon as I can. is no unique matter (or energy) associated with
They are a logical impossibility, along with the record. You just need an authoritative
electronic chattel paper and UCC 7 electronic registry.
warehouse receipts.
Hence the logical impossibility of an electronic
The word "electronic" is miserably defined in promissory note. "Promissory note" means
all the statutes. But we all kinda sorta know unique piece of matter. "Electronic" means
what it means: something in a computer, rather that there is no unique piece of matter, and
than in some more fixed medium. Of course, a we're dealing with authoritative registries.
computer is made of matter and energy, just
like a slip of paper or the side of a cow. So it UCC 8 gets this right. It has two property
must mean something special to be "in a systems that rely on unique pieces of matter
computer." (registered and unregistered certificates), and
two systems that rely on authoritative registries
And it does! Most records are stably (transfer agents and securities intermediaries.)
associated with a particular agglomeration of The cotton warehouse system gets this right,
matter which--if it is not realty--can be and talks in great detail about authoritative
physically transferred from one person to registries. UCC 7, 9 and UETA screwed up.
another. This includes paper, cows, and They are bad law—literally incomprehensibly
DVDs. If the piece of paper or Old Bossy or bad law.
the DVD is uniquely distinguishable from any
other piece of paper or cow or DVD that bears The courts will probably eventually define 7, 9,
the same data structure, we have the basis for a and UETA into registry systems of some kind.
system of negotiability. But until then, I would treat electronic
negotiability systems as if they were rabid
cows.”

j.mcguire@swbell.net P O Box 1352, Bedford, Texas 76095-1352

MERS Letter To: Board of Governors of the Federal Reserve System 2010
⌂ January 15, 2010

“To: Jennifer J. Johnson, Secretary Allowing Members to continue operating under the
Board of Governors existing MERS® InvestorID program which
Federal Reserve System
captures the seller's closing date would quickly and
Mortgage Electronic Registration Systems, Inc. is a efficiently maximize industry compliance with the
wholly-owned subsidiary of MERSCORP, Inc. which Interim Final Rule.”
serves as the mortgagee or beneficiary of record in
the local land records for loans registered on the Uniform Commercial Code – Article 3
MERS® System. As mortgagee or beneficiary, it
§ 3-201. NEGOTIATION
holds mortgage liens on behalf of promissory note
owners… (a) "Negotiation" means a transfer of possession,
whether voluntary or involuntary, of an instrument by a
person other than the issuer to a person who thereby
becomes its holder.
As of the date of this comment and request letter, (b) Except for negotiation by a remitter, if an instrument
more than 63 million residential mortgage loans are is payable to an identified person, negotiation requires
transfer of possession of the instrument and its
registered on the MERS System… indorsement by the holder. If an instrument is payable to
bearer, it may be negotiated by transfer of possession
alone.
We request that the Board of Governors consider
§ 3-203. TRANSFER OF INSTRUMENT; RIGHTS
broadening the current definition of “the date of ACQUIRED BY TRANSFER
transfer” to provide alternative dates that would be
(a) An instrument is transferred when it is delivered by a
included in the “the date of transfer” definition, so person other than its issuer for the purpose of giving to
the person receiving delivery the right to enforce the
that definition is not restricted to be only "the date of instrument.
acquisition recognized in the books and records of (b) Transfer of an instrument, whether or not the transfer
is a negotiation, vests in the transferee any right of the
the covered person." There is evidence that there are transferor to enforce the instrument, including any right
as a holder in due course, but the transferee cannot
other dates that can be treated as the "date of acquire rights of a holder in due course by a transfer,
transfer." For example, the current process directly or indirectly, from a holder in due course if the
transferee engaged in fraud or illegality affecting the
established and utilized by Members who participate instrument.
(c) Unless otherwise agreed, if an instrument is
in the MERS® InvestorID program is to identify "the transferred for value and the transferee does not become a
date of transfer" as the seller's closing date. holder because of lack of indorsement by the transferor,
the transferee has a specifically enforceable right to the
Mechanically, once the seller enters the date of unqualified indorsement of the transferor, but negotiation
of the instrument does not occur until the indorsement is
transfer, recognized as the seller's closing date, on
made.
the MERS® System and the purchaser confirms this (d) If a transferor purports to transfer less than the entire
instrument, negotiation of the instrument does not occur.
transaction, the MERS® System generates the The transferee obtains no rights under this Article and has
disclosure notices to consumers… only the rights of a partial assignee.
j.mcguire@swbell.net P O Box 1352, Bedford, Texas 76095-1352
MERS
S Fedeeral Reserve Press Releaase 2010
⌂ January 6,
6 1997

“Th
The Fedderal Reserve
R Boardd “P
Paul E. Mullings”
M
“
“McLean, V
Virginia”
todday nam
med eigh
ht new members
m s
to its
i Conssumer Advisory
A Counciil “Mrr. Mullingss is Presiddent and CEO
C of thee
Morrtgage Eleectronic Registratio
R on System
m,
to replace membeers whosse termss
Inc. (MERS), established in Februuary 19966.
havve expirred, and desiggnated a
MER
RS is a naational reggistration system
s that
new
w Ch
hairman andd Vicee tracks mortgaage rightss for the benefit off
Chairman of the Coun
ncil forr conssumers annd the real
r estatte financee
induustry. Thee idea waas conceiived by a
19997.”
technology committee
c of the Mortgagee
Bankers Assocciation of America
A (M
(MBA). Mrr.
Mulllings serveed as a member
m of the MBA'ss
Board of Goveernors from
m 1995 to
19966, and is a past vicee-chairmann of its fairr
lendding comm
mittee. He currently serves onn
the MBA's
M leggislative coommittee. Previously
P y,
Mr. Mullings was Preesident andd CEO off
Firsst Interstate Bank's Residential
R l Mortgagee
Com
mpany, whhere he was
w respoonsible forr
Seal of the Uniteed States Fed
deral Reservve System
morrtgage o
origination,
, serviciing, andd
secoondary maarketing for
f thirteeen westernn
The symbol
s is not to
t convey the impression
i thatt the author is a statees. He haas servedd on Fannnie Mae'ss
bankiing associationn, firm or parttnership or a member of thhe
Federral Reserve Sysstem (per 18 U.S.C
U § 709).
Natiional Adviisory Counncil. In 19992 he wass
nam
med "Outstaanding Baanker of the Year" byy
the Los
L Angelees Urban Bankers.”
B

j.mcguire@sw
wbell.net P O Box
B 1352, Bedford, Texas 766095-1352
Mortgaage Bankers Association
n Board of Goovernors of the
t Federal Reserve
R Sysstem 2010
⌂ Letter
Letterle Januaryy 19, 2010

“Ms.. Jenniferr J. Johnsoon Nominees:

Secrettary
B
Board of Governorrs of the Federal
F MBA A seeks confirmatioon that thee definitionn
of "covered person" does noot includee
R
Reserve System
S "nom minees" whow take assignm ment of a
morttgage on behalf
b of the party with legaal
title. Specificaally, we seeek confirmmation thaat
the Mortgage
M Electronicc Registratiion System
m
(ME ERS) as "nominee"
" for the owner orr
assiggnee of thhe mortgaage wouldd not be a
"covvered persoon" becausse it does not
n own thee
morttgages.

Reecording Location
L

The Board corrrectly statees that trannsfers of

ownnership of the
t debt aree almost neever
Thhe symbol is nott to convey the im
mpression that thhe author is a recoorded becauuse ownersship of the debt is
bankking association,, firm or partnersship or a membeer of the Federal perffected throuugh possesssion….
Reserrve System (per 18 U.S.C § 709)).
Sincce most traansfers of thhe debt aree not
Covered Person
P recoorded….

Secttion 226.339 (a)(1) defines a "coveredd Johnn A. Coursson

persson" as: Pressident and Chief
C Execcutive Offi
ficer”
"a person....th
p hat becommes the ow wner of ann
exissting morttgage loan n by acquuiring legaal
Author Com
mment:
on, whetheer through a
titlee to the debbt obligatio
purcchase, assiignment, or o other traansfer, andd Perfe
fection of thhe security instrument
i t allow thee
to
whoo acquires more than n one morrtgage loann indebbtedness to be
b “Securedd” governedd by Article 9
in any
a twelve--month perriod. For purposes
p o
of and the
t laws of loocal jurisdicction.
this section, a servicer of a morrtgage loann
shalll not be treated as the ownner of the fection/Non-P
Perfe Perfection asa to Priorrity betweenn
subseequent purchhasers is govverned by Arrticle 9.
obliigation if the serviccer holds titlet to thee
loann or it is asssigned to the
t serviceer solely foor
the administtrative co onveniencee of thee
servvicer in servicing
s the obliggation." 122
C.F.R. §226.339(a)(1). 74 7 Fed. Reg.R 60151
(Noovember 200, 2009)

j.mcguire@sw
wbell.net P O Box
B 1352, Bedford, Texas 766095-1352
MERS Southwest Law Seminar Power Point Presentation 2010
⌂ Letterle November 10, 2004

“MERS Mortgage Electronic Registration

Systems, Inc. (“MERS”)
Designed to track and identify
A bankruptcy-remote subsidiary of
electronic promissory notes” MERSCORP, Inc. whose sole purpose
is to serve as mortgagee in the land
records for loans registered on the
Electronic registry for tracking
MERS® System.
servicing rights and beneficial
ownership interests in mortgage loans.
MERS as Original Mortgagee
Mortgagee (“MOM”)
MERS is the mortgagee in a nominee Use Deeds of Trust or Mortgages with
capacity for the beneficial owner of a MERS as Original Beneficiary or
Mortgagee using standard language
mortgage loan in the land records.
approved by Fannie Mae, Freddie
Mac, FHA and VA.
Registration vs. Recording
MERS is not a system of legal record
Assignment to MERS
nor a replacement for the public land
Use an assignment to MERS for an
records. Mortgages must be recorded
existing non-MOM mortgage.”
in the county land records.
Borrower mortgages, grants and
MERS is a tracking system. No conveys the Property to MERS.
interests are transferred on the
MERS® System, only tracked. If Lender executes the lien release
instead of MERS, it will cloud title.”
MERS executes documents through
Certifying Officers who are employees
of the members.

j.mcguire@swbell.net P O Box 1352, Bedford, Texas 76095-1352

Fannie Mae & eMortgages MBA Legal Issues in Mortgage Technology 2010
Pam Holland – Associate General Counsel
Letterle November 15-17, 2006

Legal Framework
Fannie Mae’s Requirements
Uniform eNote Clause
eMortgage Guide
Borrower’s agreement to the electronic Available on eFannieMae.com (search on
transaction “eMortgage”)

“I expressly state that I have signed this Lender readiness process

electronically created Note (the "Electronic
Contract
Note") using an Electronic Signature…”
Amendment to Master Agreement that incorporates
eMortgage Guide
eNote Registry
Documents other than note
“the identity of the Note Holder and any
Selling Guide permits most documents to be created
person to whom this Electronic Note is later electronically or to be imaged
transferred will be recorded in a registry
maintained by [MERS]…” Key Points
•Uniform eNote
eNote Registry •eSignatures
•Borrower Attribution
“The current identity of the Note Holder and •Registration on MERS within 1 Day of
eClosing
the location of the authoritative copy…, will
be available from the Note Holder or Loan
Servicer, as applicable.” Practical Considerations
“The only copy of this Electronic Note that is Enforceability
the authoritative copy is the copy that is Modifications
within the control of the person identified as Foreclosure
the Note Holder in the…Registry (or that Payoffs
“

person’s designee).“

j.mcguire@swbell.net P O Box 1352, Bedford, Texas 76095-1352

Fannie Mae Announcement 06-24 2010
⌂ Letterle December 7, 2006

“Servicing Guide Part VIII Non-Judicial Foreclosure

In any non-judicial foreclosure proceedings, the

Section 105 servicer has the option of either assigning the
mortgage from MERS to the servicer (in
accordance with the process outlined above for
Conduct of Foreclosure judicial foreclosures), or proceeding with the
Proceedings foreclosure with MERS as the mortgagee of
record.
Judicial Foreclosure If MERS remains the mortgagee of record, the
servicer must ensure that the foreclosure
Effective immediately, MERS must not be named attorney or trustee accurately identifies the
as a plaintiff in any judicial action filed to status of MERS. MERS may never be identified
foreclose on a mortgage owned or securitized by as the “owner” or the “holder” of the Note or
Fannie Mae. MERS is the mortgagee of record Security Instrument being foreclosed. MERS
when either a mortgage names MERS as the may be identified as the beneficiary of the deed
original mortgagee and is recorded in the of trust being foreclosed, but only if MERS is
applicable land records, or a completed and also identified as a nominee for the servicer, or
recorded assignment names MERS as the as a nominee for Fannie Mae if our Servicing
mortgage assignee. Therefore, in most Guide requires the foreclosure to be brought in
jurisdictions, the servicer will need to prepare a Fannie Mae’s name.
mortgage assignment from MERS to the
servicer, and then bring the foreclosure in its The servicer should consult with its foreclosure
own name, unless the Servicing Guide requires attorney or trustee to determine the specific
that the foreclosure be brought in the name of legal requirements of each jurisdiction in which
Fannie Mae. In that event, the assignment will it conducts non-judicial foreclosures of
need to be from MERS to Fannie Mae. mortgages in which MERS is the mortgagee of
record. Further, if MERS remains the mortgagee
The assignment from MERS to the servicer of record, then the servicer should also consult
should be in recordable form (e.g., executed and with its foreclosure attorney or trustee to
notarized) and, in some jurisdictions, it will need determine the appropriate manner for
to be recorded. In other jurisdictions, it may be identifying MERS’ interest in the subject
held by the servicer or the foreclosure attorney mortgage.
without being recorded. Because the assignment
will be completed before the foreclosure begins In any event, if an assignment has been recorded
(and recorded if required by applicable law), from MERS to either the servicer or Fannie
MERS will no longer be the mortgagee. Mae, and the borrower reinstates the mortgage
Therefore, MERS should not be named as a prior to completion of the foreclosure
plaintiff in the foreclosure complaint or other proceedings, the servicer may choose to re-
judicial filings. assign the mortgage to MERS and re-register
the mortgage with MERS. Any such action will
be at the discretion and expense of the servicer.”
j.mcguire@swbell.net P O Box 1352, Bedford, Texas 76095-1352
Pooling Servicing Agreement Conveyance of Mortgage Loans 2010
⌂ Letterle Example

“SECTION 2.01. Conveyance of Mortgage Loans. in the case of each MERS Mortgage Loan, the original
Mortgage, noting the presence of the MIN of the
(a) Each Seller, concurrently with the execution and Mortgage Loans and either language indicating that the
delivery hereof, hereby sells, transfers, assigns, sets over Mortgage Loan is a MOM Loan if the Mortgage Loan is
and otherwise conveys to the Depositor, without a MOM Loan or if the Mortgage Loan was not a MOM
recourse, all its respective right, title and interest in and Loan at origination, the original Mortgage and the
to the related Initial Mortgage Loans assignment thereof to MERS, with evidence of recording
(b) Immediately upon the conveyance of the Initial indicated thereon, or a copy of the Mortgage certified by
Mortgage Loans referred to in clause (a), the Depositor the public recording office in which such Mortgage has
sells, transfers, assigns, sets over and otherwise conveys been recorded;
to the Trustee for the benefit of the Certificateholders,
without recourse, all the right, title and interest of the (iii) in the case of each Mortgage Loan that is not a
Depositor in and to the Trust Fund together with the MERS Mortgage Loan, a duly executed assignment of the
Depositor's right to require each Seller to cure any Mortgage (which may be included in a blanket
breach of a representation or warranty made herein by assignment or assignments), together with, except as
such Seller or to repurchase or substitute for any affected provided below, all interim recorded assignments of such
Mortgage Loan in accordance herewith. mortgage (each such assignment, when duly and validly
completed, to be in recordable form and sufficient to
(c) In connection with the transfer and assignment set effect the assignment of and transfer to the assignee
forth in clause (b) above, the Depositor has delivered or thereof, under the Mortgage to which the assignment
caused to be delivered to the Trustee (or, in the case of relates); provided that, if the related Mortgage has not
the Delay Delivery Mortgage Loans that are Initial been returned from the applicable public recording
Mortgage Loans, will deliver or cause to be delivered to office, such assignment of the Mortgage may exclude the
the Trustee within thirty (30) days following the Closing information to be provided by the recording office;
Date and in the case of the Delay Delivery Mortgage provided, further, that such assignment of Mortgage need
Loans that are Supplemental Mortgage Loans, will not be delivered in the case of a Mortgage for which the
deliver or cause to be delivered to the Trustee within related Mortgaged Property is located in the
twenty (20) days following the applicable Supplemental Commonwealth of Puerto Rico;…
Transfer Date) for the benefit of the Certificateholders
the following documents or instruments with respect to (F) The executed UCC-3 financing statements or other
each Mortgage Loan so assigned: … appropriate UCC financing statements required by state
law, evidencing a complete and unbroken line from the
(A) the original Mortgage Note endorsed by mortgagee to the Trustee with evidence of recording
manual or facsimile signature in blank in the following thereon (or in a form suitable for recordation).
form: "Pay to the order of ____________ without
recourse," with all intervening endorsements showing a In addition, in connection with the assignment of any
complete chain of endorsement from the originator to the MERS Mortgage Loan, each Seller agrees that it will
Person endorsing the Mortgage Note (each such cause, at the Trustee's expense, the MERS(R) System to
endorsement being sufficient to transfer all right, title indicate that the Mortgage Loans sold by such Seller to
and interest of the party so endorsing, as note holder or the Depositor have been assigned by that Seller to the
assignee thereof, in and to that Mortgage Note); or Trustee in accordance with this Agreement (and any
Supplemental Transfer Agreement, as applicable) for the
(B) with respect to any Lost Mortgage Note, a benefit of the Certificateholders by including (or deleting,
lost note affidavit from Countrywide stating that the in the case of Mortgage Loans which are repurchased in
original Mortgage Note was lost or destroyed, together accordance with this Agreement) insuch computer files
with a copy of such Mortgage Note; the information required by the MERS(R) System to
identify the series of the Certificates issued in connection
(ii) except as provided below and for each with such Mortgage Loans. Each Seller further agrees
Mortgage Loan that is not a MERS Mortgage Loan, the that it will not, and will not permit the Master Servicer
original recorded Mortgage or a copy of such Mortgage to, and the Master Servicer agrees that it will not, alter
certified by Countrywide as being a true and complete the information referenced in this paragraph with respect
copy of the Mortgage (or, in the case of a Mortgage for to any Mortgage Loan sold by such Seller to the
which the related Mortgaged Property is located in the Depositor during the term of this Agreement unless and
Commonwealth of Puerto Rico, a true copy of the until such Mortgage Loan is repurchased in accordance
Mortgage certified as such by the applicable notary) and with the terms of this Agreement”

j.mcguire@swbell.net P O Box 1352, Bedford, Texas 76095-1352

MERS Policy Bulletin Number 2002-01 2010
⌂ Letterle August 27, 2002

“To: All MERS Members

Changes to Assignment to MERS

MERS has revised its sample

assignment form to clarify that
Mortgage Electronic Registration
Systems, Inc. (MERS) is the assignee of
the mortgage lien, not the MERS
member lender. Confusion resulted
from having the clause “as nominee
for” after the MERS name causing
some erroneous indexing of the MERS
member as the assignee in place of
MERS, the true assignee. By removing
the “nominee” wording, there can be
no mistaking the fact that all interested
parties intend MERS to be the assignee.
The removal of the “nominee”
language does not change the
relationship between MERS and its
Members as defined in the MERS
Governing Documents.

j.mcguire@swbell.net P O Box 1352, Bedford, Texas 76095-1352

 Electronic Signatures - Electronic Negotiable Instruments
James McGuire

E-Sign Act
Electronic Signatures in Global and National Commerce Act1

Subcommittee on Domestic Monetary Policy, Technology, and Economic Growth, 
Committee on Financial Services Washington, DC.2 

Saturday,  June  30th,  2000,  President  Clinton  signed  the  historic  ESIGN  legislation  granting 
electronic  records  and  signatures  legal  enforceability  on  a  par  with  written  documents. 
Enactment of ESIGN was driven by the explosion in online commerce and the bipartisan desire 
of Congress and the Clinton Administration to facilitate its continued expansion. 
 
This  legislation  gave  legal  recognition  and  effect  to  electronic  signatures,  contracts  and 
records. 
 
And now for an opening statement, the Chairman of the full committee who has a long and 
abiding interest in this legislation, Mr. Oxley.” 
 
“Thank you, Mr. Chairman, and thanks for holding this hearing on ESIGN and encouraging the 
use  of  electronic  signatures  in  the  financial  services  industry.  This  is  the  first  technology­
related  hearing  for  the  subcommittee,  and  I  look  forward  to  continuing  our  review  of  tech 
issues as they affect financial services. 
 
The Electronic Signatures in Global and National Commerce Act enabled electronic signatures 
to satisfy the legal requirements for paper signatures. I worked closely with Chairman Bliley 
last session on the passage of ESIGN, and I was a Member of the Conference Committee that 
wrote the current law. 
 
The  goal  of  ESIGN  was  to  simplify  electronic  business  transactions,  enabling  consumers  to 
sign a mortgage, take out a student loan, or open an IRA account from their own computer. 
Exchanging  records  and  agreements  electronically  instead  of  on  paper  is  good  for  the 
                                                            
1
http://uscode.house.gov/download/pls/15C96.txt
2
U.S. House of Representatives, Subcommittee on Domestic Policy, Technology, and Economic Growth, June 28, 2001
 
environment, less burdensome for consumers, and more cost effective for businesses. Members 
of  the  Conference  Committee  envisioned  that  ESIGN  would  open  up  the  floodgates  to  many 
new transactions that individuals and businesses would be able to do online while at the same 
time giving people greater confidence and convenience when shopping online. 
 
STATEMENT  OF  EILEEN  HARRINGTON,  ASSOCIATE  DIRECTOR  FOR  MARKETING 
PRACTICES, FEDERAL TRADE COMMISSION BUREAU OF CONSUMER PROTECTION 
 
“In Section 105(b) of ESIGN, the Congress directed the FTC and the Department of Commerce 
to  issue  a  report  on  the  impact  on  electronic  commerce  and  consumers  of  the  reasonable 
demonstration  requirement  of  the  consumer  consent  provisions  of  the  Act.  Specifically,  the 
Congress asked us to report on the benefits of that provision to consumers, the burdens that 
the provision imposes on e­commerce, whether the benefits outweigh the burdens, the effect of 
the provision in preventing fraud, and whether any statutory changes would be appropriate. 
 
Our testimony today will be limited to a discussion of these issues which were the focus of our 
review  and  the  report  from  Commerce  and  the  FTC.  To  fulfill  our  mandate,  we  conducted 
outreach efforts, which included issuance of a notice in the Federal Register inviting comment, 
a  public  workshop,  and  extensive  outreach  to  consumer,  industry,  and  other  Government 
organizations.” 
 
“To  comply  with  the  mandate  to  solicit  comment  from  the  general  public  and  consumer 
representatives  in  e­commerce  businesses,  as  I  mentioned  we  published  a  Federal  Register 
notice  inviting  comment.  We  sent  that  notice  and  the  press  releases  by  both  agencies  to 
literally  hundreds  of  businesses  and  organizations  that  we  know  have  an  interest  in  the 
development of electronic commerce. And in response to our outreach efforts, we received 32 
comments from consumer organizations, software and computer companies, banks, members 
of the financial services industry, and academics.” 
 
STATEMENT OF THOMAS E. CROCKER, PARTNER, ALSTON & BIRD, LLP 
 
“Mr.  Chairman,  Chairman  Oxley,  and  Members  of  the  subcommittee,  my  name  is  Thomas 
Crocker.  I  am  partner  in  the  Washington  office  of  the  law  firm  of  Alston  &  Bird.  My 
involvement  with  the  ESIGN  Act  goes  back  to  1997.  When  representing  the  then­CitiCorp,  I 
helped draft a predecessor version of the ESIGN Act in the 105th Congress. More recently, we 
represented Charles Schwab & Company and the Securities Industry Association in all phases 
of  the  development,  consideration,  and  eventual  enactment  of  the  ESIGN  Act  in  the  106th 
Congress.” 
 
“Our findings confirmed what we had long suspected to be the case—that use of the ESIGN Act 
has been slow to take off and that compliance with it is limited at best. Its embraced by U.S. 
industry  at  large  has  been  spotty.  Why  is  this  so?  Based  on  our  work  with  various  clients 
seeking to understand and implement the ESIGN Act, we believe that although well­intended, 
the  ESIGN  Act  in  its  present  form  fails  to  deliver  on  the  promises  of  uniformity,  consistency, 
and legal certainty.” 
 
STATEMENT OF JEREMIAH S. BUCKLEY, PARTNER, GOODWIN PROCTOR; GENERAL 
COUNSEL, THE ELECTRONIC FINANCIAL SERVICES COUNCIL 
 
“However,  based  on  my  experience,  the  complexities  and  ambiguities  of  the  statute  have 
already resulted in a tangible level of discomfort in industry that procedures, once adopted, 
might  be  held  inadequate  or  out  of  compliance  when  the  law  is  eventually  interpreted  by 
courts or Federal or State agencies.” 
 
“These instruments must be originated to the satisfaction of the secondary market purchasers 
of  mortgages  and  chattel  paper  and  others  who  trade  in  or  finance  these  instruments.  In 
order  that  this  happen,  each  financial  services  industry  will  have  to  develop  a  series  of 
conventions  or  guidelines  regarding  what  electronic  practices  and  procedures  will  be 
acceptable to companies doing business in that particular industry. 
 
We  at  the  Electronic  Financial  Services  Council  are  participating  in  promoting  the 
development of these guidelines or conventions. Over the last 7 months, Freddie Mac, one of 
our members, has developed specifications for the purchase of electronically originated loans 
in the secondary market. Freddie Mac and Fannie Mae are currently negotiating with lenders 
to  arrange  forward  commitments  for  the  purchase  of  electronically  originated  mortgages. 
And  as  a  result,  we  expect  a  gradual,  but  steady,  growth  in  the  paperless  mortgage 
transactions.” 
 
“In  the  absence  of  court  decisions  affirming  the  evidentiary  validity  of  electronic  records, 
those seeking to do business electronically are understandably proceeding with caution.” 
 
STATEMENT OF LOUIS F. ROSENTHAL, EXECUTIVE VICE PRESIDENT, ABN AMRO NORTH 
AMERICA, INC., ON BEHALF OF THE FINANCIAL SERVICES ROUNDTABLE AND BITS 
 
“ESIGN creates a uniform national framework for the use of electronic signatures, contracts 
and other records.” 
 
“Finally, our members are concerned that some Federal regulatory agencies are interpreting 
ESIGN  in  an  overly  restrictive  manner.  We  urge  Congress  to  continue  to  review  agency 
interpretations,  along  with  the  OMB  Guidance  on  which  many  of  them  are  based,  to  ensure 
regulations implementing ESIGN are consistent with the goals of the Act.” 
 
Credit Union National Association3 
Project to Revise Articles 3 & 4 of the Uniform Commercial Code 
Michelle Q. Profit - Assistant General Counsel 
 
“The undersigned financial institution organizations are writing to you to urge that electronic 
negotiable  instruments  be  included  within  the  scope  of  the  National  Conference  of 
Commissioners on Uniform State Laws (NCCUSL) current effort to revise UCC Articles3 and 4. 
We  believe  this  UCC  Article3  and  4  revision  project  represents  a  unique  and  critical 
opportunity  for  NCCUSL  to  provide  leadership  to  the  states  and  the  financial  institution 
community on the timely and important issue of electronic negotiable instruments. 
 
We  were  quite  surprised  by  the  announcement  this  spring  that  it  had  been  preliminarily 
decided not to include electronic negotiable instruments within the scope of the UCC Articles3 
and 4 revision project.” 
 
For  the  foregoing  reasons,  the  undersigned  organizations  urge  the  inclusion  of  electronic 
negotiable instruments within the scope of the current UCC Articles3 and 4 revision project.” 
 
 
ABA Business Law Section 
Committee on the Uniform Commercial Code 
Linda J. Rusch ­ Chair, Committee on the Uniform Commercial Code 
 
“The Electronic Signatures in Global and National Commerce Act (codified at 15 U.S.C. § 7001 
et seq) ("Esign") provides that the "provisions of Section 7001 of this title shall not apply to a 
contract or other record to the extent it is governed by. . . . the Uniform Commercial Code, as 
in effect in any State, other than sections 1­107 and 1­206 and Articles 2 and 2A." 15 U.S.C. § 
7003. 
 
This  exclusion  from  the  provisions  of  Section  7001  for  contracts  or  records  subject  to  the 
Uniform Commercial Code should  be maintained. The Uniform Commercial Code as in effect 
and as revised accommodates electronic commerce in a carefully considered manner. Section 
7001  is  not  necessary  to  facilitate  electronic  commerce  in  these  transactions,  and  would  be 
potentially  harmful  to  established  and  evolving  paper­based  and  electronic  commercial 
transactions which are governed by the Uniform Commercial Code. 

                                                            
3
http://www.cuna.org/reg_advocacy/comment_letters/cl_102700.html
 
Uniform Commercial Code Article 3 governs negotiable instruments, including checks and 
promissory  notes.  Negotiable  instruments  must  be  in  writing  and  signed.  To  the  extent  that 
parties want to engage in electronic payment mechanisms, Article 3 does not prevent parties 
from doing so. Thus parties may use funds transfer, debit cards, credit cards, ACH transactions 
or  other  forms  of  electronic  payment  mechanisms.  All  of  those  other  types  of  payment 
mechanisms are governed by law other than Article 3 and Article 3 does not prevent their use. 
Article 3 provisions would merely not apply to those electronic payment mechanisms. 
 
The  primary  purpose  of  Article  3  is  to  provide  for  the  rights  of  third  parties  who  take  the 
negotiable instrument. Article 3 is premised on a regime of possession and indorsement of an 
instrument and the rights and obligations that accompany that possession and indorsement. 
To allow for electronic negotiable instruments there must be a concept that is the functional 
equivalent  to  possession  and  indorsement  in  order  to  adequately  protect  third  party  rights. 
The  difficulty  in  making  such  a  wholesale  change  was  recognized  at  the  time  that  both  the 
Uniform  Electronic  Transactions  Act  (UETA)  and  Esign  were  promulgated  by  setting  up  the 
concept of a "control"  system to substitute for the possession and  indorsement  concept as it 
applies to electronic notes. UETA Section 16 and Esign Section 7021. Nothing has changed to 
make  that  concern  less  real.  Adequately  protecting  third  party  rights  and  assuring 
commercial  market  stability  cannot  be  done  by  two  party  contracts  in  the  absence  of  a 
statutory  scheme  that  is  designed  to  accommodate  electronic  negotiable  instruments. 
Applying  Section  7001  provisions  would  sweep  away  the  writing  and  signature  barriers  as 
applied to the creation and enforcement of a negotiable instrument. This change would create 
havoc as there would be substitute for the possession and indorsement concepts that currently 
govern the rights and obligations of third parties as to a negotiable instrument. 
 
Conclusion ­ As can be seen from the above comments, the current exclusion for the Uniform 
Commercial  Code  from  the  provisions  of  Esign  Section  7001  should  be  continued.(10)  To 
subject the Uniform Commercial Code to the generalized approach of Section 7001 is in large 
part unnecessary given the carefully crafted accommodations to electronic commerce already 
in place and would create much disruption and uncertainty in the transactions governed by 
the Uniform Commercial Code. 
 
C. Analysis ­­ Are the Exceptions Still Necessary to Protect Consumers?4 
 
“The ESIGN Act provides that the "provisions of Section 7001 of this title shall not apply to a 
contract or other record to the extent it is governed by . . . the Uniform Commercial Code, as in 
effect  in  any  State,  other  than  sections  1­107  and  1­206  and  Articles  2  and  2A."(73)  This 

                                                            
4
http://www.ntia.doc.gov/comments/2002/esign/report2003/partc.htm
provision  establishes  that  transactions,  contracts,  and  records  subject  to  the  identified 
sections  may  rely  upon  ESIGN,  as  applicable,  for  validity.  Those  governed  by  one  of  the 
remaining Articles of the UCC ­­ Article 3 (Negotiable Instruments), Article 4 (Bank Deposits 
and  Collections),  Article  4A  (Funds  Transfers),  Article  5  (Letters  of  Credit),  Article  6  (Bulk 
Sales), Article 7 (Documents of Title), Article 8 (Investment Securities), and Article 9 (Secured 
Transactions)  ­­  may  not  rely  on  ESIGN  for  validity,  but  must  instead  look  to  other  laws, 
including the Articles themselves, for validity. 
 
given that several of the articles are based on the concept of negotiability of a signed writing, 
the proponents asserted that “simply substituting electronic records and authentications for 
writing  and  signature  requirements  .  .  .  would  have  a  significant  unintended  impact  on 
substantive  commercial  law  rules.”  A  wholesale  'electronification  of  these  articles  would 
create new electronic payment products, such as electronic negotiable instruments, including 
checks,  without  providing  an  appropriate  framework  for  handling  them.  Rules  addressing 
physical  possession,  endorsement,  and  physical  delivery  that  affect  the  right  to  own  and 
enforce the subject writings "would make no sense, and would be impossible to satisfy, if the 
writing requirement were replaced with electronic records." 
 
CUNA & Affiliates 
Re: The Uniform Commercial Code Exception to the Electronic Signatures in Global and 
National Commerce Act (E­SIGN Act) 
Michelle Q. Profit ­ Assistant General Counsel 
  
 
Under  current  law,  Articles  3  and  4  of  the  UCC  do  not  allow  for  checks  or  other  negotiable 
instruments to be created or transferred in electronic form. 
 
The E­SIGN Act expressly exempts Articles 3 and 4 from its application. Therefore, the E­SIGN 
Act  does  not  override  Articles  3  and  4  to  make  electronic  negotiable  instruments  the 
equivalent of their paper counterparts. 
 
Electronic Financial Services Council 
Re: The State Uniform Commercial Code Exception of the Electronic Signatures In 
Global and National Commerce Act, Docket No. 010222048­2313­07 
Jeremiah S. Buckley – General Counsel 
 
The UCC Exclusion first appeared in the Uniform Electronic Transactions Act (“UETA”). ESIGN 
adopted  the  same  exclusion,  along  with  many  other  provisions  of  the  UETA.  Both  the  UETA 
and ESIGN excluded Articles 3 through 9 of the UCC for one or more of the following reasons: 
 
·  The  Article  contained  rules  related  to  the  use  of  writings  as  physical  tokens  and  included 
integral rules on physical possession, indorsement and physical delivery that affected the right 
to own and enforce the writings – these rules would make no sense, and would be impossible 
to satisfy, if the writing  requirements were replaced with electronic records (Articles 3, 4, 5, 7, 
8 and 9); 
 
Federal Reserve Bank of Atlanta 
Re: The State Uniform Commercial Code Exception of the Electronic Signatures In 
Global and National Commerce Act, Docket No. 010222048­2313­07 
Patrick K. Barron 
 
The Reserve Bank believes that the UCC exception in E­SIGN should be retained. The Reserve 
Bank  actively  supports  the  adoption  of  new,  more  efficient  technologies  in  the  payments 
system, but we believe that the elimination of E­SIGN's UCC exception would not result in an 
orderly transition from paper based processes to electronic processes. 
 
…the  UCC  does  not  depart  from  the  tenet  that  a  negotiable  instrument  must  be  a  signed 
writing. 
 
Simply  changing  the  law  by  substituting  electronic  records  and  authentication  would  not 
account for the complex issues raised by making an electronic copy the legal equivalent of an 
original  check.  Eliminating  the  E­SIGN  exception  for  Articles  3  and  4  would  amount  to  a 
wholesale “electronification” of negotiable instruments without providing a legal or business 
framework for handling electronic instruments. 
 
National Conference of Commissioners on Uniform State Laws 
Re: Docket No.: 010222048­2313­07 (Request for Comments) 
William H. Henning ­ Chair, PEB 
 
I  am  writing  as  Chair  of  the  Permanent  Editorial  Board  for  the  Uniform  Commercial  Code 
(PEB).  The  PEB  is  a  joint  board  established  by  the  Code's  co­sponsors,  the  American  Law 
Institute and the National Conference of Commissioners on Uniform State Laws. 
 
The  analysis  concludes  that  the  ESIGN  exclusion  for  the  UCC  continues  to  be  necessary  and 
that significant harm to both consumers and commercial entities will result if it is repealed or 
in any way cut back.