Today's Trends in Credit Regulation

Use of Electronic Signatures Expands for FHA Lending
By Jed Mayk

On January 30, 2014, the Federal Housing Administration released Mortgagee Letter 2014-03 in which it announced that, effective immediately, it will permit the use of electronic signatures on an expanded array of documents in FHA transactions. This new policy applies to FHA single family Title I and Title II forward mortgages and home equity conversion mortgages ("HECMs"), and is a welcome development for the industry.

In Mortgagee Letter 2010-14, FHA permitted the use of electronic signatures on third-party documents that are originated and signed outside the mortgagee's control, such as the sales contract. That policy remains in effect for third-party documents. However, Mortgagee Letter 2014-03 significantly expands the universe of documents that may now be electronically signed in FHA transactions.

In addition to third-party documents, FHA will now accept electronic signatures on the following documents:

  • All documents requiring signatures included in the case binder for mortgage insurance except the Note. As of December 31, 2014, FHA will accept electronic signatures on the Note for forward mortgages only. FHA will not accept electronic signatures on HECM notes.
  • Any documents associated with servicing or loss mitigation services for FHA-insured mortgages.
  • Any documents associated with the filing of a claim for FHA insurance benefits, including the Form HUD-27011, "Single Family Application for Insurance Benefits."
  • The HUD REO Sales Contract and related addenda.

Mortgagees should follow the definition of "electronic signature" used in the federal ESIGN law, except that FHA will not accept an electronic signature that is solely voice or audio. A mortgagee's electronic signature technology must comply with all requirements of the ESIGN law and any state law applicable to the transaction. The process for obtaining electronic signatures must ensure that the document is presented to the signatory before an electronic signature is obtained. The electronic signature must be attached to, or logically associated with, the document that has been electronically signed.

An electronic signature is only valid if it is executed or adopted by a person with the intent to sign the record. Such intent can be established by identifying the purpose for the borrower signing the record, being reasonably certain that the borrower knows which electronic record is being signed, and giving notice to the borrower that his/her electronic signature is about to be applied to or associated with the electronic record. An intent to use an electronic signature can be established in several ways, including by use of a dialog box that alerts the borrower that the process will result in an electronic signature or a click-through agreement that advises the borrower that continuing the process will result in an electronic signature. Mortgagees must also require a separate action by the signer, evidencing intent to sign, in each location where a signature or initials are to be applied, except where the signer is a mortgagee employee or contractor (in such a case the mortgagee must obtain the consent of the individual for use of his/her electronic signature).

Before a mortgagee can submit a case for endorsement that contains electronic signatures, the mortgagee must confirm the identity of the individual by authenticating data provided by the individual with data maintained by an independent source, such as a national credit bureau, state motor vehicle agency, or government databases. At a minimum, the mortgagee must verify an individual's name and date of birth, and either the Social Security number or driver's license number.

Mortgagee Letter 2014-03 also requires a mortgagee to maintain sufficient evidence to establish that an electronic signature can be attributed to the individual purported to have signed, such as by the assignment of a unique PIN or password that the individual uses as part of the signature process, delivery of a credential to the individual by a trusted third party, knowledge base authentication using "out of band/wallet" information, or combinations of the foregoing. Mortgagees must also have a system in place to ensure the security of all issued credentials. Acceptable measures include ensuring that identification codes and passwords are periodically checked, recalled or revised, adhering to loss management procedures to electronically de-authorize compromised identification codes or passwords and to issue temporary or permanent replacements, and detection and reporting of any attempts at unauthorized use of passwords and identification codes.

A mortgagee must also ensure that electronically-signed documents cannot be altered, by using industry standard encryption to protect the individual's signature and the integrity of the accompanying document. If there are any changes to a document, the electronic process must be designed to provide an audit trail of the changes. The signed document must be designated as the Authoritative Copy. A mortgagee must also update its quality control plan to address the use of electronic signatures.

The Mortgagee Letter reminds mortgagees that the record retention requirements are the same for both ink and electronic signatures. Mortgagees must ensure that all electronic signatures meet FHA's record retention requirements, and the audit log and computer systems, controls, and documentation must be available for inspection for the same periods as records signed in ink. The system must be able to reproduce electronic records as accurately as if they were paper records.

While not as fully-developed as the Fannie/Freddie "eMortgage" protocols that have been in place for several years now, the FHA's decision to finally accept electronic signatures on most documents required for FHA transactions is a significant and important step on the "paperless" mortgage trail.

Jed Mayk is a partner in the Pennsylvania office of Hudson Cook, LLP. Jed can be reached at 610-430-1818 or by email at

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