In recent years, the
major concerns affecting Massachusetts mortgage transactions have been the
abuses of sub-prime lending,
The question is,
how far do we want to go to extend the “click to buy” mentality to mortgage
financing?
Under Remote
Online Notarization, a notary, qualified in another state, takes an acknowledgment
by video conferencing or other electronic means from a borrower not then in
their presence. An article in the July 30th ALTA Title News, dealing
with the adoption of national standards for RON, made clear that the mortgage
banking and title insurance industries have made its implementation a priority.
If realized, a national lender could simply direct a Massachusetts borrower to a
website, have them click “agree,” (much like downloading a new app on a cell
phone), attach an electronic signature to a note and mortgage, and record the
mortgage remotely under existing facilities for electronic recording. The borrowers
would not be sitting in a bank branch or a lawyer’s office, but might be at
their kitchen table between commercials at an NFL game. This would take place
without anyone having seen the borrowers in person, or having had the
opportunity to confirm their capacity, demeanor, understanding, identity or even
existence.
The proposed Mortgage
Industry Standards Maintenance Organization (MISMO) protocols might protect the
lender and enable it to insure the loan, but what about the homeowner? As
always, where large amounts of money are involved, even the best defenses have
proved inadequate to deter inventive and determined criminals, and the internet
has proven to be a fertile medium for wrongdoing. The object, which itself is
questionable, is to make financing a home look and feel as easy as buying an
electric can opener from Amazon, all without the intervention or participation of
a lawyer, likely insulated from liability relating to the unauthorized practice
of law, and not subject to ethical supervision by the BBO or otherwise accountable
in any way whatsoever.
Under current
Massachusetts law, consumers, lenders and the conveyancing industry have the
benefit of laws that require that a mortgage be acknowledged, and that
acknowledgment be taken with the borrower appearing in person before the notary
“at a
single time and place.” (M.G.L. c.222 §§1
and 15)
It is also a jurisdiction in which the SJC has ruled that “a lawyer is a necessary participant at the closing to direct the proper transfer of title and consideration, and to document the transaction, thereby protecting the private legal interests at stake, as well as the public interest in the continued integrity and reliability of the real property recording and registrations system.” (Real
Estate Bar Assoc. v. National Real Estate Information Services, 946 N.E.2d 665 at 684).
The consequences
of a failure to comply strictly with the legal requirements of Massachusetts
law with regard to acknowledgements was the subject of the 2016 decision of the
U.S. Bankruptcy Court for the Eastern District of Massachusetts in Degiacomo
v. First Call Mortgage Company (Chapter 7 Case No. 14-10589-FJB). In that
case, as later affirmed by the First Circuit, the court allowed the Trustee to
avoid a mortgage because “a number of formalities must be observed in the
execution of an acknowledgment” and “if these requirements are not met, ‘it is
well established law that a defective acknowledged mortgage cannot be legally
recorded, and, if recorded, the mortgage does not, as a matter of law, provide
constructive notice to future purchasers . . . and may be avoided by the
Trustee under 11 U.S.C. §544(a)(3).”
Although the 2016
amendment to the Notary Statute made some changes intended to validate
improperly acknowledged mortgages, they left intact the requirement of section
16 (a) of Chapter 222, providing that “a Notary shall not perform a notarial
act if: (i) the principal is not in the notary public’s presence at the time
of notarization” or the definitional requirement of sec. 1 under which an
acknowledgment is “a notarial act in which an individual, at a single time
and place, appears in person before a notary public….” A violation of the
statute is a criminal offense under section 18(a), allowing the court to impose
fines and imprisonment, as well as injunctive relief. In addition, under
subsection (c), a violation of the Notary Statute is “an unfair and deceptive
trade practice” under Chapter 93A; and, under subsection (d), it shall not be a
defense that the conduct occurred outside the Commonwealth. These are vitally
important protections for the consumer.
Although perhaps an
unintended consequence, RON will make it not only possible, but convenient and
efficient, for a national lender (perhaps based in a state with more lenient
consumer and banking laws) to eliminate from the system the one remaining factor
that makes financing a home different than shopping on the internet.
Not only does
online lending facilitate fraud and deceit by both borrowers and lenders, but, regardless
of how and where the acknowledgement is taken, the closings facilitated by RON would
violate the good funds law (M.G.L. c.183 §63B)
which requires that no mortgage be recorded before good funds are in the hands
of the closing attorney. This is one requirement that no remote lender can satisfy
without using the services of a Massachusetts attorney with a Massachusetts
IOLTA account; and if a Massachusetts attorney is involved, there is no need
for RON.
A member of the Association’s board of directors and
Co-chair of its Ethics Section, Henry Dane practices with the Concord firm of
Dane, Brady & Haydon, LLP. His practice areas include real estate; zoning
and permitting; civil litigation (primarily defense) and appeals; municipal
law; criminal defense; medical employment law (advising and representing
candidates for department chairs at medical schools); medical ethics and
research integrity; non-profit and charitable corporations; and commercial
lending. Henry can be contacted by email at hdane@danelaw.com.
