A Short Course in Electronic Real Estate Transactions

Colorado Real Estate Journal, August 6, 2003

Paperless real estate transactions may be closer than you think. In 2002 the Colorado legislature authorized all Colorado county clerks and recorders to keep electronic records and to accept electronic documents for filing. The legislation, known as House Bill 1119, created a fund (with a $1 surcharge on recorded documents) and an "Electronic Recording Fund Advisory Panel" to administer it. This panel is adopting standards for implementation of electronic recording in any county that elects to have it, including acquisition of appropriate hardware and software, adopting standards for "trusted partners" that will be permitted to submit electronic documents for recording, and establishing rules for electronic notarization.

E-Sign, UETA, and E-Record. In 1999 Colorado passed two statutes authorizing the use of electronic signatures, one for "general" use and one relating to government transactions. Then in 2000 Congress passed the "Electronic Signatures in Global and National Commerce Act" ("E-Sign") which provides that no transaction may be rejected or considered invalid solely because it is electronic. The states have the option of overriding E-Sign by adopting UETA, the Uniform Electronic Transactions Act. Colorado adopted UETA in the 2002 legislative session.

Definitions. The definitions are critical to understanding what this all means. "Electronic" means "relating to technology having electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities." It is very broad and inclusive. A digital pager, a fax machine, and digital voice mail are all "electronic." "Transaction" is defined differently in E-Sign and UETA. The UETA definition is broader, and is "an action or set of actions occurring between two or more persons relating to the conduct of business, commercial, or governmental affairs." An "electronic record" is a "record created, generated, sent, communicated, received or stored by electronic means." An "electronic signature" under UETA is "an electronic sound, symbol or process attached to or logically associated with a record and executed or adopted by a person with the intent to sign the record." There is nothing special, secure, or mistake-proof about the broadly defined "electronic signature." You click "I accept" on a web page and you have "signed" a document. For that matter, your cat walking across your keyboard could do the same thing. When referring to something more reliable, deliberate, and verifiable than this, the term "digital signature" is used.

Electronic Recording. UETA and E-Sign pave the way for electronic transactions by saying that if a law requires a certain kind of document to be in writing, an electronic record satisfies the "writing" requirement. UETA permits notaries to use "electronic signatures" but does not elaborate on how this can be done, other than to suggest that somehow the protections afforded by traditional "paper" notarization be maintained. Neither E-Sign nor UETA says specifically how to record documents electronically, and House Bill 1119 was passed to answer that question.

It is useful to think of electronic recording as taking progressively more "paperless" forms. In addition to the speed and the paper savings, an advantage to electronic recording is the ability to "code" documents so that the records can be searched electronically for attributes other than just grantor and grantee. Standards are being developed for what kind of information will be associated with electronically recorded documents, and there are at least 21 different attributes that will be coded and stored electronically.

Level Zero is what we have now, but with indexing data that are extracted manually by the recorder. Level 1 is like Level 0, but then the document is scanned and emailed, or is faxed to the recording officer. At this level the recorder also hand-extracts document data. The parties sign with pen and ink, and the notary physically signs and stamps the paper document. Level 2 is like Level 1, but the indexing data are also sent electronically. Level 3 is a totally paperless document. The signature is electronic. The notary "seal" and signature are also electronic. Indexing data are the same as in Level 2. Level 4 involves an electronic document that self-codes the indexing data. The data are extracted electronically. Signatures are electronic, as in Level 3.

Under current law, the notary acknowledgment on a document serves to certify the identity of the person signing the document and the person's intent to sign that particular document. Informally, but just as importantly, the notary provides a common sense observation about the transaction. Is it done voluntarily, without duress, and with sufficient awareness to be the legally binding act of the signing party? The technology exists to produce an electronic document that has the attributes of authentication, access control, confidentiality, message integrity, and non-repudiation. Encryption and decoding software and hardware can be used to assure with a fair degree of confidence that the document has not been altered, that the signature was attached by the purported signer, and that the signer will not be able to repudiate the document at a later time. A properly signed and notarized paper document has all these attributes. Digital signatures should be no less reliable than their paper counterparts, and this would appear to require that the document be signed in the presence of the notary.

The widespread use of completely paperless real estate closings will begin with the adoption of standard electronic loan documents that will be accepted in the secondary market, plus standards for electronic notarization that will satisfy title examiners, the recording officers and the parties to the transaction.