Reduced Fraud And Identity Theft With E-Closing
Since the federal Electronic Signatures in Global and National Commerce Act (E-Sign Act, or ESA) was adopted in 2000, and the subsequent Uniform Electronic Transactions Act (UETA) was adopted in 46 states and the District of Columbia, courts have held that electronic documents and signatures are valid and enforceable parts of commercial and real estate transactions. Debates continued, though, at the county and municipal levels. Because the recording regulations were written on the assumption that documents pertaining to land transactions and property titles would be done on paper with wet-ink signatures. Uniform Real Property Electronic Recording Act (URPERA) was adopted in 2014, in an effort to clarify the situation and reaffirm that recorders have the authority to accept and store digital documents and signatures. URPERA allows recorders to accept e-signatures and documentation, but does not require it, and URPERA includes an unfunded mandate for state oversight of the receipt, recording, storage and retrieval of electronic documents. Because states are left to develop their own systems and oversight for managing these issues, the application of the act is not, in fact, uniform. Although the acceptance of e-signatures and digital documents improves with every year, there are still skeptics asking whether these inconsistencies are leaving the parties in real property transactions open to potential identity theft, and the properties themselves vulnerable to recording fraud.
Media outlets concerned with digital technology and practices have made much of the benefits and drawbacks of e-signatures, as applied across a wide range of fields. In the state of New York, for example, switching from paper to digital prescriptions and creating a database of those prescriptions and when and where they are filled has helped to reduce abuse of controlled substances, obliterated a once-thriving black market for paper prescription pads, and reduced opportunities for unethical pharmacists to fleece programs like Medicaid for non-controlled, but in- demand, drugs like HIV medication.
Other media have pointed out e-sign issues like consumers accidentally entering into binding contracts, and having fewer protections in those contracts than they would have had in a paper contract situation. The general provisions in the E-Sign Act (ESA) establish an e-signature as, “an electronic sound, symbol, or process attached to or logically associated with a contract or other record, and executed or adopted by a person with the intent to sign the record.” The ESA does not, however, provide any general requirement for verification of those e-signatures, which has created unintended consequences for consumers. Because a sound is included in the definition of an e-signature, pressing one on a phone keypad can be considered a legal signature, and create a legally binding contract. Touching a button on a salesman’s tablet or phone can also constitute a signature, as could replying to an email.
E-signatures in real estate transactions
Negative publicity with regard to e-signatures, e-commerce, and digital transaction documents creates a challenge for the real estate industry. Consumers often do not understand that there are critical differences between the way contracts are written for things like contracting (possibly fraudulent) home improvement services or purchasing $2,000 vacuum cleaners from a door-to- door salesman.
First and foremost, as applied to real estate transactions, ESA and URPERA provide additional options for documentation and signing options, but they do not lessen or remove the other requirements already in place for the sale and transfer of real property. Identification and notarial verification are still required to ensure that real estate contracts are entered knowingly, voluntarily, and without duress by the legal owner or representative of that property. The objections that can apply to other types of consumer contracts with e-signatures don’t apply here, because no one can sell their property accidentally by simply pressing "1" or clicking on an agree button.
Digital documentation reduces fraud opportunities
In the age of predominantly paper-based real estate transactions, and before the proliferation of digital documentation, there were far more opportunities for parties to commit fraud, either alone or in collusion with other parties to transactions. Paper-based transactions and documents were, by nature, maintained in a relatively isolated system, so it was less likely that the perpetrators would be discovered through routine checks and verifications. In some cases, scammers were able to use legal stumbling blocks to their own advantage, for example, by taking advantage of the fact that many states limits a recording office’s authority to verify identity and documentation represented as part of an instrument in a real property transaction.
One common type of deception that was facilitated by paper-based transactions was the production of forged quitclaim deeds or trust deeds, which allowed the perpetrator to take effective control over property they didn’t own and sell or mortgage those properties to their own gain, at the rightful owners’ expense. Because of the slow nature of paper recordings, scammers could often create multiple encumbrances against a single property and be gone with the resulting funds before any discrepancy was detected. One notorious case in California, which has not adopted URPERA regulations, resulted in a group of carefully orchestrated conspirators fraudulently selling or encumbering at least 15 homes worth more than $3.6M.
Another common fraud practice involves using the stolen or forged stamp of an unsuspecting notary, or bribing an unethical notary to sign fraudulent documents. In a paper-based system, this is easier to successfully accomplish, and takes longer to stop, because of the relative isolation in which transactions are conducted. As securely shared digital records become the norm among members of the title-production chain, the likelihood of that type of fraud succeeding long term is minimized.3
Reduced vulnerability for legitimate parties to transactions
Digital documentation and e-signatures are used in a tightly controlled and secured system in the real estate industry. When the legitimate parties to transactions are sharing personal identity and financial information in the confines of a secured electronic fortress, it becomes far more difficult for scammers to get hold of that information in the first place, and it’s more immediately obvious when a document has been tampered with or forged. As the proliferation of digital transactions continues, it will be easier to notice fraud attempts such as straw man purchases, because it will be more readily apparent that this buyer who makes $75,000 a year has purchased 6 homes this month. Recording will take place more quickly, and information that will help uncover scams will surface more quickly, and be available to all legitimate parties involved in transactions faster.
At the same time digital transactions reduce the vulnerabilities of legitimate buyers and sellers, they dramatically increase the vulnerability of scammers. In a paper system, those scammers really only have one major weak point, which is the money transfer, and as the California example above illustrates painfully, even that can be overcome with relative ease by a smart scammer with a good plan. Digital transactions, though, create a much more elaborate and effective set of obstacles for criminals, because, in order to access the information they need to perpetrate fraud, they are forced to work through a system that generates a clear record of their activities.
Fewer opportunities for human error
Obviously, not all of the problems with a paper-based system stem from criminal activity: many problems come from human error. The practice of robo-signing, in which mortgage lenders’ employees sign dozens of transaction packets a day without properly reviewing them, is a good example. While some mortgage lenders found themselves facing legal consequences over this practice when they illegally foreclosed on homes, others have used the practice to simply get more mortgages produced in a short time. In either case, robo-signing can produce faulty results, and jeopardize the heath and growth of the housing market. Even in offices where robo-signing is not an official, standard practice, important steps can be inadvertently skipped, data entry errors happen, and miscalculations are possible during rushed times. Because digital systems include a default set of checks for completeness, they help create an environment where there is little benefit to shortcutting the process, and in fact, it makes completing the process correctly faster and easier.
Taking part in an effective solution to real estate fraud
Ultimately, the eradication of fraud and identity theft in real estate transactions will come from creating a digital documentation system that protects the integrity of all aspects of every transaction from end to end. Easysoft offers a secure environment for real estate attorneys to communicate with clients and transfer critical information and documents, out of reach of potential scammers. File transfers and secured email all operate within a verified-access security shell, so only legitimate parties to each transaction have access, and access is trackable to a verified device. Phishing schemes are foiled immediately, and everyone involved in the transaction can rest assured that sensitive information is well protected from accidental and deliberate exposure to prying eyes. The suite is loaded with timesaving features like automated forms generation, which also helps prevent human error. Data entry is done at a single point for every transaction, and after that, any form chosen for that transaction will automatically populate: Complete and correct documentation every time.