eMortgage and Crypto-Mortgage in Home Finance

Abstract

Most home mortgage loans today are documented on physical paper, but they are increasingly closed as eMortgages. The move to electronic documents is inevitable and will ultimately be a positive change for lenders and borrowers. However, additional regulation is needed to address issues raised by electronic home mortgage closings and the “crypto-mortgage,” a mortgage loan with the obligation evidenced by or tethered to a non-fungible token. Lenders have traditionally required that home mortgage loans be evidenced by a wet-signed paper promissory note to gain the advantages and the certainty of Article 3 of the Uniform Commercial Code (UCC) governing negotiable instruments. However, delivery and storage of promissory notes is expensive and inefficient. More than twenty years ago, state and federal statutes enabled an electronic equivalent to the negotiable promissory note, called a transferable record. More recently, states have begun to adopt the 2022 revisions to the UCC, including new Article 12 of the UCC, which enables a new type of electronic record that may evidence a mortgage loan and that facilitates crypto-mortgage architecture. This Article is the first to provide a comprehensive comparison of the traditional paper mortgage loan, the transferable record eMortgage loan, and the Article 12 electronic mortgage loan and is the first to consider the cryptomortgage. The Article explores the advantages and disadvantages of a move to electronic residential mortgage loan documentation, including the cryptomortgage, with a focus on the homeowner. Consumers may be less likely to read and understand electronic loan documents, but electronic documents can be designed to increase understanding. In addition, the law governing negotiable promissory notes and their electronic equivalent, transferable records, protects lenders from certain defenses to payment at the borrower's expense; Article 12, on the other hand, leaves borrower defenses in place. Finally, storage and registration of eMortgages, registration using blockchain technology, and the crypto-mortgage raise new security questions. To address these issues, this Article recommends adoption of the 2022 revisions to the UCC, use of the Article 12 mechanism rather than the transferable record, abrogation of the holder in due course doctrine for home mortgage loans, regulation of closing procedures designed to consider electronic closings, and further study and regulation of security.