What Is an eNote and How Does It Work?
An eNote is the digital equivalent of a promissory note, and it has the same legal weight as a paper note if executed correctly.
Since digital documents can be copied and edited, eNotes aren’t just PDF scans of a paper note. Instead, they’re generated in a specific file format. The industry has also set up precise systems to determine ownership of the original eNote and to store and transfer them.
For lenders who want to adopt digital mortgage closings, it’s important to understand how eNotes work. This post will cover the basics of electronic promissory notes, including the definition of an eNote and how the dynamics of a paper note translate to an electronic note.
What is an eNote?
While an eNote is the electronic version of a promissory note, it’s more complicated than just scanning a paper note and having a borrower eSign it.
An eNote contains the same information that a paper note does, like the property address, loan amount, and interest rate. It can be transferred between a lender, investors, warehouse lenders, document custodians, servicers, and subservicers. The difference between the two is that electronic notes are digitally created, signed, transferred, and managed.
To ensure the security of the electronic note, eNotes are created in a special file format that can be secured. They are created as an XML file in the MISMO SMARTDoc format. If eNotes aren’t in this format, they can’t be registered or sold to investors.
Once the electronic promissory note is eSigned and the closing is completed, the eNote is tamper sealed to protect the integrity of the document. This tamper seal means no one can alter the note without leaving evidence of the changes. Then, the eNote is registered on the MERS® eRegistry and stored in an eVault.
Since electronic notes are eSigned and not eNotarized, their validity is based on the two acts that govern eSigning: the Uniform Electronic Transactions Act and the Electronic Signatures in Global and National Commerce Act. Because of these two acts, electronic notes are legal in all 50 states.
Although eNotes are legal in every state, not all investors and warehouse lenders currently accept them. Before implementing them, it’s important to check with your investors and warehouse lenders.
How do you know who owns an eNote?
Whereas paper notes can be physically possessed and endorsed, electronic notes are controlled and this control can be transferred from one party to another. Whoever has control of the eNote is known as the controller. When the note is transferred, it’s called a transfer of control.
The Mortgage Electronic Registration Systems (MERS) eRegistry is the mortgage industry’s “system of record” for eNotes and shows who controls the note and the location where it’s stored.
Just as there’s an original paper note, electronic notes have what’s known as an authoritative copy. The authoritative copy of the eNote is unique, identifiable, and unable to be altered without detection. Whoever controls the electronic note has the authoritative copy and determines whether it can be altered.
How are eNotes stored and transferred?
Once eNotes are executed, they’re stored in an eVault. An eVault is an electronic repository used to securely store and transfer electronic documents. The controller of the electronic note has to be able to demonstrate that the note wasn’t tampered with while in their possession. An eVault provides the necessary controls to do that.
While a paper note is mailed back and forth, eNotes are electronically transferred. To transfer control of an electronic promissory note, the controller has to initiate a digital transfer and the recipient has to accept it. Afterward, the authoritative copy is stored in the new controller’s eVault and the MERS® eRegistry is updated with the new controller and location information.
Why are eNotes registered on the MERS® eRegistry?
Because eNotes are a digital file, a new file is created every time the electronic note is transferred. With multiple digital copies of the note, it can be difficult to determine who owns the original one.
The MERS® eRegistry takes care of this problem by providing a record of who currently controls the eNote and its location, which is a named party (usually the controller) who stores the eNote in an eVault. Along with identifying the controller and location, the MERS® eRegistry assigns the eNote the same Mortgage Identification Number (MIN) as its corresponding mortgage loan.
It’s best practice to register eNotes. However, if you don’t plan on selling the loan, it’s not required to register the note.
How to implement eNotes and digital closings
Lenders can do hybrid closings that don’t include electronic promissory notes, but eNotes are a required component for full eClosings. While this means that you can offer digital closings without implementing eNotes, electronic notes reduce the risk of lost notes, eliminate errors, decrease costs, and enable lenders to turn their credit lines faster.
Check out The Definitive Guide to Digital Closings to learn more about where eNote acceptance currently stands, the barriers to widespread adoption, and how to successfully implement digital closings.