Since the national mortgage crisis began, there has been substantial interest in creating a more efficient system for tracking residential mortgage notes. A more efficient and effective system would serve the interests of both obligors and lenders. One of the difficulties that courts, and others, had in dealing with the mortgage crisis was understanding the relationship between a mortgage and the underlying note. This became especially important in situations of default when it was necessary to identify the holder with rights to enforce the mortgage.
Mortgage Electronic Registration Systems, or MERS, had been intended to simplify the process of tracking mortgages as they were sold to various new holders throughout their lifetime. When mortgage loans are registered in the MERS system, MERS acts as the nominee for the lender and servicer in county land records and becomes the mortgagee of record and nominee for the mortgage loan’s beneficial owner. While MERS provided a good mechanism for tracking the holder of the mortgage, it did not do the same for the underlying note.
A second major issue with tracking paper notes garnered national attention in 2005 with Hurricane Katrina and again in 2012 with Superstorm Sandy. The fact that these two storms were responsible for the destruction of so many promissory notes contributed to the desire to provide a mechanism that allowed for immobilization and dematerialization of residential mortgage notes. The goal was to make it possible for residential mortgage notes either to be originated in electronic form or to be converted from paper to electronic form. Thus began the project that became the National Mortgage Repository Act of 2017.
The Federal Reserve Bank of New York has taken the lead in drafting the Act. The Act is intended to provide greater transparency to borrowers, to make the secondary mortgage markets more efficient and liquid, to provide for paper residential mortgage notes to be converted to electronic entries on a national repository system, to provide clear rules for electronic notes in a way that promotes their use, and to protect consumers throughout this process.
As part of this effort, a committee of the Uniform Law Commission has been drafting proposed revisions to UCC Articles 1, 3, and 9 to accommodate electronic promissory notes in the mortgage registry, the conversion of such notes from paper to electronic form, and the impact of a central registry. This committee, which began its work in 2016, includes Commissioners as well as American Law Institute members. Article 3, which was written with paper instruments in mind, will be revised to accommodate electronic promissory notes in the mortgage registry. Likewise, Article 9 will be revised to cover issues relating to electronic notes held as collateral, including how security interests will be granted and perfected, as well as issues relating to attachment, possession, and priorities. Conforming amendments to the relevant Article 1 definitions will ensure consistency with the changes made to Articles 3 and 9.
Some of the major issues being examined by the drafting committee, which is led by Edwin E. Smith (Morgan Lewis) as Chair and Professor Steven L. Harris (Chicago-Kent College of Law) as Reporter, include how rules are allocated between the UCC and the Act and the proper balance between protecting the rights of obligors and those of secured parties and holders.
More information about the project, including drafts of both the Act and the proposed revisions to Articles 1, 3, and 9, is available on the ALI website at https://www.ali.org/projects/show/uniform-commercial-code/. The Members Consultative Group on UCC Issues is open to all ALI members who are interested in the UCC, and the committee looks forward to receiving comments from the ALI membership.