Electronic Recording: What Does It Mean To You?

ELECTRONIC RECORDING: WHAT DOES IT MEAN TO YOU?

by John T. Frey^*

Not since the adoption of the augmented estate has there been a proposal that would so dramatically change the basic concepts of real estate law in the Commonwealth of Virginia. The National Conference of Commissioners of Uniform State Laws (NCCUSL) has approved and recommended for enactment the Uniform Real Property Electronic Recording Act (URPERA).⁽¹⁾This act fundamentally changes the definition of what is an original document for purposes of electronic recordation.

Legislators in the Virginia General Assembly will decide the direction of electronic recording in Virginia during the next session. Their decision will effect real estate practices and procedures into the next decade. It is imperative that the Real Estate Bar evaluate the choices confronting the legislature and assist them in the decision making process.

LEGISLATIVE HISTORY

Virginia has been a leading state in the area of electronic recording of land records since the first enabling legislation was passed in 1996.⁽²⁾ At that time, the General Assembly took a cautious approach. The enabling legislation authorized the circuit court clerk in Fairfax County to implement an electronic recording system. However, the legislature placed a two year sunset provision in the legislation and limited electronic recording to governmental and quasi-governmental agencies such as Fannie Mae.⁽³⁾

In 1998, the General Assembly amended the legislation to allow any circuit court clerk in the Commonwealth to implement an electronic filing system for land records. In addition, language was added which authorized electronic filing in civil and criminal actions pursuant to rules to be adopted by the Supreme Court of Virginia.⁽⁴⁾ The governmental and quasi-governmental requirement was retained and the sunset clause was extended until July 1, 2004.⁽⁵⁾

In 2000, the General Assembly passed the Uniform Electronic Transactions Act (UETA),⁽⁶⁾ which provided a legal framework for most electronic transactions. At the same time, the General Assembly made numerous changes to the electronic filing statutes. The three most significant changes to the statutes were: 1) a requirement for an agreement between the clerk and "each entity the clerk authorizes to file documents electronically;"⁽⁷⁾ 2) a provision specifically authorizing an electronic signature pursuant to UETA to satisfy "any statutory requirement for an original signature;"⁽⁸⁾ and 3) a specific provision allowing a notary to execute a document with an electronic signature.⁽⁹⁾

In 2003, the General Assembly continued to simplify the electronic recording statutes by conforming them to UETA. The most significant change was the elimination of the sunset clause,¹⁰ or so everyone thought. In reality, because of a technicality discovered after the 2004 session of the General Assembly, the electronic filing statute expired July 1, 2004.⁽¹¹⁾

This year, the General Assembly passed SB992⁽¹²⁾ which corrected the technical error by reenacting the former electronic filing statutory scheme.⁽¹³⁾ The only substantive change was a provision to validate electronic filings recorded after July 1, 2004.⁽¹⁴⁾

The General Assembly not only reestablished the status quo for electronic recording, but also took a major step toward statewide adoption of electronic recording by clerks. The remaining portion of SB992, which in order to become effective requires reenactment by the General Assembly next year, establishes The Real Property Electronic Recording Act. The Virginia Real Property Electronic Recording Act (VARPERA) is similar to NCCUSL's URPERA. It is important to note that the General Assembly specifically chose not to adopt URPERA. Senator Devolites Davis' bill began as the URPERA. However, significant changes were made in the Senate Courts of Justice Committee, including changing the name from the Uniform Real Property Electronic Recording Act to the Real Property Electronic Recording Act.⁽¹⁵⁾

LEVELS OF ELECTRONIC RECORDING

When discussing electronic recording, it is important to know the different levels of electronic recording. The industry has been using a three level model which is based upon the format in which indexing data is made available to the clerk. Recently, the three level model has been modified into a four level model based both upon the format in which indexing data is made available to the clerk and upon whether the document was created in a paper or electronic format. Both models are acceptable. For the purposes of this discussion, the four level model will be used.

Level 4 documents are created electronically, digitally signed, and sent to the clerk's office for recording in an electronic format. The indexing data required by the clerk is "tagged" in the document as the document is being created by the attorney or other preparer. When the electronic document is received by the clerk, the clerk's system automatically reads the "tagged" indexing information and automatically places it into the clerk's indexes. This saves the clerk's staff from having to manually key in the data. It also prevents the clerk's staff from inadvertently misspelling grantor or grantee names during a manual indexing process.

Level 3 documents are created electronically, digitally signed, and sent to the clerk's office for recording in an electronic format. The indexing data is not "tagged" within the document. Instead, the indexing data is sent in a separate file along with the actual document. This is similar to a coversheet in the paper world. The indexing data can still be read automatically by the clerk's system and automatically placed into the clerk's indexes. However, because the indexing information was not created at the same time as the document, there may be a discrepancy in the information contained in the document and the indexing information provided in the electronic coversheet.

Level 2 documents are created in paper, signed in ink, converted into an electronic format, and sent to the clerk's office for recording in an electronic format. Just like level 3 documents, the indexing information is sent in a separate file along with the electronic document.

Level 1 documents are created in paper, signed in ink, converted into an electronic format, and sent to the clerk's office for recording in an electronic format. No indexing information is sent to the clerk. The clerk's office staff must manually index the information from the document.

When discussing three levels of electronic recording, level 4 documents become level 3 documents. Levels 2 and 3 above are combined and referred to as level 2 documents. Level 1 documents remain the same. Level 2 and 3 documents are combined because both types of documents send the indexing information in a separate file along with the document to the clerk's office. Despite providing the clerk with the indexing information in the same manner, there is a real distinction between a document that is created in an electronic format and a document that is created in a paper format and converted into an electronic format. The four level model recognizes this distinction and avoids confusion.

AN OVERVIEW OF VARPERA AND URPERA

This overview will begin with a discussion of the provisions where both acts are identical or substantially the same. It will then discuss the major issue that appears to have caused the General Assembly not to adopt the URPERA in its entirety.

UNIFORM STANDARDS

The URPERA provides the state with two options for designating the entity that will adopt standards to implement the act. The first is to establish a state Electronic Recording Commission. The second is to delegate the duty to adopt standards for implementing the act to an existing state agency. Virginia chose the second option. Under the VARPERA, the Virginia Information Technologies Agency (VITA) is mandated with the duty "to develop standards to implement electronic recording of real property documents."⁽¹⁶⁾ VITA is directed to "develop the standards in consultation with the circuit court clerks, the Executive Secretary of the Supreme Court, and interested citizens and businesses."⁽¹⁷⁾ VITA is also directed to consider standards promulgated by the Property Records Industry Association and other national standard-setting bodies.⁽¹⁸⁾

RECORDING RELATED PROVISIONS

· Both acts are voluntary. A clerk does not have to establish an electronic recording system or accept electronically recorded documents. Furthermore, the clerk cannot mandate that you, the practitioner, file your documents electronically. Both acts mandate that a clerk "who accepts electronic land records for recording shall continue to accept paper land records and shall place entries for both types of land records in the same index."⁽¹⁹⁾

· Both acts allow a clerk "to receive, index, store, archive, and transmit electronic land records."⁽²⁰⁾

· Both acts allow a clerk to "provide for access to, and for search and retrieval of, land records by electronic means."⁽²¹⁾

· Both acts allow a clerk to convert new paper recordings and existing paper recordings (Deed Books) into an electronic format.⁽²²⁾

· Both acts allow a clerk to collect any authorized fee or tax electronically.⁽²³⁾

· Both acts require any clerk who implements any of the aforementioned functions to be in compliance with the standards established by the state standards setting group, which in Virginia is VITA.⁽²⁴⁾

VALIDITY PROVISIONS

· Both Acts similarly provide that "[i]f a law requires, as a condition for recording, that a land record be an original, on paper or other tangible medium, or in writing, an electronic land record satisfying this act satisfies the law."⁽²⁵⁾ At first glance this seems reasonable. However, when coupled with the definition of "electronic document" which was excluded in VARPERA, it is revolutionary. The Commissioners state in their comments that "[s]ubsection (a) states the basic principle of the act - if a document would be recordable in a paper format, an electronic document with the same content and meeting the same requirements of this act is also recordable. Any reference in a statute, regulation, or standard to a document as being on paper or a similar tangible medium in order to be recordable is superseded by this Act."⁽²⁶⁾

· Both Acts provide that "[i]f a law requires, as a condition for recording, that a land record be signed, an electronic signature satisfies the law."⁽²⁷⁾

· Both Acts provide that "[a] requirement that a land record or signature associated with a land record be notarized, acknowledged, verified, witnessed, or made under oath is satisfied if the electronic signature of the person authorized to perform that act, and all other information required to be included, is attached to or logically associated with the land record or signature. A physical or electronic image of a stamp, impression, or seal is not required to accompany an electronic signature."⁽²⁸⁾

THE MAJOR HURDLE: A COPY BECOMES AN ORIGINAL

Both acts use the same or very similar definitions as UETA for terms such as "document," "electronic," and "electronic signature."⁽²⁹⁾ One notable difference is URPERA uses the term "document" instead of "record." The Commissioners specifically used the term "document" in URPERA because "[t]he term 'record' has a different meaning in real estate recording law and practice than it has in UETA. If the term 'record' were used generally in this act, it might lead to confusion and misinterpretation."⁽³⁰⁾ The Commissioners went on to state: "In UETA, the term 'record' refers to information on a tangible or electronic medium as does the term 'document' in this act."⁽³¹⁾

The major distinction is that URPERA takes a bolder approach than UETA and VARPERA with the definition of "electronic document." Under the UETA, an "'electronic record' means a record created, generated, sent, communicated, received, or stored by electronic means."⁽³²⁾ The URPERA states that "'[e]lectronic document' means a document that is received by the [recorder] in an electronic form."⁽³³⁾ What many in the industry argued that UETA did subtly, URPERA left no doubt: a copy is eligible for recording if it is received by the clerk in an electronic format. This language authorizes a paper document signed and notarized in ink at the settlement table and scanned (converted into an electronic format) at the settlement agent's office to be recorded electronically with the clerk. It would even authorize a facsimile to be recorded electronically.⁽³⁴⁾

This is exactly what was envisioned by the Commissioners. In the URPERA Section 2(3) Comment, the Commissioners state: "The character of a document as 'electronic' or 'paper' will be determined at the moment it is received by the recorder."⁽³⁵⁾ The Commissioners go on to say: "In many cases a document may have originally been executed in a paper form with 'wet signatures' and subsequently imaged and converted into an electronic format. This act provides that, if such a converted document is received by the recorder in an electronic format, it will be considered to be an electronic document and may be recorded."⁽³⁶⁾

One of the questions facing the General Assembly next year when they consider whether to reenact VARPERA is: did they prevent paper documents converted into an electronic format from being recordable? Even though the URPERA definition of "electronic document" was intentionally left out of the VARPERA, it is arguable that UETA's definition of "electronic record" encompasses the concept that a document is an electronic document if it is received in an electronic format and therefore will be recordable under Virginia law, if VARPERA is reenacted next year.

WHERE IS THE INDUSTRY GOING?

No one knows exactly how many jurisdictions have implemented some type of electronic recording system or are in the process of developing such a system. PRIA lists fewer than 100 jurisdictions nationwide.⁽³⁷⁾ In Virginia, only Fairfax and Wise counties currently record land records electronically. However, numerous clerks around the Commonwealth are in the process of developing electronic recording systems.

Orange and San Bernadino counties in California were two of the first jurisdictions in the country to implement electronic recording in the mid- to late 1990's. They were also the first to accept level 1 and level 2 documents. In Orange and San Bernadino, the title companies scan the paper documents in their offices and then file them electronically with the clerk. Many of the jurisdictions nationwide that have subsequently implemented electronic recording have also embraced level 1 and level 2 documents.

The reason many people in the industry have accepted level 1 and level 2 documents is due to cost. Level 1 and level 2 do not require lenders to make any changes to their current systems. The only real change is the shifting of responsibility and workload from the clerk's staff to the settlement agent or title company. In the paper world, the clerk's office is responsible for the time consuming task of converting every page of a paper document into an electronic image. Under both level 1 and level 2, the title company or settlement agent is responsible for converting the documents into an electronic format. The additional requirement of providing indexing information under level 2 is not prohibitive. Many lenders and title companies already prepare a coversheet in the paper world, so there is little or no added inconvenience or cost to provide what is essentially an electronic coversheet.

The benefits to the private sector seem to outweigh the costs, since the shift of responsibility gives the title companies and other parties more control over the recording process. In addition, level 1 and level 2 allow the lenders and title companies to eliminate overnight delivery fees and the cost of paying someone to stand in line to record, as well as to take advantage of quicker recording times.

Many clerks have accepted level 1 and level 2 documents because of the huge savings gained by having the title companies responsible for the conversion from paper to electronic, especially in a time of budget cuts on the state and local levels. The Fairfax Circuit Court Clerk's office only accepts level 4 documents at this time. However, to put the issue of shifting the workload from the clerk's office to the title companies and settlement agents into perspective, the Fairfax Circuit Court Clerk's office converted over 11,405,000 pages of land records into digital (electronic) images during the period between January 1, 2001 to December 31, 2004. This is an average of more than 2.8 million pages per year.

VIRGINIA'S DILEMMA

Nationally, the acceptance of level 1 and level 2 documents is being embraced by both the private sector and by clerks. If the General Assembly does not adopt URPERA in its entirety and refuses to accept level 1 and level 2 documents for recordation, then we run the risk of failing to fully capitalize on the efficiencies afforded by this new technology. On the other hand, remember two things your mother used to say to you: "If everybody else jumped off the bridge, would you?" and "Just because you can, doesn't mean you should."

WHAT DOES THIS MEAN TO YOU?

From a practitioner's point of view, you probably have several years before the majority of clerk's offices in Virginia have electronic recording systems. Even then, under VARPERA the clerk will still be required to accept paper recordings.

If the General Assembly reverses course and allows level 1 and/or level 2 documents, there will be a quantum leap in electronic recording. As pointed out before, the process stays the same. The only difference is the shift of responsibility for converting the paper documents into an electronic format away from the clerk's office.

If the General Assembly stays the course, the statewide adoption of electronic recording will be significantly slower. Under this scenario, lenders will be the heaviest users, but not in the traditional purchase settlement. The normal purchase settlement involves many different parties and requires everyone's cooperation, in order to facilitate an electronic settlement. It is not worth it for lenders, attorneys, or settlement agents to invest in electronic purchase settlements without a significant adoption rate by the local industry. However, lenders are in a prime position to capitalize on electronic recording for their in-house products.

Major lenders such as Wachovia and Wells Fargo are already recording level 4 certificates of satisfaction in Fairfax and around the country. The lenders control this transaction. The only parties involved are the clerk and the lender. The logical next step for these and other lenders is to develop in-house electronic settlement systems for all of their second trust work. In the typical credit line or home equity line settlement, the home owners go to a local branch of their bank and sign the documents or in some cases the bank sends a notary to the borrower's house. The bank then sends the documents to the clerk's office for recordation, often by overnight mail.

Just as with the certificate of satisfaction, the lender controls the in-house second trust transaction. Lenders do not have to worry about attorneys or settlement agents that do not have the technology to conduct electronic settlements. Sellers are not involved. Most likely, the borrowers are not going to be concerned about signing a keypad instead of paper, especially when the lender says it's okay. Under these circumstances, the lender would be assured that the majority of the second trust settlements would be conducted and recorded electronically and therefore, it would be worth it for them to invest in the technology. It is important to note that certificates of satisfaction are approximately 30 percent of all recordings in Fairfax each year. Assignments are approximately 5 percent and all types of second trusts are between 20 and 25 percent. These are the documents and the transactions lenders control. Lenders have the ability to capitalize on electronic settlements and electronic recording now, even if it takes years for the average purchase settlement to be conducted and recorded electronically.

CONCLUSION

Over the next five years, electronic settlements and electronic recording will become an integral part of the average real estate attorney's practice. How we arrive at that point is still open for debate. Virginia is at a crossroads. Decisions made in the next year will affect the practice of real estate law for years to come. It is very important that attorneys who practice real estate law in Virginia participate in the development of electronic recording standards being undertaken by VITA. It is also important that you actively participate in the debate over the acceptance of level 1 and 2 documents. The Real Estate Bar has the expertise and practical knowledge that both lawyer and non-lawyer members of the General Assembly need in order to make a reasoned decision next year.

* John T. Frey is the Clerk of the Fairfax Circuit Court. He is a past President of the National Association of County Recorders Election Officials and Clerks. Mr. Frey is a member of the Virginia Metropolitan Circuit Court Clerks Association, the Virginia Court Clerks Association, and the Property Records Industry Association. Prior to becoming Clerk, Mr. Frey was a principal in the law firm of Frey & Autry, P.C.

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Endnotes:

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(1) A copy of URPERA along with NCCUSL's comments can be found at www.law.upenn.edu/library/ulc/ulc.htm#urpera. (return)

(2) See VA. CODE ANN. § 17-83.1:1 et seq. (return)

(3) See id. §17-83.1:2. (return)

(4) See id. (return)

(5) See id. Effective October 1, 1998, Title 17 was repealed and Title 17.1 was enacted. The electronic filing statutes were recodified as 17.1-255 et seq. (return)

(6) VA. CODE ANN. § 59.1-479 et seq. The Uniform Electronic Act was drafted by NCCUSL. In the Prefatory Note, the Commissioners state that "the purpose of the UETA is to remove barriers to electronic commerce by validating and effectuating electronic records and signatures." (return)

(7) Id. § 17.1-256. (return)

(8) VA. CODE ANN. § 17-258(B) provides: "If the electronically filed document contains an electronic signature pursuant to the Uniform Electronic Transactions Act, any statutory requirement for an original signature shall be deemed to be satisfied." (return)

(9) VA. CODE ANN. § 17-258(C) provides: "Any statutory requirement for a document to be notarized shall be deemed satisfied by the appropriately executed electronic signature of such notary." (return)

(10) VA. CODE ANN. § 17.1-258.1 was repealed by Acts 2003, c.127, cl 2. (return)

(11) After consultation with members of the General Assembly Legislative Services, the Attorney General's office, and the Governor's staff, it was determined that UETA was broad enough to provide sufficient authority to continue electronic filing until the General Assembly could revisit the issue during the 2005 session. (return)

(12) Senator Devolites Davis was the Patron of SB 992. (return)

(13) The electronic filing statutes are now found in § 17.1-258.2 et seq. (return)

(14) See VA. CODE ANN. § 17.1-258.5. (return)

(15) The legislative history and text of SB 992 can be found at the Virginia General Assembly's Legislative Information System: http://leg1.state.va.us/cgi-bin/legp504.exe?ses=051&type=bil&val+sb992. (return)

(16) Id. § 55-142.13. (return)

(17) Id. (return)

(18) See id. (return)

(19) Id. § 55-142.12(D); URPERA § 4(b)(4). (return)

(20) VA. CODE ANN. § 55-142.12(B); URPERA § 4(b)(2). (return)

(21) VA. CODE ANN. § 55-142.12(C); URPERA § 4(b)(3). (return)

(22) See VA. CODE ANN. § 55-142.12(E); URPERA § 4(b)(5), (6). (return)

(23) See VA. CODE ANN. § 55-142.12(F); URPERA § 4(b)(7). (return)

(24) See VA. CODE ANN. § 55-142.12(A); URPERA § 4(b)(1). (return)

(25) VA. CODE ANN. § 55-142.11(A); URPERA § 3(a). (return)

(26) URPERA § 3(a) comment (emphasis added). (return)

(27) VA. CODE ANN. § 55-142.11(B); URPERA § 3(b). (return)

(28) VA. CODE ANN. § 55-142.11 (C); URPERA § 3(c). (return)

(29) See VA. CODE ANN. §§ 55-142.10, 59.1-480; URPERA § 2. (return)

(30) URPERA § 2(1) comment. (return)

(31) Id. (return)

(32) VA. CODE ANN. § 59.1-480(7) (emphasis added). (return)

(33) URPERA § 2(3) (emphasis added). (return)

(34) Id. comment. (return)

(35) Id. (return)

(36) Id. (emphasis added). (return)

(37) See www.pria.us/electronicrecording.htm. Additional jurisdictions can be found listed at the PRIA members only website. (return)

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