Internet Coming into Play
New York Law Journal, August 14, 2000
Copyright 2000 New York Law Publishing Company
August 14, 2000 Monday
HEADLINE: How Is Internet Coming Into Play?
BYLINE: By Jonathan Bick; Jonathan Bick, a shareholder with Greenberg Traurig, is adjunct Internet professor at Pace University School of Law and Rutgers Law School.
The precise nature of these trends related to the integration of the
Internet and real estate titles is difficult to predict. However, predicting
their general nature is less arduous. Herewith, some observations and
For decades, changes in realty title matters have been nominal. The application of the Internet to these matters has changed that. Due in part to the fact that commercial mortgage Internet sites have millions of dollars of venture capital behind them and expertise from some of the real estate merchant princes, the trend to apply the Internet to land title matters has accelerated changes in all aspect of property title transactions. (Trammell Crow Co. and Grubb & Ellis Co, for example, back LoopNet.) Indeed, the pace of the changes associated with the application of the Internet to property titles has been and is expected to be far more rapid than most real estate title trends.
Further accelerating the general trend to integrate Internet use into standard property title procedures is the fact that automating the paper-intensive process of commercial real estate lending will increase profits for the real estate industry. With margins thinning in the commercial mortgage securitization business, there is a major incentive to drive down costs. The use of the Internet with respect to real estate titles appears to provide a viable process. In addition, Internet companies and divisions of traditional companies which are Internet driven are used to working in "Internet time" - about seven times faster than traditional bricks-and-mortar time.
Commercial enterprises have designed a series of e-commerce systems that provide access to the title, mortgage, credit and other financial data required by their customers. One example is FASTWin, which provides instant access to mortgage solutions. FASTWin, operating from a desktop environment, permits access to multiple products from a single source. With this Internet application a customer can order title insurance, closing services, a home warranty, appraisal and flood determinations.
Similarly, other Internet applications provide an interface with a customer's loan origination system and allow the delivery of appraisal and title information, credit reports and flood determinations in a rapid and flexible manner. Each of these Internet applications is bound to start a trend with respect to property title matters.
The increasingly frequent application of the Internet to all aspects of property title procedures can also be directly related to the characteristics of both this new medium and real estate titles. That is, title to realty is an intangible asset and the Internet is an ideal tool for working with intangible assets.
The general trend of applying the Internet to property title transactions will in turn promote specific trends related to the production, modification, dissemination and use of new property title procedures and processes. It will also result in new adjudication procedures and rationales, as courts try to balance competing claims.
As the Internet is applied to land title transactions and litigation, practitioners and the courts will need to determine who bears the risk of loss from the resulting errors that will arise. For example, non-traditional parties will be introduced into the land title process and into litigation matters. Thus, when the Internet is used for property title transactions, the risk of loss may be born by the originators of the on-line transaction, the recipients of that transaction, and/ or the intermediaries who handled it.
Some have argued that property title transactions will be relatively unchanged by the application of the Internet. They contend that real property title matters remain among the most fundamentally and unalterably localized of regulatory interests. That is, while Internet negotiations and transactions may occur across the dimensions of space and time, the subject of the contracts themselves - i.e., the land - remains inextricably connected to an identifiable locale. The conclusion that the supporters of this logic have reached is that in the absence of a fundamental rethinking of federalism, states' interests in governing real property transactions could not be diminished.
Local interests in property located in a particular community are indeed compelling. However, it can also be argued that recent communication technology innovations, including the Internet, have made that argument less compelling than ever before, as the growth of global communications has, in turn, affected the very concept of community. While it is difficult to argue that real estate is not a local matter, the Internet has expanded the definitions of the terms "local" and "community" for the purposes of governance. All of the new media have fostered a concept of the "global village." It is less obvious, but equally true, that the Internet has changed perspectives on centralized versus localized control with respect to a state's rights and the proper sphere of federal influence and control. And property title transactions may well reflect such changes.
Also, the Internet has created new ways of communicating and storing information. In particular, the near-universal access to data and the ease of communicating that data has changed the ways that parties have both structured and executed transactions. This change has, however, resulted in both opportunities and difficulties. Thus users have found that Internet uses do not always comport with the traditional perceptions of transactions conducted through tangible writings and signatures. For example, while the new federal e-signature law, discussed below, has prepared the way for the U.S. legal system to deal with intangible records and signatures, the difficulties associated with many centuries of jurisprudence which has depended upon a paper-based system of communication must still be overcome.
The application of the Internet to real estate title transactions is strongly based on geographically defined sovereigns. Thus the integration of the Internet into property title processes requires that parties to a transaction must deal with the free flow of information across sovereign boundaries. Difficulties associated with the determination of civil and criminal jurisdiction, as well as other purely technological challenges, must be addressed.
Despite all of this, however, there is still a trend to make property
title transactions more amenable to being conducted as Internet transactions,
thereby reducing the inefficiencies of paper-based communication and
speeding up real estate title transactions. When paper-based title transactions
are compared to Internet-based title transactions, the former are more
expensive, slower, and significantly more cumbersome. The efficiencies
and associated benefits of the application of the Internet to property
title transactions are just too good to ignore.
Real estate agents are offering houses for sale on the Internet and several mortgage lenders issue estimates interactively. The use of an Internet real estate registry can be used to search remotely for title deeds. However, until recently, one major gap in the property title process was a way of exchanging electronic signatures with security and confidence.
For example, using keystroke.com, a person can obtain information about terms, rates and fees and completely process a real estate transaction electronically. Even at closing, the keystoke.com process draws up documents and transmits them via e-mail and orders the title document over the Internet. It also prepares the closing and escrow documents and transmits them on-line. The only obstacle to a completely Internet transaction was the signature requirement.
However, the Electronic Signatures in Global and National Commerce Act, the new federal law referred to above that legitimizes electronic signatures, may have removed this obstacle. In effect, the law declares that a virtual signature created on a computer, either with a digital code or other technology, has the same legal weight as a signature on paper. It has put to rest the idea that a tangible document related to the exchange of an intangible item must be signed in person. The statute, while untested, seems to bring a new level of certainty regarding the legal validity of on-line contracts and their evidentiary acceptability.
As Dana Ward, then a Louisiana manager for Lawyers Title Insurance Corp. predicted in 1996, electronics are uncluttering the in-house paper trail of title agencies. He envisioned paperless closings, where all documents are completed on computer screens, including electronic signatures. The e-signature act makes paperless closings a real possibility.
Even prior to the new statute, though, the industry had taken advantage of the Internet. A mortgage co-op loan officer and an applicant could e-mail to a bank all the available documentation that the bank needed - proof of income, bank statements, and so on. The bank could use the Internet to schedule an "e-appointment" at a site that was the equivalent of a secure Internet chat room.
The e-conferencing would typically begin with a bank official reviewing the credit report. Any concerns associated with it would normally be resolved during the e-conference, along with any other questions that the bank officer had. The applicant could make a written response. Alternatively, a telephone could be used for verbal responses.
If an applicant was under contract for a specific property, the bank official could use a description of it to create a "collateral evaluation" by searching Internet databases for comparables. The loan could be approved without an appraisal. While this procedure is normally only employed for conventional mortgages, FHA and VA loans could be processed in a similar manner.
The states also had not waited to promote the use of "e-title" transactions. The Uniform Electronic Transactions Act (UETA), which has been adopted by a number of states, has also created a level of certainty regarding the validity and evidentiary acceptability of electronic records and signatures.
UETA, as prepared and adopted by the National Conference of Commissioners on Uniform State Laws (NCCUSL), was designed to assure that a transaction would be governed by the same substantive rules regardless of the choice of medium made by the parties. In addition, UETA appears to extend the protections inherent in written documents and signatures to their Internet counterparts. Such results are to be expected since the general principles underlying UETA include the preservation of freedom of contract, technology neutrality and technology sensitivity, minimalism and avoidance of regulation.
However, certain specific transactions are excluded from UETA, and land title transactions could be among them. Accompanying UETA is a legislative note that specifically identifies four categories of laws that legislatures might consider excluding from its operation, including laws relating to: (1) powers of attorney, particularly durable ones and those related to living wills and health care; (2) real estate transactions; (3) trusts generally; and (4) consumer protection statutes with initialing or signing requirements. It should be noted that while legislatures normally consider these categories for exclusion from UETA, particularly during the drafting process, they are generally not excluded.
In addition to UETA's application to property title transactions, some states have gone further. For example, in Idaho, which is among the most recent states to adopt UETA, excluding real estate transactions was unnecessary because that state had already adopted the Idaho Electronic Signatures and Filing Act (IESFA) to encourage state agencies to allow electronic filing of records with them. See Idaho Code 67-2351-2357 (1998).
Still other states have amended existing legislation to specifically encourage Internet real estate title transactions. For example, the Georgia General Assembly took such action by amending the Georgia Electronic Records and Signatures Act. The amendment clarified the fact that an enforceable contract for the sale of real property may be created by an exchange of electronic correspondence, including Internet transmissions, such as e-mail. So in Georgia, as elsewhere, a signature now may be interpreted to mean the author's identifier appended to an e-mail.
The Georgia legislature's amendment expressly states that a signed
electronic record satisfies the statute of frauds. It is just this type
of clarification regarding the enforceability of electronic signatures,
electronic execution of real estate contracts and related documents
that will likely become a significant trend in property title transactions.
For reasons stated previously, the Internet has proved to be a wonderful medium for conducting intangible asset transactions. Consequently, it is not surprising that it is already being employed for transactions related to real estate titles. However, that use has been limited by the underlying difficulties associated with existing standard operating procedures related to property title operations.
Here it might be noted that there is a general agreement among academics and practitioners that the law of real property has undergone significant change in the past several decades. See Roberts, "The Demise of Property Law," 57 Cornell L. Rev. 1 (1971). This change followed centuries of incremental development. Real estate titles have been adapted in varying degrees to the existing social and political philosophies of a jurisdiction, changes which have contributed to the consistency of real property law. Nevertheless, most of the medieval concepts with respect to property titles generally remain the same.
The difficulties in question are tied to the nature of the title process itself. Changing the realty title standard operating procedures is not simply a matter of modifying traditional processes to include Internet access. Rather, it involves coordinating changes in a vast number of county courthouse administrator activities and adding third-party involvement, no easy task. For example, many states require local human decisions as a part of real estate title transactions, which in turn limits the extent to which appraisals can be automated.
Additionally, not all real estate title records in the hands of the courthouse administrators are Internet accessible. While many thousands of jurisdictions maintain computerized title records suitable for Internet access, some jurisdiction lack the automation necessary to accommodate the e-commerce needs of the lender's community. The primary problem exists in low-density rural areas where manual procedures are still in place. The advent of low-price personal computers and scanners which sell for less than $ 100, though, is making inroads even in the most rural communities.
There is also the fact that while homebuyers and other customers want Internet access to the county courthouses, the administers are not always legally allowed to accommodate the data users quickly and accurately.
A typical real estate transaction involves a number of steps (such as whether environmental, zoning, or special title problems are presented, and whether all parties have agreed to use such standard closing documents as the ALTA title insurance and survey forms). The first few steps are already Internet enabled. The contract is transmitted among the various parties on-line; the lending documents are similarly exchanged; the Internet is used to help prepare the due diligence documents, such as existing and maintenance contracts, which are then posted on the Internet for use by all parties; the legal descriptions as set forth in existing title insurance policies are communicated to the interested parties on-line.
It is when the matter of property titles arises that the use of the Internet becomes impaired. While commonly used to resolve known title problems, as counsel for the buyers, sellers and lenders communicate on-line, accessing land title information via the Internet is strained. Some title insurance companies' property title databases are available to the public. Those databases which are computerized can usually be accessed via the Internet and thus can permit counsel to review and copy the appropriate underlying documents in a manner consistent with e-commerce. In addition, most title companies will maintain Internet access to affidavits and other documents that are required to cure routine title problems. However, the difficulty is that not nearly all databases are available on-line.
There is also the fact that while title insurers get some title information in a matter of minutes, usually the time necessary to get such information is measured in terms of days. This time difference is unacceptable for lenders who seek to be part of the e-commerce community and achieve Internet standards, whereby they must close loans in a matter of moments or a single day at the most. To achieve the objective of bringing property title to the Internet, the human element associated with this process must be changed or eliminated.
Nonetheless, the economics of the industry appear to be requiring the
introduction of Internet technology. The entire insurance industry,
including title insurance, is far ahead of other service providers in
investing in computer technology in general and e-commerce technology
Another trend being seen as the title industry seeks to integrate with the Internet is a move to circumvent local laws to effect on-line property title efficiencies. To achieve this end, some national banks are trying to avoid the need for land title data, particularly property title data that is not found on the Internet. They have turned to the Office of the Comptroller of the Currency because the OCC's regulatory actions will generally preempt inconsistent state laws.
In response to an advance notice of proposed rulemaking, several national banks have asked the OCC for permission to conduct e-commerce activities. In order to do so, these banks have asked for the opportunity to take temporary title to property being bought via the Internet without the requirement that they secure real estate title data.
If the banks' request is granted and is coupled with the appropriate indemnification, the need for property title data could be avoided. In short, banks are asking federal regulators to help them overcome local constraints by circumventing current rules, so that they may use the Internet technology that they have developed but are legally barred from using.
It should be noted that the banks' request is coupled with the OCC's
request to banking organizations by which the agency seeks to determine
which laws should apply when a bank that is based in one state has an
Internet server and customers in another state. OCC's request is necessitated
by the various state laws applicable to the numerous locations of a
Will the Internet increasingly also be used as a tool to resolve property title-related disputes and related issues? For example, a state statute provided that "in a suit against the estate of a decedent involving the title to real property, the executor or administrator, if any, and the heirs must be made parties defendant." In a case involving that statute, none of the heirs was made a party to a suit that determined interests in the decedent's real property; the heirs were not readily apparent. Minga v. Perales, 603 S.W.2d 240 (Texas Ct. of Civ. App., 13th Dist., 1980).
The court, while making note of the parties' efforts to resolve the difficulties presented by the facts, nevertheless enforced the following provision:
The heirs at law of a decedent are jurisdictionally indispensable parties when the suit against the estate involves the title to real estate... Failure to join jurisdictionally indispensable parties constitutes fundamental error, which an appellate court must recognize when it becomes apparent in the record.
In quieting title to real estate, could a court in such a situation
rely on what is an immense body of Internet genealogy research? It is
likely that judicial notice of the parties' efforts to use the Internet
to resolve their difficulty, in the case just described, would have
resulted in an outcome other than the actual one.
The overall benefit of the Internet is similar to any other application of technology to business; it is used to streamline workflow. In the case of real estate, title searches, title insurance and actual property transfers benefit from the use of the Internet.
The real estate industry has always sought one-stop shopping, where a consumer will deal with a small group of people that will sell the house, originate the mortgage and close the deal. The new federal e-signature law has just allowed the real estate industry to use the Internet more effectively.
The future of property title trends is clearly related to increased Internet use. The legal trends associated with on-line land title transactions are mostly easily classified into one of two categories, transactions that create new law or transactions that fundamentally change the property title transaction process.
Most attorneys neither have nor need a comprehensive knowledge of all
of the laws related to the Internet in order to assess and act upon
these trends. As in the case of handling traditional property title
matters, the rule of thumb is initially to apply generally acceptable
commercial standards and statutes. However, practitioners must be aware
that the Internet-related elements of state consumer protection legislation,
financial service statutes and the laws on data and intellectual property
protection will most likely be integrated into land title matters, as
the use of the Internet is made part of realty title transactions. It
is safe to assume that if a law in a jurisdiction forbids a particular
property title transaction, then that transaction is likely to be objectionable
when executed on the Internet.