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Electronic Disclosures and Contracts

by Mary Beth Guard, BOL Guru
Guru Bio

If your institution is contemplating providing required notices or disclosures electronically, or exploring the feasibility of entering into binding electronic contracts, you must first familiarize yourself with the operative laws and what they require.

Two key statutes:

  • ESIGN (Electronic Signatures In Global and National Commerce) - federal statute; took effect October, 2000
  • UETA (Uniform Electronic Transactions Act) - Was developed by NCCUSL (National Conference of Commissioners on Uniform State Laws). Has been adopted by the majority of states.

These two statues, ESIGN and UETA, are similar, but they have important differences. This article will focus on ESIGN. The second article in this series will describe UETA's provisions.

Advantages/Benefits
Why should you care about these statutes? Because of the advantages to be gained from utilizing them to provide notices and disclosures electronically or to enter into contracts with electronic signatures. Those benefits include:

  • Removal of physical/geographic barriers
  • Time savings
  • Cost savings
  • Expediency/convenience
  • Security
  • Enhanced record retrievability/sharing

ESIGN Basics

  • Provides authority for
  1. electronic records (notices, disclosures, other writings); and
  2. electronic signatures
  • Basic premise:
    With respect to any transaction in or affecting interstate or foreign commerce-
    1. a signature, contract, or other record relating to such transaction may not be denied legal effect, validity, or enforceability solely because it is in electronic form; and
    2. a contract relating to such transaction may not be denied legal effect, validity, or enforceability solely because an electronic signature or electronic record was used in its formation.

    ESIGN does not:

    • Require the use of electronic signatures, contracts or other records, but permits them.
    • Displace the substantive requirements of consumer protection laws and regulations. Those statutes and regulations continue to specify who gets what and when. ESIGN merely provides an additional "how".
    • Specify specific technology that must be used.

    ESIGN does:
    Provide the authority for electronic contracts, statements, disclosures. Content and timing are governed by other laws and regulations. (e.g., the GLB privacy rule specifies what must be included in a privacy notice and to whom it must be delivered. ESIGN merely allows it to be given electronically if the ESIGN statutory requirements are met.)

    ESIGN and the banking business
    If a record (a notice or disclosure or any writing) is required to be given "in writing", it can now be given in electronic form, so long as it is given in a manner that complies with ESIGN.

    ESIGN is technology-neutral.

    • can be created by a variety of different technologies;
    • can take different forms.


    Important facets of ESIGN:

    • The person seeking to rely on the electronic signature has the burden of proving it is the customer's electronic signature.
    • Multiple protections are built into the law to ensure the customer has the necessary technical expertise and equipment for electronic dealings.
    • A "consent handshake" is required when delivering electronic records to a consumer.

    Consent handshake:

    • Consumers are protected under ESIGN by a requirement that there be a "consent handshake" - an electronic process that demonstrates both the consumer's agreement to obtain the records via electronic means and the consumer's ability to electronically receive/access the record.
    • Four requirements:
    1. The consent must be informed. That requires an extensive disclosure regarding the consumer's rights or options relating to the record and the requirements for electronic accessibility/retention;
    2. The consumer must have the technological ability to accept the electronic records. That means you must obtain proof that the consumer has the capability to access the information in the electronic form in which it will be provided;
    3. The consumer must agree. You must obtain consumer's consent to accept the records electronically;
    4. Changes in technology may warrant additional procedures. You must provide subsequent disclosures if the technology requirements change in a material way and must get proof of capability under the new technology.
    5. The consumer has the right to withdraw consent prior to receiving the electronic record.


    Ten Requirements for the disclosure:

    • Must be clear and conspicuous;
    • Must be provided before the consumer agrees to accept electronic records;
    • Must explain what rights the consumer has to obtain the records in paper form;
    • Must explain the consumer's right to withdraw consent for electronic records and the consequences and conditions of the withdrawal of consent. [You can elect to make the receipt of electronic records a condition of the relationship. In that event, you would disclose that the relationship would terminate at any time when the consumer withdraws consent. Example: purely online account with reduced fees and charges. The account is only available to online customers who consent to receive all notices and disclosures through electronic means. If the customer decides to no longer accept notices and disclosures electronically, the customer is no longer eligible for the account.]
    • Must describe the extent of the consent granted;
    • Must delineate the procedures to be followed in the event the consumer chooses to withdraw consent;
    • Must tell the consumer the process which should be followed to update his contact information (such as when the consumer's email address changes, how to communicate the change to the institution);
    • Must divulge whether the consumer may obtain a paper copy of the electronic record;
    • Must tell whether there will be a fee assessed for obtaining a paper copy of the electronic record and whether the relationship will be terminated upon withdrawal of consent;
    • Must describe the hardware and software requirements necessary for the consumer to both access and retain the electronic record.


    Establishing consent:

    • Consent must be affirmatively granted;
    • Consent must be given or confirmed electronically. The consumer cannot give paper consent to future electronic transactions;
    • In order to establish consent, the consumer must reasonably demonstrate the ability to access electronic information that is in the form in which you intend to provide the electronic record.
    • Determine how you will provide the record:
    • On the Web? In HTML format, .txt format, or as a PDF file?
    • Via email? Text email, or html?
    • Devise a "test" to ensure the customer can access the electronic record in the format in which you are providing it. (Examples: a) clickwrap >
    • Things to watch: browser differences; print anomalies. Test it in a variety of browsers. Try printing it on a variety of printers from the various browsers. For example, some PDF documents require more memory than some inexpensive printers have.


    Technology changes that require subsequent disclosures:
    If the hardware or software the consumer needs in order to access the electronic records changes in a way that creates a material risk the consumer will not be able to access or retain subsequent electronic records, you must provide a disclosure which:

    • outlines the revised hardware and/or software requirements;
    • provides another opportunity for the consumer to withdraw consent;
    • requires the consent handshake to be redone.


    Electronic Record Retention under ESIGN
    ESIGN allows contracts and disclosures to be retained electronically. Does not change the period of retention; it stays whatever it is under the pertinent law. A contract or disclosure is considered to be retained in its original form if it:

    • accurately reflects the information in the contract/disclosure; and
    • it remains accessible to all persons entitled to access, in a form that can be accurately reproduced, for the required access period.

    If a statute, regulation, or other rule of law requires a contract or other record relating to a transaction in or affecting interstate or foreign commerce to be:

    • provided,
    • available, or
    • retained
    • in its original form, or provides consequences if the contract or other record is not provided, available, or retained in its original form, that statute, regulation, or rule of law is satisfied by an electronic record that complies with the two conditions above.

    Checks ESIGN specifically states that if a statute, regulation, or other rule of law requires the retention of a check, that requirement is satisfied by retention of an electronic record of the information on the front and back of the check in accordance with the two conditions above.

    ESIGN exceptions that are relevant to banking:

    • wills, codicils, or testamentary trusts;
    • records relating to Articles 3 through 9 of the UCC;
    • court orders or notices in connection with foreclosure, repossession, etc. in connection with the primary residence of an individual;
    • cancellation or termination of health insurance or life insurance (would include credit-related insurance).


    Electronic signatures
    Makes an electronic signature a "legal signature". Used in place of paper signatures to signify agreement. Can even be used for notarization and acknowledgment.

    "Electronic" means relating to technology having electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities.

    If a statute, regulation, or other rule of law requires a signature or record relating to a transaction in or affecting interstate or foreign commerce to be notarized, acknowledged, verified, or made under oath, that requirement is satisfied if the electronic signature of the person authorized to perform those acts, together with all other information required to be included by other applicable statute, regulation, or rule of law, is attached to or logically associated with the signature or record.

    Definition of "electronic signature" - three components

    1. an electronic sound, symbol or process;
    2. attached to or logically associated with a contract or other record; and
    3. executed or adopted by a person with the intent to sign the record.


    Issues raised:

    • Proving consent
    • Authenticating the person's identity;
    • Establishing authority to enter into the agreement or electronically sign the writing.


    Preemption of ESIGN:

    • a federal regulator may, under certain conditions, exempt a specified category or type of records from the consumer consent requirements;
    • a state may modify, limit or superseded the federal law if they adopt the official text of UETA or adopt rules with alternative procedures or requirements for the use and/or acceptance of electronic records or electronic signatures, so long as not inconsistent with ESIGN.


    Part two of this article will focus on the differences between ESIGN and UETA and the issue of preemption.

    First published on BankersOnline.com 9/9/02

  • First published on 09/09/2002

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