The Wild and Wooly World of E-Signatures Dino Tsibouris (614)

Allows online applications Electronic disclosure delivery Paperless and easy Why use them?

NO! FFELP Loans: Agreement wording, format and pricing prescribed by a unique federal program Alternative Loans: Agreement wording, format and pricing regulated by differing state laws and federal consumer protection statutes FFELP Loans Already Use “ESIGN” Isn’t it the Same for Alternative Loans?

Title I, Section 107(b)(3) of ESIGN gave ED one year to create electronic promissory notes under Section 432(m) of the HEA A promissory note must be in writing… BUT… FFELP Loans Already Use ESIGN Isn’t it the Same for Alternative Loans?

ED still pays benefits if collection defense arises from the use of an electronic signature! Avoids state law contract requirements Insures against any “questions” FFELP Loans Already Use ESIGN Isn’t it the Same for Alternative Loans?

Alternative loans are state-law based consumer loans A “promissory note” must be in writing Not guaranteed by ED if problems arise FFELP Loans Already Use ESIGN Isn’t it the Same for Alternative Loans?

Lender is responsible Outsourced vendors limit their liability Portfolio purchasers hold you responsible Long loan maturity plus statute of limitations ESIGN Loans: A Long Term Liability

ESIGN Loans: A Long Term Liability

“Click-wrap” agreements E-SIGN Act (federal law) Uniform Electronic Transactions Act (state law) Three Forms of Legal E-Signatures

Must display terms on the screen Consumer must agree, submit or apply Agreement is formed! Suited for credit applications Click-Wrap Agreements

Acceptance or rejection must occur before access is given Viewer must be forced to expressly and unambiguously manifest either assent or rejection prior to being given access to the product Register.com, Inc. v. Verio, Inc., 356 F.3d 393 (2d. Cir., 2004) Click-Wrap Agreements

Promissory Note is a contract detailing the terms of a promise by one party to pay a sum of money to the othercontractmoney The terms must include the principal amount, the interest rate if any, and the maturity dateprincipalinterest ratematurity date Payee's rights in the event of a defaultdefault Loans Must Be in Writing, Though

The term "negotiable instrument" is limited to a signed writing that … promises payment of money Loans Must Be in Writing, Though

The ESIGN Act – June 30, 2000

State that a signature, contract, or other record cannot be denied legal effect solely because it is in electronic form A contract … may not be denied legal effect … solely because an electronic signature … or record was used in its formation BUT does not apply to the law of promissory notes The ESIGN Act

Deliver consumer disclosures electronically Use of electronic records Other forms of agreements (Non-negotiable) Authorizes “transferable records” but only if secured by real property The ESIGN Act

Conspicuous ESIGN disclosure FIRST Consumer consent NEXT THEN disclose terms… The ESIGN Act

Scope of electronic communications Method of providing electronic communications How to withdraw consent How to update records Hardware and software requirements How to request paper copies Termination/Changes The ESIGN Act Disclosure Must Include

Initial Truth-in-Lending Act disclosures FCRA disclosures State law disclosures governing extension of credit The ESIGN Act Then Permits Delivery of Disclosures

FCRA requires “clear and conspicuous” disclosure But small type on back of mailer in a paragraph of type about other matters inadequate; Use different type, color - Cole v. U.S. Capital) Internet Lending The Other Disclosures

Examples: Credit grantor disclosures Cosigner notices Notices near the signature line Font size and proximity requirements Record retention requirements The ESIGN Act Does Not Preempt State Law Consumer Disclosures

Errors in ESIGN compliance result in failure of delivery of consumer disclosures The ESIGN Act Disclosure Required

Delivery fails even if proper text of the disclosure is given Complete compliance with ESIGN is required to subsequently provide E-disclosures Otherwise must give disclosure in paper form The ESIGN Act Disclosure Required

Creates electronic “transferable records” similar to paper promissory notes Doesn’t provide for disclosure delivery The parties merely have to agree to do business electronically to benefit from UETA Determined by the circumstances ( ?) Uniform Electronic Transactions Act

“Transferable records” only exist if the authoritative copy can be identified Independent registry best way to determine who controls the authoritative copy Uniform Electronic Transactions Act

Control environment must be independent of lender and secure or the system fails and the loan status becomes legally uncertain Uniform Electronic Transactions Act

May have to specifically opt out to avoid being drawn into UETA online Very complicated practical application to lending Legal certainty of loan proportionate to integrity of system where loan originates and independent company acting as registry Uniform Electronic Transactions Act

Compliance with law and regulations Limits on use of data, FCRA Audit rights Notice if breached Indemnity for claims and losses No limit on liability E-Signatures Vendor Management – Key Issues

QUESTIONS?