Written by Stephanie Lyon, Regulatory Compliance Counsel
Credit Unions are increasingly going paperless and implementing fully electronic membership and loan origination processes. While going digital can expedite the application process, reduce staffing costs and eliminate the need to maintain voluminous paper archives, there may be legal and compliance concerns with the enforceability of electronic signatures (e-signatures).
Both federal and state laws affect the validity and enforceability of e-signatures; the two governing bodies of law are the Electronic Signatures in Global and National Commerce Act (ESIGN) and the various state enactments of the Uniform Electronic Transactions Act (UETA). As of today, 47 states and the District of Columbia have enacted some version of UETA — notably missing are New York, Illinois and Washington.
Both ESIGN and the model UETA define an e-signature as “an electronic sound, symbol, or process attached to or logically associated with a record and executed or adopted by a person with the intent to sign the record.” 15 U.S.C. § 7001. An important provision of the federal and state law is that an e-signature “may not be denied legal effect, validity, or enforceability solely because it is in electronic form.” See, 15 U.S.C. § 7001 (a)(1)-(2). Keep in mind that ESIGN does not apply to all documents. The law contains an explicit exception for certain documents that states have historically required in paper format and to have wet signatures. Some examples may include:
- Foreclosures and Evictions
- Wills and Trusts
- Domestic Relations matters
- Court Orders
See, 15 U.S.C. § 7003. Additionally, some land recording offices continue to require wet signatures for deeds of trust and other security agreements pertaining to real property. With all of these state variations, credit unions may want to consult with local counsel regarding the enforceability of e-signatures and e-documents in the states it transacts business.
Apart from the exceptions noted, federal regulations that require a signature or a written document generally also state that an electronic version can meet the requirements as long as it is ESIGN compliant. For example, the Credit Card Act and its implementing regulations require young members to submit a written application and a signed agreement of a consigner, guarantor, or joint applicant who is at least 21 years old. See, 12 C.F.R. § 1026.51(b)-(ii)(A). The official interpretation explains that an electronic application and consent would meet the requirements of Regulation Z. See, 12 C.F.R. Pt. 1026, Supp. I, comment 1026.51(b) – 4. Hence the main concern is not whether you can use e-signatures, but rather what makes the e-signature enforceable.
The manner of evidencing the member’s intent to be bound to the terms and conditions of the contract is essential in the enforceability of both wet and e-signatures. See, NCUA Examiner’s Guide, Chapter 19. Neither ESIGN nor UETA recommend a specific technological standard for electronic signatures, hence the method of obtaining a signature or executing a contract may vary from credit union to credit union. Some legal enforceability and admissibility questions that a credit union may want to consider are — “Was the intent of the member to sign the document and be bound by the terms and conditions of the contract?” “Is the document an accurate representation of the original?” “Was the identity of the signatory established?” The process the credit union uses to obtain e-signatures should be able to answer these important legal questions. The credit union may also want to review applicable state law to ensure the digital process mirrors the enforceability requirements of wet signatures, as well as investor requirements, which may have their own provisions for the acceptability of e-signatures.
Finally, it is worth noting that the CFPB has been working on an “eClosing” project since 2015 that seeks to streamline the use of electronic documents. Here is the CFPB’s Press Release and the CFPB’s Report. NAFCU’s Regulatory Affairs team will alert our members if there are any new developments in this area.
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