By Reginald Watson, Regulatory Compliance Counsel
Electronic documents and signatures are almost a mainstay in the financial industry, allowing credit unions to dramatically improve efficiency by reducing costs, saving paper, and expediting the application process. Additionally, consumers have come to enjoy the benefits of being able to easily edit and correct errors, or cut and paste pre-filled information. Before we take that dive, here's picture of a lovely dolphin that reminds me of my last boat trip in my hometown of sunny Tampa!
Now on to electronic signatures! Congress enacted the Electronic Signatures in Global and National Commerce Act (ESIGN) to accommodate the global transition to electronic transactions, records, and signatures, allowing electronic documents to carry the same legal weight as paper documents. The law went into effect on October 1, 2000 and states that the enforceability of a contract, electronic record, or signature for a transaction cannot be challenged solely because it is electronic. ESIGN also authorizes signatures to be retained in an electronic format so long as it is an accurate reflection of the information in the original document, remains accessible to all persons entitled to access, and is capable of being accurately reproduced.
This Blog will take a deep dive into the application process and discuss the ESIGN implications of electronically signed online account applications. As a threshold matter, ESIGN only applies to information that is legally required to be in writing. Thus, we should first ascertain which applications are legally required to have a signature.
Online Membership Applications
With regard to obtaining signatures on membership applications, the FCU model bylaws (Appendix A to Part 701, Art. II, Sec. 2) indicate that applications for membership must be signed by the applicant. The credit union's bylaws will likely have a similar requirement; however, there is no specific requirement for a wet signature. NCUA affirmed this position in NCUA Opinion Letter 2004-0543, explaining that "the credit union may rely on the electronic signature and need not require an applicant to print the form and sign it in handwriting," so long as the credit union ensures "that its audit and verification procedures are sufficient where the member's signature is captured electronically."
An “electronic signature” can be any type of notification that the member and the credit union both understand will formalize an agreement. While not required, using an electronic signature-verification service (e.g. DocuSign) provides that additional level of confirmation that both parties understand the e-signature is intended to bind the parties to the agreement.
Online Credit Applications
Remember, ESIGN consent is only required for information that is legally required to be in writing. There is no federal regulatory requirement that a credit union obtain a signature on a mortgage loan application (but be on the lookout for state law requirements). However, some institutions require a signature as a means of further identifying the member to prevent identity theft. In the commentary to section 1002.4(c) of Regulation B, the bureau indicates that for credit decisions, the credit union "may complete an application on behalf of an applicant and need not require the applicant to sign the application."
With respect to pulling credit, the Fair Credit Reporting Act (FCRA) allows the credit union to pull credit if it has a permissible purpose – such as when a member requests a loan – but does not require that the credit union obtain a signature (except for employment purposes which require a signature). Nevertheless, some states and investors may have specific authorization requirements before a credit union can pull a credit report, in which case, some credit unions may use the applicant's signature for purposes of fulfilling these requirements.
There are a few specific issues related to credit card accounts which may require the credit union to obtain a signature. Regulation Z contains a requirement related to issuing credit cards to consumers under 21, where the credit union is required to have a signed agreement from a cosigner or joint applicant. See, §1026.51(b)). The credit union may also require a signature to maintain a consensual lien on the members’ shares in connection with a credit card account. Regulation Z specifically prohibits offsetting credit card debt with shares on deposit, unless the credit union has obtained a consensual security interest in the funds. See, §1026.12(d)(2). Some credit unions may obtain a signature in connection with establishing the consensual lien.
Other Purposes
The credit union may also choose to obtain a signature even when not required by federal regulation, for example, to substantiate an audit trail, or to fulfill investor or state requirements. Most applications also have a statement that the information provided in the application is true and correct, and having the signature can make a difference in the credit union’s legal recourse in the event of fraud. If a credit union decides as a matter of policy to obtain application signatures for these purposes, the use of an e-signature as opposed to wet signature would be a risk-based decision. When it comes to legality and enforceability, however, either will suffice!
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