E-Sign Act Disclosures

QUESTION

We originate loans almost exclusively through E-Sign procedures. Recently, we were cited for not providing proper disclosure to consumers regarding our E-Sign policies. What are the proper disclosures that we must provide consumers in order to ensure compliance with E-Sign?

ANSWER

The Electronic Signatures in Global and National Commerce Act (E-Sign Act) provides a general rule of validity for electronic records and signatures for transactions in or affecting interstate or foreign commerce. The E-Sign Act allows the use of electronic records to satisfy any statute, regulation, or rule of law requiring that such information be provided in writing, if the consumer has affirmatively consented to such use and has not withdrawn such consent.

Prior Consent is required from the consumers in order to implement the E-Sign Act procedures. Prior to obtaining their consent, financial institutions must provide consumers, a clear and conspicuous statement informing the consumer:

• of any right or option to have the record provided or made available on paper or in a non-electronic form, and the right to withdraw consent, including any conditions, consequences, and fees in the event of such withdrawal;
• whether the consent applies only to the particular transaction that triggered the disclosure or to identified categories of records that may be provided during the course of the parties’ relationship;
• that describes the procedures the consumer must use to withdraw consent and to update information needed to contact the consumer electronically; and
• that informs the consumer how the consumer may nonetheless request a paper copy of a record and whether any fee will be charged for that copy.

Jonathan Foxx

Managing Director 

Lenders Compliance Group

E-Sign and Enforcing Electronic Signatures

QUESTION

We recognize the requirements of E-Sign. One subject of discussion has been its role in contractually binding our financial institution in mortgage loan originations, especially in the area of consumer disclosures. How valid are electronic signatures? Can electronic signatures be used to enforce contracts?

ANSWER

The Electronic Signatures in Global and National Commerce Act (E-Sign) was designed to allow greater flexibility to implement electronically signed transactions. Its requirements have been used more and more since E-Sign’s inception in 2000. E-Sign specifies that an electronic record or transaction may not be rendered invalid solely on the basis of its electronic or digital nature, but it makes no guarantees about the overall enforceability of such electronic contracts.

An electronic record is only enforceable if it meets the criteria specified in relevant contract laws as well as the language of E-Sign. It is worth noting that E-Sign applies to interstate or government interactions. With respect to in-state transactions, these are bound either by the Uniform Electronic Transactions Act (UETA) or the governing state laws relevant e-Signature laws – which, in some states, are actually more strict than E-Sign or UETA.

For an electronically signed document to be enforceable in court, it must meet certain requirements for legal contracts in addition to the electronic signature guidelines specified in the appropriate laws (such as E-Sign and UETA). According to E-Sign, an electronic signature is "an electronic sound, symbol, or process, attached to or logically associated with a contract or other record and executed or adopted by a person with the intent to sign the record."

In contract law, signatures serve the following general purposes:

1. Evidence: Authenticates agreement by identifying the signer with a mark attributable to the signer that it is capable of authentication.
2. Ceremony: Act of signing calls attention to the legal significance of the act, preventing inconsiderate engagements.
3. Approval: Express approval or authorization per terms of agreement. 

To elucidate on factors involving authentication, broadly, authentication is defined as evidence that a given record, contract, or form is a genuine, unaltered written representation of an agreement approved by two or more parties, whether in paper or electronic form.

An authentic document contains no evidence of fraud or tampering, such that it may be reasonably concluded that the parties in agreement did indeed assent to the enclosed terms. Assent is evidenced by an attributable, authenticated signature. To be authenticable, the transaction must contain enough information uniquely attributable to the user that fraud, forgery, or validity can be reasonably proven.

For an electronic transaction to withstand scrutiny in court, it must meet the definitions and criteria stated above; that is, it must be capable of authentication and non-repudiation, call attention to the document's legal significance (viz., creation of the electronic signature), and demonstrate approval of the terms of the agreement.

Some electronic signature technologies sufficiently meet these criteria and some do not. Therefore, it is very important for businesses and government agencies to choose their electronic signature technology carefully or risk making agreements that cannot be enforced.

If interested in a review of your electronic signature technology, please contact us. We have subject matter experts who can review the technological and regulatory compliance requirements of E-Sign.

Jonathan Foxx

Managing Director

Lenders Compliance Group

Consumer withdraws E-Sign Consent

QUESTION

Much has been said about obtaining E-Sign consent. But we received a notice from our borrower to withdraw the consent they had previously given to us. Now we are unsure how their withdrawal of E-Sign consent affects the disclosures that they had agreed to receive and already received. What are the disclosure consequences in a withdrawal of E-Sign consent?

ANSWER

The withdrawal by the consumer of consent to receive electronic records does not affect the legal effectiveness, validity or enforceability of electronic records provided to the consumer before the implementation of the withdrawal of such consent, if the applicable procedures to obtain the E-Sign consent have been fully implemented. [15 USC § 7001(c)(4)]

For instance, applicable procedures include that, prior to consenting, the consumers are to be provided with a statement of the hardware and software requirements for access to and retention of the electronic records, and they also consent electronically in a manner that reasonably demonstrates that they can access information in the electronic form that will be used to provide the information that is the subject of the consent.

The consumers’ withdrawal of consent to receive electronic records is effective within a reasonable period of time after the record provider receives the withdrawal. 

Under certain conditions, the consumers’ failure to comply may be treated as a withdrawal for E-Sign consent purposes if, after consumers give consent and upon their election, the following circumstances pertain:

1. A change in the hardware or software requirements needed to access or retain electronic records creates a material risk, such that consumers will not be able to access or retain a subsequent electronic record that was the subject of the consent; and

2. Consumers are provided with a statement of both the revised hardware and software requirements for access to and retention of the electronic records as well as the right to withdraw consent without the imposition of any fees for such withdrawal, and without the imposition of any condition or consequence that was not disclosed. The foregoing applies where, prior to consenting, consumers were provided with (A) a clear and conspicuous statement informing them of any right or option they have to the record provided or made available on paper or in non-electronic form; and (B) they had been notified of their right to withdraw the consent to have the record provided or made available in an electronic form, and of any conditions, consequences (which may include termination of the parties’ relationship), or fees in the event of such withdrawal.

Jonathan Foxx

President & Managing Director

Lenders Compliance Group

Emailing an Appraisal

QUESTION: May I deliver an appraisal and other valuations to the applicant(s) via email, thereby reducing the waiting period required prior to closing? 

ANSWER:  In order to provide an answer to this question, many issues need to be discussed. 

By now, everyone in the mortgage industry should be aware of the new ECOA Valuations Rule which applies to all applications received on or after January 18, 2014. 

The ECOA Valuations Rule states as follows:

§1002.14: Rules on providing appraisal reports 

(a) Providing appraisals and other valuations.

(1) In general. A creditor shall provide an applicant a copy of all appraisals and other written valuations developed in connection with an application for credit that is to be secured by a first lien on a dwelling. A creditor shall provide a copy of each such appraisal or other written valuation promptly upon completion, or three business days prior to consummation of the transaction (for closed-end credit) or account opening (for open-end credit), whichever is earlier. An applicant may waive the timing requirement in this paragraph (a)(1) and agree to receive any copy at or before consummation or account opening, except where otherwise prohibited by law. Any such waiver must be obtained at least three business days prior to consummation or account opening, unless the waiver pertains solely to the applicant's receipt of a copy of an appraisal or other written valuation that contains only clerical changes from a previous version of the appraisal or other written valuation provided to the applicant three or more business days prior to consummation or account opening. If the applicant provides a waiver and the transaction is not consummated or the account is not opened, the creditor must provide these copies no later than 30 days after the creditor determines consummation will not occur or the account will not be opened.

If the appraisal is mailed to the consumer, you need to add additional time onto the three business days referenced in the statute. Conservatively, the appraisal should be placed in the mail for delivery six days prior to consummation. 

What if the appraisal is delivered electronically? May a lender use the delivery and read receipt to confirm receipt as the start of the three business day requirement?  The short answer is Yes, but there are other considerations.

§1002.14 (a) (5) states:

Copies in electronic form. The copies required by §1002.14(a)(1) may be provided to the applicant in electronic form, subject to compliance with the consumer consent and other applicable provisions of the Electronic Signatures in Global and National Commerce Act (E-Sign Act) (15 U.S.C. 7001 et seq.).

The E-Sign Act requires the applicant(s) to consent to the use of electronic signatures and records to satisfy any statute or regulation.  Prior to obtaining their consent, a financial institution must inform the applicant(s) of (a) an option to have the record made available on paper; (b) the right to withdraw consent; (c) the procedures the applicant must use to withdraw consent; (d) the procedures the applicant must follow to request a paper copy of the record and whether a fee will be charged for the copy; and (e) the hardware and software requirements for access to and retention of electronic records. 

While this seems simple enough, let’s not forget two of the general themes set forth by the CFPB: (1) emails from financial institutions containing non-public personal information (“NPI”) should be encrypted; and (2) financial institutions should adopt an information security program which protects non-public personal information.

Thus, the ECOA Valuations Rule and E-Sign Act allow for the delivery of an appraisal via email, but the email should be encrypted as there is non-public personal information contained in an appraisal.

One would think that if a financial institution has a methodology for sending secure disclosures that are full of NPI, than the same delivery method would work for delivering a copy of the appraisal.

Michael Barone
Director/Legal & Regulatory Compliance
Lenders Compliance Group

E-Delivery of RESPA and TILA Disclosures to Multiple Applicants

QUESTION: 

We are a lender that initially attempts to e-mail disclosures to our loan applicants. Our e-delivery system requires the applicant to consent to e-delivery before the disclosures can be opened. If the applicant responds “yes”, the disclosures are opened. If there are co-applicants and we receive consent to e-delivery from one applicant, but not the second, is that sufficient for compliance with disclosure requirements under the Real Estate Settlement Procedures Act (“RESPA”) and the Truth in Lending Act (“TILA”)?

ANSWER: 

With respect to TILA disclosures, generally, when there are multiple applicants, the disclosures may be made to any applicant “who is primarily liable on the obligation”. [12 CFR 1026.17(d)] However, when there is a right to rescind (such as a refinance), the disclosures “shall be made to each consumer who has the right to rescind”. [12 CFR 1026.17(d)] So, if the transaction is a refinance, all applicants must consent to the e-delivery in order for the lender to be in compliance.

With respect to RESPA disclosures, the answer is not as clear cut. Regulation X, the implementing regulation of RESPA, simply states that “the lender must provide the applicant with a GFE”. [12 CFR 1024.7(a)] The term “applicant” is not defined. Thus, the conservative approach is to give the GFE to each applicant, which under your delivery system, will require each applicant to consent to e-delivery before opening the documents.

Additionally, although not part of your initial questions, note that with respect to notifications under ECOA and Regulation B, in the case of multiple applicants, notifications only need to be given to one applicant, but “must be given to the primary applicant where one is readily apparent”. [12 CFR 1002.9(f)]

Joyce Pollison
Director/Legal & Regulatory Compliance
Lenders Compliance Group