August 31, 2001
Office of the Comptroller of the Currency
Public Information Room
250 E Street, N.W.
Third Floor, Mail Stop 1-5
Washington, D.C. 20219
Attention: Docket No. 01-15
Ms. Jennifer J. Johnson Secretary
Board of Governors of the Federal Reserve System
20th and C Streets, N.W. Washington, D.C. 20551
Attention: Docket No. R 1105
Robert E. Feldman
Executive Secretary
Federal Deposit Insurance Corporation
550 17th Street, N.W.
Washington, D.C. 20429
Attention: Docket No. FRO1-17888,
Comments/OES
Manager, Dissemination Branch
Information Management and Services Division
Office of Thrift Supervision
1700 G Street, N.W.
Attention: Docket No. 2001-41
Re: Study of Banking Regulations Regarding the Online Delivery of
Financial Services
Dear Madams and Sirs:
The Electronic Financial Services Council ("EFSC") 1
appreciates the opportunity to respond to the requests for comments issued
by the Federal Reserve Board ("FRB"), the Office of the
Comptroller of the Currency ("OCC"), the Office of Thrift
Supervision ("OTS") and the Federal Deposit Insurance
Corporation ("FDIC") (collectively, the "banking
agencies") in connection with their respective studies of banking
regulations regarding the online delivery of financial services. The
banking agencies are required by Section 729 of the Gramm Leach Bliley Act
to study their respective regulations regarding the online delivery of
financial services and report to Congress their findings and any
recommendations for regulatory or legislative action to better facilitate
the online delivery of financial services.
The EFSC commends the banking agencies for undertaking these studies and
for their efforts to date to review and revise their regulations to better
accommodate new electronic commerce technologies and new business
strategies in the financial services industry. The members of the EFSC
have experienced significant expense, delay and frustration in their
efforts to offer their products to consumers via the Internet as a result
of a variety of "legacy" laws and regulations designed to
facilitate face-to-face, paper-based transactions, but which now stand as
barriers to the electronic delivery of financial services. Although there
has been significant progress in removing one of the largest impediments
to financial services, the need for paper documents and pen-and-ink
signatures, through the passage of federal electronic signature
legislation, much remains to be done. The EFSC appreciates the opportunity
to participate in the current effort of the banking agencies to study and
identify areas of law and regulation that should be revised, repealed or
reworked to improve the online delivery of financial products and
services.
The banking agencies have raised a variety of issues in their respective
requests for comment, many of which are substantial similar. The following
are the EFSC's comments on some of the specific issues and questions
presented by the agencies.
Electronic Signatures
The banking agencies have asked whether it is appropriate for them to
issue regulations or other supervisory guidance to set forth standards for
the use of electronic signatures and records pursuant to the Electronic
Signatures in Global and National Commerce Act, 15 U.S.C. § 7001 et seq.
("E-SIGN Act").
The EFSC believes that as a general matter the rules set forth in the
E-SIGN Act have tremendous promise for facilitating the online delivery of
banking and other financial services. In consumer transactions, the E-SIGN
Act addresses the need of consumers to obtain information before agreeing
to receive legally mandated disclosures as electronic records. While the
EFSC believes that certain provisions of the E-SIGN Act could stand
improvement, particularly those relating to the timing and methodology for
delivering disclosures mandated by the E-SIGN Act in connection with
consumer consent, 2 it is premature, unnecessary and, perhaps
inappropriate, for the agencies to issue regulations or other supervisory
guidance on these aspects of the E-SIGN Act.
The E-SIGN Act establishes a series of specific procedures that must be
followed before a federal agency has authority to issue regulations
interpreting the E-SIGN Act. As noted in our comment to the Board
regarding its interim rules concerning the use of electronic
communications to provide required notices under five consumer protection
regulations (i.e., regulations B (Equal Credit Opportunity Act), E
(Electronic Fund Transfers), M (Consumer Leasing), Z (Truth in Lending),
and DD (Truth in Savings)), the EFSC is concerned that regulations may be
issued which, while helpful in providing practical solutions to important
problems with implementing electronic records and signatures, may have the
unintended effect of creating future legal uncertainty for financial
service providers by circumscribing the procedural requirements of the
E-SIGN Act and misinterpreting provisions of the Act. 3
Accordingly, while the EFSC reiterates its previous comments regarding the
E-SIGN Act as set forth in the attached materials, and would urge the
banking agencies to recommend that Congress consider appropriate technical
corrections to the E-SIGN Act, we believe that regulations or other
supervisory guidance interpreting the E-SIGN Act are not warranted at
this time.
Differing Legal Requirements
The federal banking agencies have asked whether there are particular
aspects of conducting online banking and lending activities that could
benefit from a single set of legal standards that can be applied uniformly
nationwide.
As a general matter, the EFSC supports the creation of clear, consistent
and uniform standards for regulating financial services given the
increasing national and international character of the financial services
industry in the 21st century. Indeed, the EFSC strongly supported
inclusion of provisions in the E-SIGN Act to ensure that it creates a
nationwide minimum standard for the use of electronic records and
signatures. The EFSC is concerned that there are several areas in which
there is a significant risk that the states, and in some cases local
governments, will adopt a patchwork of laws that will impede not only the
online delivery of financial services, but the ability of financial
institutions generally to offer products and services on a nationwide
basis. In particular, the EFSC is concerned with the possibility that
states will adopt laws addressing the information sharing practices and
lending operations of financial institutions under the guise of consumer
privacy and predatory lending laws in a manner that makes compliance
unduly complicated and costly and operations impractical. Already, we have
seen several financial institutions abandon significant market segments as
a result of unworkable, over reactive and non-uniform state laws. The EFSC
urges the banking agencies to recommend that Congress adopt legislation
providing for a single national standard on these and other important
issues that run to the heart of the operations of national and regional
financial services firms.
With respect to privacy legislation, we note that even before there has
been an opportunity to assess the impact of the privacy provisions of the
Gramm Leach Bliley Act, states are proposing additional privacy
requirements. For the reasons described above, we believe that a patchwork
of state privacy requirements will inhibit the electronic delivery of
financial services. The issues surrounding privacy are not only emotional,
but more complex than they would at first appear. The Council believes
that there are strong arguments for adopting national standards regarding
privacy and for placing a moratorium on state enactments until there is an
opportunity for a thorough consideration of all the aspects of this
complex issue at the federal level. This is an area where the promotion of
interstate and international commerce, in our view, requires a uniform
national policy.
The Need for Uniformity of Licensing Requirements
The banking agencies also have asked whether there are any state laws or
regulations, such as licensing provisions for banking and other financial
products and services, that affect the nationwide provision of financial
products or services over the Internet. In the experience of members of
the EFSC, state licensing requirements are becoming increasingly
burdensome and costly, inhibiting the ability of financial institutions to
offer their products and services to consumers nationwide.
By transmitting information over the Internet, a company may, from a
single location, enter into a consumer transaction in any and every state.
A threshold question is whether the transaction occurs in the state in
which the consumer is located, or at the location from which the
electronic message originated (which may not necessarily be where the
company transmitting the message is physically located and licensed). Most
states that we have encountered believe that the transaction is deemed to
occur in the state where the consumer is located. Also, in some cases,
such as residential mortgage loan transactions, state jurisdiction follows
from the situs of the property securing the loan, even if neither the
borrower nor the lender are residents of the situs state. As a result,
insurance companies, mortgage brokers, mortgage lenders, and real estate
brokers are typically required to obtain separate licenses or other
regulatory approvals in each state in which they do business.
While the difficulties associated with 50 or more different licensing laws
predate the existence of the Internet or the conduct of business by
electronic means, the ease of access to a nationwide market made possible
by new technologies such as the Internet heightens the need for greater
uniformity in the licensure and regulation of financial service providers.
The Gramm Leach Bliley Act of 1999 was an important step towards the
elimination of unnecessary and unduly burdensome regulatory barriers for
the banking and securities sectors of the financial industry. The EFSC
believes similar progress must be achieved in the mortgage, insurance and
real estate industries.
For example, the regulations governing the brokering, making, and
servicing of residential mortgage loans, home equity loans and consumer
loans vary significantly from state to state. Each state has at least one,
and in some cases two or more licensing laws applicable to the mortgage
business. There is no consistency of definitions of the activities subject
to licensing or the categories of companies eligible for exemption from
licensing. A company doing business on the Internet seeking to become
licensed to offer first and second mortgage loans in all 50 states and the
District of Columbia must complete 50 to 75 separate license applications,
obtain multiple surety bonds, provide similar corporate, personal and
financial information on its officers, directors, and investors on
separate forms for each state, and undergo extensive and repetitive
background investigations. Although each state reviews roughly the same
information when considering license applications, there is no uniformity
with respect to how the information is gathered, processed or analyzed,
nor is there an effective system by which states can access the
information obtained by other states to reduce the redundancies of the
current system.
As a result of the inefficiencies of the multi-state licensing process, a
company seeking national lending authority may require up to a year or
more to obtain all the licenses required to operate. The direct cost of
this process is significant as well, running as much as $500,000 or more
in terms of state filing fees, bond premiums, auditors' fees, registered
agent expenses, and legal fees. The indirect costs associated with the
current multi-state licensing system, such as the diversion of extensive
corporate and administrative resources and the opportunity costs resulting
from the lengthy time to obtain nationwide authority to conduct business,
are more difficult to quantify, but are undoubtedly significant as well.
Corporate officers, directors and investors can expect to be called upon
repeatedly to provide detailed personal, business and financial
information, and to provide fingerprints for multiple criminal background
investigations. In addition, once licenses are obtained, companies must
incur significant costs and devote substantial administrative resources
for functions related to the upkeep of licenses, including annual license
renewal procedures, the completion of annual reports of lending activity
and financial results, general regulatory compliance and management of
state examinations, and the payment of annual fees and assessments.
To address these concerns, and reduce the substantial barriers to online
delivery of financial services presented by the current system of
multi-state regulation, the EFSC suggests that the banking agencies
consider the feasibility of a federal non-depository financial institution
charter. A federal non-depository financial institution charter could be
available as an alternative to, and not a replacement of, the current
system of state licensure and regulation of non-bank financial services
providers. The advantages of such a charter to consumers and companies
offering financial products online would be clear: companies could obtain
authority to do business nationwide, and be subject to supervision and
oversight, by a single, federal regulator. This would eliminate a
substantial impediment to the online delivery of financial services
throughout the country, while at the same ensuring consumer protection via
a strong regulator and expanding access to financial services to consumers
located in inner cities, rural areas and other under served markets.
Moreover, because the charter would not involve deposit insurance, safety
and soundness concerns would be minimized and taxpayers would not bear the
risk of loss.
Alternatively, legislation could be enacted to encourage states to adopt,
within a specified time period, uniform licensing laws or a system of
reciprocity under which a license issued in one state is recognized in
other states, provided that the laws applicable in the "home
state" of the licensee meet a minimum threshold standard of
regulation and oversight. Unless a significant majority of states adopt
either a uniform licensing law or provide reciprocity for licenses issued
in other states, it would be appropriate for a federal licensing system to
be implemented to ameliorate the significant barriers to electronic
commerce resulting from the current multi-state licensing system. A
precedent has been set in the insurance industry for a mechanism to
encourage states to adopt a uniform, national licensing system for persons
who sell or solicit the purchase of insurance. The Gramm-Leach-Bliley Act
contains provisions (see Sections 321-336) that require states to act
within three years either to adopt uniform licensing laws or to enact
reciprocity laws governing the licensing of nonresident insurance agents.
If a majority of states fail to act within three years, a national
registration scheme, known as the National Association of Registered
Agents and Brokers ("NARAB"), will be implemented. An insurance
agent who registers with NARAB would be able to be licensed in any state
without regard to state residency requirements so long as the agent pays
the requisite license fees and meets applicable bonding requirements. The
EFSC suggests that consideration be given to extending the NARAB model to
other segments of the financial services industry, such as mortgages and
real estate, that are plagued by similar licensing inefficiencies inherent
in the current non-uniform, multi-state licensing system.
In-State "Bricks and Mortar" Office Requirements are
Unconstitutional and Clear Barriers to Electronic Commerce
In several segments of the financial services industry, a host of state
laws exist which require financial service providers to maintain offices
in state or employ local residents as employees or agents. While some of
these laws are legacies of an era where it was valid to assume a
transaction would occur in person, others were clearly intended to
restrict out-of-state competition. The EFSC believes it is appropriate for
the federal government to exercise its authority to regulate interstate
commerce and block enforcement of these state laws that unduly burden
commerce among the states and which are antithetical to the concept of the
Internet as an electronic marketplace free of the expense and
inconvenience of physical places of business.
In the mortgage industry, approximately 30% of states require companies
that make, broker or service first or second lien, residential mortgage
loans to maintain some form of instate office as a condition for becoming
licensed. Among the states with these so called "bricks and
mortar" requirements are Arizona, California, Georgia, New Jersey,
Ohio, Pennsylvania, and South Carolina. In-state office requirements no
longer serve any legitimate public policy object, such as consumer
protection, and impose an undue burden on interstate commerce in the
mortgage industry. Requirements for companies to maintain offices or
employees in a particular state cannot be justified by business necessity
and are out of sync with new technologies and business models that permit
the accurate, convenient, and efficient communication of information to
consumers via the Internet, centralized call centers and express mail.
Without discussing the specific bricks and mortar rules for each state, it
is useful to consider the requirements in South Carolina's mortgage broker
statute as an example of the burden these requirements impose on all
mortgage companies operating nationally from centralized locations, using
the Internet or other communications media. South Carolina law requires
that a licensed mortgage broker maintain a physical place of business in
the state, which, at a minimum, is staffed by at least one employee with
authority to contract on behalf of the licensee and to accept service of
process on the broker. The office must be open during regular business
hours, which are defined as at least 30 hours a week from Monday through
Friday. The state regulator must be notified of the licensee's hours of
operations if the licensee's office is not open for business from at least
8:30 am to 5:00 pm, Monday through Friday.
While requirements in other states are not as well defined or onerous, the
mere necessity of a physical presence in a state is a significant burden
for companies doing business through electronic commerce. Companies are
forced to either incur the cost of leasing offices, hiring employees and
paying for equipment that they do not need and would not use but for the
fact of the bricks and mortar requirement, or elect not to do business in
that state. Either way, consumers are the ones that ultimately suffer as
there are fewer sources of capital and less competition among lenders; and
those out-of-state lenders that elect to do business in the state must
incur greater expenses and do business at a competitive disadvantage, with
the likely result being higher costs for consumers.
Unfortunately, in many states, the bricks and mortar requirements are not
merely a case of old laws needing to be brought up to date. In the past
three years, a number of states, including Alabama, Georgia, Kansas, Ohio,
Texas and Wisconsin, have adopted some form of in-state office requirement
for mortgage companies. In many cases, these laws are the result of
lobbying efforts by local mortgage companies with the express purpose of
limiting competition from lenders and brokers operating on the Internet or
otherwise from out of state.
With respect to insurance sales, many states still require that a resident
agent countersign policies issued by agents or insurers not domiciled in
the state. Some states also have laws or other requirements that specify
that a nonresident agent or producer must be accompanied by a resident
producer to solicit insurance. Countersignature requirements and
resident-nonresident "hand holding" requirements clearly impede
the sale of insurance through electronic means and serve only as a
protection of resident agent commissions.
In addition to the fact that there is no reasonable business or public
policy justification to support the continuation of in-state office or
resident agent requirements, a compelling legal case may be made that a
state law mandating that a company operate an office instate or employ a
state resident as a condition of becoming licensed or operating in the
state violates the Commerce Clause of the Constitution of the United
States.
It is well settled that a state law that discriminates on its face or in
its effect by treating in-state and out-of-state commerce or competitors
differently is per se invalid under the Commerce Clause. Hughes v.
Oklahoma, 441 U.S. 322, 336 (1979); New Energy Co. of Indiana v. Limbach,
486 U.S. 269, 274 (1988). A state law that discriminates in favor of local
interests to the detriment of out-of-state businesses "invokes the
strictest scrutiny of any purported legitimate local purpose, and of the
absence of nondiscriminatory alternatives" and will generally be
upheld only if it is the least restrictive means available to achieve a
legitimate local government objective. Hughes v. Oklahoma, 441 U.S. at
337.
Federal courts considering the validity of in-state office requirements in
connection with professional licenses have consistently struck down
requirements that companies maintain an office in the subject state as a
condition for holding a license. See, e.g. Codar, Inc. v. Arizona, No.
94-16902,1996 U.S. App. LEXIS 21356 (9th Cir. 1996) (collection agencies);
Georgia Association of Realtors v. Alabama Real Estate Commission, 748
F.Supp. 1487 (M.D. Ala. 1990) (real estate brokers); Underhill Assoc.,
Inc. v. Coleman, 504 F.Supp. 1147 (E.D. Va. 1981) (securities dealers).
Indeed, the Supreme Court has noted that state laws requiring business
operations to be performed instate that could be performed more
efficiently elsewhere are virtually per se illegal. See, e.g., Pike v.
Bruce Church, 397 U.S. 137, 145 (1970).
The EFSC urges the banking agencies to recommend that Congress enact
legislation to remove these unconstitutional, protectionist barriers to
electronic commerce by expressly preempting state requirements for instate
office and resident agent requirements for mortgage companies, insurance
companies and other financial services providers.
Appraisals
The banking agencies have asked whether the requirement for written
appraisals impairs or impedes online lending operations. To the extent
that there is any doubt as to the ability of an electronic appraisal to
substitute for a written appraisal, the EFSC believes that this issue has
been clearly addressed by the adoption of the E-SIGN Act. The E-SIGN
Act provides that with respect to any transaction in or affecting
interstate commerce, 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. Clearly, an
appraisal is a record relating to a transaction - an appraisal is
typically required by lenders, if not by regulation, as a condition of
making a mortgage loan. Thus, because the E-SIGN Act permits the use of
an electronic record wherever a writing is required, there is no need for
the agencies to provide guidance on how electronic appraisals can be
utilized in connection with lending transactions. Furthermore, the
Appraisal Standards Board ("ASB") of the Appraisal Foundation
(overseen by the Appraisal Subcommittee of Federal Financial Institutions
Examination Council ("FFIEC")) issued a Statement on the
Electronic Transmission of Reports (statement 8) in July 1995. This has
been the "regulatory" acknowledgment that appraisals could be
transmitted electronically subject to certain protections: essentially
that the appraisal performed an act (similar to a signature) that
indicated that he or she accepted/adopted the work as his or her own and
that he or she was assured that the appraisal was transmitted and received
in its original form. The ASB has recently withdrawn that statement, not
because they disapproved of electronic transmissions, but felt that the
practice was well enough established that the statement might be more of a
hindrance than an encouragement (or a bar to future changes in
technology).
The agencies have also sought comment on whether additional regulatory
guidance is needed with respect to authentication of an electronic
appraisal, certification of the appraiser, or other standards regarding
the authenticity and integrity of electronic appraisals. The EFSC believes
that the recent guidance issued by FFIEC regarding authentication in an
electronic banking environment creates a reasonable and flexible standard
that should be applied expanded and applied to cover financial
institutions' electronic communications with vendors, including providers
of electronic appraisals. 4
Finally, the EFSC recommends that the banking agencies consider through
the FFIEC a separate process to review the feasibility of certain property
valuation models as an alternative to an appraisal performed by a licensed
or certified appraiser. New, automated property valuation tools are
increasingly being utilized as part of automated underwriting systems to
assist lenders and investors in making decisions to extend credit or
purchase loans. Typically, the cost of these alternative valuation methods
is substantially less than an appraisal. In light of the potential cost
savings to consumers, the banking agencies should consider whether and
under what circumstances these valuation tools should permitted as a
substitute for a full appraisal performed by a licensed or certified
appraiser.
Weblinking
Finally, the banking agencies have requested comment on whether various
weblinking or hyperlinking arrangements create consumer confusion and
whether further regulatory guidance is required. In the typical case, a
financial institution may provide hyperlinks from its website to websites
of affiliated or non-affiliated third parties that offer financial and/or
non-financial products or services not otherwise offered by the
institution as a means of providing users of its website access to a wider
array of products or services.
While the EFSC acknowledges that the possibility of consumer confusion
always exists, responsible institutions have significant incentives to
avoid any misunderstanding over which entity provides which products and
services. From a legal perspective, a financial institution providing
weblinks would be wise to avoid any characterization that it is offering
or endorsing the product or service available through the link, not only
to prevent claims of liability for the product or service itself, but also
to avoid questions regarding its licensing authority to broker products
offered at a linked website, such as mortgages, insurance or securities.
In addition, financial institutions have a significant reputational and
customer relations interest in making clear their limited role when
providing weblinks as they do not want to be viewed by their customers or
the public as guarantors of the quality of products and services offered
by third parties. Accordingly, absent an empirical showing of actual
consumer confusion or harm, the EFSC believes that regulation of
weblinking arrangements is not warranted at this time.
The banking agencies request for comment on weblinking highlights another
concern, which is the need for consistency among federal agencies when
dealing with new electronic commerce issues. The financial services
industry has been awaiting guidance for many years from the Department of
Housing and Urban Development ("HUD") on the applicability of
the Real Estate Settlement Procedures Act ("RESPA") to many
aspects of the Internet, including weblinking arrangements. The EFSC is
concerned that the various statements by the OCC over the years, including
most recently its proposed rule and supervisory guidance that define
weblinking as a "finder" activity permissible of national banks
may have the unintended effect of prejudicing consideration of weblinking
arrangements under RESPA. In particular, there are substantial questions
as to what type of weblinks and under what circumstances such arrangements
might constitute a "referral" of real estate settlement service
business for which no fees may be paid may be paid under RESPA. The EFSC
urges the banking agencies to exercise caution when reviewing emerging
electronic commerce business practices and consider the implications of
their regulations on other laws outside their immediate interpretative
jurisdiction. When appropriate, the banking agencies should consult with
other federal agencies, such as HUD or the Federal Trade Commission, to
ensure greater consistency and uniform treatment of a particular business
practice.
The EFSC appreciates this opportunity comment on many of the important
issues and questions raised by the banking agencies in connection with
their studies of regulations regarding online delivery of financial
services. Please contact Jeremiah S. Buckley or John Kromer at (202)
974-1000 with any questions.
Sincerely,
/SIGNED/ Jeremiah S. Buckley
1 The EFSC is an
organization representing many of the leading companies offering financial
services over the Internet. The Council's mission is to update laws and
regulations to facilitate the electronic delivery of financial services
(including mortgages, insurance, real estate, on-line banking services,
and securities). Members include: Countrywide Home Loans, Inc., Intuit
Inc., GE Capital Mortgage, Microsoft Corporation, Cendant Mortgage, Chase
Manhattan Mortgage, Citigroup Mortgage, Inc., Fannie Mae, Freddie Mac,
GMAC Mortgage Corporation, Lender Services, Inc., Lending Tree, The
Principal Financial Group, United Guaranty Insurance, and Wells Fargo, and
Esurance. Additional information about the EFSC is available on the
Internet at www.efscouncil.org.
2 As further background on the EFSC's position regarding the
E-SIGN Act in general and the consumer consent provisions in particular,
we have attached copies of the EFSC's comments to the Federal Trade
Commission and National Telecommunications and Information Administration
and its testimony before the House Financial Services Subcommittee on
Domestic Monetary Policy, Technology and Economic Growth as Exhibits A, B,
and C.
3 See the EFSC's comment to the Board, attached as
Exhibit D.
4 See FFIEC, Authentication in an Electronic Banking
Environment (August 8, 2001).
March 17, 2001
Secretary
Federal Trade Commission Room H-159
600 Pennsylvania Avenue, N.W.
Washington, D.C. 20580
Sallianne Fortunato
National Telecommunications and Information Administration
Room 4716
14th Street and Constitution Avenue,
N.W. Washington, D.C. 20230
Re: ESIGN Study - Comment P004102
To the Federal Trade Commission ("FTC"):
These comments are provided in response to your Request for Comment and
Notice of Public Workshop on the Electronic Signatures in Global and
National Commerce Act ("ESIGN"). The Electronic Financial
Services Council ("EFSC") is a national trade association
promoting legislation and regulation designed to ensure that electronic
commerce continues to revolutionize the availability and delivery of
financial services.
The EFSC welcomes the opportunity to comment on the benefits and burdens
of requiring consumer consent to receive information electronically
pursuant to Section 101(c)(1)(C)(ii). The EFSC believes that as a general
matter the rules set forth in ESIGN have tremendous potential for
assisting the growth of electronic commerce. Furthermore, the EFSC is
firmly committed to the proposition that consumers are entitled to timely
and meaningful information concerning their options and all the methods
available to them for receiving required notices and disclosures.
Electronic commerce cannot reach its full potential without the consumer's
complete comfort with, and confidence in, both the process and the medium.
Effective delivery of the ESIGN consent disclosures as set forth in
Section 101(c)(1) ("ESIGN consent disclosures") will materially
contribute to that comfort and confidence.
The EFSC strongly supported the original package of consumer protection
provisions added to ESIGN in the House of Representatives (sometimes
called the "Inslee Amendments"). The EFSC supports both (i) the
requirement under Section 101(c)(1)(A) that consumers give affirmative
consent to electronically receive information otherwise required to be in
writing, and (ii) disclosure of the information currently mandated by
Section 101(c)(1)(B).
However, the EFSC also believes that the current rules regarding the
timing and methodology for delivering the ESIGN disclosures and obtaining
consumer consent could be substantially improved. Certain elements of
ESIGN's rules concerning effective consumer consent in Section
101(c)(1)(C)(ii) were not part of the original Inslee Amendments. Instead,
they were added at the very end of the legislative process and so were,
perhaps, unavoidably subjected to a less rigorous level of analysis than
the rest of the statute. In particular, the consent process described in
Section 101(c)(1)(C)(ii) can create unanticipated, and unintended,
obstacles to the effective use of electronic commerce by both consumers
and businesses. This letter will respond to a number of the questions the
FTC has addressed to the financial services industry concerning the ESIGN
consent procedure.
The consumer consent provisions in ESIGN Section 101 (c) lay out four
principal procedural requirements:
o The consumer must be provided the "ESIGN consent disclosures";
o The disclosures must be conspicuously displayed prior to the consumer's
first receipt of information which otherwise would be required to be
delivered in writing ("required information");
o Having received the ESIGN consent disclosures, the consumer must consent
electronically to receive the required information in electronic form; and
o There must be a "reasonable demonstration" of the consumer's
ability to receive and access the file formats that will be used during
the transaction.
EFSC's members are now in the process of designing and implementing a
variety of products and services intended to benefit from and implement
ESIGN. For the most part, these products and services are still in the
planning and design stage, so that at this time the EFSC has little
empirical data available concerning consumer acceptance and practical
application of the ESIGN consent disclosure requirements "in the
field." However, the EFSC's members do have experience in design and
implementation of electronic commerce applications that are not dependent
on ESIGN for validity (e.g. online lending applications, commercial data,
aggregation and exchange, and agreements for provision of certain
financial services), as well as significant experience with consumer
reaction to those designs. Based on this experience, the EFSC's members
believe that implementation of the consumer consent provisions, and in
particular the electronic consent and "reasonable demonstration"
requirements of Section 101(c)(1)(C)(ii), impose the following potential
burdens (discussed in more detail below):
o The combination of the timing and ESIGN consent disclosure requirements
may, in a number of instances, force presentation of the ESIGN consent
disclosures before the customer has committed to the transaction in any
form, and before the customer is prepared to choose either an electronic
or written medium. An example would be the delivery of pre-application
disclosures in connection with certain types of consumer credit products.
o The reasonable demonstration test requires interruption of the
contracting process to establish, based on a subjective standard, the
consumer's ability to access documents that are provided in formats in
common use for which viewing software is freely available. The test also
provides an incentive to favor certain file formats over others in order
to streamline the testing process.
o The requirement of electronic consent, combined with the reasonable
demonstration test, impairs the use of electronic contracting and
disclosure in business models where the relationship begins with a
face-to-face meeting in a commercial setting or via telephone (or some
combination of the two), but both parties wish to communicate and exchange
required information electronically.
o Technical violations of the rules for ESIGN consent disclosures may
result in disproportionate penalties.
As noted earlier, the members of EFSC have not, in general, had a chance
yet to fully test consumer acceptance of, or reaction to, the systems and
processes they are designing. It is conceivable that additional issues may
arise as testing continues.
It is the view of the EFSC that the information communicated to consumers
in the ESIGN consent disclosures is of significant benefit to both
consumers and businesses; it empowers consumers to make educated decisions
regarding the transaction of business and the receipt of legally required
disclosures electronically. However, the benefits associated with some of
the technical and procedural requirements outlined above for the delivery
of the ESIGN consent disclosures and the process for obtaining consumer
consent are significantly outweighed by the burdens they impose on
electronic transactions involving financial services and products. The
balance of this letter will explore each of these burdens in more detail
and suggest statutory solutions that would retain the most meaningful
benefits of the consent provisions, while reducing the burdens. The letter
will also indicate the FTC questions that are addressed in the course of
the discussion.
EVALUATING THE BURDENS
Timing (Responds to FTC Questions 1, 3, 5, 6, 12, 15)
As a general matter, both ESIGN and the Uniform Electronic Transactions
Act ("UETA") require the parties to an electronic transaction to
agree to replace any required writings or traditional signatures with
electronic equivalents. The consent can be express or implied from the
circumstances. Timing is left to the parties under the UETA for all
transactions and for business-to-business transactions under ESIGN.
Consent may be given before the electronic records and signatures are
utilized, or the use of electronic methods may be ratified at any time
during the transaction or even after the transaction is concluded.
In contrast, Section 101 (c) requires the ESIGN consent disclosures to be
given before the required information is provided. In some financial
transactions (particularly certain types of consumer credit transactions)
required information must be delivered before the consumer is committed to
conclude the transaction. The presentation of the full ESIGN consent
disclosures while the consumer is still evaluating the proposed
transaction can be intrusive and confusing. Introducing the burden of
reviewing and absorbing the ESIGN consent disclosures too early in the
"shopping" process may cause consumers to reflexively opt out of
efficient, cost effective electronic delivery and signature systems that
could benefit them. This is particularly true in the context of an online
transaction initiated by the consumer, who is actively and intentionally
seeking out the required information electronically. The forced display of
the detailed ESIGN consent disclosures while the consumer is still
shopping interrupts the consumer's evaluation of the proposal, and may
lead to the erroneous belief that the consumer is being asked to commit to
the transaction itself, when all that is being sought is consent to use
electronic records to effect delivery of pre-transaction required
information.
Past experience with consumer reactions to online contracting strongly
suggests that under these circumstances many consumers will become either
frustrated or confused and abandon the transaction entirely. As a
consequence, some lenders designing online systems are actively seeking
ways to delay the ESIGN consent disclosures until the consumer is at the
point of committing to the transaction. One way this is being done is by
invoking the rules relating to telephone loan applications, so that
initial delivery of required information may occur shortly after the
consumer has completed the application process. In this way, the ESIGN
consent disclosures do not interrupt or interfere with the consumer's
evaluation of the offered loan and completion of the application. The
result is that the timing of information flow to the consumer is being
determined, not by consumer preference, need or convenience, but by the
strictures of the timing requirements for consumer consent.
Reasonable Demonstration Test (Responds to FTC Questions 1, 3, 7, 12, 15,
26, 27)
The requirement of a "reasonable demonstration" of the
consumer's ability to receive file formats is already having an impact on
electronic financial services, both by (i) discouraging the use of widely
available, reliable file formats, such as Adobe Acrobat PDF ("PDF")
in favor of HTML and other formats native to the software delivering the
ESIGN consent disclosures, and (ii) discouraging some major lenders from
utilizing ESIGN at all.
One of the principal goals of any electronic information delivery process
is to keep the flow of information as streamlined as possible. Experience
has shown that frequent extended interruptions and downloads increase the
likelihood that the consumer will abandon the transaction. As a result,
EFSC members and representatives have observed a growing pattern over the
last few months: a number of system designers are selecting the native
file format of the software delivering the ESIGN consent disclosures (such
as HTML for a web browser) as the exclusive file format for delivering all
required information. This choice is made because it simplifies completion
of the reasonable demonstration test, without regard to whether it is the
best format for handling the documents in the transaction. Financial
service providers reason that in many cases consumers will initiate
electronic contact over the Internet, using a web browser, or using
proprietary software provided for the specific purpose (such as bill
payment or money management software). If the ESIGN consent disclosures
are delivered in the software's native format, and the consumer reviews
the ESIGN consent disclosures and affirmatively consents, that should
constitute a "reasonable demonstration" of the consumer's
ability to receive records. The consumer and service provider have not had
to deal with multiple formats, and the consumer has not had to endure a
complex "download and response" test.
Essentially, the reasonable demonstration test provides a disincentive to
use alternative file formats such as PDF and Microsoft Word, despite the
fact that these formats are highly reliable, print and store accurately
across a wide variety of platforms and printers, provide an excellent
medium for delivering information with the formatting intact, and may be
viewed using software that is distributed free of charge and is widely
available. As a result, the file format of choice is being selected by
some designers based on its unobtrusive "fit" into the
reasonable demonstration test, and not on an evaluation of the most
appropriate and useful format for the transaction. This is ironic, given
Congress' clear general intent that ESIGN be technologically neutral and
not favor any one process or format for doing business electronically to
the detriment of others.
In addition, uncertainty as to what constitutes a "reasonable
demonstration" is persuading some businesses to avoid the use of
electronic documentation entirely. The test is subjective and fact-based.
This means that even if the required information is actually received and
reviewed, consumers may at a later date challenge the effectiveness of the
required information based on whether the test was reasonable.
Furthermore, because the reasonableness of the test will usually be a
question of fact, not law, there will be little opportunity for the
industry to shape its testing process based on reported judicial decisions
and prior case law. Representatives of the EFSC have been present at
public forums where counsel to large, sophisticated lenders stated that
they have advised their clients against using ESIGN because of these
uncertainties.
Electronic vs. written consent (Responds to FTC Questions 1, 3, 12, 13)
The primary benefits of substituting electronic records and signatures for
traditional paper-and-ink documents are the ability to better manage data,
workflow, quality control, speed of delivery, and document management
(storage, retrieval and transmission). These benefits accrue whether a
transaction is initiated online, or initiated in person. In the financial
services industry, many customers still prefer to establish a relationship
with an in-person visit, but are fully prepared to accept electronic
delivery of the required information that is part of the ongoing
relationship. Because of the electronic consent and reasonable
demonstration requirements, businesses cannot rely on a consumer's consent
obtained during the initial in-person meeting. Instead, the business must
provide instructions for giving consumer consent, which the consumer must
keep and remember to follow at a later date. In some instances, the time
for providing certain required information may be running while the
business is waiting for the consumer to complete the consent process. As a
result, the business must continue to send paper documents to a consumer
who is slow to complete the consent procedure, even though the consumer
may be ready, willing and able to receive electronic documents.
Disproportionate Penalties (Responds to FTC Questions 1, 3, 5, 11, 12, 14)
Under Section 101(c)(1)(A) and (B), a technical failure to comply with the
ESIGN consent disclosure and timing requirements may result in ineffective
delivery of the required information, even if the violation was not
intentional and did not prevent receipt and review of the required
information. If the required information is not considered effectively
delivered, or consent is deemed ineffective, the provider of the required
information may be exposed to significant statutory damages and other
remedies associated with the substantive law underlying the transaction.
For example, it might be argued that an unintentional misstatement of the
fees for paper copies, or a technically incorrect statement of hardware or
software requirements, invalidates both the consent and delivery of the
required information, even though the inaccurate disclosure had no impact
on the transaction and the required information was actually received and
reviewed successfully. In the same vein, it may be argued that both
consent and delivery of required information is invalidated if the
presentation of the ESIGN consent disclosures is not correctly timed, even
though the consumer wished to consent and actually received and reviewed
the required information.
EVALUATING THE BENEFITS
Each of the consent timing and methodology requirements discussed above
generates some benefit. However, upon examination it is clear that the
benefits are not as significant, or as certain, as might be thought at
first glance.
Timing (Responds to FTC Questions 3, 5, 17)
The object of the ESIGN consent disclosures timing rule is to prevent the
use of ESIGN to force the consumer to accept electronic delivery of
required information. It is also intended to prevent the use of ESIGN to
render required information ineffective either because it is delivered in
an obscure manner or in file formats the consumer is unable to view,
download or print. In the context of required information delivered before
the consumer is committed to the transaction, however, the need for such
protection is attenuated, so long as the consumer has initiated the
transaction online and has been notified that important information is
about to be delivered electronically. If the information is delivered in
an inaccessible format, or is garbled in transmission, or is otherwise
unreadable, the consumer has the option of simply terminating the
transaction. The past experience of EFSC members strongly indicates that
consumers routinely terminate unconsummated transactions when they become
frustrated or confused by the on-line process.
Reasonable Demonstration Test (Responds to FTC Questions 3, 17)
The "reasonable demonstration" test is intended to establish the
ability of a consumer to receive and view the file formats being used to
deliver required information. The significance of the test is diluted,
however, because of other protections available to the consumer.
Intentional use of obscure or unstable file formats will run afoul of
state and federal laws governing deceptive trade practices and fraud. In
addition, even in the case of unintentional delivery problems the consumer
retains the right to rescind consent and either terminate the transaction
or demand delivery of required information on paper.
In addition, the effectiveness of the test is, by definition, limited to
the computer the consumer is using at the time the test is administered.
Many consumers have Internet access both at home and at work, and may have
multiple computers in their home. The various computers may use different
operating systems, different versions of key software, or even competing
software to perform the same functions. The relevancy of the test is
diminished because it only establishes the ability to receive and view the
files on one computer, which may not even be the computer on which the
consumer principally relies. In cases where the proposed file formats are
in common use, and software for viewing the file format is freely
available, the test will often be no more than an unnecessary annoyance
for all parties.
Electronic vs. written consent (Responds to FTC Questions 3, 17)
The primary purpose of the electronic consent requirement is to prevent
consumers who do not have the ability to receive electronic records from
unwittingly or unwillingly agreeing to their use for required information.
This is perceived as a particular problem with respect to the homebound
and the elderly. However, it is not clear what benefit this adds to a
transaction initiated in a commercial establishment or by telephone, if
the full ESIGN consent disclosures are provided at the time of the
election. In most cases, if the transaction is occurring at a place of
business it means that the consumer sought out the transaction. If the
consumer is unwilling or unable to accept electronic delivery of required
information, or is feeling undue pressure to accept electronic delivery,
then the consumer can simply terminate the exchange.
Disproportionate Penalties (Responds to FTC Questions 3, 5, 17)
The imposition of penalties for intentional and material non-compliance
with ESIGN's consent and timing requirements is both necessary and
appropriate; it provides an incentive for compliance and a remedy for
injured consumers. However, penalties do not accomplish either of those
goals in situations where a good faith attempt at compliance has occurred,
the violation is inadvertent and non-material, and the required
information was actually delivered. Penalties will not prevent
unintentional technical violations, and offering remedies to consumers who
were not harmed by the error results in a windfall, not relief from an
injury. Furthermore, the cost of settlement of actions brought in
connection with unintentional technical violations is borne by all
consumers.
RECOMMENDATIONS
(responds to FTC questions 2, 4, 17)
In light of the foregoing evaluation, the EFSC recommends that the
following four changes be made to the ESIGN Act:
a. In circumstances where a consumer is initiating a transaction
electronically and required information must be given before the consumer
is obligated on the transaction, it should not be necessary to display the
full ESIGN consent disclosures before providing the required information.
An alternative procedure should be available, permitting the display of a
brief statement requesting consent to deliver the information
electronically, advising that the full ESIGN consent disclosures are
available for review, and providing the consumer voluntary access to the
full disclosures before proceeding. Conspicuous display of the full ESIGN
consent disclosures would still be required before the consumer becomes
bound to complete the transaction.
b. It should be possible to give consent either electronically, or on
paper if the transaction is being initiated at a commercial location, or
over the telephone. Written or telephonic consent should be preceded by
the full ESIGN consent disclosures, including a disclosure of the file
formats and delivery methods that will be used to provide required
information to consumers.
c. The "reasonable demonstration" test should not be required
when information is being provided in file formats for which free viewing
software is available (examples would include HTML, PDF, or Microsoft
Word), if the consumer is given notice of the availability of the viewing
software as part of the ESIGN consent disclosures (this would mirror the
practice on a number of federal websites, including the FTC and Internal
Revenue Service sites, where files are made available for downloading in
PDF format and hyperlinks are provided to obtain free PDF viewing
software).
d. The consumer's consent and effective delivery of required information
should not be invalidated as a result of technical violations of the ESIGN
consent disclosure or timing requirements, where the required information
is actually received and reviewed.
By its nature, a comment letter of this type can sometimes seem to focus
on the negative. The members of the EFSC wish to emphasize that they are
enthusiastic supporters of the ESIGN legislation and its potential
contribution to efficiency, economic expansion, and consumer convenience.
The fact that large-scale implementation of ESIGN has not yet occurred
should not be read as a lack of enthusiasm for the statute or a waning of
industry interest in electronic commerce. Rather, the deliberate pace
reflects the determination of many responsible members of the financial
services industry to act thoughtfully and to roll out ecommerce
applications that are well designed and well implemented.
Sincerely,
Jeremiah S. Buckley
General Counsel
STATEMENT
OF
JEREMIAH S. BUCKLEY
ON BEHALF OF THE
ELECTRONIC FINANCIAL SERVICES COUNCIL
BEFORE THE
HOUSE FINANCIAL SERVICES SUBCOMMITTEE ON DOMESTIC MONETARY POLICY,
TECHNOLOGY AND ECONOMIC GROWTH
UNITED STATES HOUSE OF REPRESENTATIVES
June 28, 2001
Good morning, Mr. Chairman and members of the Subcommittee. My name is
Jerry Buckley. I am a partner in the law firm of Goodwin Procter and I
serve as General Counsel for the Electronic Financial Services Council.
The Council, established in 1998, is a national trade association made up
of both technology companies and traditional financial services firms
dedicated to promoting legal and regulatory changes needed to facilitate
electronic delivery of financial services. The Council welcomes the
opportunity to comment on the operation and impact of the ESIGN Act and
its consumer consent provisions on the financial services industry.
Members of the Council believe that the rules regarding electronic
signatures and records set forth in the ESIGN Act have tremendous
potential to promote the growth of electronic commerce, particularly in
the financial services sector.
Under the ESIGN Act, consumers and businesses will be better able to
access products and services 24 hours a day 7 days a week. Transaction
times will be reduced. Consumers in currently under-served communities, be
they urban or rural, will now have access to a competitive menu of
services from a variety of financial services providers. These online
consumers will receive financial disclosures in real-time, not a packet of
papers mailed and received days after they commit to a financial product,
as is now the case.
Imagine the luxury of exploring a financial product and related
disclosures at leisure on your computer whenever you want. Pop-up boxes or
hyperlinks will be available to answer frequently asked questions or
explain financial jargon which you don't understand. By having a
real-time, online conversation with the consumer, a financial services
provider will be able to assure that the consumer is informed and
committed to the product, thus avoiding costly fall-out as the transaction
approaches consummation.
Beyond empowering consumers, it is hard to overestimate the savings and
increased productivity which ESIGN will facilitate with respect to the
management and retention of records. ESIGN will allow businesses to
eliminate billions of dollars in records management costs, which savings
will ultimately be competed through to consumers in the form of reduced
costs for financial services.
Congress is to be congratulated for its foresight in enacting the ESIGN
Act and providing the legislative infrastructure to facilitate a dramatic
expansion of electronic transactions. Mr. Chairman, we are pleased that
with the first anniversary of enactment of the ESIGN Act coming up in two
days, you have seen fit to hold this oversight hearing on implementation
of the ESIGN Act and its impact on the financial services industry.
Some have observed that financial services industry has been slower than
expected in adopting the use of the electronic medium that ESIGN empowers.
We believe that several factors are responsible for this phenomenon.
o First, the Act is self-effectuating, that is, it does not require a
federal agency to spell out "rules of the road" and standard,
mandated forms as is often the case with federal legislation, rather
leaving these decisions to private parties. This flexibility, which will
be very important to facilitating market innovation over the long run, has
the short run disadvantage of not providing specific governmental guidance
regarding appropriate electronic business procedures.
Thus, private sector parties are having to devise their own standards and
specifications for conducting business electronically. Particularly in the
financial services business, where financial instruments must often be
capable of being traded or pledged, it is not sufficient for the financial
instrument to be enforceable as between the originating parties. These
instruments must be originated to the satisfaction of secondary market
purchasers of mortgage or chattel paper and others who trade in or finance
such instruments. In order for this to happen, each financial services
industry will have to develop a series of conventions regarding what
electronic practices and procedures will be acceptable to companies doing
business in a particular industry.
We at the Electronic Financial Services Council are participating in
promoting the development of these conventions. Over the last seven
months, Freddie Mac has developed specifications for purchase of
electronically originated loans in the secondary market. Freddie Mac and
Fannie Mae are currently negotiating with lenders to arrange forward
commitments for the purchase of electronically originated mortgages. As a
result, we expect a gradual, but steady growth in paperless mortgage
transactions.
Similarly, drawing on the seminal thinking by Freddie Mac in developing
its specifications, the Department of Education has promulgated guidelines
for the electronic origination of student loans. These loans will be
available online next month for students seeking financing for the
upcoming academic year.
Our conversations with financial services providers in other industries
lead us to believe that similar conventions will develop in these
industries as well.
o In addition to the need for time to develop industry guidelines and
conventions, another factor slowing the introduction of electronic
financial services is the fact that, just as the ESIGN Act became
effective, the U.S. economy began to slow and businesses, in an effort to
maintain profitability, have reduced capital expenditures, including
expenditures on development of electronic channels of communication.
Pressures on "dot com" companies and the closure of the "IPO
market" have also been factors in slowing adoption of ESIGN
technology.
As an attorney advising clients on the implementation of ESIGN, I deal
with clients who are wrestling with choices of vendors, decisions
regarding authentication, evidence of intent, and authority to sign.
Again, ESIGN having become law these companies are now coming to grips
with the legal decisions involved in setting up an online contracting
process. In absence of court decisions affirming the evidentiary validity
of electronic records, those seeking to do business electronically are
proceeding with caution.
You have asked whether the consumer consent provisions of the ESIGN Act
are hampering the speedy adoption of electronic records. While we
recognize that some aspects of the consumer consent provisions may place
an unnecessary burden on the use of electronic signatures and records, the
Council is firmly committed to the proposition that consumers are entitled
to timely and meaningful information concerning their options and all the
methods available to them for receiving required notices and disclosures.
Electronic commerce cannot reach its full potential without the consumer's
complete comfort with, and confidence in, both the process and the medium.
Effective delivery of the ESIGN consent disclosures will materially
contribute to that comfort and confidence.
The Council strongly supported the original package of consumer protection
provisions added to ESIGN in the House of Representatives, the so-called
"Inslee-Roukema Amendments." The Council supports the
requirement that consumers give affirmative consent to receive
electronically information otherwise required to be in writing including
disclosure of their rights and responsibilities as participants in
electronic transactions.
Certain elements of ESIGN's rules concerning effective consumer consent
were not part of the original Inslee-Roukema Amendments. Instead, they
were added at the very end of the legislative process and so were, perhaps
unavoidably, subjected to a less rigorous level of analysis than the rest
of the statute. For example, the Act requires that a consent be in
electronic form and that there be a "reasonable demonstration"
of the consumer's ability to access the intended information. However, so
far these requirements have proven to be hurdles, not barriers, to the use
of ESIGN powers.
More specifically, the requirement of electronic consent impairs the use
of electronic contracting and disclosure in business models where the
relationship begins with a face-to-face meeting in a commercial setting or
via telephone (or some combination of the two), but both parties wish to
communicate and exchange required information electronically on a going
forward basis. Having made the decision to do business electronically, the
need to go back and reconfirm the consumer's intent through an electronic
channel is burdensome and has led some consumers to abandon the process.
The testimony of Fidelity Investments at the April FTC Workshop on ESIGN
relating its experience with consumer decisions to do business
electronically, pre- and post- ESIGN, is instructive.
Further, the reasonable demonstration test requires interruption of the
contracting process to establish, based on a subjective standard, the
consumer's ability to access documents. The test also provides an
incentive to favor certain file formats over others in order to streamline
the testing process. In addition, it should be noted that a technical
failure to comply with the ESIGN consent provisions may result in
ineffective delivery of required information even if the violation was not
intentional and did not prevent receipt and review of the required
information. We believe this technical failure may result in
disproportionate penalties. These issues are treated in more detail in the
attached copy of the Council's submission to the Federal Trade Commission
in connection with its April workshop regarding the benefits and burdens
of the consumer consent provisions.
With respect to your question of whether the ESIGN Act and the UETA are
operating harmoniously, we have seen no evidence to date that they are
not. In this regard, we note that most consumer financial transactions
have the federal nexus, and the disclosures mandated by federal law in
most cases can only be delivered electronically under the authority
granted by the ESIGN Act. Thus, for financial services firms, compliance
with the requirements of the ESIGN Act, including consumer consent
provisions, is a necessity if they are to provide consumers with
electronic financial services.
We do have some concerns, however, regarding implementation of the
regulatory requirements contained in Section 104 of the ESIGN Act. We
believe that federal and state agencies should adhere to the standards set
out in the ESIGN Act when interpreting ESIGN or exempting transactions
from its coverage, and we have noticed an early tendency to stray from
these standards. Our views on this issue are spelled in more detail in the
attached comment letter submitted to the Board of Governors of the Federal
Reserve System on the Board's interim final rule on electronic
communications.
To sum up, the fact that large-scale implementation of ESIGN has not yet
occurred should not be read as a lack of enthusiasm for the statute or a
waning of industry interest in electronic commerce. Rather, the deliberate
pace reflects the determination of many responsible members of the
financial services industry to act thoughtfully and to roll out e-commerce
applications that are well designed and well implemented. While some may
urge that Congress revisit or amend the ESIGN Act at this point, we
believe the best course is to allow the financial service industry and
other firms time to acclimate themselves to this new environment and to
implement the powers already conferred by the ESIGN Act.
The long term importance of the ESIGN Act for the industries which are
under the jurisdiction of your Committee is hard to overstate. Traditional
charter and licensing restrictions have limited financial services
providers to the products they are entitled to offer at their retail
outlets under their respective charters as banks, insurance companies,
securities brokers, and so forth. Until now each industry has tended to
operate in its separate silo. In the future, it will be possible to mix
and match elements of different types of financial products from different
providers, perhaps using a web-based advisor or software package. As
Marshall MacLuhan observed, "The medium is the message," and for
financial services consumers the electronic medium will deliver a message
of new financial empowerment, which will in turn, reshape not only the
types and varieties of financial products offered to consumers, but may
ultimately re-configure the financial services providers themselves.
June 1,
2001
Ms. Jennifer J. Johnson Secretary
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, N.W.
Washington, DC 20551
Re: Interim Final Rules on Regulation B; Docket No. R-1040
Interim Final Rules on Regulation E; Docket No. R-1041
Interim Final Rules on Regulation M; Docket No. R-1042
Interim Final Rules on Regulation Z; Docket No. R-1043
Interim Final Rules on Regulation DD; Docket No. R-1044
Dear Ms. Johnson:
The Electronic Financial Services Council ("EFSC") is a national
trade association which seeks to promote legal and regulatory changes
designed to facilitate electronic delivery of financial services. The EFSC
appreciates the opportunity to submit its views regarding the interim
rules (the "Interim Rule") of the Board of Governors of the
Federal Reserve System (the "Board") concerning the use of
electronic communications to provide required notices under five consumer
protection regulations: B (Equal Credit Opportunity), E (Electronic Fund
Transfers), M (Consumer Leasing), Z (Truth in Lending), and DD (Truth in
Savings). Although we recognize that there are differences among the
interim rules, the EFSC is submitting its comments in this single letter
in order to address certain concepts common to all of the proposals. This
letter will direct specific comments to the interim rule under Regulation
Z.
We strongly support the Board's efforts to facilitate electronic
applications and believe that several of the provisions of the Interim
Rule could be helpful to both consumers and industry. We are concerned,
however, that in promulgating the Interim Rule, the Board has adopted
certain interpretations of the meaning of the Electronic Signatures in
Global and National Commerce Act (the "ESIGN" or
"Act"), Pub. L. No. 106-229, 106th Cong., 2d Sess., 114 Stat.
464 without going through the procedures prescribed under ESIGN, exceeding
its authority under the Act. The Board's interpretations, while providing
sound practical solutions to important problems, may have the unintended
effect of creating future legal uncertainty for financial service
providers seeking to make disclosures electronically.
Our most serious concerns are (1) that the Board's Interim Rule in
interpreting the word "transaction" in Section 101(c) of ESIGN
did not comply with the standards and limitations on rulemaking required
by Section 104(b) of ESIGN and (2) that the Board interprets the consumer
consent provisions without making the appropriate findings and otherwise
complying with the requirements under Section 104 and (3) that the Board
misinterprets the timing and delivery exclusion contained in Section
101(c)(2) to permit it to establish differing timing and content
requirements for electronic communications than for those provided on
paper. If other state or federal agencies adopt similar interpretations of
their authority under ESIGN, the Act's effectiveness could be seriously
compromised.
The EFSC recognizes that the Board has broad power under TILA to interpret
Regulation Z in a way that furthers the goals of the statute. Based on the
analysis used to support the Board's 1998 revisions to Regulation E
permitting electronic disclosures, it is possible that the Board can
support the Interim Rule without reference to ESIGN. However, the EFSC
strongly believes that before promulgating a final version of the Rule,
the Board should follow the procedures set forth in Section 104 of ESIGN,
for three reasons:
o The history and provisions of ESIGN make it clear that Congress intended
to provide baseline rules, and regulatory procedures, for replacing
writing and signature requirements across the whole range of federal laws
and regulations affecting consumer disclosures and notices.
o The use of parallel or alternative authority by the Board will result in
a regulatory "double standard", in which federal regulators
without the broad interpretive authority of the Board are required to live
within ESIGN, while the Board and other regulators with arguably broader
authority may avoid its procedures and limitations.
o Since the use of parallel or alternative authority will not supplant
ESIGN, institutions wishing to avail themselves of electronic notices and
disclosures will be forced to select between two potentially different
schemes, creating the potential for both competitive inequalities and
confusion for consumers as they encounter widely differing practices.
DISCUSSION
1. The Board Would Interpret Section 101 of ESIGN without Making the
Findings Required by Section 104(b).
Our first concern is that the Interim Rule in interpreting the word
"transaction" in Section 101(c) of ESIGN does not comply with
the standards and limitations on rulemaking required by Section 104(b) of
ESIGN.
A. ESIGN's General Rules
E-Sign applies to the use of electronic records and signatures relating to
a "transaction in or affecting interstate or foreign commerce."
1 A transaction is defined as any "action or set of actions
relating to the conduct of business, consumer, or commercial affairs
between two or more persons."2 E-Sign is a statutory
"overlay." It sets up uniform rules revising traditional writing
and signature requirements in the law, permitting the use of electronic
records and electronic authentication methods instead. Section 101(c) of
ESIGN applies a modified rule to any "statute, regulation, or other
rule of law [that] [I] requires that information relating to a transaction
or transactions ... [2] be provided or made available to a consumer
[3] in writing" (emphasis added).
B. Required Findings
As a condition of issuing any regulation, order, or guidance that
interprets Section 101 of ESIGN, an agency must satisfy the standards set
forth in Section 104(b) of ESIGN, including that:
(A) such regulation, order, or guidance is consistent with section 101;
(B) such regulation, order, or guidance does not add to the requirements
of such section; and
(C) such agency finds, in connection with the issuance of such regulation,
order, or guidance, that-
(i) there is a substantial justification for the regulation, order, or
guidance;
(ii) the methods selected to carry out that purpose-
(I) are substantially equivalent to the requirements imposed on records
that are not electronic records; and
(II) will not impose unreasonable costs on the acceptance and use of
electronic records; and
(iii) the methods selected to carry out that purpose do not require, or
accord greater legal status or effect to, the implementation or
application of a specific technology or technical specification for
performing the functions of creating, storing, generating, receiving,
communicating, or authenticating electronic records or electronic
signatures.
We also note that the Board can exempt certain types of disclosures under
Section 104(d)(1) of ESIGN, which provides that the Board may:
... with respect to matter within its jurisdiction, by regulation or order
issued after notice and an opportunity for public comment, exempt without
condition a specified category of record or type of record from the
requirements relating to consent in section 101(c) if such exemption is
necessary to eliminate a substantial burden on electronic commerce and
will not increase the material risk of harm to consumers.
C. The Board Used its Interpretive Authority Inappropriately
The Interim Rule authorizes certain disclosures to be provided
electronically without first obtaining consumer consent under ESIGN.3
The disclosures exempted from consent are sometimes referred to
collectively as the "shopping disclosures," and include
advertisements (§ 226.16 and § 226.24), Home Equity Line of Credit
("HELOC") and Adjustable Rate Mortgage ("ARM") loan
application disclosures (§ 226.5b and § 226.19(b)), and disclosures
under §§ 226.17(g)(1)-(5) ("Shopping Disclosures"). The
exemption is based on a finding by the Board that these disclosures are
"deemed not related to a transaction."4 This is
presumably a reference to the provision in Section 101(c) of ESIGN that
requires consumer consent to be obtained before presenting
"information relating to a transaction" that is otherwise
required to be presented in writing.
The result under the Interim Rule makes perfect sense. The consumer has
consciously sought out the information in an electronic environment. If
the Shopping Disclosures, which are provided before the consumer has
entered into any binding obligation, are not delivered in a satisfactory
form, the consumer may simply abandon the transaction. Furthermore,
interrupting the delivery of these disclosures with ESIGN consent process
may create confusion and frustration for the consumer. The consent process
may create the impression that a binding commitment to proceed with the
transaction is being forced before the Shopping Disclosures are provided,
causing the consumer to abandon the process. Ironically, such a result
would inhibit, rather than promote, the effective dissemination of the
shopping disclosures to potential borrowers.
Unfortunately, however, the approach taken by the Board in implementing
the exemption does not appear to conform with either (i) a reasonable
interpretation of the term "transaction" as it appears in ESIGN,
or (ii) the requirements of Section 104(d) of the Act for exempting
disclosures from the consent requirement.
As noted above, the definition of "transaction" in the Act is
extremely broad. It covers "any ...set of actions relating to the
conduct of. .. consumer ... affairs between two or more persons."5
Note that the definition does not require that an exchange of value occur,
nor that the actions result in a binding agreement. 6 The fact
that the borrower has not yet become bound to complete the transaction
does not mean that a transaction has not been initiated. By making contact
with the lender and seeking out the shopping disclosures, a consumer has
begun a process that is related to any loan ultimately made. Even if no
loan is made as a result of the disclosures, there has still been a
transaction within the meaning of ESIGN; the choice to proceed or not
proceed, based on the information provided, is a significant consumer
choice that affects both the consumer and the lender. It directly impacts
the conduct of the consumer's affairs.
This view of the relevance of pre-obligation communications is consistent
with commercial law generally. For example, the express warranties covered
by Article 2 of the Uniform Commercial Code include affirmations of fact
made by the seller during the advertising and negotiation cycle, well
before any commitment is made to purchase or sell. Terms of sale may also
include communications made prior to any commitment. All of these
communications are viewed as related to the final transaction, because
they form part of the foundation for the mutual understanding of the
parties. The shopping disclosures fulfill the same function.
Even though the result reached by the Board is both reasonable and
desirable, the reasoning used to support it is of grave concern. A
narrowing of the term "transaction" as defined in ESIGN
constitutes an invitation to other regulators to conclude that various
consumer disclosures within their jurisdiction are not "related to a
transaction," and so are not covered by ESIGN at all, permitting the
reintroduction of paper requirements that otherwise would be prohibited
under ESIGN.
As an alternative to attempting to narrow the statutory definition of
"transaction" the Board has the option of making an explicit
decision to exempt the shopping disclosures from ESIGN's consent
requirement. Applying the consent process to the Shopping Disclosures,
which were deliberately sought out by the consumer in an electronic
environment, is both burdensome and largely pointless. Because the
consumer has no obligation to proceed, if the disclosures are not
effectively delivered or cannot be read, the consumer may simply abandon
the transaction, so that no material harm will result from the lack of
consent.
By narrowing the scope of the definition of transaction in reaching its
conclusion, the Board interprets Section 101(c) of ESIGN as not applying
to certain disclosures. In such cases, the Board must satisfy the
requirements of Section 104(b) of ESIGN before reaching a conclusion about
the applicability of Section 101 of ESIGN to these disclosures. On the
other hand, the Board could have exempted such categories of disclosures
from Section 101(c) of ESIGN by following the procedures set forth in
Section 104(d)(1). Given the burdens that the consumer consent provisions
impose on shopping disclosures, the Board could have used either its
interpretive or exceptive authority under the Act to eliminate such
burdens without taking the extraordinary step of excluding shopping
activities from the definition of a transaction under Section 101(c).
The Board fails to reconcile its conclusion that shopping is not related
to a transaction for purposes of Section 101 (c) with its apparent intent
to include such activities within the scope of the definition of
transaction in Section 106. Our concern with this line of reasoning is
that it opens the door to excluding certain commercial activities such as
shopping from the definition of transaction under both Sections 101 (c)
and 106, thus denying such activities both the burdens and the benefits of
ESIGN. Such a line of reasoning in the hands of a regulator not favorably
disposed to electronic commerce might consign shopping disclosures to a
paper environment only. Clearly Congress did not intend such a result when
it established detailed procedures for exercise by a regulator of its
interpretive and exemptive authority under ESIGN.
II. Any Regulation Must be Consistent with the Broad Purposes of ESIGN.
A. Interpretation of the Consumer Consent Provisions
The Board interprets the consumer consent provisions without making the
appropriate findings and otherwise complying with the requirements under
Section 104. As noted above, in order to interpret the consumer consent
provisions, the Board must find among other things, that there is a
substantial justification for the Board's action, the resulting
requirements for electronic disclosures will be substantially similar to
the requirements for paper disclosures, and the requirements for
electronic disclosures will not impose unreasonable cost.
We believe that the Interim Rule imposes delivery-related requirements on
electronic disclosures that (i) add to the requirements of Section 101,
and (ii) are not substantially equivalent to the requirements for
equivalent writings. In addition, to the extent these requirements do not
otherwise violate ESIGN, the Board has still failed make specific findings
that (i) the regulation is substantially justified, (ii) the methods used
to implement it are substantially equivalent to those for non-electronic
records and will not impose unreasonable costs, and (iii) the methods are
technology-neutral. 7
E-mail notice for disclosures displayed in real time
The Interim Rule provides that, for disclosures other than the Shopping
Disclosures, if a disclosure is posted on a website the consumer must be
sent an e-mail (or postal mail) informing the consumer of the location at
which the disclosure is available for review. The disclosure must remain
available for at least ninety days from the delivery date. The requirement
to deliver an e-mail (or postal) notification appears to apply even if the
disclosure is being displayed and viewed at the website as part of an
interactive real time session with the consumer. Under ESIGN, an
electronic disclosure is the operative disclosure. In the case where a
disclosure or notice is being reviewed on a website in real time, that
disclosure is effective when it is displayed, just as it would be
effective when handed across a desk or delivered in the mail. If the
consumer is offered the opportunity to retain a copy by printing or
download at the time of display, then the record retention rules of ESIGN
have been satisfied.8 Requiring additional notification
constitutes a burden that is not equivalent to any imposed for paper
documents. The Interim Rule should be revised to clarify that the e-mail
notice is not required when the disclosure or notice is being displayed to
the consumer electronically in real time as part of an interactive
session.9
Redelivery
The Interim Rule requires a creditor to take "reasonable steps"
to attempt redelivery of an electronic communication if the disclosure is
returned undelivered. The Commentary indicates that such steps must
include sending the disclosure to a different e-mail or postal address
that the creditor has "on file." No such requirement is imposed
when disclosures are initially made through postal mail.
The redelivery issue is an example of an area in which the Board might be
permitted to issue regulatory interpretations under ESIGN if it could make
the required findings, including a determination that the methods chosen
in the regulation are "substantially equivalent" to those that
apply to non-electronic records and that they "will not impose
unreasonable costs." Due to the limitations of current technology, it
may be more likely that e-mail will be returned as undeliverable than that
a postal letter will be, which could provide a basis for regulatory
action. But the method that the Board has chosen-requiring the creditor to
send a second notice to another address that the creditor has "on
file"-has the potential to be burdensome, because the creditor may
have other addresses for the applicant "on file" but have no way
to connect those addresses with the applicant.
B. Interpretation of the Timing
and Content Exclusion
The Board misinterprets the timing exclusion contained in Section
101(c)(2) to permit it to establish different timing requirements for
electronic communications than for those provided on paper.
Section 101(c)(2) of ESIGN states that-
Nothing in this title affects the content or timing of any disclosure or
other record required to be provided or made available to any consumer
under any statute, regulation, or other rule of law.
Although the Board's rulemaking authority gives it power to issue
regulations effecting content and timing, ESIGN overrides any other
statute, regulation, or rule of law that may be inconsistent with ESIGN.
As the Board acknowledges in the Preamble, regulatory agencies have
limited authority to interpret ESIGN. The Act gives the Board no power to
undermine the safe harbor that the Act creates.10 Thus, any
regulations issued by the Board must be consistent with the broad purpose
of ESIGN.11 Regulation effecting electronic disclosures that
exceed those for written ones should not be issued until the Section
104(b) findings are made to ensure that the intent of Congress and the
purpose of ESIGN are upheld.
By purporting to impose requirements beyond those in ESIGN, the Board's
Interim Rule undermines ESIGN's fundamental purpose. If the Board's
Interim Rule is allowed to stand, then the intent of Congress-"to
facilitate e-commerce and to provide legal certainty for electronic
signatures, contracts and records where such certainty [did] not
exist"12-will be defeated.
C. Delivery of Forced Disclosures using Multiple Screens"
The Board's interpretation of §226.36(b) includes the following analysis
of methods for forcing the review of certain disclosures:
When a creditor permits the consumer to consummate a closed-end
transaction on-line, the consumer must be required to access the
disclosures required under § 226.18 before becoming obligated. A link to
the disclosures satisfies the timing rule if the consumer cannot bypass
the disclosures before becoming obligated. Or the disclosures in this
example must automatically appear on the screen, even if multiple screens
are required to view the entire disclosure.
The methods for forcing disclosure described in the Staff Interpretation
are instructive. However, it is not clear from the Staff's comments
whether the methods described are intended to be examples, or to
constitute the exclusive methods for deploying a forced disclosure. In
particular, the reference to "multiple screens" could be read as
a rejection of the use of scroll boxes to deliver disclosures that require
more than a single screen for full display. Prohibiting the use of scroll
boxes for the delivery of important information would be contrary to both
current practice and would set a different standard than the guidelines
for conspicuous disclosure provided by the FTC in connection with the
delivery of online privacy notices, which permit the use of scroll boxes
for delivering disclosures.13 The Board should consider
revising the Staff Interpretation to reflect that there are a broader
range of delivery solutions available, beyond the examples provided in the
Interpretation.
CONCLUSION
The EFSC strongly supports the Board's actions in formulating and
promulgating the Interim Rule. The Interim Rule provides valuable guidance
on the delivery of electronic disclosures and notices. It is at least
arguable that the Board has the authority to issue the Interim Rule
without regard to the requirements of ESIGN. However, the law of
electronic records and signatures is in its infancy. ESIGN creates a new
environment for delivering notices and disclosures. It is intended to
foster both efficiency and innovation. Congress clearly intended ESIGN to
provide an across-the-board set of guidelines for federal regulation of
electronic notices and disclosures used in place of required writings. The
Board is a highly influential and well-regarded regulator, and the Interim
Rule represents the first comprehensive attempt to interpret ESIGN as it
applies to specific federal disclosure requirements. The EFSC believes it
is essential that the Board's final Rule complies with the procedural
requirements and limitations of ESIGN, in order to promote a uniform
environment for electronic transactions and clear early guidance to other
regulators addressing the same issues. The EFSC looks forward to working
the Board Staff to achieve these goals.
The EFSC appreciates the opportunity to comment on the Interim Rule.
Very truly yours, [SIGNED] Jeremiah S. Buckley
1 ESIGN §
101(a).
2 ESIGN § 106.
3 Interim Rule §226.36(c).
4 Interim Rule §226.36(c).
5 ESIGN § 106(13).
6 Although the language of the statute is clear, it is
also supported by the legislative history of the E-Sign Act. As shown in
the following colloquy from the Senate floor debate on the bill, in
enacting the E-Sign Act, Congress intended to establish broad application
of the Act:
"MR. GRAMM. As to its coverage, does the Senator agree that this
act is intended to operate very broadly to permit the use of electronic
signatures and electronic records in all business, consumer and commercial
contexts? This breadth is accomplished through the use of the term
'transaction,' which is defined broadly to include any action or set
of actions by one of the parties to the underlying transaction, or by any
other person with any interest n the underlying transaction, or a response
by one party to the other's action, all are covered by the act. In this
regard, it is the nature of the activity, rather than the number of
persons or the identity or status of the person or entity involved in the
activity, that determines the applicability of the act. Have I stated the
matter correctly?
"MR. ABRAHAM. Yes, this act applies to all actions or set of actions
related to the underlying business, consumer, or commercial relationship
which is based on the nature of the activity and not the number of persons
involved in the activity. The act is also intended to cover the related
activities of those persons or entities who are counterparties to, or
otherwise involved in or related to, the covered activity."
7 See ESIGN § 104(b).
8 See ESIGN § 101(e).
9 For disclosures that are not made in real time (other
than Shopping Disclosures), the Interim Rule requires that those
disclosures either be (i) delivered to an e-mail address or (ii) made
available at another location (such as an Internet website) with an
accompanying notification of availability delivered to an e-mail address
or a postal address. It is the experience of the EFSC's members that a
certain small percentage of those consumers moving past the
"shopping" phase of a transaction do not have, or are not
willing to provide, an electronic address. The use of a postal address as
a substitute for notification effectively eliminates any efficiencies
derived from electronic disclosures. If those consumers unable or
unwilling to provide an electronic address have agreed to receive
electronic disclosures and have not withdrawn their consent, then it seems
reasonable that other alternatives should be available for delivering
disclosures. For example, the approximate timetable for delivery of
specified disclosures, and the location at which they will be posted,
could be provided to the consumer at the time of application if an e-mail
address is not available. The Board may wish to consider offering such
consumers the opportunity to participate in e-commerce by authorizing
alternatives to e-mail notice, including the provision of a timetable and
location for disclosures as an alternative for consenting consumers who
have not provided an e-mail address.
10 This notion is clearly documented in the legislative
history of ESIGN:
The conference report is designed to prevent Federal and State Regulators
from undermining the broad purpose of this Act, to facilitate electronic
commerce and electronic record keeping. To ensure that the purposes of
the Act are upheld, Federal and State regulatory authority is strictly
circumscribed. It is expected that Courts reviewing administrative
actions will be rigorous in seeing that the purpose of this Act, to ensure
the widest use and dissemination of electronic commerce and records are
not undermined. [Cite to Congressional Record - House H4355 (emphasis
added).]
11 The legislative history of the ESIGN is again helpful:
As the bill makes clear, each agency will be proceeding under its
preexisting rulemaking authority, so that the regulations or guidance
interpreting section 101 will be entitled to the same deference that the
agency's interpretations would usually receive. This is underlined by
the bill's requirements that regulations be consistent with section 101,
and not add requirements of that section, which restate the usual Chevron
test that applies to and limits an agency's interpretation of a law it
administers. [Cite to Congressional Record-House H4358-9 (emphasis added
(sic))].
12 146 Cong. Rec. S5282 (June 16, 2000) (emphasis added).
13 See 16 CFR Part 313.
April
18, 2001
Secretary
Federal Trade Commission Room H-159
600 Pennsylvania Avenue, N.W.
Washington, D.C. 20580
Sallianne Fortunato
National Telecommunications and Information Administration
Room 4718
14th Street and Constitution Avenue, N.W.
Washington, D.C. 20230
Re: ESIGN Study - Comment P004102 -- Additional comments
To the Federal Trade Commission ("FTC"):
This letter is provided in response to your invitation to provide
additional comments following the FTC Public Workshop on the Electronic
Signatures in Global and National Commerce Act ("ESIGN") on
April 3, 2001. The Electronic Financial Services Council ("EFSC")
was pleased to participate in the Workshop. The views expressed by the
participants, and the information shared, offered useful Insight into the
ESIGN consumer consent rules and the challenges they present.
The EFSC would like to highlight two important points that were made
during the Workshop concerning the Section 101(c)(1)(C)(ii) requirements
(the "electronic consent requirement"):
o Empirical evidence presented at the Workshop, particularly the
information supplied by Paul Gallagher of Fidelity, suggests that the
electronic consent requirement is creating a barrier to adoption of
electronic communications by consumers who are willing and able to do so;
and
o The principal rationale for the electronic consent requirement may be
based on a faulty premise.
The Electronic Consent Requirement As A Barrier To E-Commerce
At the Workshop, Fidelity Investments shared its experience with the
impact of the electronic consent requirement on consumer adoption of
electronic communication. Prior to ESIGN, Fidelity had been obtaining
In-person agreement from new customers willing to receive electronic
delivery of information. Many of Fidelity's customers opted for electronic
delivery and used It successfully. Since beginning ESIGN compliance,
Fidelity now requires electronic confirmation and a "reasonable
demonstration" test as part of the consent process. As a result, the
percentage of new customers who complete the consent process and use
electronic delivery has fallen off measurably. The only apparent
explanation is that the additional steps required by ESIGN serve as an
unintentional deterrent to giving consent.
The securities industry is the industry where, because of SEC initiatives,
there was the most use of electronic media to complete financial
transactions. As such, it provides a valuable testing ground for the
impact of the two requirements mentioned above. Because Fidelity is among
the larger players in the electronic delivery of securities services, its
testimony should be given great weight by the FTC and the Commerce
Department. Given the fact that other industries will not have the "contror"
of pre- and post-ESign experience, this may be the most valuable data in
evaluating the impact of the requirements on which the Workshop focused,
and as such is more valuable than speculation about what consumers expect
or need. So far as we are aware there were no complaints about fraud or
deception related to companies operating under the old SEC rules.
The Electronic Consent Requirement May Be Based On A Faulty Premise
Workshop participants supporting the electronic consent requirement
suggested that its primary purpose is to prevent the abuse of electronic
disclosures: a seller or service provider otherwise dealing in paper
documents as part of an in-person transaction might obtain consent on
paper for the purpose of diverting disclosures to an electronic
environment in the hope that the disclosures would either be inaccessible
or not accessible on a timely basis, or that the consumer would not bother
to review them. Participants suggested that, absent the electronic consent
requirement, ESIGN would validate these practices. As the EFSC pointed
out, a variety of existing laws protect consumers against such behavior.
An attempt to obtain paper consent and use electronic disclosures for
fraudulent purposes would run afoul of state and federal laws on deceptive
trade practices, as well as disclosure timing and delivery rules. Absent a
valid, articulated business purpose, the fact that a face-to-face
transaction was otherwise being documented on paper while important
disclosures were being delivered electronically could, in and of itself,
serve as an indication of fraudulent intent. The electronic consent
requirement appears to take aim at practices for which other,
better-targeted protections exist.
Any legitimate firm has a strong motivation to assure that the electronic
method of communication adopted by the firm and its customer works for
both. It Is the intention that this electronic channel of communication
will be used not simply for delivery of disclosures, but will serve as the
means of ongoing communication with customers such as sending periodic
statements, reminder notices, updated agreements or additions to
agreements, tax-related information, and even solicitations for new and
improved products and services.
While the EFSC continues to believe that it is premature for Congress to
amend ESign, we strongly urge that your report to Congress reflect the
fact that initial indications are that the provisions cited are having an
negative impact on usage of ESign and that the anti-fraud purposes for
which they are designed may be more appropriately addressed by other
means.
Thanks again for the opportunity to participate 1n the Workshop. If you
have any questions, or would like any additional information, please do
not hesitate to contact the EFSC at the address and telephone number
above.
Sincerely,
Jeremiah S. Buckley
General Counsel
|
