June 28, 2018Client Alert

Electronic Transactions and Consumer Consent Under the E-Sign: A Refresher

In our digital world, where some struggle to remember a time when transactions were conducted on paper with wet ink signatures, it may be beneficial for banks and financial institutions to occasionally pause and take stock of their procedures and processes around creating, accepting, and delivering electronic signatures and documents to their consumers. Some of these processes may have been put in place so long ago and changed over time without appreciating some of the requirements around making sure that they meet the requirements of the federal Electronic Signatures in Global and National Commerce Act (“E-Sign Act”).[1]

The E-Sign Act broadly provides that, with a few exceptions, electronic signatures and contracts are just as valid as paper contracts with wet ink signatures. Under the E-Sign Act, a signature, contract, or other record cannot be denied legal effect solely because it is in electronic form. Nor may a contract be denied legal effect solely because an electronic signature or electronic record was used in its formation.

In addition to validating electronically conducted contracting, the E-Sign Act also permits electronic storage of records. If a rule of law requires that a contract or record relating to a transaction be retained, the E-Sign Act permits retention in electronic form, so long as the electronic record accurately reflects the information set forth in the document and the document remains accessible, in a form that can be transmitted or printed and for the time period required by the applicable rule of law, to all people who are entitled to access to the document. The E-Sign Act allows electronic retention of records even if the rule of law requiring retention requires that the document be retained in its original form. To that end, checks may be retained electronically as long as the front and back of the check is retained in accordance with the above rules.

Another critical component of the E-Sign Act is the requirement to obtain consumer consent before delivering certain consumer disclosures electronically. Where a statute, regulation, or other rule of law requires that certain information relating to a transaction be provided or made available to a consumer in writing, those legally required written documents cannot be provided to an individual electronically unless the institution obtains a specific consent for electronic delivery of those documents. This is especially important for financial institutions to remember because many of the consumer disclosures or documents they provide to their customers fall in this category of documents that are legally required to be provided to the consumer “in writing.” The consent that a consumer must provide to enable this electronic delivery of these legally required written documents contains some well-defined components. Among these are:

  • The consent must be affirmative (must be an opt-in, not an opt-out).
  • Prior to consenting, the consumer must be provided a clear and conspicuous statement informing the consumer of:
    • The right or option to have paper records
    • The right to withdraw consent and the conditions (including any applicable fees) and consequences for doing so
    • Whether the consent applies only to the particular transaction and the particular categories of records that may be provided electronically over the course of the parties’ relationship
    • The hardware and software requirements for access to and retention of the electronically delivered documents

In addition, the manner in which the consumer consents or confirms consent must be electronic and must be done in way that reasonably demonstrates that the consumer can access information in the electronic form that will be used to provide the information that is the subject of the consent. What this means is that the consent to electronically receive documents that are legally required to be delivered to consumers in writing cannot be obtained in paper form. Beyond this, if there is a particular application or electronic account or software that is required, institutions may need to obtain the consent through the use of that application, account, or software or subsequently confirm that a consumer has access thereto before sending electronic documents.

Despite the broad reach of the E-Sign Act, it is subject to some important limitations. First, although the E-Sign Act allows parties to contract electronically, it does not require parties to use or accept electronic records or electronic signatures. Second, in an exception to the general rule of equal validity, electronic records can be denied legal effect if the electronic record is not kept in a form that is capable of being retained and accurately reproduced.

Finally, the E-Sign Act does not apply to several categories of documents, including notices of termination of utility services; notices of default, acceleration, repossession, foreclosure, or eviction, or the right to cure, under a credit agreement secured by a primary residence of an individual; and documents or contracts governed by the following articles of the Uniform Commercial Code: 

  • Negotiable instruments (such as banknotes and commercial paper) (Article 3);
  • Bank deposits and collections (Article 4);
  • Letters of credit (Article 5);
  • Documents of title for personal property (Article 7);
  • Investment securities (Article 8);
  • Secured transactions (Article 9); or
  • Funds transfers (Article 10).

The E-Sign Act’s non-applicability to these UCC articles demonstrates a deference to the UCC and a recognition that, for transactions governed by Articles 3 through 10, the UCC, not the E-Sign Act, should determine the effect and validity of electronic signatures and records.

While it may be easy to take for granted the ability to conduct electronic transactions and deliver documents electronically, it may be worthwhile to take another look at processes and procedures your financial institution may have around this to make sure that they still comply with the E-Sign Act’s requirements.

[1] Every state also has a state-law companion statute to the E-Sign Act. Forty-seven states have enacted a version of the Uniform Electronic Transactions Act (“UETA”). Three states – Illinois, New York, and Washington – did not adopt UETA but instead enacted their own electronic-signature laws.

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