Today's Trends in Credit Regulation

Time to Rethink ESIGN "Consent Handshake" Standards?
By Thomas P. Quinn, Jr.

In late April the Consumer Financial Protection Bureau (the "CFPB") published guidelines for lender and vendor participation in an "eClosing Pilot Program." The purpose of the program is to spur the development of electronic mortgage closings with the goal of increasing the efficiency and transparency of what is currently a frustrating and stressful experience for consumers. A successful electronic closing will require both the electronic execution of closing documents and the electronic provision of pre-closing and closing table regulatory disclosures.

Creditors have long been able to provide disclosures electronically that a statute or regulation otherwise requires to be in writing. This can be accomplished by complying with either the Electronic Signatures in Global and National Commerce Act (the "ESIGN Act") or a state enactment of the Uniform Electronic Transactions Act ("UETA") - but only if the state adopted UETA in its model form as endorsed by the National Conference of Commissioners on Uniform State Laws. Thanks to amendments made 2007, many of the consumer protection regulations permit disclosure to be provided electronically if done in a manner compliant with the ESIGN Act.

Section 101(c) of the ESIGN Act establishes a two-part "consent handshake" as a prerequisite to providing an electronic equivalent of a disclosure that otherwise must be provided in writing. Step one is to provide the consumer with a "consent disclosure" that specifies, among other things, the materials that will be provided electronically, how the consumer may request paper copies, the fact that the consumer may withdraw his/her consent to receive the materials in electronic form (and the consequences for doing so). The second step is to have the consumer affirmatively consent to receive the electronic materials in a manner that "reasonably demonstrates" that s/he is able to receive them in the electronic form in which provide to them. At first blush that sounds fairly straightforward.

Once you dive into the operational weeds of designing such a consent handshake it becomes apparent that the second step presents some risk management challenges. For example: if you display your consent disclosure on an HTML web page, does the consumer's agreement to its terms on that page "reasonably demonstrate" that s/he can access and retain electronic materials if they are provided in a different form (for example: in a pdf document)? Should you have the consumer somehow "prove" that s/he can access the electronic materials in that form - or is having the consumer affirm such ability as part of the consent disclosure enough? Layer on top of these considerations the fact that if the reasonable demonstration process is proved deficient it is as if the underlying disclosures were never given. A failure to provide a required disclosure not only presents the possibility of regulator criticism but also raises the specter of litigation.

While the 2007 amendments did provide some instances where disclosures could be provided electronically without regarding for full ESIGN compliance, these instances were more or less limited to advertising disclosures and disclosures on applications that the consumer accessed in electronic form. More recent rules do provide some relief to this issue, but in a limited way.

Under the new CFPB regulations that require periodic statements for closed-end mortgages, the rules indicate that a statement may be provided either in writing or, if the consumer agrees, electronically. Because the rules do not require the statement to be provided "in writing" the statement may be provided with the affirmative consent of the consumer - but without the need for a fully compliant consent handshake under the ESIGN Act. At least for purposes of the new statement requirements, the challenges of the "reasonable demonstration" step fall away.

The benefit derived from this new rule does not apply to all transactions secured by a dwelling. Home equity lines of credit are not covered and if a creditor desires to provide HELOC periodic statements electronically it must be done in a manner that complies with the ESIGN Act consent handshake requirements. The end result is two different consent standards for similar transactions. That doesn't make sense. And it makes less sense if you step back and compare it to the requirements for other types of financial products. For example, the regulations governing deposit accounts also require that disclosures (including periodic statements) be provided in writing. If you wish to provide such disclosures electronically it must be done in a manner that complies with the ESIGN Act consent handshake rules. Does it make sense to have a higher compliance hurdle to receive an electronic periodic statement for a checking or savings account than it does a residential mortgage transaction - likely the largest financial commitment a consumer will ever make?

In addition to the mortgage periodic statement rule, the CFPB also recently published a proposed rule that, if adopted, would allow financial institutions to post their annual privacy notices on their web sites. Financial institutions would be required to inform customers on another form of required or permitted disclosure of the annual notice's location and the customer's ability to obtain a paper copy. This alternative (and more relaxed) disclosure method would be available only if certain conditions are met. It is worth noting that Regulation P has always permitted the use of electronic forms of the initial notice, subject to consumer consent and his/her access of financial products or services electronically.

What to make of these recent developments is unclear. It could be that these recent actions are tea leaves indicating an acceptance with electronic disclosure forms, without the need for specified means of consent. Most would agree that consumers should retain the ability to elect whether they wish to receive a paper or electronic version of their documents. However, affirmative consent alone should be sufficient. This could be accomplished either by a revision to the ESIGN Act (which is unlikely) or through amendments to statutes and/or regulations governing financial services to make it clear that either written or electronic versions of disclosures may be provided with the affirmative consent of the consumer. Either would be a welcome step in the right direction.

Thomas P. Quinn, Jr. is a partner in the Fall River, MA office of Hudson Cook, LLP. Tom can be reached at 774-365-4758 or by email at

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