ANALYSIS: The federal Electronic Signatures in Global and National Commerce Act (E-SIGN) has been in effect for over 20 years now. Generally, the E-Sign Act says that electronic signatures, documents, and records for transactions have the same validity as written signatures and printed documents, provided certain conditions are met. We list these requirements in ii Release No. 0175:
- The consumer must be given a “clear and conspicuous statement” disclosing certain information.
- The consumer must also be given a statement disclosing the software and hardware requirements necessary to access and retain the electronic records.
- After getting the first two disclosures, the consumer must either electronically consent or electronically confirm his/her consent (though the consent can be withdrawn) in a way that “reasonably demonstrates” that the consumer can access information in an electronic form.
Members seem to prefer conducting transactions electronically more and more. E-SIGN allows credit unions to use electronic records in consumer transactions but only if the consumer consents. Wisconsin state law, the Uniform Electronic Transactions Act (UETA), also allows parties to conduct transactions electronically if they agree to it. We want to remind credit unions of the importance of complying with E-SIGN (and UETA) and share an article written by The League’s outside counsel, the Husch Blackwell law firm. You may recognize the author – Marci Kawski. She is a partner in Husch Blackwell’s Madison office, works with Wisconsin credit unions, and has been a speaker at several League events. Marci’s article was first published by the Kansas Banker’s Association.
(We have enclosed our own additional comments in brackets, interspersed in the text below.)
1. Are e-signatures lawful?
Yes, e-signatures are generally legal and enforceable pursuant to the Electronic Signatures in Global and National Commerce Act (E-Sign), governing consumer and commercial transactions, and state laws adopted from the Uniform Electronic Transactions Act (UETA), [including in Wisconsin]. There are, however, exceptions to this general principle. Many of those exceptions — such as laws governing wills, codicils, or testamentary trusts — are not relevant in the consumer or commercial financial law context. However, one noteworthy exception is as follows:
- Uniform Commercial Code (UCC). E-Sign and UETA do not apply to contracts governed by the UCC other than Articles 2 and 2A (Sales). However, the UCC has been amended to accept electronic signatures where they are excluded from coverage. The importance of this is that electronic signatures are permissible under relevant provisions of the UCC.
[In ii Release No. 0175, we explain that UETA specifically excludes certain records and transactions, so they must still be done in writing to the extent another law requires it. For example, Wisconsin law requires that wills and testamentary trusts (trusts created by provisions in a person’s will) have to be in writing – so UETA does not allow for electronic versions of these documents. UETA also does not apply to notices of “default, acceleration, repossession, foreclosure, or eviction, or the right to cure, under a credit agreement secured by or a rental agreement for a primary residence of an individual.”]
2. If I want to begin using e-signatures in a loan transaction, do my customers have to consent to conduct transactions electronically? If so, how do I obtain consent
Yes, banks [and credit unions] must obtain the appropriate level of consent from the customer before conducting the transaction electronically. The level of consent required depends upon whether your borrower is a business or a consumer. If originating a commercial transaction, consent is driven by UETA where the parties must agree to conduct the transaction electronically. Whether there has been agreement to conduct the transaction electronically is determined from the context and surrounding circumstances, including the parties’ conduct. In practice, consent could occur by simply asking the business customer whether they would like to receive their documents via email or by conducting business via email. Alternatively, banks can obtain consent from business customers, which is typically the case when using an e-signature platform.
If the customer is a consumer, he/she must have affirmatively consented to conduct the transaction electronically (without withdrawing consent) and, prior to such consent, must be provided with E-Sign disclosures per 15 U.S.C. § 7001(c)(1). These disclosures are available in e-signature platforms and may also be provided by your document vendor or loan origination system provider.
3. What documents can be signed via e-signatures — for example, can the promissory note and mortgage be signed electronically?
Generally speaking, all documents are valid when signed electronically, unless specifically excluded by E-Sign (as described above) or under UETA. This includes loan modifications, promissory notes and recordable instruments. However, as it relates to the promissory note and recordable instruments, such as a mortgage, we suggest banks continue to obtain a wet signature for the reasons described below. This may result in a bifurcated approach in obtaining signatures on documents. For example, you may be capable of using electronic means to send and obtain signatures on documents prior to closing. At closing, however, lenders should consider obtaining wet signatures.
The promissory note
Nothing in E-Sign or UETA prohibit use of an e-signature on a promissory note. However, because paper promissory notes are “negotiable instruments” under the UCC, having “possession” of the “original” signed note is legally significant. In order to create parity in an electronic world, E-Sign and UETA set forth special rules as it relates to electronic promissory notes. Specifically, the note must be considered a “transferrable record” in order to be considered a negotiable instrument. If the note is a “transferrable record,” the person identified as in “control” of the record becomes the equivalent of a “holder” under the UCC. In order to be considered a “transferrable record,” the certain criteria must be met, which in part requires “a single authoritative copy of the transferrable record” and that each copy of the authoritative copy and any copy of a copy be readily identifiable as a copy. This requires use of an appropriate storage system, be it homegrown or a third-party e-vault, that is capable of meeting the requisite criteria.
Without following the requisite criteria, you could find yourself in court unable to “produce the original note,” (aka the “authoritative copy”) like during the Great Recession, where lenders were often unsuccessful. As a result, given this significant risk, many lenders require a wet signature on the note or, alternatively, notes over a certain dollar threshold or on lower-risk loans in order to minimize this risk.
Recordable instruments/real property documents
Whether or not recordable instruments can be signed electronically is a matter of state law. ***** As a result, banks may reasonably require wet signatures on notes and recordable instruments, both of which are signed at closing.
[The Wisconsin Office of Credit Union advises that the credit union may want to keep certain “high priority” items like loan agreements in the original format for a time in case the credit union needs to rely on them. As a general matter, original documents should be retained until the statute of limitations for filing of a lawsuit expires, unless the credit union’s legal counsel has reviewed the credit union’s imaging and recordkeeping. The credit union needs to be sure that it has records that will be admissible in court under state and federal rules of evidence. We encourage credit unions to review or spot check their imaging periodically to verify image quality before originals are destroyed.
Wisconsin has also passed the Uniform Real Property Electronic Recording Act (URPERA). It authorized electronic recording and notarization of real estate documents.]
4. Are there other relevant considerations?
Investors and institutional lenders
If you sell or pledge your loans to investors or institutional lenders, you must adhere to their requirements. We are aware of several investors and institutional lenders — including Fannie Mae, Freddie Mac, and the Federal Home Loan Bank — which restrict, to some extent, the documents on which an e-signature can be used. For example, a wet signature on a note and a mortgage is likely required. We suggest reaching out to investors and institutional lenders with which you do business for guidance.
Notary requirements
For loan documents requiring notarization, banks would traditionally be limited in the ability to execute a document electronically. However, a remote notarization, which has become more ubiquitous during the pandemic, allows borrowers and notaries to be connected via webcam. ***** Use of remote notarization will help facilitate remote closings. However, to the extent that your bank is not comfortable with remote closings given the considerations above, a wet signature will be necessary on document requiring a notary.