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Commercial mortgage insider: Are you prepared ... Are you ready?

National Mortgage Professional
Mar 09, 2005

Electronic signatures in global and national commerce actLeonard A. Bernstein and Gary L. KaplanE-Signature Act, 2000, electronic signatures, electronic commerce The world of electronic transactions has galloped far beyond the efforts of the legal community to develop laws to facilitate traffic on today's electronic transaction raceway. Some states enacted versions of the Uniform Electronic Transactions Act. International rules of electronic commerce are developing, but there was no overarching federal law in place designed to eliminate the paperuntil now. On Friday, June 30 President Clinton signed in Philadelphia the "Electronic Signatures in Global and National Commerce Act" (the "E-Signature Act"). When most of the new law's provisions take effect Sunday, October 1, there will be in place for the first time a national framework for giving validity to transactions handled electronically. In brief, the E-Signature Act allows electronic signatures or documents to satisfy most existing legal requirements for written signatures, disclosures, or records. On the other hand, the Act neither entirely eliminates risks related to E-signatures and electronic documents, nor ensures their enforceability. Instead, the E-Signature Act simply provides the opportunity for businesses and government to adopt technologies and procedures that themselves provide necessary assurances of attribution, non-repudiation, data integrity, and reliability. The limitations of the E-Signature Act require elaboration. Suppose Bank A and Bank B electronically exchange a contract that is purportedly executed in the body of the contract itself. (In other words, each Bank "executes" the contract by typing in a "signature"). Although the E-Signature Act does not prohibit enforcement of these "electronic signatures," it likewise says nothing about their enforceability. In fact, such simplified electronic signatures are unlikely to withstand legal challenge because they lack any necessary safeguards. In the hypothetical, for example, no safeguards assure: Data IntegrityHow do Banks A and B know that they have "signed" the same contract? AttributionHow do Banks A or B know that the other party, as opposed to a third party, actually signed the contract? Non-repudiationHow could Banks A or B disprove a false assertion that the other party never executed the contract? ReliabilityHow can Banks A or B prove that neither side has altered the contract subsequent to its execution? Fortunately, technology has been developed (and is continuing to develop) that would allow both parties (and the courts) reasonably to rely on each other's electronic "signature." In adopting legislation that allows for electronic signatures, but which does not specify the use of particular safeguards or technology, the E-Signature Act will allow for the continued development and improvement of E-commerce mechanisms. On the other hand, the failure to adopt specific requirements or presumption of reliability implies that efforts to rely exclusively on electronic signatures or documents will not be without risk, at least until there is a greater body of case law addressing their enforceability. Legal legitimacy of electronic commerce At the heart of the E-Signature Act is its pronouncement that a signature or contract may not be denied legal effect or enforcement solely because it is in an electronic form. In other words, a contract relating to a "transaction" cannot be denied legal effect and enforceability solely because of an electronic signature or E-mail used in its formation. The E-Signature Act, however, does not require any person to agree to use electronic signatures. Electronic consumer disclosures Many consumer protection laws, such as the federal Truth in Lending Act, require disclosures to consumers in writing. The E-Signature Act states that an electronic record (i.e., an E-mail or Web posting) will satisfy the requirement that the consumer disclosure be in writing if certain conditions are met. First, the consumer must have "affirmatively consented" to the use of electronic communication and has not withdrawn such consent. Presumably, state and federal regulators will elaborate on the meaning of affirmative consent. Second, prior to consenting, the consumers must receive a "clear and conspicuous" statement that informs them: 1. of any right to have the record provided on paper, and the right to withdraw the consent to have the record provided in electronic form, together with any conditions or fees that may arise in the event of such withdrawal; 2. whether the consent applies only to a particular transaction, or to categories of records that may be provided during the course of the parties' relationship; 3. the procedures needed to withdraw consent and update information needed to contact the consumer electronically; and 4. how they may obtain a copy of the electronic message, and whether any fee will be charged for such a copy. Third, prior to consenting, the consumers must be provided with a statement of the hardware and software requirements for access to and retention of the electronic record. The consumers must then consent electronically, or confirm their consent electronically in a manner that demonstrates that the consumer can access the information. The E-Signature Act also addresses existing consumer laws that require consumer disclosure information to be verified or acknowledged (for example, New Jersey's residential mortgage application disclosure requirement). Such information may be made available electronically "only if the method used provides verification or acknowledgment of receipt..." Presumably, this means that electronic delivery of such a consumer disclosure should automatically trigger an opportunity for delivery of a consumer's electronic signature. Negotiable instruments & real estate Title 2 of the E-Signature Act deals with "transferable records," which are defined to mean electronic records that would be notes under the Uniform Commercial Code if (a) such record were in writing, (b) the issuer expressly agrees that the document is a "transferable record," and (c) the transaction involves a loan secured by real property. In such cases, a transferable record may be executed using an electronic signature. Notarization Current law requires forms recorded in real estate transactions and other formal documents to be notarized according to state law. The E-Signature Act provides a mechanism for electronic notarization if the document bears the electronic signature of the notary together with the other required information, and is "attached to or logically associated with a signature or record." Record retention Many federal and state laws require certain records to be maintained for a defined period of time. Well, the record warehouse industry will eventually face tough times. The E-Signature Act states that if an existing statute or regulation requires records to be retained, that requirement is met by retaining an electronic record of the information. However, such electronic record must "accurately reflect" the information set forth in the contract or other record, and must "remain accessible" in a form capable of being "accurately reproduced for later reference, whether by transmission, printing, or otherwise." Again, the E-Signature Act provides the opportunity for businesses to replace paper records with electronic ones but does not create a precise road map for doing so. In substituting electronic records for paper records, a firm may need to adopt technological, procedural, and administrative safeguards, which assure that the electronic records are an accurate reproduction of original materials, and that the electronic records have not been tampered with. Although the benefits of electronic records are clear, they also pose significant risks that should be considered whenever a firm is contemplating a transition to "paperless" record keeping. Accordingly, a transition to electronic record keeping should be accompanied by a review of both security and record retention practices. Originals and checks Another overlay of existing law involves original documents. If an existing law requires a contract or other record to be retained in its original form, the E-Signature Act states that such requirement is satisfied by retaining an electronic record. Again, however, such electronic record of the original must "accurately reflect" the information set forth in the original and "remain accessible" in a form capable of being "accurately reproduced for later reference, whether by transmission, printing, or otherwise." Effective date The provisions of the E-Signature Act, Title 1 that have been discussed above, become effective Sunday, October 1. However, as applied to record retention requirements, these E-Signature Act provisions become effective March 1, 2001. However, that period can be delayed until June 1, 2001 if a rule-making proceeding is underway. Conclusion The E-Signature Act should give a big boost to advocates of electronic transactions. However, technology to develop reliable electronic signatures and reliable security procedures will still need to be learned and understood in order to be implemented. It is difficult for a law to predict all of the twists and turns of technological developments. Now, at least Congress has given an unequivocal green light to those exploring the realm of electronic commerce. Leonard A. Bernstein is Chair of the firm-wide Consumer Financial Services Group of Reed Smith Shaw & McClay LLP. He is also Administrative Partner of the firm's New Jersey offices of more than 70 lawyers in Newark and Princeton. Len is also a member of Reed Smith's E-Commerce & Technology Law Group. Gary L. Kaplan is a partner in Reed Smith's Pittsburgh Office and the head of the firm's Information Technology ("IT") Group.
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