Question: We recognize the requirements of E-Sign. One subject of discussion has been its role in contractually binding our financial institution in mortgage loan originations, especially in the area of consumer disclosures. How valid are electronic signatures? Can electronic signatures be used to enforce contracts?
Answer
The Electronic Signatures in Global and National Commerce Act (E-Sign) was designed to allow greater flexibility to implement electronically signed transactions. Its requirements have been used more and more since E-Sign’s inception in 2000. E-Sign specifies that an electronic record or transaction may not be rendered invalid solely on the basis of its electronic or digital nature, but it makes no guarantees about the overall enforceability of such electronic contracts.
An electronic record is only enforceable if it meets the criteria specified in relevant contract laws as well as the language of E-Sign. It is worth noting that E-Sign applies to interstate or government interactions. With respect to in-state transactions, these are bound either by the Uniform Electronic Transactions Act (UETA) or the governing state laws relevant e-Signature laws–which, in some states, are actually more strict than E-Sign or UETA.
For an electronically signed document to be enforceable in court, it must meet certain requirements for legal contracts in addition to the electronic signature guidelines specified in the appropriate laws (such as E-Sign and UETA). According to E-Sign, an electronic signature is "an electronic sound, symbol, or process, attached to or logically associated with a contract or other record and executed or adopted by a person with the intent to sign the record."
In contract law, signatures serve the following general purposes:
►Evidence: Authenticates agreement by identifying the signer with a mark attributable to the signer that it is capable of authentication.
►Ceremony: Act of signing calls attention to the legal significance of the act, preventing inconsiderate engagements.
►Approval: Express approval or authorization per terms of agreement.
To elucidate on factors involving authentication, broadly, authentication is defined as evidence that a given record, contract, or form is a genuine, unaltered written representation of an agreement approved by two or more parties, whether in paper or electronic form.
An authentic document contains no evidence of fraud or tampering, such that it may be reasonably concluded that the parties in agreement did indeed assent to the enclosed terms. Assent is evidenced by an attributable, authenticated signature. To be authenticable, the transaction must contain enough information uniquely attributable to the user that fraud, forgery, or validity can be reasonably proven.
For an electronic transaction to withstand scrutiny in court, it must meet the definitions and criteria stated above; that is, it must be capable of authentication and non-repudiation, call attention to the document's legal significance (viz., creation of the electronic signature), and demonstrate approval of the terms of the agreement.
Some electronic signature technologies sufficiently meet these criteria and some do not. Therefore, it is very important for businesses and government agencies to choose their electronic signature technology carefully or risk making agreements that cannot be enforced.
If interested in a review of your electronic signature technology, please contact us. We have subject matter experts who can review the technological and regulatory compliance requirements of E-Sign.
Jonathan Foxx is managing director of Lenders Compliance Group, the first and only full-service, mortgage risk management firm in the United States, specializing exclusively in outsourced mortgage compliance and offering a suite of services in residential mortgage banking for banks and non-banks. If you would like to contact him, please e-mail [email protected].
