But although banks like Chase and Royal Bank of Canada have made the investment and are embarking on large e-sign projects, challenges remain for the adoption of electronic signatures. For documents with "downstream afterlife," such as mortgage documents for which the loan is sold to another bank or collateralized and sold to investors, disputes can arise. The original lender and borrower might have agreed on the intent to sign the document, but how will third parties down the road feel? "There's some ambiguity about that," LeClair says.
Another issue is the process architecture around electronic signing. Does the electronic signature software handle just the verification of the actual signing, or does it do more than that?
"You don't want to let a particular business unit come in with its own e-signature process and have another one build their own, with different vendors and different formats for electronic evidence," LeClair says. "You want to get the legal department to sanction a particular approach and build a technology stack that can act as a shared service to multiple business units." One e-signature technology could work with mortgages, car loans, demand deposit account opening and more.
Many banks are using outside business process management providers to build the electronic signature workflow technology that can be shared across business lines. "They're not building their own content management, not building their own process orchestration," LeClair says. "Most of them have investments in five to eight systems already and are trying to pick and consolidate."
Simple Documents Yes; Mortgages No
Paperless mortgages are still a ways off, according to David Whitaker, counsel at BuckleySandler and former counsel at Wells Fargo. "Ironically one of the original drivers behind UETA was the residential mortgage industry, they said we'd like to see with statutory certainty that we can take residential mortgages electronic," Whitaker recalls. "They were the driving force behind the drafting and adoption of UETA. There is no transaction more complex than a mortgage, nor one that involves more parties."
Issues around electronic mortgages include incompatible systems, variable rules around electronic recording, and the integration of electronic closing documents into the back-room systems of lenders, Whitaker says. "The mortgage lender bang for the buck in the e-mortgage is what that allows you to do post closing, that's where the money and expense are," he says. "The up-front expense of integrating and automating the post-closing process is very significant. You find large financial institutions approaching that in small stages until they have the resources to automate all that post close."
At some banks, the mortgage loan origination and initial delivery of disclosures have been automated. But the back office will take several years.
"Large institutions' mortgage software is home grown, custom made and layered with years of adjustments, changes, and integrations with other systems in the institution," Whitaker says. "They have a million lines of spaghetti code and two guys who understand it."
What the Courts and Regulators Say
"Judges like the simplicity of e-signatures," says Whitaker, who can recall with great detail every U.S. involving electronic signatures over the past several years.
"We have not seen a court say, I'm not going to enforce this signature because it's electronic," Whitaker says. "I have not seen judicial hostility toward e-signatures. But there is an expectation that they will be fairly presented, protected after signing, that attribution and intent will be established. With that, we're seeing significant judicial support and even enthusiasm for e-signatures."
"With regulators it's more complicated, but they like a well-designed system," Whitaker says.
Regulators, mainly the FFIEC, have issued nine documents providing guidance on the use of e-signatures in banks, such as the FFIEC E-Banking Booklet.
One key regulatory requirement is for any needed disclosure or document provided, the consumer needs to consent to an electronic delivery mechanism such as email. Where email is used, the bank needs to deal with glitches such as bouncebacks.
Evidence has shown that with electronic documents, consumers are more likely to read the accompanying disclosures. "The banking industry has seen an uptick in the number of people who are reading materials online; they're getting more questions from people calling customer service saying, 'I didn't understand paragraph 23,'" Whitaker says. "There have been a few cases of gross overreaching in disclosures that have caused consumers to say maybe I should be looking at this stuff." Having the documents on their own tablet or phone helps. "They're watching Castle, it goes to commercial, they think, I might as well read this agreement. If they can sit in their jammies at 10:00 at night and read this, why not?"
Another key requirement: the consumer needs to be able to maintain the record in an accurate, printable format.
And companies need to be able to prove that they made a reasonable effort to prove that the person signing the document is who they say they are (in the online banking world, this is called authentication; in the electronic signature world, it's called attribution).
For instance, a former employer sued a company called Quicksilver for wrongful termination. In an electronic arbitration agreement, the employee's name had been typed into two blank fields, with no credentials required. The employee said she never signed it, and a California appellate court upheld her claim, saying Quicksilver had not established attribution.
The court cited these specifics: the employee did not have to use a password to access the document, there was no audit trail for the signature process, the record was not protected against undetected post-signature alteration and at least two other Quicksilver employees had accessed the signed record after it was saved and submitted by the employee.