Electronic Disclosure Rule Is Scored

Debate is swirling around a provision of the year-old Electronic Signatures in Global and National Commerce Act (E-SIGN) that requires businesses to show that consumers who agree to receive disclosures electronically have the means to do so.

E-SIGN ensures that contracts entered into electronically are legally equivalent to those entered into in writing. The law states that information legally required to be in writing can be made available electronically, but only if the business obtains the consumer's informed consent, which must be conveyed in a manner that "reasonably demonstrates" the consumer's ability to receive information electronically.

In testimony before the House Committee on Financial Services, a banking industry representative complained that the law fails to give a precise definition of "reasonably demonstrates," and this in turn places an unfair burden on financial institutions.

"The reasonable demonstration requirement has emerged as the most significant practical challenge to fully implementing E-SIGN," according to Louis Rosenthal, executive vice president at ABN AMRO North America. Rosenthal testified on behalf of the Banking Industry Technology Secretariat (BITS), an industry advisory board.

"The reasonable demonstration requirement poses particularly difficult challenges when firms interact with consumers both through electronic and non-electronic means," said Rosenthal. If a consumer opens an account at a branch or over the phone, and at the same time consents to receive subsequent disclosures electronically, both the consumer and the bank must confirm-electronically-that the consumer can receive them electronically. This is true, Rosenthal said, even if the consumer provides an e-mail address on a paper form or states that he or she has Web access.

Rosenthal suggested that Congress consider reverting to the consent rules that existed prior to E-SIGN, when federal agencies required a consumer's informed consent but didn't impose the reasonable demonstration requirement.

The federal agencies charged with enforcing consumer protection laws appear to be taking a hard line on the question. In a joint report to Congress, the Federal Trade Commission and Department of Commerce stated that E-SIGN's reasonable demonstration requirement "appears to be working satisfactorily at this stage of the Act's implementation," and recommended that Congress take no action to amend the law.

Meanwhile, the Independent Community Bankers Association (ICBA) endorsed the Federal Reserve's interim rules on electronic disclosures, which comply with the reasonable demonstration requirement. The interim rules went into effect March 30 and become mandatory October 1.

The ICBA said that the meanings of the terms "affirmatively consent" and "reasonably demonstrate" were clear and required no further interpretation by the Fed. A bank's obligation of reasonable demonstration was met once the consumer assents to electronic delivery, the ICBA said in a letter to the Fed's Board of Governors.

The ICBA said that no further guidance from the Fed was necessary on withdrawal of the consumer's consent to receive electronic disclosures. "A documented request from the consumer requesting that electronic delivery cease in lieu of paper is self-explanatory."