When President Clinton signed the Electronic Signatures in Global and National Commerce Act on June 30 last year, he commented that Americans will soon be using electronic signatures for many things, and one of those things will be closing a mortgage.
The President was right, but that is just the tip of an iceberg of labor- and time-saving positives engendered by the act, commonly known as the Digital Signature Law.
Before we discuss these benefits, however, some terminology needs to be clarified. Although the word signature connotes letters and writing, the most common form of electronic signature will likely be some type of password challenge. After all, banks already use passwords today for bank-by-phone and Internet banking applications. The PINs consumers use with their ATM and debit cards are essentially electronic signatures, telling the bank, "I am the person who is supposed to be using this card, and I am approving this transaction."
Electronic signature semantics aside, banks stand to reap incredible rewards from the new law. The reason: The act legitimizes the use of electronic documents in contracts. Previously, banks were legally forced to maintain contracts and records in their original paper form-an often burdensome and expensive stipulation. Now easy-to- store and maintain electronic records can satisfy this requirement.
In addition to obvious back-office savings, this transfer from paper to electronics allows banks to take full advantage of the burgeoning e-commerce marketplace. For example, a mortgage loan transaction can now be completely executed using electronic records and electronic signatures. The customer's application can be taken and signed on the Internet. The bank can issue all its disclosures electronically and prove they were issued and received by the customer on time.
The credit investigation, loan processing, underwriting and document preparation steps can also all be done electronically. The borrowers can sign all the loan papers and the mortgage or trust deed can be notarized over the Internet. Funds can be wire transferred along with electronic authorization.
The bank can also sell the loan, including the electronic records, into the secondary market. In this scenario, electronic signatures may be used in place of paper and ink to transfer or assign ownership of the note from the seller to the buyer.
Theoretically, the entire mortgage lending process-including the ultimate secondary market transaction-can now be conducted with no paper at all. Indeed, the technological capability to do so has existed for quite some time, but a host of legal issues had kept it on the backburner. Were e-mail or Web-based disclosures as legitimate as paper ones? Did any banker honestly believe that a promissory note and mortgage created and signed electronically were as enforceable as paper and traditional signatures? How were we to deal with getting documents notarized or recorded at the courthouse?
The Digital Signature Law answered all these questions and opened the e-commerce gates by stipulating that a contract may not be denied legal effect, validity or enforceability solely because an electronic record or electronic signature was used in its formation.
This transfer from paper to electronics will not be without challenges. For example, although the law clears the way for widespread use of electronic documentation, it's still up to the consumer to utilize the technology. In most cases a bank cannot require a person to use or accept electronic records or electronic signatures. Therefore, paper options must still be made available to customers.
If a person agrees to an electronic document, the bank must provide the consumer with a fairly detailed disclosure. The customer must also be able to access the form at all times, which will require sophisticated storage and retrieval systems.
So for the short term, banks will see a much faster impact on their bottom line if they concentrate on document imaging, storage, and retrieval benefits of the Digital Signature Law. Eliminating paper has always been a technique to reduce costs, and while it may not be as exciting to implement as signing loan documents over the Internet, we think it will have a much faster payoff.
Michael Ryan is founder of The Planning Solutions Group, Inc., an Austin, Texas- and Newport Beach, Calif.-based full-service management consulting firm. He can be reached at www.theplanningsolutions.com.
This guest column, a regular feature in Bank Systems+Technology, allows industry executives and experts to discuss a key bank technology topic. If you would like to contribute, please send requests by e-mail to Steven Marlin, BS+T executive editor, at [email protected]