e-signature law presents opportunities, challenges to credit unions

Congress took a big step toward growing e-commerce by passing electronic signature legislation last month, but questions remain about security of the new technology, which will allow credit unions to do business more efficiently on-line. With hardly a dissenting vote Congress, on June 14 and 16, passed the Electronic Signatures in Global and National Commerce Act. The measure has been sent to President Clinton, who has indicated he will sign it. The new law recognizes electronic contracts, signatures and disclosures as equivalent to those in writing on paper, with only a few exceptions. It removes a major impediment to the development of a full-blown e-commerce economy. Without this kind of legislation, the Internet age would remain significant mainly for its ability to provide information rapidly and broadly. Recognizing electronic contracts, signatures and disclosures will permit the on-line consummation of most forms of commercial activity and may eventually lead to a significant decline in brick and mortar facilities. In fact, it is safe to say that most businesses are not yet prepared to take full advantage of their new opportunities for "electronic contracting." An important point of this legislation is that it does not make all contracts with electronic signatures legally binding. Under the new law, a signature, contract or other record of a transaction cannot be denied legal effect solely because it is electronic. That's a long way from saying that all electronic contracts and signatures are enforceable. Whether or not a particular contract will be enforceable, will still be determined by state law. The Electronic Signatures in Global and National Commerce Act specifically avoids endorsing any particular hardware or software. In other words, it is technology neutral. This means Congress is leaving it up to computer scientists and engineers to find ways to conclusively connect an electronic signature with a specific person. Potential choices include digital signatures (a type of electronic signature using an asymmetric cryptosystem - public and private key), biometrics (retinal scans or thumbprints) and electronic signature pads. This will be the next big challenge in electronic commerce. Credit unions will understandably be nervous about fraudulent use of electronic signatures. To allay those concerns, CUMIS Insurance Society, Inc. will be adding an "Electronic Crime-Loan Endorsement" to its forgery coverage under CUNA Mutual Group's bond program on Aug. 1, 2000. This optional insurance coverage will initially cover only digital signatures that use an asymmetric cryptosystem. It protects a credit union if a person other than a member obtains account information and creates an unauthorized loan, or alters the terms of an existing loan, through the use of a digital signature. It also provides coverage for hacker intrusions. When a law requires that a consumer receive disclosures in writing, they may be provided electronically only if the consumer agrees after receiving certain disclosures. Consent may be obtained electronically, and, if it is not, the consumer must confirm his/her consent electronically. Whether the consumer consents electronically or confirms consent electronically, it must be done in a manner that reasonably demonstrates that the consumer can access information in the electronic form will be used to provide the disclosures. This means members should be asked questions that enable credit unions to determine whether the members have the hardware and software necessary to view and retain the information that will be provided electronically. The new legislation also permits retention of electronic records, instead of paper documents, in most cases where there is a legal requirement to retain a contract or record. Even checks may be retained in an electronic format. The law requires that the electronic record be reproducible for later reference, and the consumer must also be allowed to retain an electronic copy if desired. There are, however, certain exceptions, such as court documents; notices of health and life insurance terminations; adoption, divorce and other family-law papers; and notices that threaten the primary residence of an individual. These will continue to be paper documents. The law will take effect Oct. 1, 2000. The record retention provisions, however, are effective March 1, 2001, with a possible extension in some cases to June 1, 2001. You'll be hearing a lot more about electronic signatures and related aspects of electronic commerce in the weeks and months ahead.