6 Steps Before Adding E-Signatures to Your Lending Process

To count on digital signatures working well for your financial institution you must be sure that your systems can handle them, that the potential glitches fall within your institution's risk tolerance, and that you are not only up to date on applicable federal and state rule but also on pending national legislation.

Considering implementing an electronic signature solution at your community bank or credit union? Here are six things you should know. As a bonus, watch the webinar described later in this article to see how easy Finastra’s ProSign Online is to implement and hear from a banker directly on how she did it.

1. Make Sure You Have Digital Documents

If your financial institution is new to electronic signatures, it’s critical to lay the groundwork first by ensuring that your systems can support digital documents.

“Instituting digital documents is a comprehensive process, requiring consideration of many factors.”

Instituting digital documents is a comprehensive process, requiring consideration of many factors. These include how documents will be stored, the security protocols that will protect them, where disaster recovery systems will be held, and how digital documents will be managed internally.

Meeting these needs can require technology upgrades, and in some cases, the hiring of new talent to manage associated systems and processes. According to FDIC, electronic documents could have an active life of 30 years or more, as well as an additional three-to-five-year retention life. Because some financial institutions never destroy old loan documents, digital storage needs could be extensive.

2. eSignature Regulation Can Differ By State

During the COVID-19 crisis, electronic signatures gained traction as a quick and legal way to obtain document signatures without in-person contact. As we move beyond the pandemic, the online transactions that drive the need for e-signatures will likely to retain their consumer appeal.

“Three states — Illinois, New York and Washington — have not adopted UETA and are subject to individual state mandates as well as the overarching E-SIGN regulations.”

The Uniform Electronic Transactions Act (UETA) and the Electronic Signatures in Global and National Commerce Act (E-SIGN) make electronic signatures and records enforceable by granting them the same validity as manually signed, paper-based transactions.

When preparing to use electronic signatures, banks and credit unions will need to adhere to the appropriate regulations for the state in which they are conducting business. UETA has been adopted by 47 states, and in most cases, supersedes the federal E-SIGN Act.

Three states — Illinois, New York and Washington — have not adopted UETA and are therefore subject to individual state mandates as well as the overarching E-SIGN regulations.

3. Digital Documents are Subject to Some Federal Banking Regulations

Electronic signatures have become common in multiple industries, used for everything from signing a DoorDash receipt to scrawling your electronic autograph on a tablet when renting a car.

For certain, all electronic signatures that meet the proper regulations are considered valid, but financial institutions are governed by more extensive oversight than other types of businesses.

Many of these regulations will have an impact on the use of electronic signatures within the community bank or credit union, depending on the product or line of business.

“One thing to keep in mind is that financial institutions are highly regulated and there are many federal disclosures that apply to taking deposits, making loans and other consumer-related activities,” said Melinda Williams, Principal Compliance Counsel, Finastra. “And those disclosures are subject to much stricter regulation than those imposed under UETA.”

As federal documents, these types of disclosures fall under the consumer consent requirements of the federal E-SIGN Act, federal regulations that must be satisfied before disclosures may be provided electronically. Banks and credit unions need to be aware of the additional governing requirements to ensure compliance with all applicable laws and regulations.

4. Know How to Manage Your Risk

For financial institutions, something as simple as an electronic signature could put the organization at risk if not handled properly. For example, many banking institutions sell or collateralize loans. What if a loan that was signed electronically in Virginia under UETA now passes to an organization in Illinois, where the same regulations are not in force?

“E-signatures are not 100% risk-free.”

E-signatures are not 100% risk-free. Financial institutions must review processes from both an upstream and downstream perspective, considering what the organization wants to achieve and in what lines of business they want to achieve it. They will then need to weigh the potential outcomes against the organization’s risk appetite.

It may be that the bank or credit union is willing to accept the risk of e-signatures on loan documents, for example, because the financial institution holds the notes. In other lines of business, the bank or credit union could decide to maintain the physical signature process. They may also opt for a hybrid model where electronic signatures are used in situations of minimal risk and physical signings come into effect where the risk is deemed too burdensome.

5. Decide How to Handle Customer Authentication

To accept electronic signatures, financial institutions need to verify the identity of the customer who is signing the documents. This is usually accomplished through a party known as a Certificate Authority (the “C.A.”). The C.A. independently verifies a customer’s identity before a signature is accepted and then generates a digital certificate as validation.

A community bank or a credit union can become a C.A., but the process is usually cost prohibitive for financial institutions operating at this scale, so third-party solutions are optimal. However, FDIC warned, in a bulletin, that financial institutions engaging with “certificate authority (C.A.) start-up organizations may find themselves using digital signatures that are unverifiable or information systems that have no technical support.”

Financial institutions are encouraged to vet their vendors thoroughly and seek those that have extensive backgrounds in financial services.

6. Watch for Upcoming Legislation

The good news on the e-signature front is that upcoming legislation could simplify and streamline the world of e-signing soon. In July 2020, U.S. Senators John Thune (R.-S.D.), Jerry Moran (R.-Kan.) and Todd Young (R.-Ind.), members of the Senate Committee on Commerce, Science and Transportation, which has jurisdiction over technology and consumer protection, introduced the E-SIGN Modernization Act. While details are still scant, the legislation proposes to update E-SIGN to reflect advancements made in technology since the passage of the act 20 years ago.

Currently, E-SIGN requires consumers to reasonably demonstrate that they can access documents electronically before they can receive documents for electronic signing. The new legislation would repeal this requirement. If approved, consumers will only need to sign disclosures, and all subsequent documents can be passed through the same channels.

Rethinking ‘Normal’ with Electronic Signatures

Keep these six things in mind as you consider implementing electronic signatures. With the new normal under the pandemic, Finastra has an e-signature solution to easily implement along with their end-to-end lending solutions ProSign Online. It was proven to be fundamental to the Paycheck Protection Program and assisted with 55,000 PPP transactions.

Finastra has helped nearly 4,000 lenders provide relief lending through the CARES Act. “I’m so glad we had ProSign Online to use, in order to expedite all of these loan requests! We’ve already approved over 450 PPP applications, totaling over $55 million,’ said Jeremy Gray, Director of Credit Administration, Rock Canyon Bank.

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