Reprinted with permission of Blank Rome Comisky & McCauley LLP "Consumer Lending/Retail Banking Update." Blank Rome is a national law firm with offices in Pennsylvania, New Jersey, Delaware, Maryland, Washington, DC and Florida and its Consumer Financial Services/Retail Banking Group provides advice and counsel to mortgage companies, banks, thrifts, real estate professionals and all others involved in residential mortgage finance and other areas of the law. For further information, contact the Group's chairman, Paul H. Schieber at 215/569-5567 or schieber@blankrome.com.  http://www.blankrome.com/

Not one to be left behind in the electronic age, the Federal Reserve Board recently proposed amendments to Regulations Z, B, DD, and M to permit creditors to provide disclosures electronically. The Board also issued an interim rule to Regulation E to permit electronic disclosures if the consumer agrees. While timing, format, and other applicable requirements of these regulations will remain intact, the Board recognizes that a requirement to provide a disclosure "in writing" does not necessarily mean that a creditor must provide a paper document; information stored, produced or communicated by computer is also considered a "writing", at least where visual text is involved. In addition, providing alternate methods of giving necessary information reflects marketplace realities and decreases compliance burdens.

The Board has proposed that a new section be added that would permit a creditor and an applicant to "agree" to send by "electronic communication" (which is defined to allow the display of visual text) any information required to be disclosed by the applicable regulation (e.g., Reg. B requires certain disclosures in connection with taking applications, notifying applicants of action taken on an application, and compiling certain information for monitoring purposes). The proposal would include a requirement that electronic disclosures be "clear and conspicuous and in a form that the applicant may keep". (The "clear and conspicuous" requirement was added to Reg. B only to echo the current standard imposed under Regulations CC, DD, E, M and Z.)

The proposals, however, do not delineate how the applicant and creditor would "agree", and instead relegate the determination to applicable state law. As a result, before designing an electronic method of agreement, a creditor would need to consult the statute of frauds and other laws of each state in which its borrowers are located, as well as case law to evaluate common law principles applicable to consent and other principles of contract law. At the very least, stated the Board, the consumer must be "clearly informed" that it is consenting to receiving disclosures electronically.

The Board provided a number of illustrations to demonstrate the requirement that the disclosures be "provided", "given", or how a creditor may "notify" an applicant electronically. Regardless of how a creditor satisfies the requirement, consumers receiving electronic disclosures should have the same protections as those who receive paper disclosures. Therefore, simply posting information on an internet site, or stating that information is "available" would be insufficient. For example, a creditor could send disclosures to an e-mail address designated by the consumer, or to a website where the consumer must enter a personal identification number to access information.

Next, the Board attempted to resolve how a creditor could satisfy the requirement that the electronic disclosure be in a form the consumer could keep. The Board conceded that the financial institution is not required to assure that the customer has print capability attached to his computer. (Keep in mind that creditors currently have no obligation to ensure that consumers actually read the lengthy disclosures they often receive!) However, if the creditor controls the equipment used for service (e.g., by providing computer terminals in bank lobbies or other public places), then it is responsible for ensuring "retainability", by incorporating a printer or offering to transmit the disclosure to the applicant's e-mail or post office address.

The proposed amendments would also permit a consumer to make "written requests" via electronic communication (e.g., under Reg. B, a consumer may request a copy of an appraisal, or a statement of specific reasons for a loan denial).

Certain additional proposals were made to address credit card applications and solicitations pursuant to Reg. Z. The Board recognized that a consumer could obtain an application for a credit or charge card via electronic means, to the same extent it could through direct mail or from a magazine. Under the proposals, if the creditor used electronic means that "alert the consumer" that the application has arrived (e.g., through e-mail), then the creditor would follow Reg. Z's direct mail rules. Alternatively, if the creditor makes the application "publicly available" (e.g., through a web site), then the creditor would follow Reg. Z's take-one rules. With respect to accuracy of the APR and when a "printing" is deemed to have occurred, the Board believes that updating a web site is equivalent to printing.

Unique to Reg. Z, is a provision permitting creditors to provide credit via mail or telephone, as long as certain disclosures are "made available in written form". The Board stated that since it is possible to provide disclosures when communicating with the consumer via electronic means, permitting a creditor to defer providing certain disclosures would not further the purposes of the Truth-in-Lending Act. Therefore, the proposals would provide that if credit is offered via electronic means, certain disclosures must be provided before consummation of the transaction.

Finally, authentication of signatures in the electronic context requires special consideration. Under Reg. Z, a consumer must sign or initial an affirmative request for credit insurance, and may cancel certain home-secured loans by sending a signed notice to the creditor. The proposals issued by the Board under Reg. E's interim rules had addressed the issue by stating that electronic authentication methods must provide the same assurance as a signature on paper, such as by use of a security code or a digital signature. (In fact, some states have adopted laws providing that an electronic communication signed with a digital signature constitutes a "writing". However, the statutes are not uniform in the extent to which they impose operational and liability standards on lenders.) The Board has requested comments to learn about other ways in which electronic authentication could replace a paper signature.

Whether the Board will be able, as promised, to closely monitor the growing use of electronic communication in delivering disclosures and services, remains to be seen. The Board appears to be willing to give lenders flexibility. For example, in Reg. E's interim rule, financial institutions are not required to provide a paper copy on a consumer's request, after receiving disclosures electronically. On the other hand, the Board "expects" that lenders will "accommodate" consumers requests "to the extent it is feasible to do so". In addition, under Reg. E's interim rule, in response to lenders' concerns, a lender is permitted to request paper confirmation of certain consumer requests sent orally or electronically, for example a stop- payment notice, as long as the lender clearly identifies to the consumer what information will be subject to paper confirmation. With the active involvement of creditors in the comment and rulemaking process, the Board should be able to derive a workable compromise for the future.