Digital Transformation: eSignature and ePayment News and Trends - 5 February 2021

A fact of business today is that customers – both consumers and other businesses – and employees expect to transact digitally. To remain competitive, companies find themselves increasing their efforts to digitally transform their businesses.

 

Successfully implementing this transformation requires careful planning to ensure regulatory compliance, a smooth integration with existing business technology and a positive customer experience.

 

Each issue will feature in-depth insight on a timely and important current topic.

 

In this issue, for our Insights piece, we analyze the report from the CFPB’s Taskforce on Federal Consumer Financial Law, with a focus on its recommendations for ESIGN. In addition, this edition includes reports on other recently enacted federal and state laws, federal and state regulatory activities, fresh judicial precedent and other important news.

 

For related information regarding blockchain and digital assets, please see our monthly bulletin Blockchain and Digital Assets News and Trends.

  

INSIGHT

CFPB Taskforce on Federal Consumer Financial Law proposes changes to ESIGN

 

By Margo H.K. Tank, R. David Whitaker, Andrew W. Grant and Liz Caires

 

On January 5, 2021, the Consumer Financial Protection Bureau released a report with recommendations on how to improve consumer protection in the marketplace. The report consists of two volumes: the first volume examines the context of consumer finance and regulation today, while the second volume focuses on the Taskforce’s recommendations. This Insight discusses the report’s review of ESIGN and the Taskforce’s recommendations.  Read more. 

 

REGULATORY DEVELOPMENTS

 

FEDERAL

CFPB enters into consent order for violations of law, including the Electronic Fund Transfer Act: On December 30, 2020, the Consumer Financial Protection Bureau (CFPB) issued a consent order against a lender for violations of law, including the Electronic Fund Transfer Act (EFTA). Specifically, the CFPB found that the lender required all borrowers to provide bank-account information and authorize the lender to withdraw funds from that account on the first business day after each missed payment. This process violated the EFTA’s prohibition against requiring consumers to preauthorize electronic fund transfers as a condition of receiving credit.

 

Federal Reserve Board Governor discusses use of artificial intelligence in financial services: On January 12, 2021, Governor Lael Brainard gave a speech at the AI Academic Symposium hosted by the Board of Governors of the Federal Reserve regarding supporting the responsible use of AI and equitable outcomes in financial services. Governor Brainard focused on various topics. First, on the application of AI in financial services, Governor Brainard discussed how harnessing the promise of machine learning requires being alert to potential risks regarding bias and inequitable outcomes. Specifically, he warned that using historical data that reflects racial bias may instead amplify rather than reduce racial gaps in ability to access credit. Second, Governor Brainard addressed “black box problems,” ie, the lack of model transparency.  Third, Governor Brainard noted that the black box problem, while “formidable,” was not always “insurmountable.” Of import is context and explainability – “for an explanation to "solve" the black box problem, it must take into account who is asking the question and what the model is predicting.” Governor Brainard stated that the Federal Reserve is committed to supporting banks’ development and use of AI in a responsible manner to promote a fair and transparent financial services marketplace. He also noted that the Federal Reserve is exploring whether further supervisory clarity is needed to facilitate the responsible adoption of AI.

 

FTC settles claims against photo storage app regarding its use of facial recognition technology: In early January, the Federal Trade Commission, entered into a proposed settlement with Everalbum, Inc. based on allegations that it deceived users about its use of facial recognition technology and the retention of photos and videos from users who deactivated their accounts. The FTC alleged that the company offered an app that allowed users to upload photos and videos that would be stored via the company’s cloud-based storage. The FTC alleged that, in February 2017, the company launched a feature that used facial recognition technology to group users’ photos by who appeared in them and to “tag” people. Allegedly, the company enabled the facial recognition by default for anyone who used the feature. Furthermore, the company allegedly represented between July 2018 and April 2019 that it would not apply the facial recognition technology to content unless users affirmatively activated the feature. However, only users in certain states - Illinois, Texas, and Washington - could turn off the facial recognition feature; for all other users, the feature was automatically active and could not be disabled. The FTC also alleged that between September 2017 and August 2019, the company combined facial images it extracted from its users’ photos with facial images it obtained from publicly available datasets to help develop its facial recognition technology.

 

The proposed settlement requires, in part, that the company delete all face embeddings that the company derived from users who did not give express consent and that it delete any facial recognition models or algorithms it developed with its users’ photos or videos. Further, as part of the proposed settlement, the company is prohibited from misrepresenting how it collects, uses, discloses, maintains, or deletes personal information, including face embeddings created with the use of facial recognition technology. In addition, if the company markets software to consumers for personal use, it must obtain a user’s express consent before using biometric information it collected from the user through that software to create face embeddings or develop facial recognition technology.

 

STATE

Money transmission

Texas Department of Banking issues Interpretative Statement regarding the “payment processor” exemption: In November 2020, the Texas Department of Banking released Interpretive Statement 2020-01 which discussed the “payment processor” rule and withdrew prior legal opinions. Specifically, the Department stated that the “payment processor” rule, which it enacted in 2015, “’expand[ed] the application of Legal Opinion 14-01 to some situations where there is no explicit agency appointment in a contract’ as long as the requirements of the Payment Processor Rule are satisfied.” Therefore, the prior Legal Opinion 14-01 was withdrawn as inapplicable and unnecessary.

 

CASE LAW

FEDERAL

 

ADA

Court finds plaintiff lacks standing in website accessibility case: In Langer v. The Pep Boys Manny Moe & Jack of California, 2021 WL 148237 (N.D. Cal. Jan. 15, 2021), the court held that the plaintiff lacked standing to bring a website accessibility claim under the Americans with Disabilities Act (ADA) because the alleged violations on the website did not have a nexus to the defendant’s physical locations. The plaintiff alleged, for example, that a video did not have closed captioning and that he was denied the “full use and enjoyment of the facilities.” The court stated, however, the plaintiff did not allege that the violations had a nexus to the defendant’s physical location (eg, intended to visit but did not because website was inaccessible). However, the defendant also argued that the plaintiff’s arguments were mooted because, since the filing of plaintiff’s complaint, the defendant revised its website to be compliant with WCAG 2.0 standards. Under the ADA, the voluntary removal of alleged barriers may render an ADA claim moot. The court stated, however, that the Supreme Court carved out an exception for acts that can be repeated yet evade review. The court stated that where the claim arose because the website lacked closed captioning, a defendant could easily remove any offending videos after a lawsuit to moot a claim. The court further stated that it is not necessary to find whether ADA claims based on website accessibility can never be mooted, but that, in this particular case, the defendant did not present sufficient evidence. Finally, the court granted the plaintiff leave to amend his complaint to address the deficiencies in this order granting the defendant’s motion to dismiss.

 

Electronic signatures and general online contract formation

Court upholds arbitration agreement entered into electronically:

• In Espinoza v. South Beach Associates, 2021 WL 200112 (S.D. Fla. Jan. 20, 2021), the defendant’s system required a manager from the defendant to initially log into the system to start the process for the employee to sign the arbitration agreement, but that once the signing employee completed the electronic signing process associated with the arbitration agreement, a form was printed out on which the employee would need to sign and acknowledge electronically signing the arbitration provision. The defendant put forth as exhibits the hand-signed printout and the electronically signed arbitration form. The court therefore concluded that the plaintiff electronically signed the arbitration form.
  
  
• In Bannister v. Sally Beauty Supply, LLC, 2020 WL 8223534 (M.D. Fla. Dec. 15, 2020), the defendant used a third-party platform to send the new hire packet to prospective employees. As part of that process, the third-party platform sent an email to the plaintiff with a unique user name and password and website URL. The defendant did not have access to the URL or the new hire documents before they were signed. The defendant demonstrated that the plaintiff signed the arbitration agreement by showing an activity time sheet, which tracks completion of the new hire documents. Further, the time sheet showed the IP address, which was on a server in the same city and state that the plaintiff was in on the date the arbitration agreement was signed. Therefore, the court concluded that the plaintiff had agreed to arbitrate.
  

Prepaid card regulation

Court invalidates part of CFPB’s Prepaid Card Rule:  In PayPal, Inc. v. CFPB (Civ. Case 19-3700), the United States District Court for the District of Columbia held on December 30, 2020 that two provisions of the Prepaid Card Rule exceeded the CFPB’s regulatory authority.  First, the court found that the CFPB had no authority under either the Electronic Funds Transfer Act or the Dodd-Frank Act to require the use of mandatory disclosure forms, because those statutes only authorize the agency to promulgate model forms, which the provider has the option to utilize.  Second, the court held that the CFPB had no authority under either the Truth-in-Lending Act or Dodd-Frank to mandate a 30-day waiting period before a credit product may be linked to a prepaid card, because such a mandate was a substantive limitation on when a consumer can access and use a credit product, as opposed to a disclosure requirement.  Accordingly, the court vacated the requirements of 12 CFR § 1005.18(b) to the extent it requires a mandatory form, and also vacated the 30-day credit-linking provision under 12 CFR § 1026.61(c)(1)(iii).  The CFPB may appeal the decision.

 

STATE

 

Electronic signatures and general online contract formation

Court affirms order denying motion to compel arbitration: In Fisher v. Bird Rides, Inc., 2021 WL 141174 (Cal. Ct. App. Jan. 15, 2021), the defendant claimed that the plaintiff signed an arbitration agreement. The defendant terminated the plaintiff’s employment in early December 2018. To establish that the plaintiff signed the arbitration agreement, the defendant described the standard onboarding process and provided a copy of the arbitration agreement located in the plaintiff’s online account with the plaintiff’s name keyed in. In opposition, the plaintiff stated that his onboarding process differed from what the plaintiff described, and that he never saw the arbitration agreement during his onboarding or employment and that it did not appear in his online account in early January 2019, after he had been terminated. The plaintiff sent an email to the defendant stating that these onboarding documents had just been added and asked for “time stamped proof of those documents you just added.” In reviewing the evidence, the original court stated that insufficient evidence existed that explained what specifically happened with the plaintiff and that, because the defendant only produced a generic version of how its process worked along with a document with plaintiff’s name on it, the plaintiff had met its burden of providing that he did not sign the arbitration agreement. This court held that the defendant had failed to establish the prior court was in error and affirmed the denial to compel arbitration.

 

RECENT EVENTS

 

In the 2021 edition of Chambers Fintech, Chambers and Partners identified DLA Piper as “one of the foremost firms in the country for transactional FinTech matters.”  Partners Margo Tank and David Whitaker were recognized individually for their work in FinTech.

 

ESRA Digital 2020 Education Series, including webinars on mortgage eclosings, remote online notarization, and digital transformation in automotive selling and lending.

 

On January 20, 2021, Liz Caires and Andrew Grant presented at the New York State Bar Association’s Business Law Annual Meeting on the use of electronic records and signatures.

 

On January 28, 2021, David Whitaker presented at ACI’s Prepaid Card Compliance Conference on “Prepaid Accounts vs. DDAs: Weighing the Business and Compliance Issues When Deciding Which Product to Offer.”

 

The Financial Times has ranked DLA Piper second on its lists of Most Innovative Law Firm and Most Digital Law Firm in the FT North America Innovative Lawyers 2020 report. The Financial Times particularly noted our pro bono legal work on behalf of the UN’s World Food Programme, which the authors of this publication assisted with.

 

RECENT PUBLICATIONS

 

The Law of Electronic Signatures, 2020 - 2021 Edition (Thomson Reuters) is an essential guide to electronic signatures and records laws, including the context in which the laws were adopted and the ways in which the authors believe the drafters intended them to be interpreted. The publication is prepared by authors, including Margo Tank and David Whitaker, with more than 30 years combined experience that includes involvement with the drafting and passage of Electronic Signatures in Global and National Commerce Act (ESIGN), the preparation of the Uniform Electronic Transactions Act (UETA), the creation of SPeRS™ (the Standards and Procedures for electronic Records and Signatures), and serving as counsel to the Electronic Signatures and Records Association. The insights they provide will be indispensable to anyone seeking to understand the impact of, and the liability associated with, using electronic signatures and electronic records. These insights include:

• Details on the legal requirements for using electronic signatures and records, including delivery, presentation, signing, and record retention


• Comprehensive tables itemizing the state variations to the uniform UETA language


• Special considerations for using electronic signatures and records in connection with emerging and evolving technology


• Using electronic records and signatures in specialized transactions and documents, such as securities, chattel paper, and mortgages


• Analysis of the interplay between ESIGN, UETA, and many other key laws and regulations


• Identification and summaries of recent legal developments and court cases impacting electronic signatures and records

The MBA Compliance Essentials Remote Online Notarization State Surveys, developed by DLA Piper, provides a comprehensive look at RON requirements in each state that has enacted RON legislation.  These fully editable surveys are organized by category of requirements, including registration, technology, seal and signature, certificates of RON acts, journal, authentication, session, recording, and additional requirements. Companies can purchase the full package which includes surveys for all states that have enacted RON legislation along with a matrix summarizing state requirements, or companies can purchase information about individual states as needed. 

In case you missed it

Read the latest issue of our bulletin Bank Regulatory News and Trends

Read the latest issue of our bulletin Consumer Finance Regulatory News and Trends

Contacts

 

Learn more about our eSignatures and ePayments practice by contacting:

 

Margo H.K. Tank

 

David Whitaker