Digital Transformation: eSignature and ePayment News and Trends - 30 July 2020

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 OCC’s recent interpretive letter regarding cryptocurrency custody services. 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

National banks may provide cryptocurrency custody services – exchanges will soon face competition

On July 22, the Office of the Comptroller of the Currency (OCC) issued Interpretive Letter #1170 concluding that national banks and federal savings associations have the authority to provide cryptocurrency custody services for their customers, including holding the unique cryptographic keys associated with the cryptocurrency. The bank or savings association must still implement appropriate controls and systems to mitigate risk, and otherwise comply with applicable law. Learn more. 

REGULATORY DEVELOPMENTS

FEDERAL

FinTechs

FDIC issues request for information regarding whether a voluntary certification program would help banks partner with fintechs: On July 20, 2020, the FDIC issued a request for information (RFI) seeking input on whether a standard-setting and voluntary certification program could be established that would allow financial institutions to conduct due diligence of fintechs by certifying or assessing certain aspects of the third-party providers’ operations or condition. The FDIC issued the RFI as part of its FDiTech initiative to promote the efficient and effective adoption of technology at FDIC supervised institutions.

Artificial Intelligence and fair lending

CFPB discusses AI/machine learning models in context of adverse action notices: On July 7, 2020, the Consumer Financial Protection Bureau (CFPB) published a blog post on the use of artificial intelligence/machine learning (AI/ML) in connection with credit underwriting and explanation of adverse action. The CFPB examined how use of complex AI models may impact satisfaction of the adverse action requirements under the Equal Credit Opportunity Act (ECOA) and the Fair Credit Reporting Act (FCRA). The CFPB discussed how the existing regulatory framework has built-in flexibility that can be compatible with AI. The CFPB stated that while a creditor must disclose the key factor(s) resulting in an adverse action, the creditor does not need to describe why a particular factor adversely affected an application. The CFPB observed that ‘[t]his flexibility may be useful to creditors when issuing adverse action notices based on AI models where the variables and key reasons are known, but which may rely upon non-intuitive relationships.”

Relatedly, on July 28, 2020, the CFPB issued a request for information (RFI) regarding, in part, regulatory compliance challenges under ECOA. As part of that RFI, the CFPB is seeking information on the use of AI/ML as follows:

• Should the CFPB provide more regulatory clarity under ECOA and Regulation B to help foster innovation that increases access to credit in the context of AI/ML without unlawful discrimination?
• Should the CFPB modify requirements or guidance regarding notifications of actions taken, including adverse action notices, to empower consumers to make more informed decision and/or to provide clarity when underwriting decisions are based in part on models that use AI/ML?

Comments must be received 60 days after the RFI is published in the Federal Register.

eMortgages

Ginnie Mae launches Digital Collateral Program: On July 16, 2020, the Government National Mortgage Association (Ginnie Mae) announced that it has begun to implement the necessary capabilities to accept electronic promissory notes and other digitized loan files as collateral for Ginnie Mae securities. All applications to participate in this phase of Ginnie Mae’s Digital Collateral Program must be submitted by August 15, 2020. To assist in this process, Ginnie Mae published the first version of its Digital Collateral Program Guide.

Electronic Fund Transfer Act

CFPB approves automatic savings plan under its Compliance Assistance Sandbox: On July 17, 2020, the CFPB announced that it issued a Compliance Assistance Statement of Terms Template (CAST Template) under its Compliance Assistance Sandbox Policy (CAS). Employers interested in creating an automatic savings program as a way for employees to build emergency savings will be able to use the CAST Template as a basis for an application to receive approval from the CFPB for such a program. The CFPB stated that approvals based on the “CAST Template will provide protection from liability under the ‘compulsory use’ provisions of the Electronic Fund Transfer Act, and the Bureau’s regulation implementing EFTA, Regulation E.”

True lender rule

OCC proposes “true lender” rule: On July 20, 2020, the Office of the Comptroller of the Currency (OCC) issued a proposed rule that is designed to determine when a national bank or Federal savings associations makes a loan and is the “true lender” is a bank partnership model. Specifically, the bank will be the true lender when a bank makes a loan if, as of the date of origination, it is named as the lender in the loan agreement or funds the loan.

STATE

Money transmission

California DBO releases five opinions regarding applicability of Money Transmitter Act: In late June and in July, the California Department of Business Oversight (DBO) released five opinions regarding the applicability of California’s Money Transmitter Act (MTA):

• July 10, 2020 – Agent of Payee Exemption – Payment Processing Service: The DBO stated that payment processing services fall within the definition of money transmission but that the company would be exempt from the MTA when, as the merchant’s agent, the company received money from customers as payment for goods or services.
• July 1, 2020 – Online foreign currency exchange service: The DBO stated that the foreign exchange service was not money transmission because customers would use the online foreign currency exchange strictly to purchase foreign currency.
• June 30, 2020 – Agent of payee – Tax payments: The DBO stated that it recently proposed a regulation regarding the agent of the payee exemption and while the DBO is engaged in the rulemaking process, it declines to opine on the applicability of the exemption for the company’s processing of tax payments.
• June 29, 2020 – Exemption for Operator of Payment System: The DBO stated that an entity that provides payment processing services between a California governmental entity and itself is operating a payment processing system between or among persons exempt from the MTA and therefore is exempt from the MTA.
• June 29, 2020 – MTA – Agent of Payee: The DBO stated that where the company entered into an agreement with merchants whereby it is acting as an agent of the merchant and that customer’s delivery of funds to the company will extinguish the customer’s obligation to the merchant, the company was exempt from the MTA as an agent of the payee.

LEGISLATIVE DEVELOPMENTS

FEDERAL

ESIGN and electronic signatures

Senate introduces ESIGN Act modernization bill: On July 2, three senators – John Thune (R-SD), Jerry Moran (R-KS) and Todd Young (R-IN) – introduced a bill designed to “modernize” the ESIGN Act by making two substantive revisions: (1) removing the requirement that the consumer “reasonably demonstrates” his or her ability to access the information in the electronic form that will be used to provide the information subject to the consumer consent, and (2) if the hardware and software requirements change, and the change creates a material risk that the consumer will not be able to access or retain a subsequent electronic record, the entity only needs to provide a statement with the revised requirements and the right to withdraw consent without any fees being imposed or any other condition or consequence not originally disclosed. In a press release, Senator Thune stated, “Computers, smart phones, and other devices are more reliable and accessible than ever before. This legislation makes necessary updates to E-SIGN to reflect these advancements in technology and make it easier for consumers to receive documents electronically.”

STATE

Remote online notarization

Updates and status of remote online notarization. To date in 2020, five states have enacted remote online notarization. Alaska, Colorado, Louisiana, Missouri and Wisconsin. They join 21 others (Arizona, Florida, Idaho, Indiana, Iowa, Kentucky, Maryland, Michigan, Minnesota, Montana, Nebraska, Nevada, North Dakota, Ohio, Oklahoma, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia and Washington). Of these states, South Dakota is not a true RON state as it requires execution of tangible paper documents and the notary must personally know the principal. For more information, see our alert.

Illinois still investigating eNotary. On July 1, Illinois enacted SB 1857 to extend, among other things, the Notarization Task Force on Best Practices and Verification Standards to Implement Electronic Notarization for an additional year through July 1, 2021. The goal of the task force is to investigate and provide recommendations on national and state initiatives to implement electronic notarization in such a manner that increases the availability to notary public services, protects consumers, and maintains the integrity of the notarization seal and signature.

Virtual currency

Louisiana requires persons engaging in virtual currency business to be licensed: On June 13, the governor of Louisiana signed into law the Virtual Currency Business Act, which requires a person engaged in “virtual currency business activity” to be licensed or registered if the business meets certain criteria. “Virtual currency business activity” is broadly defined and includes:

• Exchanging, transferring, or storing virtual currency or engaging in virtual currency administration, whether directly or through an agreement with a virtual currency control services vendor.
• Holding electronic precious metals or electronic certificates representing interests in precious metals on behalf of another person or issuing shares or electronic certificates representing interests in precious metals.
• Exchanging one or more digital representations of value used within one or more online games, game platforms, or family of games for either of the following:
  • Virtual currency offered by or on behalf of the same publisher from which the original digital representation of value was received.
  • Legal tender or bank credit outside the online game, game platform, or family of games offered by or on behalf of the same publisher from which the original digital representation of value was received.

CASE LAW

FEDERAL

Electronic signatures and general online contract formation

Court denies enforceability of arbitration agreement: In Belyea v. GreenSky, Inc., 2020 WL 3618959 (N.D. Cal. July 2, 2020), the court denied the defendant’s motion to compel arbitration because there was no evidence that the plaintiff had notice – including inquiry notice – of the arbitration provision contained in her loan documents. The defendant argued, in part, that the plaintiff’s use of the loan proceeds constituted agreement to arbitrate, as specified in the agreement. However, the defendant did not put forth any evidence that the plaintiff received or reviewed the loan terms before using the loan proceeds. The court noted that it did not address the plaintiff’s argument that the defendant failed to show a valid electronic signature under California’s Uniform Electronic Transaction Act because it had already held that the defendant failed to demonstrate an agreement to arbitrate.

Courts uphold arbitration agreement:

• In Alminiana v. Lowe’s Home Centers LLC, 2020 WL 3491837 (W.D. N.C. June 9, 2020), the court concluded that the defendant had sufficiently authenticated the plaintiffs’ electronic acceptances of their offer letters, including the arbitration clause. Specifically, the defendant required that all applicants access an online portal completing an application and as part of that process, provides his or her email address. The defendant then sent an electronic offer letter to that email address. To accept, an applicant had to log in with unique credentials and indicate whether he or she accepted the offer after reading a text box that stated that the applicant had read the terms and conditions and that an electronic signature is the equivalent to a handwritten signature. Once this process was completed, the applicant’s name and email address were attached to the form. The defendant provided completed forms, which led the court to conclude that the plaintiffs accepted the offer’s terms, including its arbitration provision.
• In Jones v. Santander Consumer USA Inc., 2020 WL 4113045 (E.D. Ark. July 20, 2020), the court granted the defendant’s motion to dismiss and to compel arbitration when it held that the plaintiff agreed to the arbitration agreement by clicking “I Accept” (though the court noted that such action did not constitute an electronic signature under Arkansas’s Uniform Electronic Transaction Act). With that said, the court “reluctantly grant[ed] Defendant’s” motions. Specifically, the court stated if it had “any wiggle room, [it] would deny Defendant’s motion [because] [t]he Eighth Circuit and the Arkansas Supreme Court decisions are squarely contrary to what I learned about adhesion contractions and mutuality…[i]n my opinion that is ‘big over little’ quite without support in the pertinent legislation or in the dictates of fairness.”

Court allows submission of hard copy and electronic arbitration agreement into evidence: In Banuelos v. Alorica, 2020 WL 4060781 (W.D. Tex. July 20, 2020), the court, in holding that the plaintiff validly entered into an arbitration agreement, allowed the defendant to submit into evidence for its motion to compel arbitration an electronic arbitration agreement as well an audit log. First, the plaintiff objected to the admission of the electronic arbitration agreement because it was not an “original.” In response, the court stated that the defendant properly submitted original documents and complied with the “best evidence” rule when it submitted a printout of the electronic arbitration agreement because a printout is considered an original. Second, the plaintiff claimed that the audit log contained hearsay and did not meet the “business records exception” to the hearsay rule because the defendant failed to assert that the log “was made at or near the time by – or from information transmitted by – someone with knowledge” that that the log could not be a record of regularly conducted business activity. The court stated that evidence attached to a motion to compel is held to a more lenient standard and not required to be in a form that is admissible at trial. Instead, the party offering the record must be able to prove the underlying facts at trial with admissible evidence. Here, the defendant’s employees were all knowledgeable about how the log was made and that, given the more lenient standard, was a sufficient foundation for admissibility even if the employees did not state that “the record was made at or near the time by, or from information transmitted by, someone with knowledge.”

ADA

Court finds that ADA allows for “technical infeasibility” defense in website accessibility cases: In DeSalvo v. Islands Restaurants, L.P., 2020 WL 4035071 (C.D. Cal. July 16, 2020), the court concluded that the ADA allowed defendants to assert the affirmative defense of “technical infeasibility” in website accessibility allegations. Here, the court struck the defendant’s technical infeasibility affirmative defense with leave to amend.

STATE

Electronic signature rather than initials sufficient for agreeing to uninsured motorists coverage: In Jackson v. Liberty Personal Insurance Company, 2020 WL 3594459 (La. Ct. App. July 2, 2020), the court held that the plaintiff’s use of an electronic signature rather than her electronic initials – which plaintiff claims is what is required under a bulletin issued by the Louisiana insurance regulator – in selecting or rejecting uninsured motorist coverage did not invalidate the plaintiff’s choice.

RECENT AND UPCOMING EVENTS

Margo Tank and David Whitaker will be presenting for the Electronic Signature and Record Association’s Digital 2020 Education Series.  The Education Series will provide insight and practical guidance on the business, technology, and legal implementation issues across a wide spectrum of applications. These issues are of critical importance even more during this time of social distancing, remote work, and contactless consumer engagement.  For more information, go to esignrecords.org.

Margo Tank will be speaking at the ALTA Boot Camp on Wednesday, August 19, 2020 regarding standards and practices required for both title insurance and lending on digital transactions.

Margo Tank and Liz Caires took part in a Mortage Bankers Association webinar, “Remote Online Notarization State-of-Play,” on June 2, 2020.

RECENT PUBLICATIONS

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. Read more.

CONTACTS

Learn more about our eSignatures and ePayments practice by contacting:

Margo H.K. Tank

David Whitaker