Why Haven’t You Moved To E-Signatures?

Reducing Lending Costs

It was a recent conference where the presenter was talking about how artificial intelligence was going to change the face of lending and save banks a huge bucket of costs. While potentially true, let’s crawl before we walk and move to get e-signatures as a standard in the next year. Because we work with hundreds of banks across the country on a variety of commercial loan closings, we see firsthand some of the more interesting, complex and, occasionally, quirky closings.  We recently closed a loan where two individual signers resided in California and one resided in Utah, and while the bank is headquartered in Virginia, the real estate securing the loan was in North Carolina.  It took the bank three business days from the time the first signer executed documents to finally fund the loan.  The loan documents racked up many airline points flying from one end of the country to the other.

 

The expense, delay and added risk of this particular closing could have been diminished if the bank permitted electronic signatures.  We estimate that a complete electronic closing would have saved the bank thousands of dollars in closing costs, diminished risk, and enhanced borrower experience.

 

Background on E-Signature

 

There are two legal types of electronic signings in the US. The first type is called electronic signature and includes any signature or verification (including clicking a button) that evidences an agreement.  The second type is called digital or advanced electronic and involves any electronic signature plus a unique ID of the signer – for example, a certificate-based system. 

 

For most contracts, including business contracts up to hundreds of millions of dollars, employment agreements, new account openings, purchases, and mortgages, either of the two types of electronic signings is acceptable, legally binding and common.  

 

Enforceability of E-Signatures

 

The first US court to rule on the enforceability of electronic signatures was in 1869 dealing with a signing of a document via telegraph.  In 1999 all states (except New York, Illinois, and Washington) adopted a form of the Uniform Electronic Transaction Act (UETA).  The aim of UETA is to remove barriers to electronic commerce by validating electronic records and signatures.  A federal law was enacted in 2000 (E-sign Act) and applies to interstate commerce and to states that have not enacted UETA.  The federal law also preempts (or supersedes) UETA for states that have inconsistent provisions or where the state UETA deviates from the aim of the act (to remove barriers to electronic commerce).

 

The general rules of UETA and E-sign Act are as follows:

  1. A signature may not be denied legal effect or enforceability solely because it is in electronic form;
  2. If a law requires a record to be in writing, an electronic record satisfies that law;
  3. No specific technology need be used to create a valid signature; and
  4. There are certain exemptions from the general rules of validity for both UETA and E-sign Act (such as wills, certain UCC transactions, and some others).

 

Case Law

According to the E-sign Act, an e-signature is defined as “an electronic sound, symbol, process attached to or logically associated with a contract or other record and executed or adopted by a person with the intent to sign the record and be legally bound.”  Courts have held that a signing can include any of the following: writing one’s name, identifying oneself as the sender, and identifying a record using a mark or symbol with intent to authenticate it as an agreement.  Courts have even ruled that checking a box marked "I agree" beneath a scroll box of Terms of Use is binding, even if the scroll box was small and the terms lengthy.

Why Banks Use E-signatures

While most community banks use imaged loan documents, few use e-signatures. That is changing as more banks are turning to e-signatures, and more vendors are creating affordable and easy to use software platforms that reduces transaction costs, decreases risk and enhances customers’ experience.  The benefits of e-signatures for banks are as follows:

  • Compliance and risk:  Contrary to some beliefs, electronic signatures decrease risks for the lender.  E-signatures remove human error, they are more secure since the signature cannot be altered after signing, and they create a more robust audit trail, showing who signed, where and what time. 
  • Cost and environment: E-signatures save paper, water, and energy because paper is not shipped from location to location. Scanning time is saved and document logistics are made easier.  
  • Convenience and customer experience: Instead of the customer printing, signing and delivering (or handing in) documents, e-signatures allow customers to use any connected device (including a smart phone), at any time to agree to almost any bank document.  Where a bank has multiple signers, each can be notified of a signing time, each can affix their e-signature separately, and the document can simultaneously be available electronically for each borrower, escrow officer, and lender. 
  •  Workflow and retention:  Banks are very concerned about increasing efficiency and e-signatures can decrease cost at closing and during the entire workflow.  Instead of the lender retaining images (or worse still, paper) e-signatures allow banks to store legible, searchable and indexed documents.  These documents are easily shared with auditors and regulators, who can search and cross-reference any data. 

Recommendations for Community Banks

Community Banks should develop an e-sign policy by considering the following steps:

  1. Define what types of documents will be signed electronically.
  2. Define what kind of e-signatures the bank will accept.
  3. Review jurisdiction to ensure the bank is complying with local and federal law for the type of business the community bank is conducting.
  4. Apply standard document management and retention policies for e-signed documents.
  5. Review and apply templates with express consent to do business electronically and provide opt-out options as may be required by law.

 

Conclusion

We calculated that had our quirky closing, that occurred in four states and took three days, been accomplished with e-signatures, the lender would have saved $300 in direct closing costs, $2,500 in lifetime costs of retention and risk management, plus provided the customer with a much better experience. Before you move on to artificial intelligence, take a look at your lending workflow and make simple changes. Chances are utilizing e-signatures are low hanging fruit that your bank can implement to make everyone lives more efficient.