Law360 (June 29, 2020, 5:36 PM EDT) --
For two decades, the E-Sign Act has been the legal foundation for the electronic execution of trusted, enforceable digital contracts and loans by businesses and consumers, enabling an expanded digital economy.
History of the Signature
While the history of the signature can be traced as far back as 3000 BC with Sumerian pictographs, a more formative milestone came in 1677, when the English Parliament passed the Statute of Frauds, specifying that certain agreements needed signatures. This was a clear indication that a signature was the accepted evidence of assent and the intent to be bound.
When John Hancock signed the Declaration of Independence in Philadelphia more than 100 years later, it further emphasized the signature's contribution to a binding contract.
Advances in technology — from the telegraph to the fax machine — enable the legal acceptance of nonpaper signatures. In 1996, the United Nations published the UNCITRAL Model Law on Electronic Commerce. It set the path for removing legal obstacles by recognizing the enforceability of electronic signatures and records.
In 1999, the National Conference of Commissioners on Uniform State Laws adopted the Uniform Electronic Transactions Act, or UETA, the state-level precursor to the E-Sign Act. UETA enables electronic documents and electronic signatures to be used with the same effect as paper documents and ink signatures. This is important because loans are negotiable instruments that can be bought and sold to third parties, and are far more complex than traditional contracts between two parties. UETA ensured that electronic signatures and electronically executed records can be both valid and enforceable.
The E-Sign Act, a federal overlay law passed a year later, adds specific detail regarding regulatory authority, transferrable records and oral communications. It also added additional consumer protections important in 2000.
In the digital world, information can be endlessly altered and copied, and at the time, there was no technology to create this kind of unique, identifiable document. The E-Sign Act allowed parties to execute an agreement digitally, but we still needed technology to produce, manage and transfer what is referred to as an authoritative copy, which is a digital negotiable instrument that is immutable or unchangeable.
Soon after, Nissan Motor Acceptance Corp. was the first issuer of securities ever to complete a rated digital securitization.
Starting in 2015, marketplace lenders, or MPLs, such as So-Fi, Lending Club and others entered the market with a digital-first perspective, optimizing the lending activity of commercial banks. With speed, simplicity and ease of use, consumers were willing to experiment. This digital-first approach was so popular that by 2019, MPLs had captured 60% of the personal loan market.
In 2017, digital mortgage adoption began at scale — Quicken, Fannie Mae and Freddie Mac each implemented digital loan platforms for origination and movement of digital loan assets into the secondary market. It took Quicken less than two years to own 96% of electronic conventional mortgage closing in the country.
While the focus of digital transformation is typically speed and capital efficiency, there's also a significant environmental impact. The Mortgage Bankers Association estimates the average mortgage application package is 500 pages long (when printed). The positive impact in savings of forests and in the reduction in the negative impact of shipping of masses of paper documents supported digital transformation as a green initiative.
By 2018, the E-Sign Act enabled businesses and consumers to have trusted, enforceable digital contracts and loans in the automotive industry as well. Beginning that year, Tesla, Carvana and CarMax enabled digital e-contracting and delivery through 100% remote, contactless car sales. Tesla owners, for example, can review and "tap to sign" their loan or lease agreements from inside their new car on the 17-inch touchscreen of the Tesla center console.
The E-Sign Act enables businesses to operate and execute loans and contracts in a fully digital, remote environment. Fannie Mae reports that 66% of U.S. borrowers are interested in a fully digital process, and the global digital transaction management market is projected to reach $10.5 billion by 2026.
The global pandemic has further accelerated the implementation of digital lending technologies.
U.S. Small Business Administration lenders recently faced an immense challenge: dispense billions of dollars in loans in a matter of weeks as part of the Coronavirus Aid, Relief, and Economic Security Act. Social distancing required new approaches and remote application, document presentment and digital execution, and delivery processes of digital lending became the de facto solution.
Without the E-Sign legislation — and the technology it has enabled — the lending engine would have stopped several months ago during the stay-at-home orders and state shutdowns. The critical, and now proven, impact of the consumer and small-business-sustaining legislation would have largely been lost.
The SBA lending requirements, detailed in SBA Standard Operating Procedures Appendix 8, added carefully reasoned criteria for digital signatures and loan documentation, but began with foundational compliance with the provisions of the E-Sign Act.
The pandemic has directly impacted our families, social interaction, business lives, economy, and the health and lives of so many. How we view our immediate environment, and the world, has changed and will not return to a pre-pandemic state.
A May report by McKinsey and Co. states that "recent data shows that we have vaulted five years forward in consumer and business digital adoption in a matter of around eight weeks. Banks have transitioned to remote sales and service teams and launched digital outreach to customers," and that "we are witnessing what will surely be remembered as a historic deployment of remote work and digital access to services across every domain."
As important is that the recovery will be digital. "The rapid migration to digital technologies driven by the pandemic will continue into the recovery." McKinsey observes that "the uptick in the use of digital services is here to stay ... Fully 75 percent of people using digital channels for the first time indicate that they will continue to use them when things return to 'normal.'" The result will be a trend not just to digital-first, but to remote-first.
It was unimaginable 20 years ago to predict the state of the world we're in today. Fortunately, the E-Sign Act and UETA have enabled the lending economy to thrive despite difficult conditions.
I'm excited to see what the next several decades will bring for digital lending. I anticipate accelerated, creative utilization of digital transactions leveraging these foundational statutes to expand an innovative, digital economy for the benefit of all.
Stephen Bisbee is president and founder of eOriginal Inc.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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