Homepages, E-Banking & Other Compliance Mysteries

Activity on the Internet is increasing dramatically. It is now much more than e-mail and amusement sources for children who have outgrown cartoons. The Internet is rapidly becoming a staple of commerce, including banking.

Although the growth of electronic methods of banking was foreseen - to some extent - by Congress 20 years ago when the Electronic Funds Transfer Act was passed, the rate of growth of electronic techniques and tools available to banks has grown at a much greater rate than has compliance guidance. Most of the statutory and regulatory guidance assumes that transactions and particularly applications take place in person and that information transmission is paper-based.

Staff of the Federal Reserve Board have been working for more than a year on how to adapt certain compliance requirements to the emerging electronic banking environment, and more specifically to banking on the Internet. This work has not yet resulted in changes to the regulations and commentaries.

Richard Insley, Richard C. Insley, President of APR Systems, Inc., reviewed the recent proposal to update the Official Staff Commentary to Regulation Z and noticed a total absence Internet guidance. In his comment letter to the FRB, he noted that the topic is "conspicuously missing from the proposal." Insley submitted a lengthy comment letter to the FRB that identified, section by section, questions or problems in Internet banking that he believes are ripe for regulatory guidance. This article is drawn from Insley's observations. As a pioneer astronaut in cyberspace, Insley is well qualified to identify these issues.

Internet compliance concerns include "what is a page" or what is "prominent" or "in a form the consumer can keep." As Insley observes, these concerns are only the beginning.

Page or Branch?
We can identify a presence on the Web when our computer screen lights up with the logo and message of the site. The regulatory problem is: what are we looking at? It is a site? Is it a page? Is it a branch or at least some kind of location? Although the Web site can offer many services that are offered in branches, it is arguably no more than a visual image. The problem with this view comes from cyber-banks that only exist on the 'Net. Although merely an image on the screen, it may be the only place the cyber-bank exists. Regulatory treatment will have to take this into account.

When considering disclosure requirements, it is necessary to determine what constitutes a page. It can be the amount seen on the screen or something much longer. For example, a page might continue until it is necessary to enter a command in order to continue. Deciding what constitutes a page will determine what has to be "on the same page" and where information such as the FDIC insured statement should go.

On or With
Certain disclosures must be provided on or with an application. Home equity and adjustable rate program disclosures must meet these timing requirements. When taking applications over the Internet, creditors must design ways to provide and deliver these disclosures within the time limits. The disclosure booklets are presently on government Internet sites. Insley suggests that the regulation permit a hyperlink to the regulator's site as an acceptable method of providing the booklets.

Advertisements
When is a web page an advertisement? Arguably, the whole purpose of a homepage is to serve as an advertisement. Insley believes that the FRB should include e-mail messages and Usenet postings in the list of examples of advertisements.

Considering a Web page to be an advertisement may mean that advertising rules are triggered when certain terms - such as the rate - are included on the site. The question then becomes, which part is the ad and where does the ad or page begin and end?

Cash and E-money
Definitions of cash and check are written without regard to Internet transactions. For example, should negotiable electronic alternatives to currency be considered cash? If not, what are they. How this is defined or >
Signatures
What is a signature on the internet? Not only are signatures important for verifying customer identify and executing a binding contract, signatures or initials are required by Regulation Z to affirmatively request credit life insurance and remove the fee from the finance charge. Insley suggests that Regulation Z could be amended to permit electronic digital signatures and other electronic alternatives to signing or initialing paper.

Disclosures
Internet use raises several interesting questions relating to disclosures. First, how are disclosures "given" to consumers over the Internet and what constitutes "in a form the consumer may keep?" Arguably, a consumer with the skill and equipment to apply for credit over the Internet has the skill and equipment to download disclosures.

But should the disclosures be forced in some way? For example, should the web site require the consumer to go through a disclosure page to get to the application? Another approach would be to require the consumer to acknowledge electronically that they have seen or read the disclosures.

Clear and Conspicuous
When and how are electronic disclosures "clear and conspicuous"? It is tempting to get creative with Internet pages. To some extent, creativity can enhance the clarity of disclosures. However, when being creative, keep the regulatory requirements in mind.

Clarity should be measured by the user. Until we have specific regulatory guidance, the test for clarity is how well Web-browsers will see and understand it. Web pages should be designed with this in mind.

More Prominent
And how is the APR or APY made more prominent than other information? There is an opportunity for creativity here that goes far beyond traditional paper-based concepts. Clearly, methods such as larger type and use of color can make a disclosure item more prominent. Electronics make other methods possible as well. But fundamentally, "more prominent" should be measured by the user rather than by the creative cyber-designer.

Know Your Customer
This may be the most troublesome area of all. With techniques available to falsify identities and locations on the Internet, the giant question is: how is a bank to know its customer? At this point, reasonable standards include checking that the facts provided by the Internet customer appear reasonable and consistent. Then, taking steps to verify certain information and to monitor the account over a period of time would help to determine that the customer and account are bona fide.

Periodic statements and notices
Many of the banks that have actively entered cyber-banking have suggested that it should be permissible to send periodic payments electronically if the customer agrees. Insley points out that this should also apply to sending change in terms notices. For customers that regularly use the Internet to conduct their banking, it should be permissible to communicate with the customer electronically, including statements and disclosures, rather than by paper through the mail. This could result in a significant savings to the banking industry which is the largest user of first >
Where now?
Internet banking has enormous possibilities for customer service, product delivery, and new products. It also has many questions about traditional compliance. As cyber-banking becomes increasingly common, what compliance becomes will be determined not only by the regulatory agencies, but by the industry. The industry has the opportunity to invent new and useful methods of providing information over the 'Net. Regulators will watch industry techniques and innovations closely and may use the best ideas. However, by taking liberties with the lack of clear regulation, the industry also has a chance to cause more regulation. By acting irresponsibly, the industry will increase its future burden. By acting responsibly, it can relieve future burden and even make improvements.

ACTION STEPS

If your bank has a Web page, review it. Make a practice of logging on at least once a month to check its features and make sure there are no compliance concerns.
Make sure your bank has decided whether the Web page is simply an advertisement of existence and general services, or whether it is a functioning "location" with active services such as opening accounts and taking applications. This affects how the site should be developed and monitored for compliance purposes.
Review your disclosures and disclosure procedures for timing, content, and clarity.
Monitor Internet and electronic account transactions for compliance with Regulations E, D, and DD.
Pay special attention to how account disclosures are given and confirmed.
Monitor Internet and electronic loan applications for compliance with Regulations B, C, E, Z, and RESPA. Pay special attention to how early disclosures are given and confirmed.
Think through Know Your Customer procedures and techniques for Internet customers. You may want to set up special monitoring procedures for such accounts to determine that they meet normal use standards for a minimum period of time.