They've Done It! FRB Proposes Rules for Electronic Disclosures

We've been talking and waiting for a long time. The wait is finally over and we have something to work with. The Federal Reserve Board has published an array of proposed rulemakings to permit and provide for electronic disclosures. The FRB's effort includes Regulations B (Equal Credit Opportunity), Z (Truth in Lending), DD (Truth in Savings), M (Consumer Leasing), and E (Electronic Funds Transfers.

The FRB's proposals deal separately with each regulation. However, many of the questions or concerns are the same or similar from regulation to regulation. The FRB has followed a uniform approach whenever possible. This has the powerful positive of creating a standard for electronic disclosures and minimizes differences between regulations. Thus, the fundamental concerns for the design of electronic banking and web sites can be dealt with in a uniform way.

There are, however, several differences in the fine points the FRB has proposed. These are based on statutory requirements that establish a specific standard for the disclosure to meet. Some, for example, must be "clear and conspicuous." Others must be "in a form the consumer may keep." The most difficult one may be disclosures that the consumer must sign, such as credit insurance disclosures and rescission notices in Regulation Z.

Because the proposals are fundamentally similar, we discuss them together in a single article. Where there specific differences in the rules, we try to use the differences to help illustrate the regulatory approach.

Defining electronic communication
Underlying the set of rules and permissions is a definition of "electronic communication." In each regulation, the FRB proposal would insert a new definition that limits electronic communication to a communication that can be displayed as visual text. For example, in Regulation Z, the new definition would read:
Electronic communication means a message transmitted electronically between a consumer and a creditor in a format that allows visual text to be displayed on equipment such as a personal computer monitor. Proposed 12 CFR 226.2(a)(27)

This definition would establish that the disclosure need not be on paper but must be capable of being seen and being read. Providing visual text is the key.

Perhaps most important to creditors, the definition would not depend on the consumer's equipment, but on how the creditor offers the information. The proposal would not obligate the creditor to ensure that the consumer did in fact receive the disclosure in a format the consumer could read. This position is one that the industry should support in its comments. Consumers may object and ask that the regulation require the creditor to take additional steps to ensure the effective delivery of the disclosure. This definition would also rule out voicemail or other verbal forms of delivery. In short, the definition would require that where disclosures had been required "in writing" or "in a form the consumer may keep" the new test for electronically delivered disclosures would be whether the disclosure is readable. It transforms what used to be a paper exercise to one that is based on whether a consumer can read it.

When and how to provide electronic disclosures
The proposals would retain the existing timing and content requirements of each regulation. Forms and notices could be put on the website without change. However, it would also mean that when a disclosure is due before or with an application, the bank must design a web page disclosure that goes with or before the credit application. For example, disclosures for adjustable rate mortgages must be provided at the time an application is provided. If the creditor takes applications on its website, the creditor would have to design the site to provide the disclosures at or before the time the application is taken. The proposal takes the same approach to change notices and periodic statements. If the customer agrees, these could be provided electronically. However, the timing rules would be the same as those for paper disclosures.

Clear and conspicuous
The existing regulations contain clear and conspicuous requirements, and in some cases require that some disclosures - such as the APR - be more prominent than others. The proposal does not provide specifics on what clear and conspicuous means. This is left to the industry. As a practical matter, it is subject to a good faith test. This would not be the time or place to get clever with disclosures. For example, using a conspicuous icon to open disclosures is probably not the same as providing a conspicuous disclosure that the applicant must scroll through before getting to the application.

Delivery
The FRB is proposing a very reasonable and common sense approach to delivery. Disclosure requirements come with a variety of requirements such as when the disclosure should be delivered or provided, and whether it is in a form the consumer may keep. There would be no requirement that the creditor ensure that the customer had read and understood the disclosures.

Essentially, the FRB's approach to electronic disclosures is based on two important assumptions. First, the creditor is acting in good faith. The proposal would simply require the creditor to demonstrate consistent and reasonable delivery of disclosures in a manner that is consistent with the method of application or inquiry chosen by the customer.

Second, the proposal assumes that a consumer using electronic means of applying to or communicating with the institution is in fact comfortable with the electronic medium being used. Therefore, disclosures and response mechanisms designed in good faith would meet the purposes and goals of the regulations.

Format
The proposal does not make any changes to existing format designs. Thus, for example, if providing early disclosures on a residential mortgage transaction, the appropriate disclosures would need to be contained inside the federal box. Web page designs for disclosures without such rigid format requirements would be more flexible as long as they met the content and clarity standards in the regulation.

Agreements between creditor and consumers
Changes to several of the regulations would permit providing notices, disclosures, and even statements electronically if there is an agreement with the customer. The proposal is not detailed on what would constitute an agreement. It remains open to a variety of technological options. However, an agreement would have to meet several standards. First, the consumer should be clearly informed before providing consent, and should understand the effect of consenting. Second, the agreement can be electronic rather than on paper, provided that it meets the requirements of state law.

Signatures and authorization
Several of the regulations deal with situations that require an affirmative request or acknowledgment by the consumer. For example, the consumer must sign or initial the cost disclosure to indicate that they wish to purchase credit life insurance. When a credit transaction will be secured by the home of the consumer in a non-purchase situation, the consumer must sign the rescission notice.

The approach taken in the proposal is to leave the technique to the choice of the institution as long as it provides the same assurance as a signature in a paper-based system. The proposal mentions use of digital signatures, security codes, and authentication devices to meet this standard. Here, also, the proposal provides both flexibility and responsibility to the electronic provider. The final rule is likely to remain flexible as long as creditors follow good faith procedures that meet the spirit of the regulation.

This proposal is generous. When the agency proposes a rule providing this much flexibility and discretion to the industry, the rule is often opposed by consumers. If you like the proposals, comment and say so. Your vote will count.

ACTION STEPS

Make sure you are a part of the website development team. Participate in the creative side so that you are not excluded when changes are made that may affect compliance.
Establish a review process to test compliance requirements. Consider using a selected group of customers or employees to use and react to the website. Ask the users about the compliance aspects of the website, especially the clarity and timing of disclosures. Document their responses.
Give special attention to the design of procedures for getting "signatures" from customers for purposes of
Visit some websites of other banks. Note what is effective and what is not. Also look for compliance violations that you can use to illustrate what not to do.
Finally, think visual. Whether the disclosure can be read by a consumer will be the test, not whether it is on paper, or whether and how it can be saved, stored, and reproduced.
Watch your website for other technical compliance issues such as quoting APRs and APYs if rates are included in the web page.