E-Disclosure Rules - Almost

The Federal Reserve has taken a definitive step in the multi-year process of adopting rules for making electronic disclosures that comply with consumer credit protection regulations such as Regulations B, Z, E, DD and M.

The development of rules has been slow for several reasons. First, the FRB did not want to issue rules that had the unfortunate and unintended effect of limiting development of Internet and other electronic services.

Second, as predicted, the world of electronics changed dramatically even during the rulemaking process. For example, the standard for a screen got both larger (see most laptops now) and smaller as in the form of Palm Pilots and even cell phones. A rule that would have required screen display standards would have prevented the use of hand-held tools.

What is now published is an Interim Final Rule. This means that the rule is final in the sense that it provides a compliance standard for now. However, it is also subject to comment and change. The fact is that any electronic standards and requirements are probably open to change and development for the foreseeable future.

Comments are due by June 1, 2001 and lenders can use the Interim Rules as of March 30, 2001. It is unlikely - but always possible - that the rules will undergo significant change after this cycle.

So what, actually, is in these rules? There aren't a lot of surprises. The publication is more of a translation from paper to electronics, providing guidance on the fundamental informative standard for disclosures.

The General Outline
All of the rules (B, E, M, Z and DD) follow the same format and contain the same principles. The most important principle - and what to consider when you are planning something not specifically anticipated in the regulations - is that the electronic disclosure and delivery must provide the same information and protections as the paper-based rules; simply in a different medium. This principle is right up there with the general rule in Truth in Lending that disclosures must be based on and reflect the underlying legal agreement. Use this concept for the same kind of guidance and in the same situations as you would use that rule in Regulation Z. The result of electronic disclosures must be the same as the paper disclosures on the consumer.

These general principles apply to all aspects of the disclosures: timing, content, clarity, readability, and retention.

New Definition
The interim rules define "electronic communication." The definition contains several key elements. First there must be a message that is transmitted electronically. Second, to be subject to the rule, the message must be between a creditor and an applicant. Third, the message must be in a format that "allows visual text to be displayed" on equipment, such as a computer monitor. The definition leaves open the possibility of other equipment, such as cell phones, pagers, and palm pilots - and whatever is yet to be invented.

Standards
The interim rules refer to the E-sign Act as a standard for essential requirements. The interim rules give broad permission to provide electronically any disclosures that are required by the pertinent regulations to be in writing. The general rule also requires that the disclosures be provided in a "clear and conspicuous manner" and be "in a form the consumer may keep." These standards are established by the consumer credit protection laws and not by the E-sign Act. To determine whether a disclosure is clear and conspicuous, the creditor should refer to the regulation that requires the disclosure.To be clear and conspicuous, the disclosure must use visual text. This is essentially the concept of writing but in electronic form. To meet the standard, the creditor must also disclose the requirements for accessing and retaining the disclosures.Both the conspicuous and the retainability standards apply to all disclosures provided electronically.

Consumer consent
Before providing disclosures electronically, the creditor must determine that the applicant is able to access and retain the disclosures. This does not mean conducting audits at the consumer end of the electronic equipment. It simply means that the creditor should require confirmation from the consumer. Under the E-sign Act, the creditor must obtain the consumer's "affirmative consent."

Each of the regulations now contains a provision that requires consumer consent and provides examples of what constitutes consumer consent.

Timing
There is no change. All timing requirements in the regulations apply to the timing of electronic deliveries. This means that a disclosure that must go with the application, such as those required in Regulation Z for credit cards and home equity lines, must go with the application electronically.

In addition, the creditor should design the disclosures so that the applicant has to look at them. The rules do acknowledge that the creditor cannot force the user to read and understand the disclosures. But the screen design should not allow the consumer to avoid seeing them. The consumer should be required to go to or scroll through the disclosures. Looked at the other way, the consumer should not be allowed to bypass or avoid the disclosures.

Periodic disclosures and change in terms disclosures must also meet timing requirements in each regulation. For example, for purposes of open-end credit under Truth in Lending, the creditor would have to make a change in terms notice available at least 15 days in advance of the change. Using electronic disclosures, the creditor could post this notice and notify consumers of its availability at least 15 days before the effective date.

Delivery and availability
Having provided the consumer with the requirements (hardware and software) that the consumer will need to access disclosures, the creditor must provide the information in a manner that is consistent with those requirements.

Before changing any hardware or software specifications, the creditor would need to notify the customer and reaffirm the consumer's ability to receive the notices electronically.

Information may be delivered in either of two ways. The bank may e-mail the information to an e-mail address provided by the consumer. Or, the bank may make the information available on a web site. If using this option, the information must be available for at least 90 days and the bank must notify the consumer - by e-mail or other method - that the disclosure is available.If the creditor learns that the consumer did not receive the disclosure, the creditor must take steps to redeliver the information "using information in its files." This redelivery requirement means more than simply re-sending the information to the same e-mail address. When a message is returned as undeliverable, the creditor must use another address - postal address or an alternative e-mail address - to reach the consumer. In effect, this places an affirmative responsibility on the bank to find the consumer even if it is the consumer who changed e-mail addresses.

Retention
Electronic disclosures are subject to the retention rules as well as the timing rules of the regulations. The 90-day availability requirement does not affect or shorten any record retention requirements. So, for example, under Regulation B, records of all disclosures would be retained for 25 months.

The disclosures must also meet a consumer retention test. The consumer must be able to retain the disclosures in one of two ways: by printing them or by storing them electronically.

Comments
The Federal Reserve is seeking comments on several specific aspects of this interim rule. First, does the industry need interpretive guidance on the requirement that applicants confirm their consent electronically or should this be open to development? Second, should the regulations provide clarification on the effect of an applicant withdrawing consent to receive disclosures electronically?

Third, should the rules provide standards for when and how to inform customers about changes in hardware and software that may affect the consumer's ability to receive the disclosures?

Before asking for more specific guidance, consider the trade-offs. Specific guidance can provide more legal protection. But it can also limit what you can do. It inevitably increases the burden of compliance.

Some Caveats
These rules relate only to the consumer credit protection regulations administered by the Federal Reserve. While they probably constitute reasonable guidance for other regulations, they are not authority. Thus, there is no explicit permission - or prohibition - for electronic disclosures under RESPA, FCRA, and others. A standard of reasonableness and fairness should apply.

ACTION STEPS

If you have a web site, log on and scroll through it. Consider whether, when, and how any disclosures should be made.
Advise anyone connected with your web site and with product development that the new rules are in place. (You might also warn them that the rules could change, but then, so will your web site.)
Review the timing rules for all disclosures related to your products. Make sure disclosures, both paper and electronic, are timely and complete.
Visit other web sites - not just other banks - and look at how information is provided. Evaluate techniques that you like and don't like.
Talk with your friends about web site techniques they like and don't like. Bring these back to your electronics staff.