Why All the Excitement Over E-Documentation?
For years lessors have dealt with the cumbersome challenges associated with shipping and hand-signing lease documentation. Clearly, shipping packets of documents for signatures contains some very real risks that, at best, might delay the transaction by a few days. At worst, these risks can cause the lessee to become frustrated and dissatisfied, and may even expose the transaction to validity and enforceability risks.
E-documentation offers a different scenario:
Upload the lease agreement to a secure website at 9:10am. The lessee’s signer (who may be anywhere in the world) immediately receives an email, logs on to the website, reads the documents and signs them. It is now 9:15am and the entire transaction is completed.
At First American Equipment Finance, we believe e-documentation is redefining the financial services industry. It is more efficient and cost-effective than traditional paper-based processes, and most importantly, it is something our lessees are requesting. Indeed, it is already widely used for insurance, mortgage and auto loan transactions.
Rather than watch from the sidelines, First American intends to be an early adopter of the use of e-documentation in middle-market leasing transactions. We expect it will transform our business and become an important lynch pin in our continued growth strategy.
On the following pages, we will explain how we have come to this decision ... and why we hope you will join us in this game-changing industry innovation.
What Is E-Documentation?
At its most basic level, e-documentation allows you to easily send, sign and store documents online. The electronic process is intuitive, efficient and fully auditable.
We sincerely believe that e-documentation will bring a host of benefits to First American, our lessees and our lenders. We have outlined several reasons.
E-Documentation Will Generate Additional Business
It is important to realize that our clients are requesting e-documentation. These executives already use e-documentation for other financial transactions; they are comfortable with it, and they value the ease and efficiency that e-documentation provides. They handle their banking online, their mortgage transactions online and their auto loans online ... and it is a natural evolutionary step to complete their leasing transactions online as well.
That is why we see e-documentation first and foremost as a business growth tool.
By providing e-documentation as an option for our middle-market lease transactions, we can set ourselves apart – particularly in competitive situations. Adopting an e-documentation strategy provides us with a tremendous opportunity to delight existing customers, attract new lessees and close more sales. Current lessees will want to do more business with First American, and the aim is to have them recommend us to other businesses as well.
E-Documentation Means Greater Efficiency and Higher Lessee Satisfaction
With e-documentation, there are no overnight packages to send, no shipping mistakes or delays, and no chance of missed signatures. E-documentation simplifies the transaction from the lessee’s perspective, which translates directly into higher satisfaction.
Delivering consistently exceptional lessee experiences is central to the First American business model. The ease and efficiency of e-documentation streamlines the lending process, reduces the potential for frustration, and further strengthens the relationship we enjoy with our lessees.
Also, by becoming more efficient, our staff is able to spend more time on higher payoff activities like sales and nurturing existing lessee relationships, which also allows us to find and take advantage of more new business opportunities.
Greater efficiency brings secondary benefits as well. Our vendors get paid more quickly. The risk of interest rate volatility is reduced. There are fewer opportunities for errors in execution by lessees and guarantors.
Again, all of these factors impact the bottom line.
E-Documentation Is More Cost Effective
In the short term, e-documentation is less expensive than the cost of copying and express mailing paper documents. In the long term, e-documentation is less expensive than the cost of storing potentially hundreds of thousands of paper documents. Indeed, we anticipate the cost savings from e-documentation will more than pay for the vendor fees.
E-Documentation Provides Superior Security
With traditional paper documents, there is always the risk of the paper originals being tampered with, lost or accidentally destroyed. E-documentation mitigates that risk, with advanced technology that “seals” the document upon signing as well as sophisticated online security measures that prevent unauthorized access to the documents.
That is not to say that there are no risks inherent to the e-documentation process. However, we believe we have identified and adequately addressed these risks.
What Solutions Exist for Potential Concerns with E-Documentation?
Initially, we were concerned with the viability of an e-documentation strategy. This is a new move for the lease financing industry, which has traditionally been conservative in embracing changes. Nonetheless, we have done considerable due diligence, and we are confident that we have found sound solutions to these concerns.
What Constitutes an E-Signature?
Federal law defines an electronic signature as “an electronic sound, symbol, or 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.”
The signature may be accomplished through electronic means, including:
Signing a digital keypad or including one’s name as part of an email message.
One’s voice on an answering machine or other recording device.
Clicking “I agree” on a web page.
Some other sound, symbol or process executed by the signer indicating intent to sign.
Neither federal nor state laws identify or require any specific technology that must be used; the laws merely clarify that intention must be present and the “signature” must in some way be linked to, or connected with, the electronic record being signed.
Are E-Signatures Valid?
As we began to look into the potential for e-documentation, the first issue we had to address was e-signatures. Are they legally valid?
The short answer is “yes,” according to both state and federal laws.
The Uniform Electronic Transactions Act (UETA) was created in 1999 by the National Conference of Commissioners on Uniform State Laws. The act provides states with a legal framework for the use of electronic signatures and electronic records in government or business transactions.
On the federal level, in June of 2000 the United States Congress enacted the Electronic Signatures in Global and National Commerce Act (ESIGN) to govern in the absence of a state law or where states have made modifications to UETA that are inconsistent with ESIGN.
Both laws establish three core principles:
A signature, contract or other record may not be denied legal effect, validity or enforceability solely because it is in electronic form.
If a law requires a record to be in writing, an electronic record satisfies the law.
If a law requires a signature, an electronic signature satisfies the law.
In terms of the applicability of these laws to lease transactions, UETA specifically identifies lease transactions as included and validated under the Act.
Additionally, e-signatures from multiple parties are acceptable (such as when a witness or notarization is required), so long as all other requirements of notarial law are followed and the additional e-signatures are attached or logically associated with the signature or record.
Are E-Signatures Enforceable?
Enforceability is a critical concern surrounding e-signatures. Patrick Hatfield, Partner with the law firm Locke Lord Bissell & Liddell, has cogently defined a 6-point framework identifying the legal risks associated with electronic processes and practical ways to manage those risks, which we have outlined below as it relates to our leasing transactions.
Authentication Risk: The risk that the lessee says in court, “That is not my signature.” However, many methods are available to reliably verify the identity of the signatory party and mitigate this risk.
For example, the signer can identify one or more “shared secrets” that only the signer would be able to answer. Alternatively, the signer can be required to enter his or her social security number, which the system uses to perform a “soft hit” on the signer’s credit report and create a series of multiple choice questions that the signer must answer before viewing or signing the documents. The answers to these questions are typically only known to the signer and are not easily accessed by other parties, which makes this a highly reliable method of identity verification.
The ability to verify the authenticity of the document also mitigates this risk. For instance, some vendors provide an online interface that automatically marks each signature with a unique serial number, time stamp and IP address of the signer.
Repudiation Risk: The risk that the lessee claims that the document was altered after signing – a risk easily mitigated by the process known as “hashing.” See below for more information on hashing.
What is Hashing?
Hashing allows you to verify whether electronic data has been altered. A mathematical algorithm generates a “hash” code for a specific set of data. The hash code is unique and specific to this data set; if anything in the data is changed, the algorithm generates a completely different hash code. For example, a hash code generated from the text “Hello” would be completely different from the hash code for “hello” or “HELLO.”
The hash code allows you to instantly recognize if your data has been modified. When you save an electronic record with a particular hash code linked to it, the next time you access that record, you generate a new hash code and compare it to the original hash code. If the record has been altered in any way, the two hash codes will not match and you will know that the integrity of the record has been compromised. If the two hash codes match, you will have verified that the record remains intact and unaltered.
The risk that e-documentation will not be admissible into evidence in the case of default. The solution is to create an exemplary business process for the creation, storage and production of electronic information. A secure retrieval process is necessary, as is the ability to create a reliable audit trail that detects and documents any changes made to the electronic records.
It is also critical to establish a credible and qualified custodian of the e-documents – typically the vendor. The custodian must know and be able to clearly explain the process for creating, securing, archiving and retrieving records. It may even be feasible to contractually require the vendor to sign an affidavit as to the validity of transactional documents.
The risk that the signer claims he or she never saw a particular document or disclosure. This risk also exists with traditional paper documentation. However, the electronic process can be embedded with logic procedures that may even provide better compliance than in the traditional process. For example, the system can be designed so that the lessee cannot complete the process without having acknowledged receipt of all required disclosures.
The risk that the firm invests significant time and money into a particular e-process, only to find that the industry ends up preferring an alternative technology.
However, although a variety of e-documentation vendors exist, the respective processes and technologies they utilize are similar enough that future adjustments in the technology.
Furthermore, the potential for such changes in technology do not negate the facility of e-documentation in general, nor would changes in technology negate the enforceability of previously completed electronic transactions.
It is important to remember that traditional paper transactions are not immune to any of these risks either. It may be helpful to compare and contrast how each of these risks manifest in both traditional paper and electronic processes, with the goal of establishing an electronic process that reduces the overall risk to a level at or even below that of the traditional paper process.
Once we became comfortable with the validity and enforceability of e-signatures, our next area of concern was with the validity of the electronic delivery of the documentation.
Will the lessee accept e-delivery?
UETA and ESIGN both require that each of the parties involved must agree to conduct transactions via electronic means. Whether the parties agree to conduct a transaction by electronic means is determined from the context and surrounding circumstances, including the parties’ conduct.
With respect to required notices or consumer disclosures, UETA and ESIGN require the recipient to consent in advance to electronic delivery. Also:
The originator must clearly indicate that the lessee is not required to consent to electronic
delivery and that the lessee may rescind the consent at any time. (Note that withdrawal of the consent does not negate the enforceability of transactions that were completed while the consent was in effect.)
The recipient must be capable of retaining or processing the electronic record at the time of receipt; that is, the recipient must have the necessary hardware or software to access or retain the record.
Additionally, UETA stipulates that the required notices and disclosures must still be sent, posted, displayed or formatted in accordance with state law requirements.
Is E-Delivery Secure?
The answer is a resounding “Yes.” Electronic delivery may actually be more secure than traditional methods. E-delivery automatically generates proof of the date and time that delivery occurred and proof that a complete set of documents was delivered.
However, it is conceivable that the recipient might not receive the e-delivered documents. To address this potential security and confidentiality risk, utilize a secure online process:
Upload the document(s) to a secure website.
Send the lessee an email alert that the documents are ready for review.
The lessee logs into the secure site, verifies his or her identity, and accesses and signs the documents.
The system alerts you when the documents have been signed.
With this process, if the lessee does not receive the email notification, it can be easily resent. Meanwhile, the security and confidentiality of the documents remain uncompromised.
Confidentiality and Gramm-Leach-Billey Compliance:
When considering e-documentation security, it is important to also address confidentiality concerns and the Gramm-Leach-Billey Act.
Minimize the amount of documentation and lessee data sent via email.
Only upload and send documents and lessee data through secure, encrypted SSL web connections that prevent unauthorized access.
Always verify the signer’s identity, through “shared secrets” or other means.
Select a vendor that uses monitored firewalls to prevent unauthorized access to servers.
Select a vendor that restricts physical access to the network operations and the buildings that house the servers.
Electronic Chattel Paper
As we continued to assess the viability of e-documentation in our business, perhaps the biggest hurdle we faced was the question of how to establish priority when relying on electronic chattel paper.
Can a Lender Perfect a Security Interest in Electronic Chattel Paper?
UETA makes the explicit provision that “control” of an electronic record legally substitutes for “possession” of a traditional paper record. According to Uniform Commercial Code (UCC) section 9-105, a secured party has control of electronic chattel paper if the record(s) are created, stored and assigned in such a manner that:
A single, unique, identifiable and unalterable authoritative copy of the record exists.
The authoritative copy identifies the secured party as the assignee of the record(s).
The authoritative copy is maintained by the secured party or its designated custodian (typically, the e-documentation system vendor).
Copies or revisions that add or change an identified assignee of the authoritative copy can be made only with the participation of the secured party.
Each copy of the authoritative copy is readily identifiable as a non-authoritative copy.
Any revision of the authoritative copy is readily identifiable as an authorized or unauthorized revision.
In other words, the e-documentation process must make clear that only the secured party can authorize transference or assignment and that the vendor holds the record solely for the benefit of the secured party.
Additionally, hashing (as explained on page 6) provides the security that UCC 9-105 mandates. The hashing process “seals” the signed authoritative original and renders it tamper-evident and protected throughout its life cycle. Differentiated copies may be made available to authorized users, but subsequent changes or alterations to the signed and hashed authoritative copy are recorded and tracked. In this way, an authenticated audit trail can be created as necessary for perfection and enforcement.
Vendor Selection and Choice of Technology
There are a myriad of vendors and technology options in the market today, and each one subtly differs in the way they approach e-documentation. Here are several questions we have identified that are helpful to ask.
Does your system create a securely archived audit trail?
Who will be available to testify on critical points if there is a problem with the admissibility or
enforceability of the e-documentation in court?
What is generated and available as evidence for enforcement? Can I see a full sample of the evidence generated in the event of a dispute?
Does the lessee have to specifically opt-out of your system?
What if you (the vendor) go out of business or are acquired by another entity?
What if we want to change to another vendor’s system in the future?
Physical Security & Confidentiality
Are your servers protected by monitored firewalls?
Is any redundancy built into your system? How are servers protected from power failure or
How is physical access to your network operations restricted?
How are documents protected as they are uploaded into your system?
How does your system verify the identity of the recipient?
Ease of Use
What is the user experience like for our lessee?
What is the user experience like for our staff?
What is the user experience like for our lenders?
What tech support is available? How quickly can we receive answers?
The right vendor will complement efforts to provide the most secure, efficient and enforceable system possible. In this way, everyone involved will have the greatest confidence in the e-documentation strategy that is ultimately implemented.
Key Takeaways and Next Steps
In the internet age, our culture is focused on doing business faster, easier and more efficiently. Fax machines and mail boxes are giving way to e-documentation.
Our lessees want to go this route. All of their business transactions are moving online, and they expect their lenders to be online too. Providing the option of e-documentation for our lease transactions is a smart, strategic tool that will differentiate ourselves in a crowded market.
E-documentation carries some risks, to be sure. Traditional paper documentation carries risks as well. We are satisfied that each e-documentation risk can be mitigated, for an overall level of risk that is equal to or below the risk associated with traditional documentation processes.
First American is moving forward to lead the way in the use of e-documentation in middle-market leasing. We invite you to blaze the trail with us.