Compliance Article

06/08/2007

James Bork J.D., LL.M; Senior Editor, CCH Banking Compliance Library , Wolters Kluwer Financial Services

For the past several years, five of the Federal Reserve Board's regulations have included express provisions regarding electronic delivery of disclosures that banks and thrifts have had discretion to comply with or not. In order to clarify those requirements and to finally move toward a mandatory compliance date, the Fed has proposed to amend the regulations.

The following are the five regulations affected, together with publication information about the Fed's proposed amendments:

• Regulation B – 12 CFR 202; Equal Credit Opportunity (72 FedReg 21125);
• Regulation E – 12 CFR 205; Electronic Fund Transfers (72 FedReg 21131);
• Regulation M – 12 CFR 213; Consumer Leasing (72 FedReg 21135);
• Regulation Z – 12 CFR 226; Truth in Lending (72 FedReg 21141); and
• Regulation DD – 12 CFR 230; Truth in Savings (72 FedReg 21155)

On April 30, 2007, the Fed published proposed amendments to each of these regulations that address the issue of disclosures made by electronic communications. Comments regarding the proposed amendments are due no later than June 29, 2007.

In this article, I will briefly review how the provisions regarding electronic disclosures came to be included in the regulations. Then I will examine the most prominent aspects of the Fed's recent proposal to clarify their status and simplify the electronic disclosure guidelines. Details regarding some of the proposed amendments to Regulation Z will be presented in a subsequent article.

I. Electronic Delivery of Consumer Disclosures

In the mid-1990s, the Federal Reserve Board began to consider the issue of how financial institutions might provide required disclosures by email, on the internet, or by some other electronic means. It published proposals regarding this subject in 1996, 1998, and 1999.

In late March and early April of 2001, the Fed published interim rules amending Regulations B, E, M, Z, and DD to establish uniform standards for the electronic delivery of disclosures. In response to comments that identified operational and security concerns with respect to some aspects of the interim rules, the Fed lifted the October 1, 2001 mandatory compliance date but left the rules in place.

During the nearly six years since then, the interim final rules have remained in effect as part of the respective regulations. But because the compliance date was lifted, financial institutions have never have been required to comply with them. In light of this, it is not surprising that the Fed's recent proposals to amend the regulations reference the "confusion about the status of the electronic disclosure provisions."

II. The Interim Rules and the E-Sign Act

On June 30, 2000 (i.e., after the revised proposed rules were published, but before the Fed published the interim final rules), President Clinton signed into law the Electronic Signatures in Global and National Commerce Act (the E-Sign Act; 15 USC 7001 et seq.). The E-Sign Act provides that required consumer disclosures may be provided or made available, as applicable, in electronic form if the consumer affirmatively consents after receiving a notice that contains certain information specified in the statute, and if certain other conditions are met. (See 15 USC 7001(c))

The Fed's 2001 interim final rules incorporated the consumer disclosure provisions of the E-Sign Act into the five regulations and established uniform requirements for the timing and delivery of electronic disclosures.¹ Under the interim rules, disclosures can be sent to an e-mail address designated by the consumer, or can be made available by some other means, such as an internet site. If the disclosures are not sent by e-mail, financial institutions must provide a notice to consumers alerting them to their availability elsewhere.

Disclosures that are posted on an internet site must remain available for at least 90 days to allow consumers adequate time to access and retain the information. Financial institutions also are required to make a good faith attempt to redeliver electronic disclosures that are returned undelivered, using the address information available in their files.

III. The Proposed Amendments

The Fed's proposed amendments accomplish three basic objectives. First, they retain the substance of certain provisions in the interim final rules that provide regulatory relief or guidance regarding electronic disclosures. Second, they remove from the regulations those provisions regarding electronic disclosures that restate or cross-reference provisions of the E-Sign Act. And third, they remove other parts of the interim final rules that the Fed believes may impose undue burdens on electronic banking and may be unnecessary for consumer protection.

Because compliance with the interim final rules never became mandatory, the Fed believes that removing some of the provisions and revising others will simplify the regulations and reduce confusion about the status of electronic disclosures. But certain provisions in the interim final rules (including those that address foreign language disclosures in Regulations B, E, and Z) were not affected by the lifting of the mandatory compliance date and accordingly are now in final form. The Fed's proposed amendments do not delete those provisions.

A. Regulatory Provisions Directly Related to Electronic Communications

The 2001 interim final rules added sections to each of the five regulations to address the general requirements for electronic communications. The Fed's recent proposed amendments will delete those sections, as well as any Official Staff Commentary related to them.

The deletion of these sections and Commentary does not negate the basic disclosure requirements of any of the affected regulations. Those requirements, including the requirements to provide disclosures within specified timeframes and in a form that the consumer may keep, continue in force.

Further, these deletions will not generally affect the application of the E-Sign Act to consumer disclosures under 15 USC 7001(c). The proposed amendments do, however, supersede the consumer consent and other provisions of the E-Sign Act in specific circumstances, as discussed immediately below.

B. General Disclosure Requirements

The Fed's proposed amendments will add to or revise the regulations, as appropriate, to clarify that for those disclosures that must be given in writing, financial institutions may provide the disclosures in electronic form, subject to compliance with the consumer consent and other applicable sections of the E-Sign Act. But if an institution provides required disclosures in paper and electronic form, and relies on the paper form of the disclosures to satisfy its compliance obligations, the duplicate electronic form of the disclosures may be provided without regard to the consumer consent or other provisions of the E-Sign Act. The reason for this is that the electronic forms of the disclosures are not the ones being used to satisfy a regulation's disclosure requirements.

The Fed has also proposed to require institutions to provide certain disclosures in electronic form without regard to the consumer consent or other provisions of the E-Sign Act. But these mandatory electronic disclosures are limited to those in which the use of electronic communication was initiated by the consumer, or in which consent is implied by the consumer's action.

In accordance with that part of the proposals, disclosures that are required in connection with credit applications must be provided to an applicant in electronic form if the applicant accesses the application electronically. This applies to credit applications under Regulation B as well as to applications under Regulation Z for credit/charge cards, home equity plans, and closed end credit. In addition, disclosures that are required in connection with advertisements and solicitations must be provided in electronic form if a consumer accesses the advertisement or solicitation electronically.

IV. Concluding Remarks

In connection with the proposed amendments to each of the five regulations, the Fed has emphasized its intent to (i) simplify the electronic disclosure provisions, (ii) eliminate existing confusion about their status, and (iii) reduce burdens on electronic banking and commerce. With respect to four of the five regulations affected by the amendments, the Fed seems to have achieved these goals.

But as so often happens, Regulation Z stands out as a special case. An examination of how the Fed's threefold intent fares with respect to that complex regulation is the subject of a separate article. Stay tuned.