e-Signatures and Digital Records in the Automobile Financing Industry: Progress, yet far to go
The auto and equipment financing industries are crucial American economic drivers. ESRA gathered a number of industry experts together to discuss the state of e-signing in this important business sector.
The panel participants included:
Barry Rosenstock: Senior Product Manager, Dealertrack Technologies
Curt Larson: Product Manager, Open Dealer Exchange
Dominic Liberatore: Deputy General Counsel, DLL
Daniel Doman: Vice-President General Counsel, RouteOne LLC
David Whitaker: Senior Counsel, BuckleySandler LLP
Witaker led off by asking about the state of the industry on the sales and contract side. Rosenstock said that retail installment sales have come a long way. “Dealertrack started in 2002,” he said. “The idea of signing a contract electronically, storing it somewhere, and maintaining the audit trail is still very new now, and when it started, it was too new. We had difficulty in the beginning getting dealers and lenders to understand the process. We had trouble with the process of getting the contract transferred through securitization or being shopped to another lender – that was a foreign concept.
“In 2015, though, we brought on more lenders in past year than previous five years combined, so the process of signing electronically is something where it’s not groundbreaking anymore. Now the question is, “Whose vault will you be using? Is it interoperable with the document management system we’re using? Are you following all security requirements for transfer of control and ownership record?’ And so forth.
“Now we’re thinking about how to move that into the mobile world. Where is the contract being signed? Does it have to be on premises? Do I still have to sign every signature area or can I create my signature once and tap everywhere? How do I do a remote signing? We launched mobile signing over the past year in all 50 states. We had some new questions and adjustments to process from legal counsel, and now we hold ourselves to the highest standard.
“Now the question is, how do we improve the process for the consumer for the mobile world?”
Liberatore then spoke to whether the situation is the same in leasing. Similar “We’re all B2B,” he said. “The situation is disappointingly lower in the equipment leasing space. Every time I speak I think that in the next couple years it will be a dominant part of what we offer, and I’ve been wrong for the past 10 years, but this time I think that I’m going to be right.” There was some laughter in the audience in response to that.
He continued: “There are a few reasons for the current situation. It’s growing, although it’s still well below half. When I talk, I ask for a show of hands if they’re an originator who does full-blown e-lease origination, not just e-signing the doc, and I never get more than about 10% of people raise their hands.
“I’m involved in a task force to see about increasing the use in the B2B space for true 9105 equipment leases. David [Witaker] drafted a very good article for an issue of Equipment Leasing and Finance framing what lawyers should give and get if an opinion is requested. I think that will help a lot. I also find there’s no case law that’s directly on point about this. There is a lot of case law in analogous areas, but there isn’t in the control element under 9105. There’s analogous case law in Article 3 — Promissory Notes, but not equipment finance.
“I firmly believe that electronic leasing is the way to go. I tell my shop that it’s the way to go, as long as it’s done right. We’re not there yet as an industry, but I think we will get there. My mantra is, ‘The future is now, jump into it.'”
Building the software to make the transaction happen
Witaker then asked about control of electronic chattel paper. He asked Larson to talk about practical things, like creating an authoritative copy.
“The biggest challenge is building the software to make the transaction happen,” Larson said. “It’s one thing to say ‘We have a vault and it works,’ but then how do you embed that in a software system and get all the pieces to connect? There are legal considerations, although those are pretty much satisfied. So it’s about connecting the dots. There’s a lot to make it work in a seamless transaction. Customers, especially millennials, want that kind of experience.
“We’ve had challenges with due diligence on the lender side. Either they’re leery or they’re trying to justify their salaries,” he added to laughter. “There’s a a lot of work needed to ensure all the I’s are dotted and T’s are crossed to ensure it works as advertised.”
Witaker than asked Doman to talk about the key issues that his users are dealing with when they start to implement this at their businesses, since they have to satisfy themselves – and a court if there’s a dispute – along with many other people, like investors and so forth.
Doman commented: “You have to look at the overall business process. The underlying law is a concern but you have to look at e-contracting in your business process. Then you try to determine processes and policies for that. In the auto financing world, e-contracting is a tool to effect efficiencies at dealership, where it’s just a portion of the transaction for them, not so much for the consumer. Consumers don’t usually get e-versions of contracts.
“Fundamentally, the e-contract is presented as you would have it on paper, with all underlying laws applicable. For example, disclosures have to be there in a format that the customer can keep. You can allow the customer to pick the device they want to use to sign it, but there are questions, such as, ‘Can I sign once and click through everywhere else?’
“When you’re done, you get a copy of the contract, but that’s where the real efficiency starts. That’s when the dealer can e-file the docs and transfer them for underwriting purposes to the financing source. Data is linked to the file. The financing source validates data, which comes back and populates the contract. The contract is generated. The consumer signs. Then it goes to the vault. The dealer can then sign and distribute the contract to the financing source, which can receive what it needs to so it can lend again.
“One big issue: Never interrupt the flow of money to financing source. Never make electronic chattel paper be different when it’s part of a securitization transaction.”
He continued: “The consumer has a familiar experience at the dealership. They sign on a signature pad, which they’re used to already from retail stores. They leave with copy of the contract, and after that the efficiencies start. But all underlying laws and business processes need to be addressed.”
Additional thoughts from the panel
Witaker then wanted to know everyone’s additional thoughts on the subject.
Rosenstock responded: “Part of what we have to think about is, even if we replicate the paper experience for the consumer, what happens with exception processes? In the automotive space, any time you deal with a highly regulated contracted, the e-version of the paper contract may actually become paper at some point in its life cycle. How do we create a process that creates an intuitive mobile signing process that replicates paper electronically and can become paper again?
“You have to capture the signature authoritatively and ensure that the paper version is the true copy of the contract. Our vault system handles much of that and lenders understand that, but consumers don’t fully understand it because it’s much different than signing at a retail store, for example. Maintaining the ideal user experience has to be reconciled with something that’s still an 8.5 x 11 form that a signature has to b applied to.
“There are infrastructure issues too: For example, what if the store doesn’t have Wi-Fi available except for people waiting in the service area and the sales manager doesn’t have access to it? How do we maintain the e-version of chattel paper in mobile world?”
Wrapping up the conversation
A question then came from the audience: “Is there a tipping point for this? How do you deal with something like an older iPhone with a small screen? How do you deal with the need for mobile versus regulators?”
Doman replied, “The answer is, always be mindful of the underlying law. Clear conspicuousness is something that’s the letter of the law. It may vary from state to state, but it’s the law. On a mobile device, you have to be careful about how you handle it, and your responsibility is that you comply with underlying law. You can get an entire business excited about selling a product, and you need the same enthusiasm and resources to comply with the law, since that’s where your success lies.”
Witaker then offered a final question for Liberatore and Larson: “How do you deal with an open universe of potential investors, as opposed to what the other panel members deal with, where they are facing a finite universe that they can control for?
Larson responded, “The biggest issue a from a lender’s standpoint: How will they store the paper? With the first acquiring lender, in our world, we start with the contract at the dealer, it goes to their vault, then to the lender’s vault. Will the lender have the contract hosted by us or someone else? Or will they host it themselves? And then how do we get chattel paper moving around?
“The technology to store the contract is solid, so it’s the question of how do you take control of that contract and how does it go downstream at that point? That’s what we have to overcome.”
Liberatore said, “What we’ve been seeing people do and what I’m advising is to address the concerns raised here. We don’t try to build our own IT solution for contracts. We have a different provider on the front end and then the paper is transferred automatically to the back end, a vault.
“The way we approach the concerns in our space is to go to a big third party service provider that has IT structure. They have a good process for secure authentication of the signer. Then once it’s fully signed, it flips to a third party electronic vault, which is also important if you want to fund the paper.
“You want to get securitization, syndication, and financing sources comfortable with what you’re doing. We’ve found the best way to do that is go to a big company. In our space, we’re more conservative about getting more people to do this. From an operational perspective, you don’t have to redo your IT. It’s a big shift because it’s all done electronically, but it’s better than having to build your own product internally.
“The folks who are doing this are approaching it from that perspective. Down the road, you’ll see more homegrown shops.”
A final audience question arrived: “In the cases where you have consumer execution of contracts, how is the orchestration of the device happening at the point of sale? Can the consumer supply their own device? How do you maintain control over fraud?”
Larson replied: “We’re seeing the use of dealership-owned hardware to protect against that. Going forward, I could see two- or three-factor authentication so consumers can use their own devices. Authentication is currently done in the traditional manner where the finance manager confirms that the consumer is who they say they are, such as by checking their drivers license and looking at online sources.
Doman added: ” All assignment agreements say that dealers have to authenticate who the consumers are by checking IDs and so forth.”
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