The future of e-titling in the automobile industry

Many ESRA members have interest in electronic titling for automobiles. Mark Silesky, Director of eBusiness Solutions for the American Financial Services Association, moderated a panel discussion about vehicle e-titling in front of a live ESRA audience. He noted that his members provide credit to consumers and finance about 85% ($570 billion) of new vehicle sales in the US. Involved in financing and titling vehicles.

The panel participants included:

Ann Gunning: CIO of Decision Dynamics

Betty Johnson: state of Nebraska state department of motor vehicles

Lee Strickler: Harley-Davidson Financial Services

Gunning led off by asking, “What is vehicle e-titling? My definition is that it’s the electronic process that tracks a vehicle, cradle to grave. It refers to the beginning of a vehicle, from the time it comes off a manufacturer’s lot with a certificate of origin, which is the first document associated with it, then through different dealerships and then a first title when it’s sold.

“Then lien processing if there’s a lien and subsequent sales. Then there could be resales or an accident that could result in it being totaled, with insurance companies involved. Eventually, it could be crushed and sold as salvage.

“Why is e-titling important? It provides an efficient process for the vehicle’s lifecycle. But some DMVs are good about e-titling while others want to stick with how they’ve always done it, so the forward progress has to come more from dealerships who want to go through the process quicker.

“Targeted transactions are numerous: dealer to dealer, consumer sales, interstate transfers, renewals, refinancing, salvage title processing, remarketing, and so forth. All of those have to be defined within the marketplace to make it electronic.

“There are two major processes today: electronic vehicle registration, mostly by dealers but never between private parties, and electronic lien and title. If you’re only processing a few titles a day, you may want a more manual electronic process, but if you’re doing thousands a day, week, or month, you probably wanted a more automated process. Companies like mine offer various value-adds that let you do an automated process.”

Gunning then described the process: “Essentially, a driver gets a loan, or a dealer gets a loan for them, and the dealer sends the title information to the DMV. The DMV processes the transaction and does QA – notaries could be involved – and they issue a title and registration, which goes to the lienholder.

“It stays there until something happens, such as the vehicle being paid off, and a notice goes to the DMV saying that the lien has been released. Then either a manual or electronic process takes care of getting the title to the vehicle owner.

“Other tools that help with the process: There’s a national database created by the Department of Justice and recently taken over by the American Association of Motor Vehicles. But it’s not used in all states – I think there are 3 not using it. The DMV and the public have access to it.”

She continued: “Not all states have an electronic process for e-titling queries. About 40% of them have a manual process. There are commercial products that provide vehicle information, such as Equifax and Carfax. And there are lien monitoring systems, as well as solutions used by dealerships, such as loan systems that tell you what’s happening with a vehicle title.”

Gunning added: “36 states have some form of ELT (electronic loan and title) and 39 have some form of EVR (electronic vehicle registration).

“All 50 states have different legislative things happening, so you have to stay on top of all of that. The main thing: The Truth in Mileage Act in 1986 requires both seller and buyer to sign off on a vehicle’s odometer reading. But the Secretary of Transportation can approve alternative methods, and some states have done that, but by the time they get approved, the technology is usually obsolete.

“In 2012, Congress, because of the electronic wave, gave the Secretary of Transportation 18 months to develop electronic disclosure rules for odometer readings. Nothing happened, so last year, Congress passed the FAST Act, which allowed states to develop their own electronic odometer rules. But then NHTSA issued their own notice of proposed rules in March 2016, and 32 companies responded to that – we’re waiting to see what happens next.

“There are different state laws that are barriers too. Many state laws say you have to have paper titles stored because regulators will come on site to look for them. Many states have had to get rid of those laws, as well as laws specifying that signatures have to be in ink on paper. In the meantime, states are working on modernizing their systems.

“Everything being developed needs to comply with security standards, privacy rules, and so forth. New York is the most advanced state right now. They have an exception for electronic odometer disclosure, so they may have the first end-to-end electronic system. Montana isn’t far behind.

“We work with dealers to see what they need in their systems and giving them feedback on what they’re doing. We want to provide standards on e-signatures so DMVs, dealers, and so forth have guidance.”

The state perspective

Johnson then offered the state perspective on the situation: “The history of the DMV in Nebraska: Legislation for ELT passed in 2009. It was a DMV initiative. We went to our legislature and said we needed an ELT system in our state. We wanted to reduce the number of complaints with dealers storing paper titles.

“When we issued a title, it would go to the lender, who had to store it in paper format. When the loan was paid off, the lender was supposed to pull it out of their file, sign off on the lien, and mail it to the customer or to the state, so we could handle it in our system.

“Many times, though, the customer would have to pay to obtain a duplicate title, or the title would be mailed to them and the lien release wouldn’t be noted in our system. So if they went to sell it later and couldn’t find their paper title, we’d still have a lien in our system and they’d have to go back to the lender to get a release from them.

“We wanted to eliminate the multiple steps for a lien release and handle it in one electronic transaction. It’s also useful for fraud deterrence and reducing postage costs.

“We implemented our system in November 2010. Our option to move forward with ELT is the same as with the other 26 states that have done it is to use a company as an intermediary. They contract with the lenders and send the data to us, and we send our information to them so they can send it to the lenders.

“We have it set up so that that any company that can meet our minimum security requirements can become one of our providers. One downside, though, is that lenders can participate too. So we had to build an electronic system on one side but keep a paper process in place on the other. So now we don’t print a paper title.

“If a lender doesn’t participate in the program, they have to submit a paper release document, which leaves it open for fraud. We require it to be notarized, which doesn’t necessarily prevent fraud. In 2011, we added a process where a lender with paper titles could make them electronic and manage them that way.

“In Nebraska, we have over 1200 participating lenders, which is fantastic for a small state that’s been doing this for six years. A majority of our liens are from non-participating lenders, though, which impacts our efficiency gains. Most of them are local Nebraska banks.

“Today, we require a paper title if an entity does a repo or the owner moves to another state. We can do a refinance or a junior lien electronically.

“In addition, one of the places that still from our perspective is painful is if a title is transferred out of state. The vehicle owner has to contact the lender for the paper title, the lender has to contact the DMV for the title, we mail the paper title as the lender directs us to, and then the customer makes an application for title in the new state. When they come into our state, the same thing happens in reverse.

“It’s a very time-consuming process. When someone moves into our state, they have 30 days to complete this and often can’t get it done within that time. If all states had e-titling, which is based on getting the odometer rules done, it would be much easier to get that process done faster.

“What we’re working on in the future is system modernization. Our system is about 25 years old, and it’s younger than a lot of states’ systems. This is a problem across the country, and it impacts the ability to do e-titling in most states. We’re hoping to build a new system next summer and have it ready in 2-3 years, so we can do more electronic transactions.

“We also want more participating lenders, which helps deter fraud, and continue to reduce our reliance on paper. One thing we’re working on is eliminating paper titles for repossession and name change. We also want to implement the dealer automated services, which will be a big deal.”

How lenders view the situation

Strickler then gave the lender perspective on e-titling. She said: “Currently, there are about 62 million accounts represented with a lien holder, where there’s some kind of title. We need a reduction in risk. We need a lienholder on the title to protect the asset, so it’s not an unsecured loan. We’ve implemented some ELT. Our records retention is different.

“With the amount of loans, we’re looking at a cost-effective means of storing data that’s in line with state and federal regulations.

“As a result of ELT, it’s easier for dealers to file paperwork. When a customer goes into the dealer to buy a vehicle, sometimes they’re e-signing contracts, which ends with a paper title that the customer has to physically sign, as required by the state. That becomes cumbersome.

“The customer walks out with the vehicle and the title clerk processes the paperwork. That can become problematic because states and counties are different. If it’s ELT, the lienholder uses codes and we store it electronically. If it’s paper, we mail it and store it onsite. When the loan is paid off, if it’s ELT, the notice is sent to the state, and then it depends on their process whether it’s sent to the consumer or to the third party. Then we close the account. We’re processing a lot of new accounts and old accounts, along with requests coming in from consumers.

“We’d like to reduce the amount of time it takes to release a lien. A lot of times there’s not a clear process why it can take so long to deal with a state. And we have to deal with liens expiring. If the consumer doesn’t take care of removing the lien, it can become a problem.

“E-titling saves money, reduces mistakes and things getting lost. Fewer storage requirements. Mailing costs and a reduction in the number of people processing and filing paperwork. E-titling helps in many ways.

“It also helps with data accuracy: Lenders spend a lot of time fixing what the consumer told the state to put on the title, whatever the state thought should be on the title, and so forth. Title data remains intact for the life of the vehicle, Many things can vary from state to state. There are 50 different standards and ways to do it.

“Fraud reduction is important too. California and Texas are the worst states for that. The quicker we can get the title transferred the better. We don’t want to impede the process of the consumer selling the vehicle.

“Dealer satisfaction is key as well: They want consumers to move through the process quickly. A standard ELT process would help from the dealer perspective.

“Challenges: There are different standards and processes, especially for out-of-state deals. When we go from state to state, it’s tough for dealers and lenders to know all the state laws. It’s a higher cost for the lender, if they don’t know the process. Some states don’t recognize electronic contracts, and we have probably 50 different powers of attorney out there. We have to have a signed power of attorney, which may not work from state to state.

“State statutes continue to be a challenge too. Many states say they don’t have the resources to keep up with the move toward e-titling. And consumers are reluctant to go back into the DMV to deal with a problem because of the long wait times. That’s a problem for the state and the lender.

“Various corrections, as well as name changes on titles, are a pain point too. We have to reissue everything in paper because there’s no electronic process. We have to send paper to the state to have them correct it.”

Regulating vendors

Silesky then brought up the question of who regulates the vendors.

Gunning replied: “For vendors, we have to abide by  GLBA and any other rules. We’re subject to their audits too.”

Johnson said: “We have specific areas where we have some federal government oversight, such as odometers. But it’s state law beyond that.”

The impact of smart cars

The panel closed with a question regarding the advent of smart cars.

Gunning said: “People are asking why we’re talking about e-titling with smart cars coming? Odometer information can be transmitted electronically with smart cars.”

Johnson added: “Some best practices are being created around that. I’m on that committee. The impact on the title and lien process will be minimal, but the place where it will be interesting is that the more technology you add to vehicles, the more security you have to add. It will be interesting to monitor odometer readings because of that.

“Also, if a vehicle is in self-driving mode, who’s responsible for an accident? That kind of thing will have a huge impact on DMVs.”

Strickler said: “It will impact the name on the title, among other things. We don’t know what will happen around this.”

Johnson closed by commenting: “What will be interesting is it’s not just about self-driving vehicles. When you get to the point with them where you can make deliveries without humans being involved, or if you don’t own a vehicle and a driverless vehicle comes to your door to take you somewhere, it will turn everything upside-down.”

The principles of electronic record retention

Record retention isn’t the most glamorous topic, but it can be very embarrassing if it’s not handled correctly. Curt Moy, USAA, Assistant Vice-President, Corporate Counsel at USAA, and ESRA Board member knows quite a bit about electronic record retention. He moderated a discussion about retaining electronic records in front of a live ESRA event audience. Joining him were Jerry Buckley, founding partner of Buckley-Sandler, and John Isaza, CEO of Information Governance Solutions.

Implementing a meaningful record retention schedule

Isaza started the discussion by pointing out the major issue facing companies that don’t have a proper record retention plan in place: “The failure to retain records can create big problems when there is pending litigation. Look at Arthur Andersen, which went out of business for that reason.”

He noted that businesses have always known how to handle paper records, and while the technology explosion has led to a large increase in the number of electronic files being created, “statistically, most organizations are still maintaining the same amount of paper. The problem is they don’t know what to do with electronic records.”

Isaza added: “Records have to be maintained irrespective of medium. How do you create a records retention schedule that resonates with all your systems? How does that program capture those records? We have a lot of clients who are good at capturing the data, but they have difficulty with disposing of it properly, which creates vulnerabilities.

“It’s a distributed data problem. There are records stored in places you wouldn’t expect them to be stored, like some random person’s backup in the cloud, so you lose the ability to control the data. In all fairness, the technology has come a long way in the last three years, with the cheap ability to store data.

“Two cornerstone documents that need to exist for the creation of a successful program: a legal holds program and a records and information management policy, which includes a records retention schedule. They need to work in tandem, be robust, and be able to be audited.”

And, Isaza said, don’t forget that “a records retention schedule needs to be adaptable to all the places you store data and it has to follow the thousands of regulations that exist in the United States.”

Best practices

Moy then turned to best practices, noting that the first one should involve creating an inventory of the information currently being stored and seeing what types of documents need to be retained.

“That’s correct,” Isaza said. “In the old days, that was the best practice. For many companies, they have an inventory from the paper world that serves as a good starting point. These days, we try to leverage our experience with other clients to say which are the types of records that should be expected for any organization– 80% of them will fall under finance, accounting, and so forth, where the type of information being retained is very similar. The other 20% of documents are dependent on vertical you’re in.

“Other than inventorying everything, you can create a department records coordinator network, where someone in each department is assigned the responsibility of telling you what kinds of records they have. That way the schedule is an evolving document that changes with the changes in the organization.”

Moy continued: “Next is determining the regulatory environment for the records and assigning retention periods for them.”

“Yes,” Isaza replied. “We know what the regulations are around the world. Even if a company is based in the US, if it does business elsewhere in the world, it can be subject to regulations in other jurisdictions. So the next step is identifying all those regulations, including what’s specific to your vertical, or verticals.

“Here’s a good anecdote that relates to identifying your verticals. I have a client with a technology consulting business, and they came to me asking about regulations around vaccinations. They have a division they purchased that has to do with creating vaccines, as odd as that seemed.”

Moy then moved on to document handling. He asked: “Don’t you have to focus on all components of a document, such as a contract with a digital signature? You have to marry the regulations that cover both because they’ve been compiled into one document, even though they may be housed in two different containers, one for the signature and one for the contract.”

Isaza replied: “Yes. That goes to the biggest challenge. You need to determine what the official record is and whether you’ll preserve it in place or find a repository to migrate it to. Most organizations decide to preserve in place, but in the example given, then you have to make sure that when you, for example, preserve a contract with a signature contained in another system, you have to make sure the systems speak to each other.

“You also have to keep in mind how to dispose of that document. Are you allowed to dispose of the signature at the same time as the contract? You need to know that.”

Moy asked: “What are some of the best practices for purging or disposing of records once the expiration date hits?”

Isaza responded: “That’s a challenge for most of our clients because of the number one concern around legal holds. You have to make an assessment whether a legal hold is pending. If you have the green light to dispose, the question becomes how to set the systems up top delete.

“In an ideal world, the deletion is taking place automatically in the systems, and you have the ability to stop the destruction if there’s a litigation hold. The best practices would involve identifying the triggering event that will initiate the disposition. The triggering event could be when the document is no longer active, or the sale of an asset. And then you have to decide if you want to tack on a certain number of years beyond that.

“Then the technology has to do what you want it to do. From that viewpoint, it’s a laborious process to apply the technology to this.

“You need to focus on the systems that are the most active and apply the rules to those systems and hopefully you’ll have systems that will allow you to build rules with disposition into them. If not, there are systems you can purchase that allow you to migrate the record into that system, such as Documentum, which provide repositories for records.”

Isaza noted that such an effort feeds into “the information lifecycle governance model. You’re being inundated with data on a daily basis, but only 3-5% of it rises to the level of becoming a regulated record or something you need to keep. Easily 70% of the rest of it is redundant data that can be disposed of at any time.

“Let’s say you have files on a portable device. I would consider that a copy. I would give it a very short time frame to retain, such as 3 years. That gives the end user 3 years to decide if they need to keep it before it’s destroyed.

“You can create buckets in your records retention schedule so you can retain big data. I would consider anything not in the official repository to be a copy that can be disposed of.”

An audience member then had a question about how Isaza’s comment aligns with the “store in place” trend. Isaza replied: “When we talk about ‘store in place,’ we’re talking about official repositories of records. So when you have a data map of where all the content is located, certain systems are the primary generators of records. Even emails could be generating records.

“That’s what we mean, versus store in place on a thumb drive or something like that. You need to make sure when the record is created, it has to be retained in an official repository. You need a ‘mother ship,’ so to speak. In SharePoint, there are add-ons you can use to create and capture a record. The implementation is a challenge, but it takes baby steps to get there.”

The impact of SPERS on e-record retention

Moy then turned to Buckley to discuss the impact of SPERS (Standards and Procedures for Electronic Records and Signatures) on digital record retention. Buckley and his colleagues played a role in developing SPERS.

Buckley recalled: “After the ESIGN Act was passed, we realized there were no provisions for regulations, which was intended. We deal mostly with financial services firms, and they need guidance. There was a realization that you could substitute e-signatures for ink signatures as long as certain standards were met, but people who had to deal with each other in secondary markets didn’t know what was legal, valid, binding, and enforceable.

“We initiated SPERS in the early 2000s to deal with that. We convened all the major trade associations and many of the biggest players in the business to discuss it. We spent a year-and-a-half to develop SPERS. That standard has 5 major parts. The fifth part relates to record retention. The intention is to have something that’s accepted as commercially reasonable and holds up in court. It’s a behavioral standard, not a technology one.

“SPERS was adopted by the mortgage, variable annuity, and auto finance industries. It’s had some durability since then. We are considering an update to it even though what’s in there has been reinforced by the courts.”

Buckley continued: “SPERS’ record retention provision is crucial because you have the offering of the record to the consumer, which has to be done under ESIGN, but you also have the retention of the record by the business party. That’s where the rules come in. It was designed for business people, lawyers, and technology people. We lay out the issues that need to be considered.

“One of the issues with the secondary market is retention and how records are retained. You have to demonstrate ongoing integrity of a record, keep it for specified time, and if you’re using vendors, you have the question of their durability. You also have to retain the audit trail so you can prove up the record.

“We’re talking about the records and the data. You can reference the SPERS standard and have a discussion with your legal, technology and business teams. The document is very readable. It has a practical approach to what has to be done.”

Moy noted: “It takes the entire company to make sure that information and record retention schedule is handled properly.”

Isaza added to that: “ARMA International promulgated eight principles for retaining records and information: accountability, transparency, integrity, protection, availability, retention, disposition, and compliance. When we talk about SPERS and its section on retention, maybe we need a section on disposition too, because it’s important to, for example, know what to keep when a merger happens. For many of my clients, it can be a liability if they keep things that should be disposed of.

“The other thing is what the courts are focusing on. When they look at whether you’re using artificial intelligence or the system you use, they’re looking at your methodology. They want you to have created an adaptable environment and did the best you could in a systematic way, not a situation where you applied it in different places.”

Retaining records in obsolete systems

Moy then brought up an interesting conundrum: “How should organizations deal with records in obsolete systems? You may have records that need to be retained for decades, but systems can change, so you have to migrate them as systems are updated. But what happens if you can’t retrieve those records?”

Isaza replied: “It’s a problem. The federal rules were revised in December 2015 to address those issues. But the reality is that as the owner of that data, if the information is relevant to the subject matter of a lawsuit, you’ll have to figure out how to obtain it.

“An example: We just wrote memoranda for a client who had 45,000 backup tapes. Of those 45,000 tapes, at least half were in an unreadable format because of physical deterioration. It was costing them $25,000 a month to store the tapes and it would cost them a fortune to restore the data because the systems and data are obsolete.

“So you’re stuck footing the cost to retrieve the data if that happens.”

Moy asked: “Is the creator of the document the person responsible for retaining it, or the recipient?”

Buckley replied: “It’s easiest to think of this as who is going to rely on the information. The truth is that with e-signatures, your signature will be created by the counter-party who feels it’s reliable and can be proved in court. The party that originated the transaction and parties relying on the record are the ones who have to retain it.”

Isaza added: “Along with a retention schedule, it’s useful to track owners of records, which could be an entire department. That way the record owner knows that if they receive a litigation hold, they put the record on hold.

“But there are other things that can transcend a department, such as a tax record, which could be held across accounting and finance. In that situation, I would argue that the record owner is the one who needs it the longest.”

Buckley added: “I think of retention almost like mortgage servicing. Until something goes wrong, you won’t worry about it, but if something happens, you’ll want to know you have a way to deal with it.”

A final question, regarding the risks seen in other spaces, was then raised to close out the session.

Isaza responded: “I do work across all the verticals out there, including oil and gas, automotive, software companies and others. It’s an issue across the board because of those 80% of your records that every company has. Then you have levels of complexity around various requirements, especially if, say, a company is in Omaha but they’re doing business in Germany.”