July 10, 2019
ELECTRONIC SIGNATURES: THE TIME IS NOW
What you don’t know can hurt you—at least if you have somehow managed to ignore or avoid the benefits of creating and embracing electronic signatures. That would be hard to do because, quite simply, electronic signatures (e-signatures for short) are revolutionizing the way agreements, including chattel paper, are being executed and stored. The use of e-signatures is making transactions more secure and far more efficient to take from inception to funding.
I had the pleasure of co-chairing a roundtable discussion on this topic at the recent Equipment Leasing and Finance Association (ELFA) Legal Forum in San Diego. While my session was advertised as addressing e-signatures and cybersecurity, it quickly became clear that the implementation and use of e-signatures was foremost on virtually all of the roundtable participants’ minds.
This should come as no surprise. Clearly, attendees were realizing the time is now for all who are involved in almost any form of financing to get up to speed on e-signatures.
Quite simply, originators, funding sources, and, eventually, customers are or will be demanding the convenience, cost savings, and/or speed of e-signatures. Perhaps most importantly, a document that is properly signed electronically offers enhanced security over one with a traditional ink signature. For all these reasons, the capability to handle a financial transaction electronically is now emerging as a significant marketing advantage for originators and funding sources.
There is a difference between “e-leasing” and having a lease signed electronically. Generally, e-leasing involves a front-end process to confirm that the proper party signed the document and a back-end process to electronically store the electronically signed document. The location of the electronically signed documents is often referred to as a “vault.” Despite the term “e-leasing” being derived from the word “lease,” many use that term to refer to electronically signing and storing any documents underlying the lease or financing of equipment (i.e., it would include equipment finance agreements, notes, security agreements, and chattel mortgages). Some companies are only going half way, by having the documents signed electronically and then printing them as paper originals. Clearly, this is not as efficient. With that said, an e-signature should still have advantages over a “wet” (i.e., ink) signature.
E-signatures represent a clear advantage on the front end of any financial transaction. From the days of quill pens and parchment paper to the present day with e-signatures, the question surrounding any signature has been and always will be, “How do I know who signed this?” Prior to the advent of e-signatures, the only verification of the person who actually signed the document was by a witness and/or a notary—neither of whom were generally accessible and/or reliable.
When set up properly, an electronically signed document materially upgrades the verification process. For most companies, it is recommended that a “multi-factor” authentication process be set up. For example, many front-end vendors start the e-signature process by sending a passcode and other required access information by SMS text to a signatory’s mobile phone. With this information in hand, the signatory logs on to a website and creates an account and new password. Then, before electronically signing the document, he or she has been authenticated by two methods (i.e., first by mobile phone and secondly by computer). In addition, many funders go further and ask the signatories to properly answer specific questions to verify their identity. These questions often refer to information about him or her obtained from public or other records, such as prior addresses. This test is specifically designed to not seek current information about the signatory. Many refer to this verification tool as the “out-of-the-wallet” test. That is, if someone were to find your wallet, he or she would not be able to find the answers to these questions and would therefore fail the security authorization and be unable to electronically execute the document. Passing the out-of-the-wallet test thus creates an additional layer of confidence and security that the person executing the document is, in fact, the person who should be executing the document.
Moreover, e-signatures have additional built-in verification tools in the form of a clear and traceable electronic “trail” verifying that the electronic document was opened and signed electronically, in addition to providing a clear identification of the computer that was used to access and sign the document. E-signatures are far more easily verified—and therefore resistant to fraud or abuse—than their paper predecessors. Clearly, an e-signed document can provide many more touch points to confirm that the proper party signed the document. In contrast, an ink signature usually provides little to no additional verification.
Once signed, what do you do with the document? The best answer is to store it electronically. That is usually done by an outside vendor (usually different from the front-end company that obtained the e-signature) that will store and safeguard the electronic document. This raises the second important issue: once the document is signed electronically, how do we confirm what was signed? For example, if the document is stored electronically, how do we know it hasn’t been changed?
More so than with paper contracts, if an electronic document is being properly stored electronically and has been slightly revised, a comparison of the original and revised version would look vastly different because e-vaulting companies set up the electronic documents using codes and other verification tools. Each and every change made to a document, regardless of how insignificant it might appear on a paper copy, can be determined electronically by changes in the code and therefore not missed as an oversight (which could happen more easily on a paper version). The value of e-vaulting is that it shows when, how, and by whom a document has been changed—and, more importantly, when it has not been altered. When selecting a vendor to store your electronic document, you should inquire as to how the documents will be “locked” behind the scenes because down the road you may need to prove that no changes were made to them. Amendments that are requested in the future will be addressed by a new document—not an electronic change to the existing document. To continue the analogy to the paper world, an e-vaulting vendor is providing customers with the equivalent of a safe deposit box with their name on it—essentially, their personal electronic document vault to store, safeguard, and ensure that the documents contained therein are preserved intact.
Once all the elements of the Uniform Commercial Code § 9-105 are satisfied, the stored document should be the original “single authoritative copy” of chattel paper—i.e., the electronic originals. The e-vaulting company will usually attest to the authenticity of any e-document it stores and provide a supporting affidavit. You can also transfer the electronic originals of one or a whole portfolio of leases from one vault to another with the proverbial keystroke; it’s very efficient. Also, should you need a “paper original,” most e-vaulting vendors have the ability to create it as well.
Specifically, when set up properly, companies prefer having documents signed and stored electronically for many reasons, including:
1) E-signing and distributing documents to others for their e-signature is much easier and faster than doing the same with paper.
2) Documents get signed properly the first time; it should be impossible to e-sign a document incorrectly (because the process should not allow you to submit an electronically signed document until all signatures have been made).
3) The document can be distributed to multiple persons at the same time.
4) Manpower and the costs associated with sending paper documents to be signed and/or re-signed are eliminated.
5) Many funders insist upon perfecting their security interest in the chattel paper by possession of the “original document.” Compared to a paper original, the electronic single authoritative copy can be easily transferred electronically between the electronic vaults of the seller and buyer.
As with any evolving technological change, there are still downsides. Many funding sources are not comfortable with electronically signed documents. While they are getting better and are warming up to the concept, they are not entirely there yet. There is also a cost to using outside vendors facilitating the electronic signing and storage process. There is also a lack of case law enforcing electronically signed documents. However, more and more supportive case law has been emerging, and we expect more to come. The tide has certainly turned, and e-signatures are gaining momentum.
Part of what is driving this shift is largely demographic. Frankly, while many decision-makers are in their 50s and 60s and perhaps not very technologically savvy, members of the rising generation have grown up with technology all around them and are accustomed to doing everything on their computer or phone. As these 20- to 30-year-olds move toward becoming decision-makers as 30- to 40-year-olds, the transition to electronically signed documents will be well established. “Just send it to my phone” will become the order of the day between lessors and lessees. Pressure from originators will also help hasten the transition as these new decision-makers want to use e-signatures, and to the extent to which they have a choice of several funding sources, they will increasingly opt for those sources that allow them to work electronically.
Clearly, the time has come to embrace the use of e-signatures. The capability to fund a deal in 15 minutes instead of 2 hours or more; the improved assurance that documents are being signed properly the first time and that a solid trail is created to verify this fact; and the ever-growing appetite for the convenience and flexibility afforded by electronic technologies all bode well for the growing role of e-signatures in ushering in the transition to e-leases and other forms of e-paper. For e-signatures, the time is now.