The Office of the Comptroller of the Currency issued a notice of proposed rulemaking on electronic banking that appeared at p. 34855 et seq. of the Federal Register, Vol. 66, No. 127 (July 2, 2001), which cites The Economist for the prediction that, by the end of 2003, 25 to 40 million households will bank online. This number is in addition to business banking online. (The OCC has established an electronic banking website at: www.occ.treas.gov/netbank/netbank.htm.) 
 
Legal Framework

 

Recently passed laws, when analyzed in the context of existing statutes and regulations, set the legal framework within which online banking operates. In New Jersey, the Uniform Electronic Transactions Act was signed on June 27, 2001, as P.L. 2001, c.116. This law, which took effect immediately, should be read in conjunction with the corresponding federal law, the June 2000 Electronic Signatures in Global and National Commerce Act, 15 U.S.C. |7001.

 

Generally, these electronic signature laws give electronic records, contracts and signatures the same validity as written ones, with certain exceptions such as wills and family law documents. The usual defenses to a contract claim remain, such as forged endorsement, no meeting of the minds and so on.

 

The electronic signature laws also permit many consumer disclosures to be given electronically but set forth procedures that must be followed to demonstrate consumer consent.

 

Before consenting, the consumer must also be provided with a statement of the hardware and software requirements for access to and retention of the electronic records.

 

After consenting, if a change in the hardware or software requirements needed to access or to retain electronic records creates a material risk that the consumer will not be able to access or retain a subsequent electronic record that was the subject of the consent, the person providing the electronic record must provide the consumer with a statement of the revised hardware and software requirements for access to and retention of the electronic records and the right to withdraw consent without the imposition of any fees for such withdrawal and without the imposition of any condition or consequence that was not initially disclosed. Further, the person providing the electronic record must also again comply with 15 U.S.C. |7001(c)(1)(C).
 
Online Checking

 

Security. With legal authorization in place, the greatest obstacle to, and safety and soundness risk presented by, online checking and bill paying is security. How does a bank know a person accessing its customer account information records and transferring funds out of an account is, in fact, its customer?

 

Security is the greatest concern regulators have as well. See, Joint Final Rule, Interagency Guidelines, 66 Fed. Reg. 8616, Feb. 1, 2001, OCC Bulletin 98-3, Technology Risk Management (Feb. 4, 1998), and Comptroller's Handbook, Other Income Producing Activities: Internet Banking (Oct. 1999).

 

Before a bank allows customers to access their account information online and pay bills, it must have in place adequate controls to verify customer identity and to limit access to authorized persons. Registration keys, passwords, verification of digital signatures, encryption and so on are all in order, with internal safeguards to limit access to this information and account numbers. Controls should also be in place to detect and report unauthorized physical or electronic entry into customer files.

 

Notice to and Approval of Regulators . The Office of Thrift Supervision requires a federal association under its jurisdiction to file a written notice within 30 days before establishing a "transactional Web site." 12 C.F.R. ||555.300(b), 555.310(a). A transactional Web site is defined by the OTS as an Internet site that enables users to conduct financial transactions such as accessing an account, obtaining an account balance, transferring funds, processing bill payments, opening an account, applying for or obtaining a loan or purchasing other authorized products or services. The other bank regulatory agencies do not appear to have adopted a regulation similar to the OTS regulation. Nonetheless, it is recommended that they be notified by entities regulated by them before any interactive Web site becomes operational.

 

Specific products offered online may or may not require specific approval.  Typically, an online product such as electronic bill presentment or mortgage lending, which exercises a power the bank or thrift already has, does not need separate approval. New products might. In each case, the institution should review the regulations of its applicable bank regulator to determine if an online product is pre-approved or needs separate approval.

 

FDIC Advertising Regulations . The Federal Deposit Insurance Corporation regulations require an insured bank to include the "official advertising statement" (prescribed in 12 C.F.R. |328.3(b)) in all of its advertisements, with certain exceptions.

 

In a proposed regulation published on Feb. 11, 1997, the FDIC expressed its view that every insured depository institution's online system "home page" is an "advertisement" for the purpose of displaying the "official advertising statement" required by 12 C.F.R. |328.3, 62 Fed. Reg. 6145 (1997) (to be codified at 12 C.F.R. Part. 328) (proposed Feb. 11, 1997).

 

Although this proposal has yet to be adopted, it reflects the FDIC's view that financial institutions subject to |328.3 of the FDIC regulations (12 C.F.R. Part 300) should display the official advertising statement unless the proposed online transaction or activity falls within one of the enumerated exceptions set forth at 12 C.F.R. |328.3(c). Advertisements relating to the making of loans by the bank or loan services are excepted from the required official advertising statement. 12 C.F.R. |328.3(c)(12).

 

Online advertisement of uninsured products by a bank, such as insurance or stock brokerage services, should specifically state that those products are not a deposit, not FDIC insured, not guaranteed by the bank and present risks as to loss of principal. Joint Final Rule, 65 Fed. Reg. 75822 (Dec. 4, 2000, effective April 1, 2001).

 

Other Online Disclosures . Any bank offering online checking services should review all other deposit-gathering and electronic funds transfer disclosure requirements and determine if these disclosures are going to be made online or mailed.

 

Offering online bill paying only to existing customers means that they should have already received most required disclosures, although those disclosures themselves should be revised to reflect the online products, rules and fees.  Special attention should be paid to (1) the Federal Truth in Savings disclosures; (2) the Electronic Funds Transfer Act; and (3) federal and state funds availability disclosure requirements. (See N.J.S.A. 17-16L-1 et seq.)

 

Further, a national bank that shares a co-branded Web site or other electronic space with a bank subsidiary or a third party is required to make disclosures enabling its customers to distinguish its products and services from those of the subsidiary or third party.
 
Online Mortgage Lending

 

Web Site Loan Applications . Many banks are now posting their first lien home mortgage loan application, and other loan applications, on their Web sites.  Consumers can fill the application out online and e-mail it in. Thereafter, as before, many of these banks are giving all required disclosures via hard copy, and the closing is in person. Indeed, it is difficult to imagine an electronic purchase money home mortgage closing until county clerks are prepared to honor electronic signatures when recording deeds and mortgages.
                                                                     
Equal Housing Lender Logotype and Poster . Internet or other systems in which a credit application can be made online may be considered "places of business" under rules of the U. S. Department of Housing and Urban Development prescribing lobby notices. Thus, institutions may want to consider including the "lobby notice" on their interactive Web site, particularly in the case of systems that accept loan applications.

 

The FDIC's fair housing regulations require each bank to display all advertisements, except those for savings products, a facsimile of either the Equal Housing Lender poster or the Equal Housing Opportunity poster.

 

To minimize compliance risks, banks should include the Equal Housing Lender logotype on each page of their Web site. Because not all visitors to a Web site will enter through the bank's "home page," placing the Equal Housing Lender logotype on each page will ensure that the logotype is visible to all who access a bank's Web site.

 

Interim Rule Governing Electronic Disclosures . On March 30, 2001, the Federal Reserve Board adopted an interim final rule establishing uniform standards for the electronic disclosures required by the Truth in Lending Act, 15 U.S.C. |1601 et seq., and Regulation Z, 12 C.F.R. Part 226. This interim rule, which can be found at 66 Fed. Reg. 17329 (March 30, 2001), became effective upon adoption, but compliance is optional until Oct. 1, 2001.

 

The interim rule is a result of a March 1998 proposed rule (63 Fed. Reg. 14548) and a September 1999 proposed rule (64 Fed. Reg. 49722) on this same subject, together with the enactment of the electronic signature laws. Both the 1998 and 1999 proposals attempted to address how lenders might satisfy their disclosure responsibilities electronically under the Truth in Lending Act and Regulation Z. Those disclosure responsibilities include timing requirements and requirements that disclosures be "clear and conspicuous," "in writing" and "in a form that the consumer may keep."

 

The interim rule creates a new Subpart F in Regulation Z (|226.36) establishing rules that apply with respect to all "electronic disclosures" provided under Regulation Z. "Electronic disclosures" are defined in Subpart F as an electronic message delivered between a creditor and a consumer in a format that allows visual text to be displayed on equipment such as a personal computer monitor. 12 C.F.R. | 226.36(a).

 

Subpart F provides that, consistent with the electronic signature laws, disclosures related to a transaction may only be given electronically if the (1) creditor has disclosed the requirements for accessing and retaining the disclosures in that format, (2) consumer has demonstrated the ability to access the information electronically and affirmatively consents to electronic delivery and (3) disclosures are provided in accordance with certain requirements. See Official Staff Commentary to Regulation Z, para. 36(b)2.

 

With respect to the timing requirements in Regulation Z, the commentary indicates that electronic disclosures that are provided periodically are made (1) when transmitted by e-mail or (2) when posted on an Internet Web site and the creditor sends a notice alerting the consumer that the disclosures have been posted. This is so regardless whether the consumer reads or receives the disclosure. (The alert notice must identify the account mentioned and the address of the other location where the disclosure is available.) 

                                                                 

The commentary also indicates that the requirement in Regulation Z that disclosures be provided before the consumer becomes obligated is met under the interim rule if the disclosure is accessed via a non-bypassable link or if it automatically appears on the screen.

 

The requirement that disclosures be in a form the consumer may keep is met under the interim rule if the creditor sends them to the consumer's designated e-mail address or makes them available for at least 90 days at another location, such as the creditor's Internet Web site.

 

At or about the same time that it adopted the interim rule, the Federal Reserve Board also adopted similar interim final rules amending Regulations B (Equal Credit Opportunity), 66 Fed. Reg. 17779 (April 4, 2001), E (Electronic Funds Transfer), 66 Fed. Reg. 17786 (April 4, 2001), M (Consumer Leasing), 66 Fed. Reg. 17322 (March 30, 2001) and DD (Truth in Savings), 66 Fed. Reg. 17795 (April 4, 2001).

 

Other Disclosures . All consumer disclosure requirements relating to mortgage lending should be reviewed and a determination made whether to post these online or mail them as hard copy. In some cases, where an application is taken online, online disclosure is required. Particular attention should be paid to the Truth in Lending Act and Federal Reserve Board Regulation Z, particularly as related to open-end credit, 12 C.F.R. |226.5 (a)(5) and 5b(d) (referencing Subpart F), closed-end credit, 12 C.F.R. |226.17 (a)(3) and (b), and variable-rate mortgage transactions, 12 C.F.R. |226.19 (b). See Commentary, para. 19 (b)2v.

 

We conclude from our review of these regulations that disclosures must be provided online where online applications are taken for closed and variable rate loans, and disclosures and the brochure required by Regulation Z must be provided online where online applications are taken for home equity loans.

 

Ordering a consumer report from a consumer reporting agency is an important part of processing a loan. Does the Fair Credit Reporting Act, 15 U.S.C. |1681 et seq., as administered by the Federal Trade Commission, permit electronic authorization by a consumer to order such a report, or must the authorization be in "writing?"

 

As reported in CCH's "Consumer Credit Guide" of June 26, 2001, the FTC has issued an informal staff opinion permitting electronic consent by a consumer when ordering a consumer report as long as the electronic report authorization is in a form that can be retained and retrieved in perceivable form, as specified in the electronic signature laws.

 

Disclosures, under the Real Estate Settlement Procedures Act (12 U.S.C. |2601 et seq.), |32 of Regulation Z (12 C.F.R. |226.32), the Equal Credit Opportunity Act (15 U.S.C. |1691 et seq.) and HUD's good-faith estimate requirements (24 C.F.R. |3500.7 (a)) must also be reviewed in the context of electronic mortgage applications.

 

Finally, the lender should reconsider the method of delivery of the special information booklet (as required by RESPA and Regulation X) to a person from whom the lender receives, or for whom the lender prepares, an application for a federally related mortgage loan. The lender should also consider whether to give the servicing disclosure statement and receive the applicant acknowledgement thereof online. See 24 C.F.R. |3500.21(b)(1)-(3).                       

                                         

Online banking and its predecessor, p.c. banking, have been talked about for years. Substantial cost savings at the expense of the U.S. Postal Service are available to banks and customers with online bill payment. And loan applications may now also be processed up to the point of closing online.

 

Younger consumers and many businesses demand online products and use Web sites to comparison shop before making important financial decisions. Business customers are also looking to online invoicing and increasingly expect their banks to offer other online financial products as well. Regulatory encouragement combined with recently enacted laws are making online banking a reality.