Embrace End-to-End E-Lending

Electronic lending, from application to funding, will be a requirement to remain competitive.

February 1, 2011

Many credit unions have been doing electronic commerce in some fashion for years. Online banking and bill pay are services you’ve likely offered members for a long time.

Electronic lending, on the other hand, isn’t something credit unions have been as willing to offer. As a vice president of lending at a large credit union has told me for several years, “We’ve been just this close to making loans over the internet for the last five years.”

Advances in technology and confidence in the internet channel are making lending on the internet—from taking applications through funding—not only a possibility, but a reality. And as members demand it, electronic lending will be a requirement to remain competitive.

Congress passed the Electronic Signatures in Global and National Commerce Act (ESIGN) in June 2000. This act did a number of things:

  • Provided that a contract or signature “may not be denied legal effect, validity, or enforceability solely because it is in electronic form”;
  • Provided that a consumer could not be required to enter into a contract in electronic form;
  • Added safeguards to ensure consumers could receive and review electronic documents and disclosures;
  • Required regulators to create rules for the implementation of ESIGN in consumer regulations, such as the Electronic Funds Transfer Act (Regulation E) and Truth-in-Lending Act (Reg Z).

These provisions are well established and used frequently in account opening and bill payment services. However, there has been a much slower adoption for lending transactions.

That’s due to several reasons:

  • A wait-and-see attitude regarding courts’ interpretation and enforcement of the ESIGN and similar state laws;
  • A general concern that lending transactions require a “face-to-face” approach that can’t be done without either a visit or at least a telephone call;
  • Concerns that fraud will be greater with electronic loan transactions; and
  • Concerns over technical requirements for “signatures.”

Subscribe to Credit Union MagazineWhile many of these issues have been addressed by experiences with other electronic transactions, concerns about the technical aspects of “signatures” linger.

The two types of “signatures” seen in the marketplace are:

1. Electronic signatures. Documents are signed with a stylus on a signature pad. It’s a digitized image of a hand-written signature that’s most likely to be used in a face-to-face situation.

2. Digital signatures. Documents are signed using a coded message called a digital certificate, which is issued to the signer once identity is established. This can’t be tampered with once the digital signature is applied to a document.

Generally, electronic lending will use digital signatures. Credit unions will need to apply appropriate due diligence to find the right digital signature provider.

It’s important to find a provider able to configure transactions to an individual credit union’s needs. These needs include strong methods for authenticating member identities, a sequence of presentation of documents and disclosures that reduce fraud possibilities, and a strong explanation of process for members.

Why electronic lending?

We’re in an unusual and, hopefully, fleeting period of time wherein lenders can require members to make loans in ways most friendly to the credit union’s interests. This situation won’t last forever.

When borrowers again have options, they’ll be looking for easy access and convenience.

We have trained our members to use our online banking and bill payment features. They will demand the ability to obtain loans without face-to-face visits at any point in the transaction. This is especially true for the younger generation of members who are entering their prime borrowing years.

If you’re not ready to complete loans over the internet using digital signatures, you’ll lose those members. Don’t believe me? Send me a text and I’ll be glad to tweet you back.

BILL KLEWIN is director of regulatory compliance at CUNA Mutual Group, Madison, Wis.