CUNA Comment Letter

The Uniform Commercial Code Exception to the Electronic Signatures in Global and National Commerce Act (E-SIGN Act)

February 24, 2003

Ms. Josephine Scarlett
Senior Attorney
National Telecommunications and Information Administration
14th Street and Constitution Avenue, N.W.
Washington, DC 20230

Dear Ms. Scarlett:

Credit Union National Association ("CUNA") appreciates the opportunity to comment regarding whether the Uniform Commercial Code (UCC) exceptions, in particular the check exception to the E-SIGN Act, should continue. CUNA represents more than 90 percent of the nation’s 10,000 federal and state chartered credit unions. This letter reflects the views of CUNA’s Payment Systems Subcommittee, whose chair is Terry West of VyStar Credit Union, Jacksonville, Florida.

The E-SIGN Act makes electronic records and signatures the legal equivalent of their written counterparts. As a result, it makes electronic records, signatures and contracts legally valid. One exception is that the E-SIGN Act does not apply to most sections of the UCC, including Articles 3 and 4. A study of all the exceptions is required by the E-SIGN Act, which also requires the Secretary of the Department of Commerce to issue a report on whether these exceptions to the E-SIGN Act are needed to protect consumers. In preparation for this report, which is due on June 30, 2003, CUNA provides these comments regarding the UCC exception to the E-SIGN Act.

Summary of CUNA’s Position

UCC Check Law Covers Paper Checks Only

Section 103(a)(3) of the E-SIGN Act excludes coverage of most sections of the Uniform Commercial Code, including Articles 3 and 4. This part of the UCC establishes the basic law for checks, especially: 1) the requirements for the creation of negotiable instruments, including checks; 2) the exchange of checks among the drawer (person writing the check), the payee of the check, and other third party transferees; and 3) the collection and payment of checks by financial institutions, including credit unions. Articles 3 and 4 apply to all parties that are exchanging a check or otherwise have an interest in the check. One of the unique features of Articles 3 and 4 is that it is not necessary for the parties interested in the check to have any other prior agreement between themselves establishing their respective rights and obligations associated with the check or share draft (share draft is the term for checks drawn on a credit union). This means that a check or share draft can be exchanged between two persons that have no prior course of dealing or arrangement for payment.

Under current law, Articles 3 and 4 of the UCC do not allow for checks or other negotiable instruments to be created or transferred in electronic form. In order to qualify as a negotiable instrument under Articles 3 and 4, the check must be a "writing" that is "signed" by the drawer of the check. As a result of these requirements, it is not possible to create a check, using an electronic record and an electronic signature, which would be a negotiable instrument, governed under Articles 3 and 4.

The E-SIGN Act expressly exempts Articles 3 and 4 from its application. Therefore, the E-SIGN Act does not override Articles 3 and 4 to make electronic negotiable instruments the equivalent of their paper counterparts. If the exception were removed and the E-SIGN Act was applied to Articles 3 and 4 of the UCC, then that would allow for the recognition of electronic records and signatures to create an electronic check that could be exchanged and collected through an electronic process.

CUNA believes that the treatment of electronic negotiable instruments should be established in federal law, preferably in measures similar to the check truncation draft law that was sponsored in the 107th Congress. Our understanding is that check truncation bills also will be sponsored in the 108th Congress. Those bills, if passed, would allow credit unions to use the latest check processing technologies to electronically send check image information to financial institutions or to send "substitute" paper checks to those financial institutions that do not want to process electronic checks. Passage of this check truncation legislation would allow credit unions to take advantage of new technologies, but would not penalize those institutions that do not participate in electronic exchange.

CUNA believes that the Department of Commerce and National Telecommunications and Information Administration should monitor the progress of the check truncation bills, before Congress attempts to amend the E-SIGN Act. If passage of this legislation is not enough to encourage the full usage of electronic negotiable instruments or if check truncation legislation is not passed, then Congress should consider amending the E-SIGN Act to remove UCC Articles 3 and 4 from its list of exceptions. However, if Congress amends the E-SIGN Act, then Congress should do so only after comprehensive hearings that solicit the views of consumer groups as well as financial institution representatives and other stakeholders.

If the E-SIGN Act were amended, there would still be protection for consumers. For example, if the exceptions were removed and electronic negotiable instruments could be created under the Articles 3 and 4 of the UCC, the consumer protections that apply under the UCC for paper checks would also apply to these electronic instruments. Furthermore, consumers would receive sufficient protection under the Electronic Fund Transfer Act (15 U.S.C. § 1693 et. seq.) and Regulation E (12 C.F.R. Part 205), because they both apply to any transfer of funds that is initiated through an electronic terminal, telephone, computer or magnetic tape for the purpose of ordering, instructing, or authorizing a financial institution to debit or credit a consumer account. 12 C.F.R. § 205.3(b). Although this regulation expressly excludes paper checks from coverage under the Electronic Funds Transfer Act and Regulation E, this exclusion does not extend to electronic checks.

CUNA commends the Department of Commerce and the National Telecommunications and Information Administration for seeking public comment about the E-SIGN Act exceptions. If you have any questions about these comments, please contact CUNA's Senior Vice President and Associate General Counsel Mary Dunn or me at 1-800-356-9655.


Michelle Q. Profit
Assistant General Counsel