CUNA Comment Letter

Docket No. R-1043, Interim Final Rule Regarding the Electronic Delivery of the Disclosures Required Under Regulation Z


June 1, 2001

Ms. Jennifer J. Johnson
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, NW
Washington, DC 20551

Re: Docket No. R-1043, Interim Final Rule Regarding the Electronic Delivery of the Disclosures Required Under Regulation Z

Dear Ms. Johnson:

The Credit Union National Association (CUNA) appreciates the opportunity to comment on the interim final rule amending Regulation Z, which implements the Truth in Lending Act (TILA). The rule, which appeared in the Federal Register on Mach 30, 2001, would provide guidance to creditors that use electronic communications to provide the disclosures required by Regulation Z if the consumer agrees to such delivery. CUNA represents more than 90 percent of our nation’s 10,500 state and federal credit unions. This letter reflects the opinions of those credit unions and the opinions of CUNA's Consumer Protection Subcommittee, chaired by Kris Mecham, CEO of Deseret First Credit Union, Salt Lake City, Utah.

Summary of CUNA’s Position


In March 1998, the Federal Reserve Board (Board) issued a proposed rule to permit creditors to use electronic communications to provide the disclosures required under Regulation Z. In our comment letter to the Board, CUNA supported the proposal that would allow creditors to provide the required disclosures electronically. Because credit unions are owned and operated by their members, they want to provide the most efficient services for their members and providing disclosures electronically would help credit unions reach this goal.

In September 1999, the Board published a revised proposed rule to address the comments received in response to the 1998 proposal. CUNA again supported the proposal and offered several suggestions for improvement.

After the publication of the 1999 proposed rule, the Electronic Signatures in Global and National Commerce Act (E-Sign Act) was signed by President Clinton and became effective as of October 1, 2000. Under the E-Sign Act, electronic documents and signatures generally have the same validity as paper documents and handwritten signatures, as long as the consumer consents after receiving certain information.

The E-Sign Act also contains requirements for the use of electronic disclosures in consumer transactions. Implementing regulations are not required and financial institutions are currently permitted to use electronic disclosures. The Board and other government agencies are permitted, within limits, to interpret the E-Sign Act consumer consent provisions but are restricted from imposing additional requirements. The interim final rule, which was effective as of March 30, 2001, is intended to implement the E-Sign Act by providing uniform standards on the timing and delivery of the electronic disclosures.

The Definition of "Electronic Address" Should be More Flexible

Section 226.36(d) of the interim final rule requires that the electronic disclosures must be sent to the consumer’s electronic address or made available at another location, such as an Internet website. If the disclosures are made available at another location, the creditor must send a notice to the consumer’s electronic address to alert him or her that the disclosures are available and to indicate how they may be accessed.

The Official Staff Commentary defines an "electronic address" as "an e-mail address that is not limited to receiving communications transmitted solely by the creditor." This would appear to prohibit communications through mechanisms such as home banking programs.

We believe the interim final rule and the current narrow definition of "electronic address" will be burdensome for credit unions that had intended to or would consider using home banking programs or other Intranet systems to communicate with consumers and would prevent members from receiving the benefits of these technologies. This definition would also contradict both the language and intent of the E-Sign Act. Section 104 of the E-Sign Act generally prohibits a regulatory agency from issuing a rule unless it concludes that the rule would not impose unreasonable costs on the acceptance and use of electronic records. Section 104 also prohibits rules that accord greater legal status to a specific technology or technical specification to the detriment of others, such as home banking programs or other Intranet systems.

The interim final rule and the definition of "electronic address" will pose impediments for potentially effective means of communications between credit unions and their members. Credit unions are organized to serve members within distinct fields of membership (FOMs). These FOMs include members who are employed by specific employers, belong to specific organizations, or who live in defined communities. Under this structure, the use of home banking programs or other Intranet websites can be a very effective means of communication between credit unions and their members.

For example, a home banking system with electronic message capability would be a very effective means for credit unions that serve military men and women who are away from home on long-term assignments. Although computers are often provided on ships and other military installations, or at public libraries nearby, these members may not have access to the "personal" e-mail address that is contemplated under the rule and that is often used at home. Also, for security reasons, these members may be prohibited from using non-secured personal e-mail addresses as a means to access account data. Many members may not even have personal e-mail addresses but may still want to take the advantage of the convenience of electronic disclosures through their home banking programs.

Members who work for a non-military employer may also find it more convenient to access account information from their employer’s Intranet website, assuming that the employer permits such access. Many members may actually prefer not to disclose or use their personal e-mail address in connection with their financial transactions and may want to use home banking programs or Intranet websites in which they do not have to disclose this information. Other members may actually use their home banking programs more frequently than they access their personal e-mail. This may be especially true for members with multiple e-mail accounts. Home banking systems also provide financial institutions with the opportunity to determine if and when the consumer has opened the message containing the disclosure information.

The ability to send notices through a home banking or other Intranet system will also help ensure accurate delivery of the disclosures. Individuals often change their personal e-mail addresses, increasing the likelihood of disclosures being delivered to an inaccurate address. This will make it more difficult for creditors to monitor and update e-mail address lists. Unlike postal mail, there is no widely used mechanism to forward e-mail that is delivered to an old or inaccurate address. This problem would be minimized if communications could be delivered through these alternative means.

The Board’s current rules provide such flexibility. For example, 12 CFR § 226.5 of the TILA regulations permits periodic statements to be "mailed or delivered." The term "mail or deliver" is also referred to in 12 CFR § 230.6 of the Truth in Savings Act regulations.

Credit unions have appreciated and consumers have benefited from this ability to allow for delivery through means other than the postal system. For example, credit unions that serve airline employees have designated certain locations in airports where employees may "pick-up" their statements. These consumers appreciate this convenient and efficient means for receiving their statements. These employees would also likely prefer not to use personal e-mail addresses that may be inaccessible when they are traveling. Credit unions that serve other types of employer groups also currently have the latitude to provide statements at certain locations at the place of business. This flexibility should continue with the use of electronic disclosures by offering other means for communications besides personal e-mail addresses that are used primarily in the home.

We are also concerned because the 1999 proposed rule did not define "electronic address." Certain credit unions have since developed home banking systems with internal electronic message capabilities believing that this would be acceptable in the absence of a specific definition of "electronic address." It would be a tremendous burden if these credit unions had to overhaul or abandon their current systems.

Based on these concerns raised by credit unions, CUNA urges the Board to clarify that it would be permissible to use both Intranet and Internet websites as a means for making disclosures available to consumers and to define "electronic address" in a more flexible manner to include communications through alternative means, such as home banking programs. This should help to relieve the burden for all small financial institutions that may find such systems more efficient and would be especially helpful for credit unions and their unique fields of membership. We also believe credit union members may find such alternative systems more convenient and efficient and should not be a problem for any member, provided that he or she understands and provides the required consent.

To address any concerns regarding the receipt of the disclosure information under these alternative systems, the Board could require lenders to use other means to deliver information that is not accessed within a certain period of time after it is made available. For example, lenders could be required to send the disclosures, or notice of availability of the disclosures, to a consumer’s postal address or an alternative e-mail address if the information is not accessed by the consumer within sixty days after it was made available. There are home banking systems designed to provide the financial institution with the ability to monitor if and when consumers have accessed this information.

More Guidance is Needed Regarding Consumer Consent

The E-Sign Act requires that consumers provide consent to receiving disclosures electronically. The consent, or confirmation of consent, must be provided through electronic means and in a manner that "reasonably demonstrates" that the consumer can access the disclosure information.

We believe the entire financial services industry needs more guidance on these consumer consent provisions, specifically guidance regarding the meaning of the term "reasonably demonstrates." This need for guidance was evident during a public workshop hosted by the Federal Trade Commission on April 3, 2001 for the purpose of examining the E-Sign Act consumer consent provisions. The participants at this workshop comprised of representatives from the financial services industry, government, consumer advocate groups, academia, and other interested parties.

During the workshop, the participants offered several paradigms as to what course of action would satisfy the "reasonably demonstrates" criteria. However, there was very little agreement as to which one would satisfy the various constituencies that were represented at the workshop. This indicates the need for regulatory guidance. Otherwise, these issues will likely be resolved through litigation, a scenario fraught with uncertainty that holds little appeal for credit unions.

We believe there is one example the Board should adopt that would satisfy the "reasonably demonstrates" criteria. At this time, the Internet provides the ideal means for satisfying the consumer consent requirements of the E-Sign Act. If a consumer can access the Internet and click an icon indicating consent to receiving disclosures electronically on the website, we believe that the consumer has obviously provided a means that "reasonably demonstrates" that he or she can access the disclosure information. The fact that the consumer was able to access the Internet website should be enough to meet the E-Sign Act consumer consent provisions.

The interim rule generally requires notification from the creditor by some means, such as e-mail, when the disclosures are available on the Internet, although this is not required under the E-Sign Act. If the consumer provides the creditor with an e-mail address, this should be sufficient to demonstrate that he or she can access the e-mail notification. We encourage the Board to specifically include the consent on the Internet in this manner as an example of compliance with the Board’s rules regarding electronic disclosures.

Similarly, creditors may want to attach the disclosures to an e-mail in another format, such as Adobe Acrobat, Microsoft Word, or WordPerfect. If the consumer consents to receiving disclosures in this manner and affirmatively indicates that he or she has access to such formats, we believe this is sufficient to "reasonably demonstrate" that the consumer can access the information in this manner.

We see no downside risks with regard to the examples described above because if there is any problem with accessing the disclosures, the consumer may always withdraw the consent and request the disclosures in paper form, as permitted under the E-Sign Act. Credit unions would actually appreciate more guidance from the Board regarding the E-Sign Act provisions regarding the withdrawal of consent and the ability to request paper copies.

The Need for an Example of "Material Risk"

The E-Sign Act and the interim final rule require creditors to inform consumers about changes in hardware and software requirements if there is a "material risk" that the consumer will no longer be able to access and retain the information. The Board requested comments on whether more guidance is needed regarding the term "material risk."

We do not believe that more guidance is needed. The term as used in this context appears to be fairly straightforward and creditors should know whether any change in their systems may present such a "material risk." Although no guidance is necessary, we would appreciate any examples that the Board may be aware in which it may not be straightforward as to whether there is such a "material risk."

Eliminating Electronic Disclosures from the E-Sign Act Consumer Consent Requirements

The E-Sign Act allows the Board to eliminate disclosures from the consumer consent requirements if necessary to eliminate a substantial burden on electronic commerce and if it will not result in an increased risk of harm to consumers. The Board has requested comments on whether this exemption authority should be exercised and, if so, to which disclosures the exemption should apply.

We are not aware of any disclosures that should currently be subject to this exemption authority. However, we encourage the Board to examine this issue on an annual basis in the future to determine if, and to what extent, this exemption authority should be used.

The Board also requested comments on whether other regulatory or legislative changes are needed to take into account online banking or lending or would otherwise facilitate electronic delivery of financial services. Again, we do not believe any changes are necessary at this time but changes may be warranted in the future. For example, the Board at some point could examine the need for the periodic statements that are required under Regulations Z and DD when considering that online banking products are capable of providing up-to-date account information. This may be an issue to examine in the future as technology evolves.

General Comment

The Board has requested comments as to whether the interim final rule is clearly written and easily organized. Credit unions generally appreciate the Board’s approach of including commentary and model forms, which provide the necessary guidance to implement the rules.

We have one suggestion for improvement that would apply to all of the Board’s rules. By necessity, many sections of the rules refer to other sections. Whenever possible, it would be helpful if a section containing such a reference could also include a brief description of the other section that is referenced. The rules would be easier to read if these descriptions were included.

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Thank you for the opportunity to comment on the proposed amendments to Regulation Z. If you or other Board staff have questions about our comments, please give Associate General Counsel Mary Dunn or me a call at (202) 682 - 4200.

Jeffrey Bloch
Assistant General Counsel