CUNA Regulatory Comment Call


April 10, 2001

Fed Interim Rule Allows Regulation DD Electronic Disclosures

(MAJOR RULE)

EXECUTIVE SUMMARY

Comments on the interim final rules are due by June 1, 2001. Please submit your comments to CUNA by May 24, 2001. Please feel free to fax your responses to CUNA at 202-371-8240; e-mail them to Associate General Counsel Mary Dunn at mdunn@cuna.com or to Assistant General Counsel Jeffrey Bloch at jbloch@cuna.com; or mail them to Mary or Jeff in c/o CUNA’s Regulatory Advocacy Department, 805 15th Street, NW, Suite 300, Washington, DC 20005. You may also contact us if you would like a copy of the interim rules or you may access the rules on the Internet at the following address:
http://www.federalreserve.gov/boarddocs/press/boardacts/2001/20010329/attachment4.pdf

BACKGROUND

TISA requires financial institutions to disclose yields, fees, and other terms concerning deposit accounts to consumers at account opening, upon request, when changes in terms occur, and in periodic statements. There are also rules about advertising deposit accounts. Regulation DD implements TISA, which contains official staff commentary that interprets the regulation and provides guidance in applying the regulation to specific transactions. TISA and Regulation DD require that a number of disclosures be provided in writing. Credit unions are covered under substantially similar rules that are issued by the NCUA Board.

In August 1999, the Fed issued proposed rules to permit financial institutions, creditors, lessors, and others to use electronic communication to provide federally mandated disclosures to consumers. Click here for CUNA’s comment letter, which generally supported the use of electronic disclosures while offering specific suggestions for improvement.

In October 2000, the E-Sign Act became effective and allows electronic documents and signatures to have the same validity as paper documents and handwritten signatures. There are also special rules for the use of electronic disclosures in consumer transactions. Such disclosures may be provided in electronic form only if the consumer specifically consents after receiving certain information.

The E-Sign Act currently permits the use of electronic disclosures and does not require implementing rules, as long as the appropriate consent is obtained. This generally requires that the consumers be informed as to the hardware and software requirements for accessing the information. Consumers must also give the consent electronically and must “reasonably demonstrate” that they are able to obtain the information electronically. The term “reasonably demonstrate” is currently the subject of significant controversy within the financial services industry.

The Fed’s interim rules are designed to establish uniform requirements for the timing and delivery of electronic disclosures. They include most of the provisions that were included in the 1999 proposed and interim rules to the extent that they were not affected by the E- Sign Act. The requirements are generally consistent among the five interim final rules that have now been issued.

DESCRIPTION OF THE INTERIM FINAL RULE AND CHANGES TO THE OFFICIAL STAFF COMMENTARY

I. Account Disclosures

Financial institutions must generally provide account-opening disclosures to consumers before an account is opened or a service is provided. This may be delayed if the consumer is not present when the account is opened or the service is provided. However, this delay does not apply when the account is opened by way of electronic communications.

Financial institutions must currently provide disclosures to a consumer upon request. If this request is made by electronic communications, the disclosures must be mailed or delivered within a reasonable time. Ten days is considered a reasonable time.

To provide these disclosures electronically, the financial institution must send the disclosures to the consumer’s e-mail address, or send a notice by e-mail that directs him or her to the location of these disclosures, such as an Internet website.

II. Periodic Statement Disclosures

In 1999, the Fed issued interim rules allowing for the electronic delivery of periodic statements. Those rules are now withdrawn. Periodic statements may now be delivered electronically to the extent consistent with the E-Sign Act and the guidance contained in these new interim rules.

III. Advertising

If an advertisement in electronic form refers to certain terms, such as bonus or annual percentage yield (APY), there must be a reference to the location that contains the required, additional information. This may be in the form of an electronic link.

Financial institutions are currently allowed to state an interest rate in addition to the APY, as long as that rate is stated in conjunction with, but not more conspicuously than, the APY. For electronic advertisements, the interim rule requires that the consumer be able to review these rates simultaneously. A link to the APY is not sufficient.

Advertisements contained in certain media, such as television, radio, or outdoor billboards, are exempted from certain TISA requirements. These exemptions do not apply to other electronic communications, such as advertisements on the Internet, which do not have the same space and time constraints that originally justified these exemptions.

IV. General Provisions Regarding Electronic Communications

(All five interim rules regarding electronic disclosures contain similar provisions.)

Definition

The interim final rules provide for the delivery of disclosures by means of “electronic communication.” This is limited to information that can be displayed as visual text. This would not include other means, such as audio and video voice response systems. Alternative means may be provided to visually-impaired consumers, as long as visual text is also used.

General Rule

Other than any requirements that disclosures be in paper form, the interim rules do not affect any other substantive provision of TISA or Regulation DD. The current format, timing, and retainability rules still apply, as well as the “clear and conspicuous” standard for disclosures.

Clear and Conspicuous Format

Electronic disclosures must be in a format that is “clear and conspicuous.” The E-Sign Act also requires the following:

The disclosures do not have to be provided separately from other information. However, advertisements should not be integrated into the text to the extent that the clear and conspicuous standard would be violated. Navigational tools that direct the consumer to related information are also acceptable to the extent that they do not violate the clear and conspicuous standard.

Timing

Electronic disclosures must comply with the existing timing requirements under TISA and Regulation DD. E-mail disclosures are timely when sent by the required time. Disclosures posted on an Internet website are timely if, by the required time, they are posted on the website and a notice is sent to the consumer alerting him or her that the disclosures have been posted.

Certain disclosures must be provided before the consumer opens an account or a service is provided. The financial institution does not have to confirm that the consumer read the disclosures. When an account is opened on-line, the disclosures may be accessible by an electronic link, as long as the consumer is not able to bypass this link. Another alternative is for the disclosures to appear on the screen automatically.

Many of the disclosures provided under TISA and Regulation DD must be in a form that the consumer may retain. Electronic disclosures are subject to this same requirement and must generally be provided in a form that may be printed or stored electronically. To ensure that consumers may retain and access the information, these disclosures must either be sent to the consumer’s designated e-mail address or must be available on the financial institution’s Internet website.

Consumers must have the ability to receive and retain the information when they use equipment that is controlled by the financial institution, such as an automated loan machine or a computer terminal located in the lobby. This requirement may be satisfied if the disclosures are sent to the consumer’s e-mail address, available on the financial institution’s website, or printed automatically from the financial institution’s equipment.

Consent

Under the E-Sign Act, consumers must give consent before they receive electronic disclosures “relating to a transaction.” Disclosures in connection with advertisements and disclosures that are provided upon request are not considered to be related to a transaction and, therefore, prior consent does not have to be given. However, the required disclosures must ultimately be provided to the consumer.

Address or Location to Receive Electronic Communication

Financial institutions may deliver the electronic disclosures to the consumer’s e-mail address. The disclosures may also be made available at another location, such as an Internet website, as long as the consumer receives notices that the disclosures have been posted. This notice may be sent by e-mail or regular mail and must identify the account and the website address or other location where the disclosures are available. The disclosures must be made available for at least 90 days. The requirements for this notice do not apply to disclosures in connection with advertisements. The 90-day requirement does not apply to disclosures that are requested by the consumer.

The consumer’s e-mail address is defined as one that is not limited to receiving communications solely from the financial institution. This would, for example, exclude home-banking programs that allow communications by means of a computer and modem. Under these circumstances, the financial institution must send a separate notice, either by e-mail or regular mail.

Although the notice must identify the account, this does not require the account number. If the notice refers to one account, the notice may, for example, just refer to “your credit card account.” If more than one account is involved, the notice could differentiate the accounts based on the card program or by use of a shortened account number.

Although the disclosures must be made available for at least 90 days, financial institutions have discretion to determine if they should be available at the same location for the entire period.

Redelivery

Financial institutions do not have to verify delivery of electronic disclosures. If a disclosure is returned undelivered, the financial institution must then attempt redelivery, based on the address information that is on file. This may be delivery to a different e-mail address or to the postal address that is on file. Sending the notice electronically to the same address would not be sufficient if the financial institution has a different address on file.

These redelivery requirements do not apply when a disclosure is delivered but cannot be read by the consumer because of technical problems. Financial institutions will be considered to be in compliance with the timing requirements if they send the initial notice in a timely manner, even if it is later returned as undeliverable.

V. Miscellaneous

QUESTIONS TO CONSIDER REGARDING THE FED’S
PROPOSAL TO ALLOW ELECTRONIC DISCLOSURES
(The Fed is Specifically Interested in Receiving Comments on Most of the Issues Raised by the Following Questions.)

Eric Richard • General Counsel • (202) 508-6742 • erichard@cuna.com
Mary Mitchell Dunn • SVP & Associate General Counsel • (202) 508-6736 • mdunn@cuna.com
Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 • jbloch@cuna.com
Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 • corr@cuna.com