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U.S. House of Representatives,
Subcommittee on Domestic Monetary Policy, Technology, and Economic Growth,
Committee on Financial Services,
Washington, DC.

    The subcommittee met, pursuant to call, at 10:15 a.m., in room 2128, Rayburn House Office Building, Hon. Peter T. King, [chairman of the subcommittee], presiding.

    Present: Chairman King; Representatives Oxley, Grucci, Hart, Capito, C. Maloney of New York, J. Maloney of Connecticut, Hooley, Hinojosa, and Inslee.

    Chairman KING. The hearing will come to order. Today, the Subcommittee on Domestic Monetary Policy, Technology, and Economic Growth begins its first hearing on the use and application of technology in financial services. Innovations in the electronic world clearly have had a profound impact on the way consumers interact with financial professionals. I suspect that technology will continue to drive our marketplace in ways that we have never imagined.

    The subcommittee is committed to facilitating such growth and efficiency on behalf of financial consumers and the institutions that serve them. For the purpose of today's hearing, the subcommittee will examine the Electronic Signatures in Global and National Commerce Act, or more commonly, ESIGN. This legislation gave legal recognition and effect to electronic signatures, contracts and records.
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    We are revisiting the legislation in an effort to determine if its real-world implementation is providing the legal certainty and protection envisioned by Congress. Specifically, Section 105(b) of the legislation directs the Department of Commerce and the FTC to submit a report to Congress evaluating the benefits and burdens of a particular consumer consent provision contained in the Act. This consent provision speaks to the understanding a consumer demonstrates within the context of a business-to-consumer transaction. This subcommittee looks forward to the findings and opinions of the panelists concerning this study.

    At this time I would like to commend the FTC and the Department of Commerce for their combined efforts to complete the mandated study before its June 30th statutory deadline. This subcommittee appreciates your expediting the process to allow for this hearing and we look forward to your testimony.

    In closing, let me just say that our examination of this legislation is not a referendum on consumer protections and financial services, electronic or otherwise. Congress carefully crafted this legislation last year with the intent of providing certainty, uniformity and efficiency for transactions conducted electronically.

    We have yet to see a wholesale embracing of ESIGN and the benefits it affords. This raises the question whether the legislation is overly restrictive to the point that consumers and businesses do not recognize the benefit. Perhaps it's too early to tell. Regardless, this is a dialogue that will begin now.

    I thank the witnesses for taking the time out of their busy schedules today to share their expertise on the subject and I know that ESIGN is of particular interest to our Chairman, Mr. Oxley, who is also joining with us here this morning. And with that, I now recognize the Ranking Member of the subcommittee, the gentlelady from my State of New York, Mrs. Maloney.
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    Mrs. MALONEY. I thank the Chairman.

    A year ago this Saturday, June 30th, 2000, President Clinton signed the historic ESIGN legislation granting electronic records and signatures legal enforceability on a par with written documents. Enactment of ESIGN was driven by the explosion in online commerce and the bipartisan desire of Congress and the Clinton Administration to facilitate its continued expansion.

    While ESIGN modernizes our legal framework to reflect the new economy, Congress made clear that individuals deserve the same level of consumer protection in the online world as when they engage in paper-based transactions. One of the most important efforts to transfer these protections online is the consumer consent section in ESIGN.

    Today, the subcommittee meets to review the report of the Federal Trade Commission and Department of Commerce on the benefits and burdens of the consumer consent provisions. In preparing its report, the Commission and Department of Commerce reviewed extensive public comments from industry and consumer groups and conducted a public workshop. While today we are only 1 year removed from an enactment, I am pleased that the FTC and Commerce have concluded that thus far the ESIGN consent provisions are proving effective.

    The consumer consent provision in ESIGN required that information that businesses are currently required to provide to consumers in writing may only be provided in electronic form if the consumer affirmatively consents to electronic delivery in a manner that reasonably demonstrates the consumer's ability to access the electronic record.
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    Information that businesses are currently required to make in writing include contract terms and the gamut of consumer protection disclosures which are intended to protect consumers from fraud and to hold parties to the terms of agreements. The ESIGN consumer protection provisions recognize that there is a wide range in the level of public computer proficiency and access to the internet. While customers of online banks or brokerages are already accustomed to conducting complicated transactions over the internet, ESIGN is intended to prevent consumers who are less accustomed to the online world from unwittingly consenting to receive information in a form that they cannot access.

    While I agree with FTC/Commerce Report's conclusion that the benefits of the consent provisions outweigh their burden, I am interested to hear the perspective of industry witnesses today and their perspective on complying with the provisions. I also look forward to the discussion of the interaction of ESIGN and the electronic signature legislation being promoted at the State level, the Uniform Electronic Transaction Act. Enactment and enforcement of strong consumer protections are the best tools Congress has to increase public confidence in the internet and to contribute to the continued growth of e-commerce. The ESIGN Act's consumer consent provisions are an important part of this effort.

    Thank you very much. I look forward to all the testimony.

    Chairman KING. I thank the Ranking Member. And now for an opening statement, the Chairman of the full committee who has a long and abiding interest in this legislation, Mr. Oxley.

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    Mr. OXLEY. Thank you, Mr. Chairman, and thanks for holding this hearing on ESIGN and encouraging the use of electronic signatures in the financial services industry. This is the first technology-related hearing for the subcommittee, and I look forward to continuing our review of tech issues as they affect financial services.

    The Electronic Signatures in Global and National Commerce Act enabled electronic signatures to satisfy the legal requirements for paper signatures. I worked closely with Chairman Bliley last session on the passage of ESIGN, and I was a Member of the Conference Committee that wrote the current law.

    The goal of ESIGN was to simplify electronic business transactions, enabling consumers to sign a mortgage, take out a student loan, or open an IRA account from their own computer. Exchanging records and agreements electronically instead of on paper is good for the environment, less burdensome for consumers, and more cost effective for businesses. Members of the Conference Committee envisioned that ESIGN would open up the floodgates to many new transactions that individuals and businesses would be able to do online while at the same time giving people greater confidence and convenience when shopping online.

    Unfortunately, electronic transactions have not increased significantly over the past year. Even in the financial services industry, which should benefit from most from ESIGN, people and businesses have been very slow to take advantage of the new opportunities. When the Conference Committee was debating ESIGN we struggled to create the right balance in the consumer protection provisions.

    It is always hard to look into the future and determine what consent provisions will be necessary to protect consumers from abuse that will not unduly burden the implementation of the law. And while I believe our efforts were successful overall, we need to go back and review the balance to see if we tipped too far in one direction or another. In particular, we need to consider the proper level of protection necessary in the financial services industry where we have a separate layer of oversight and regulatory supervision already.
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    We also need to ensure a sufficient level of uniformity in the adoption and interpretation of ESIGN by the States and Federal regulators. States can now choose to adopt either ESIGN or a version of the Uniform Electronic Transactions Act, also known as UETA, as long as it's not inconsistent with ESIGN. Unfortunately, many States are adopting UETA, but with different portions of the ESIGN consent provisions thrown into the mixture. This patchwork of laws governing electronic transactions is resulting in higher costs and more confusion. If we don't end up with a minimum level of certainty and consistency, businesses and consumers will not have the confidence to make ESIGN a reality.

    Service providers and consumers must be comfortable interacting with each other online. If the procedures surrounding a transaction are unduly burdensome for either party, the deal will not get done. We must work to ensure that our laws are evenly balanced to bring the greatest benefit to all the participants in the marketplace. Recognizing that ESIGN has been in effect for less than 8 months, I look forward to the initial report by the Federal Trade Commission and the Secretary of Commerce on the benefits and the burdens of ESIGN's consumer consent provisions and to the testimony of our other industry and consumer witnesses. And I yield back the balance of my time.

    Chairman KING. Thank you, Mr. Chairman.

    Mr. Maloney.

    Mr. MALONEY. Mr. Chairman, in the interest of time, I'd just ask unanimous consent for Members who have opening statements to be able to submit them for the record.
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    Chairman KING. Without objection, so ordered.

    Mrs. Capito.

    [No response.]

    Chairman KING. Before we begin the testimony, certain Members of the full committee not assigned to the subcommittee are going to be allowed to participate and ask questions of the witnesses during this hearing, and if there's no objection, that will be so ordered.

    We have a distinguished panel of witnesses this morning. Again, I want to thank them for taking the time from their schedules to be here. We look forward to their testimony. We certainly appreciate the time and effort they put into their preparation. I will introduce them individually and then ask them to make their statements.

    The first witness will be Ms. Eileen Harrington, the Associate Director for Marketing Practices for the Federal Trade Commission. Our next witness will be Mr. Christopher Roe, the Vice President of Fireman's Fund Insurance Companies, testifying on behalf of the American Insurance Association. Mr. Thomas Crocker, Partner in Alston & Bird. Mr. Jeremiah Buckley, General Counsel for the ELectronic Financial Services Council. Also Mr. Louis Rosenthal, Executive Vice President of ABN AMRO Information Technology Services Company on behalf of the Financial Services Roundtable. And Ms. Margot Saunders, Managing Attorney for the National Consumer Law Center.
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    And we would ask you to keep your testimony to 5 minutes. If it goes a minute or two behind, we're not going to pull the trap door.

    Ms. Harrington.


    Ms. HARRINGTON. Thank you, Mr. Chairman and distinguished Members, Chairman Oxley. I am Eileen Harrington from the Federal Trade Commission, and I am pleased to be here this morning to present the Commission's testimony.

    As you may know, the FTC is the Government's principal consumer protection law enforcement agency. Its mission is to promote the efficient functioning of the marketplace by taking action against unfair or deceptive acts or practices and to increase consumer choice by promoting competition. The Commission has vigorously promoted e-commerce in a variety of ways, in part by bringing enforcement actions to stop deceptive and fraudulent practices on the internet. And this experience particularly provided useful grounding for us as we examined implementation of the reasonable demonstration requirement in the consumer consent provision.

    In Section 105(b) of ESIGN, the Congress directed the FTC and the Department of Commerce to issue a report on the impact on electronic commerce and consumers of the reasonable demonstration requirement of the consumer consent provisions of the Act. Specifically, the Congress asked us to report on the benefits of that provision to consumers, the burdens that the provision imposes on e-commerce, whether the benefits outweigh the burdens, the effect of the provision in preventing fraud, and whether any statutory changes would be appropriate.
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    Our testimony today will be limited to a discussion of these issues which were the focus of our review and the report from Commerce and the FTC. To fulfill our mandate, we conducted outreach efforts, which included issuance of a notice in the Federal Register inviting comment, a public workshop, and extensive outreach to consumer, industry, and other Government organizations.

    Our outreach was extensive in an attempt to evaluate the technology available to reasonably demonstrate compliance with the consumer consent provisions and to learn how companies are implementing the reasonable demonstration requirement. We met with online businesses community members, technology developers, consumer groups, law enforcement officials, and academics.

    Our industry contacts included high tech companies involved infrastructure development for electronic contracting and electronic payment systems as well as businesses entities that use or plan to use electronic records in consumer transactions.

    We also did our own research to identify the types of businesses that are using the consumer consent provision of ESIGN. And specifically, we just went on the internet and looked and looked and looked for businesses that are now doing that.

    To comply with the mandate to solicit comment from the general public and consumer representatives in e-commerce businesses, as I mentioned we published a Federal Register notice inviting comment. We sent that notice and the press releases by both agencies to literally hundreds of businesses and organizations that we know have an interest in the development of electronic commerce. And in response to our outreach efforts, we received 32 comments from consumer organizations, software and computer companies, banks, members of the financial services industry, and academics.
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    And in April, we hosted a public workshop to explore the issues raised in the comments and in our outreach efforts and to discuss new issues and develop a basis for analysis and conclusion as requested by the Congress.

    Although a number of e-commerce businesses, principally in the financial services industry, have implemented the procedures requiring reasonable demonstration of consumer consent, there was consensus among the participants and commentors that insufficient time has passed since the law took effect to allow consumers or businesses to experience the full effect of the provision, to develop sufficient empirical data to evaluate quantitatively whether the benefits outweigh the burdens, or to determine whether the absence of the procedures that are required by the consumer consent provision would lead to an increase in deception and fraud against consumers.

    In general, consumer advocates and State law enforcement agencies expressed strong support for the reasonable demonstration requirement of the consumer consent provision as an effective tool to promote e-commerce by increasing consumer confidence in the electronic marketplace. They said that the benefits of this requirement to consumers and e-commerce businesses outweigh the burdens associated with adapting business systems to comply with the provision.

    Consumer advocates also suggested that the reasonable demonstration requirement may prevent deception and fraud from occurring by giving consumers more information about the legitimacy of the business they are dealing with and alerting them to the importance of receiving electronic documents.
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    Businesses that have implemented the consumer consent procedures also report benefits, including increased protection from liability, increased consumer confidence, and the opportunity to engage in additional dialogue with consumers about transactions. Some industry commentors indicated that the reasonable demonstration requirement may be burdensome, because it adds an extra step that could delay the consummation of the transaction and may cause confusion that could lead consumers to forego the use of electronic records.

    Although some commentors identified burdens, there is insufficient data to assess the likelihood or severity of these burdens quantitatively or their impact on consumers and e-commerce businesses. In addition, the record suggests that some burdens such as the additional step entailed to satisfy the reasonable demonstration requirement may be resolved or minimized over time as businesses and consumers adjust to the consent procedure and gain experience sending and receiving documents in an electronic form. Similarly, instances of consumer frustration or confusion and the potential for loss of business may be reduced or eliminated by the refining of consent procedures in the marketplace.

    Although measuring the consequences of omitting the consumer consent provisions or the reasonable demonstration requirement therein is difficult, we believe that the inclusion of this provision helps prevent deception and fraud. The provision ensures that consumers who chose to enter the world of electronic transactions will have no less access to information and protection than those who engage in traditional paper transactions. This provision reduces the risk that consumers will accept electronic disclosures or other records if they are not actually able to access those documents electronically. As a result, it diminishes the threat that electronic records will be used to circumvent State and Federal laws that contain a writing requirement.
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    As enacted, ESIGN gives appropriate consideration to the threat that fraud and deception on the internet pose to the growth and public acceptance of electronic commerce. Most laws protecting consumers against fraud and deception come into play after fraud has been committed and documented. ESIGN attempts to discourage fraud before it takes hold. It incorporates basic consumer protection principles that will help maintain the integrity and credibility of the electronic marketplace, bolster confidence among consumers that electronic records and signatures are safe and secure, and ensure that consumers continue to receive comprehensible written disclosures.

    Our report concludes that although the participants in our study expressed a range of views, it is reasonable to conclude that thus far, the benefits of the reasonable demonstration requirement outweigh the burdens of its implementation on electronic commerce, although we can't make that assessment in any quantitative form. The provision facilitates e-commerce and the use of electronic records and signatures while enhancing consumer confidence. It preserves the right of consumers to receive written information required by State and Federal law, and discourages deception and fraud by those who might fail to provide consumers with information that the law requires that they receive.

    The requirement appears to be working satisfactorily at this stage. Almost all participants recommended that for the time being, implementation issues should be worked out in the marketplace and through State and Federal regulations, and that it is simply too soon to consider making changes to the statutory scheme.

    The Commission greatly appreciates the opportunity to describe its efforts, and we would be happy to answer any questions that you may have. Thank you.
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    Chairman KING. Thank you, Ms. Harrington.

    Mr. Roe.


    Mr. ROE. Thank you, Mr. Chairman and Members of the Domestic Monetary Policy, Technology, and Economic Growth Subcommittee, for providing me with an opportunity to testify before you today regarding the Electronic Signatures in Global and National Commerce Act, ESIGN.

    My name is Christopher Roe. I am Vice President and Legal Counsel for Firemen's Fund Insurance Company. Fireman's Fund, established in 1863 in San Francisco, California, is among the Nation's top writers of property casualty insurance, writing over four billion in gross premiums and employing over 8,000 people.

    Chairman KING. Excuse me, Mr. Roe. Could you move the microphone a little closer, please?

    Mr. ROE. Certainly. Thank you.

    Chairman KING. Thank you.
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    Mr. ROE. I am pleased to appear before you today on behalf of the American Insurance Association to discuss ESIGN. The AIA is the principal trade association for property and casualty insurance companies. The passage of ESIGN is an important ingredient to the evolution of e-commerce within the insurance industry. We believe that ESIGN, coupled with the State passage of the Uniform Electronic Transaction Act, UETA, will ultimately allow insurers to better deliver speed, efficiency, and cost savings in future online insurance transactions.

    In particular, some of the advantages of ESIGN are already evident. ESIGN sets a higher degree of legal uniformity among the States than currently existed, which is more conducive to an online marketing strategy in the 50 States. ESIGN establishes a higher degree of predictability and stability in the States, which allows insurers to more confidently provide their customers with the online services they are increasingly seeking. And ESIGN now allows customers to execute an online insurance transaction completely online.

    Without ESIGN and UETA, customers and their insurers could not close an insurance transaction online. Many customers naturally became discouraged after completing information for an insurance quote and then not being able to finalize the transaction. Often the customer would receive an e-mail that an agent would contact them in a few days or that they would have to wait to receive a package in the mail to complete the process. ESIGN will help smooth this transition and allow us to meet customer expectations, including 24-hours-a-day service, greater efficiency, convenience, and cost savings.

    My company, Fireman's Fund, believes annual savings of millions of dollars can be achieved if consumers signed policy applications and receive coverage notices and renewals online. Mailing expenditures alone cost Fireman's Fund $8 million annually. By the end of the year, we expect to begin to use electronic signatures and records in some of our commercial divisions.
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    Because of its recent passage and more recent implementation, the insurance industry has had limited practical experience with ESIGN. As a result, we believe more time is needed to test the workability of the ESIGN provisions before advocating specific changes to the Act.

    Even with the constraints of ESIGN, State laws still deviate from Federal law. About 20 States have adopted an exact version of UETA as recommended by the National Conference of Commissioners on Uniform State Laws, and another 15 have adopted a UETA-styled version, but with modifications. Some non-uniform provisions were adopted before ESIGN. For example, in California, homeowners and automobile insurance consumers were required to complete their transactions offline. Few insurers want to be the legal test case for Federal preemption for these particular laws.

    Recently, nine States have locked the ESIGN consent provisions into their State UETAs. The scenario is ripe for creating an unlevel playing field between the financial sectors. Because these provisions are still untested, Federal regulatory agencies were given the power to waive consumer consent provisions for a category or type of record. However, a similar regulatory waiver provision does not exist in these nine States except for Texas. Regulatory parity among the financial sectors may be further exacerbated if State regulators do not have the same regulatory flexibility.

    AIA and Fireman's Fund support a process whereby the parties consent to an electronic transaction. Similarly, in those States that adopt UETA, businesses and consumers must agree to use electronic signatures. Whether the parties agree to conduct a transaction by electronic means is determined from the context and surrounding circumstances, including the parties' conduct.
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    In conclusion, even though questions remain on such issues as consumer consent, the legal environment has vastly improved. We continue to support UETA in the States in order to maintain uniformity and believe that UETA provides a simpler approach with regard to consent. In the meantime, non-uniformity, particularly for the business of insurance, still remains a nagging and unfortunate reality.

    As this subcommittee and all of Congress mulls over the implementation of ESIGN provisions and other e-commerce issues, we urge you to take the following action:

    First, contact the National Association of Insurance Commissioners and State insurance regulators to encourage the States to strive for the highest level of uniformity possible in implementing ESIGN or UETA so that the insurance companies can have the highest level of confidence in delivering services to its customers online in a way that utilizes the best technology available.

    And second, recognize that in many policy and regulatory areas, but particularly in e-commerce, a strong Federal preemption is vital in giving businesses greater certainty and confidence in using technology and the internet to serve their customers.

    In the next year, we will learn valuable insights on whether the ESIGN consent provisions are successful and whether UETA provides an equally effective and simpler approach to consent.

    Again, I appreciate having the opportunity to testify before you today and would be happy to answer any questions you may have.
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    Chairman KING. Thank you, Mr. Roe.

    Mr. Crocker.


    Mr. CROCKER. Mr. Chairman, Chairman Oxley, and Members of the subcommittee, my name is Thomas Crocker. I am partner in the Washington office of the law firm of Alston & Bird.

    My involvement with the ESIGN Act goes back to 1997. When representing the then-CitiCorp, I helped draft a predecessor version of the ESIGN Act in the 105th Congress. More recently, we represented Charles Schwab & Company and the Securities Industry Association in all phases of the development, consideration, and eventual enactment of the ESIGN Act in the 106th Congress.

    Today, however, I am testified solely on my own behalf as an attorney in private practice who has assisted a number of clients in implementing the ESIGN Act and who has had some practical experience with the types of real-world concerns that businesses have had in complying with the Act.

    As has been noted, almost exactly 1 year ago, on June 30th, 2000, the President signed the ESIGN Act into law. At that time it was hailed as the, quote, ''single most important piece of e-commerce legislation enacted in the 106th Congress.'' Now, 1 year later, it is appropriate to ask whether the ESIGN Act has lived up to its promise, and if not, why not?
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    The significance and the promise of ESIGN Act lay in its central attribute of being a technology-neutral, uniform Federal law designed to encourage the use of electronic records and signatures. The uniformity and consistency were and remain the most important ingredients to providing industry with the legal certainty that it needs to conduct e-business on a national and global scale. These touchstones—uniformity, consistency, and legal certainty—are important measures by which the success or failure of the ESIGN Act will appropriately be judged.

    As part of our representation of clients seeking to implement the ESIGN Act, we recently conducted an informal website survey to try to determine how widespread reliance in the ESIGN Act has actually become. This survey was aimed primarily at the financial services industry—banks, broker-dealers, insurance companies—but it also touched on other business sectors such as health care, technology, and online sales.

    Our findings confirmed what we had long suspected to be the case—that use of the ESIGN Act has been slow to take off and that compliance with it is limited at best. Its embraced by U.S. industry at large has been spotty. Why is this so? Based on our work with various clients seeking to understand and implement the ESIGN Act, we believe that although well-intended, the ESIGN Act in its present form fails to deliver on the promises of uniformity, consistency, and legal certainty.

    This failure is compounded by the unusual absence of a statement of managers as part of the legislative history of the Act, which would help in its interpretation, as well as by the fact that the Act is studded with well over two dozen vague terms in its critical provisions, which inject uncertainty into its meaning. Against this background our clients' practical concerns focus on three specific areas in the Act: Consumer consents, preemption, and agency rulemaking.
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    Throughout the Congressional debate on the ESIGN Act, there was wide support by industry for reasonable consumer protection provisions. However, as is well known, the Act as signed into law contains consumer consent provisions that go beyond those that exist in the paper world.

    Two elements of the consumer consent requirements continue to cause concerns which contribute to reluctance to use the Act. First, the ''reasonably demonstrates'' requirement at Section 101(c)(1) is vague. It has, however, proven workable, provided it is interpreted to allow firms flexibility in meeting its requirements and it is used in its simplest form—one company, one consumer, one electronic system. However, the concern is that the ''reasonably demonstrates'' requirement is in a sense a straitjacket, because it requires a company to communicate with its customer only through the identified single system that the customer has originally chosen to access the information in electronic form. This rigid, narrow procedure does not take account of the reality that consumers might own multiple computers or of the increased market presence of hand-held terminals. It creates issues when a customer deals with a firm through a variety of access channels.

    The second major concern with the consumer consent provisions is the requirement governing what happens if the hardware or software requirements change after the consumer has given affirmative consent. If that change, quote, ''creates a material risk that the consumer will not be able to access or retain a subsequent electronic record'', then the party providing the electronic record must go through the entire consumer notice, consent, and reasonable demonstration process all over again. The very vagueness of the term ''material risk'' creates uncertainty as to when it must be invoked. For example, does a simple system upgrade require a company to go through the costly process of notifying all of its customers and obtaining consents de novo?
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    Another reason that businesses have shied away from using the ESIGN Act is the mind-numbing complexity of its preemption provisions and the uncertainty that they raise in connection with the Act's interface with the Uniform Electronic Transactions Act. Put yourself in the shoes of a company that wants to rely on the ESIGN Act, trying to minimize risk. You must first ask yourself whether the State whose law you want to govern has enacted a clean version of UETA, as reported by the NCCUSL.

    If it has, then that State's enactment of UETA should govern, at least in theory. But many States have not done that. You must therefore ask whether the changes by the State to UETA are pursuant to Section 3(b)(4) of UETA. If they are, well, then, the ESIGN Act preempts that State's UETA only to the extent those changes are inconsistent with Titles I or II of the ESIGN Act. However, if the changes by the State are not pursuant to Section 3(b)(4), and many are not, then you have to go to the second prong of the two-pronged preemption test under Section 102 of the ESIGN Act, which seemingly would preempt the State's version of UETA unless further tests are satisfied.

    Ultimately, in any given case, whether the ESIGN Act preempts State law may have to be determined through litigation. As one in-house counsel to a large insurance company recently told me, ''I was very excited about the ESIGN Act when it passed. But once I worked through what was in it, well, just forget it.''

    The third major concern is the agency rulemaking. This section is designed to govern the interface of the Act with Federal and State agency rulemaking at Section 104. However, it is also confusingly and complexly drafted so that the goals of uniformity, consistency, and legal certainty come up short.
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    I see that I am running out of time, so I will truncate this and just cut to my conclusion, which is that there are those who say that it is premature to consider amending the ESIGN Act and that the best approach is to wait and see. That is one view. However, based on my experience, the complexities and ambiguities of the statute have already resulted in a tangible level of discomfort in industry that procedures, once adopted, might be held inadequate or out of compliance when the law is eventually interpreted by courts or Federal or State agencies.

    It therefore is not clear what further wait-and-see will achieve. If the Congress wishes to adjust the ESIGN Act to accord it more closely with the three original goals of uniformity, consistency, and legal certainty, the time to commence that process may well be now.

    Thank you.

    Chairman KING. Thank you, Mr. Crocker. I appreciate your facilitating your statement. And just so you know that all of these statements will be considered as part of the record in full.

    Mr. Buckley.


    Mr. BUCKLEY. Thank you, Mr. Chairman. Good morning, Mr. Chairman, and Members of the subcommittee. I am Jerry Buckley.
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    Chairman KING. Mr. Buckley, if you could move the microphone a little closer, please.

    Mr. BUCKLEY. I am partner in the law firm of Goodwin Procter and act as General Counsel for the Electronic Financial Services Council. Thank you for the opportunity to appear today.

    Members of the Electronic Financial Services Council believe that the rules regarding electronic signatures and records set for the ESIGN Act have tremendous potential to promote the growth of electronic commerce, particularly in the financial services sector.

    Under the ESIGN Act, consumers may access products 24 hours a day, 7 days a week. Consumers who are in currently underserved areas will now have the opportunity, whether they be urban areas or rural areas, to access a competitive menu of services from a variety of financial services providers.

    These online consumers will receive real-time disclosures as opposed to packets of paper they receive several days after they've made their decision on a financial product, and businesses will be able to literally eliminate billions of dollars of records management costs, savings which we believe will ultimately be competed through to consumers.

    Some have observed today that the financial services industry has been slower than was expected in adopting the use of electronic medium that ESIGN empowers. We believe that several factors are responsible for this phenomenon.
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    First the Act is self-effectuating. That is, it does not require a Federal agency to spell out rules of the road and standard mandated forms as is often the case with Federal legislation, rather leaving these decisions to private parties. This flexibility, which will be very important in the long run in facilitating market innovation, has the short-run disadvantage of not providing specific governmental guidance regarding appropriate electronic business procedures. We think the tradeoff is worthwhile, though.

    Private parties are now required to devise their own standards and specifications for conducting business electronically, and particularly in the financial services business where financial instruments must often be capable of being traded or pledged, it is not sufficient for the financial instrument to be enforceable between the parties originating the transaction.

    These instruments must be originated to the satisfaction of the secondary market purchasers of mortgages and chattel paper and others who trade in or finance these instruments. In order that this happen, each financial services industry will have to develop a series of conventions or guidelines regarding what electronic practices and procedures will be acceptable to companies doing business in that particular industry.

    We at the Electronic Financial Services Council are participating in promoting the development of these guidelines or conventions. Over the last 7 months, Freddie Mac, one of our members, has developed specifications for the purchase of electronically originated loans in the secondary market. Freddie Mac and Fannie Mae are currently negotiating with lenders to arrange forward commitments for the purchase of electronically originated mortgages. And as a result, we expect a gradual, but steady, growth in the paperless mortgage transactions.
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    Similarly, drawing on the seminal thinking of Freddie Mac in this area, the Department of Education has promulgated guidelines for the electronic origination of student loans. These loans will be available online next month for students seeking financing for the upcoming academic year.

    One of my colleagues here, Pete Simons, is going to going to be attending UVA law school and intends to apply next month electronically for his student loan.

    As an attorney advising on the implementation of ESIGN, I deal with clients who are wrestling with choices of vendors, decisions regarding authentication, evidence of intent, authority to sign. Again, ESIGN having become law, these companies are now coming to grips with the legal decisions involved in setting up an online contracting process.

    In the absence of court decisions affirming the evidentiary validity of electronic records, those seeking to do business electronically are understandably proceeding with caution.

    Now you have asked whether the consumer consent provisions of ESIGN are hampering the speedy adoption of electronic records. While we believe that some aspects of the consumer consent provisions do place an unnecessary burden on the use of electronic signatures and records, we are firmly committed to the proposition that consumers are entitled to timely and meaningful information. Electronic commerce cannot reach its full potential without consumers' complete comfort with and confidence in both the process and the medium. Effective delivery of the ESIGN consent disclosures will materially contribute to that comfort and confidence.
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    The Council strongly supported the original package of consumer protection provisions to the ESIGN Act which were offered in the House of Representatives, the so-called Inslee-Roukema Amendments. Certain elements of ESIGN's rules concerning effective consumer consent were not part of the Inslee-Roukema Amendments. Instead, they were added at the very end of the legislative process and were perhaps unavoidably subject to less rigorous analysis than the rest of the statute. In particular, I refer to the requirement that consent be in electronic form and that there be a reasonable demonstration of the consumer's ability to access information. These have proven to be hurdles, although I would say we have concluded not yet barriers to the use of ESIGN powers.

    Others have covered the problems with these, and I won't try to go through them in detail here. But suffice it to say that these put the consumer through a test that is we believe unnecessary and impair the ability to take what might be a face-to-face transaction by sending the consumer back through a series of tests to make sure they can contract electronically in a way that is inconsistent with the way we otherwise do business.

    The second major concern we have is regarding the implementation of regulatory requirements under Section 104 of ESIGN. We believe that Federal and State agencies should adhere to the standards set out in the ESIGN Act when interpreting it, and we have noticed a tendency to stray from that which concerns us greatly. We have addressed this in more detail in a submission which is an attachment, a letter to the Federal Reserve regarding the Federal Reserve's new interim final rule on electronic communications.

    To sum up, the fact that large-scale implementation of ESIGN has not occurred should not be read as either a lack of enthusiasm for the statute or a waning of industry interest in e-commerce. Rather, the deliberate pace reflects the determination by many responsible members of the financial services industry to act thoughtfully and to roll out e-commerce applications that are well designed and will be well implemented.
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    While some may urge Congress to amend or revisit the ESIGN Act, we believe the best course at this point is to allow financial services industries and other firms time to acclimate themselves to this new environment and to implement powers already conferred by the ESIGN Act.

    In our written submission, which is an attachment, we submitted our comments to the FTC. And on page 8, we detail the amendments which we believe would be desirable for the ESIGN Act. But we don't think now is the time to do it. We think that we should rely on this settled law now, see what happens over the next 6 months to a year, let these processes of setting up guidelines and conventions take place, and then make a decision whether these consumer consent requirements, particularly the reasonable demonstration test and the electronic confirmation requirement, are really barriers as opposed to just hurdles. And we'll have more experience to make that judgment over time.

    Thank you, Mr. Chairman.

    Chairman KING. Thank you, Mr. Buckley.

    Mr. Rosenthal.


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    Mr. ROSENTHAL. Good morning, Mr. Chairman, and Members of the subcommittee. I am Louis Rosenthal, Executive Vice President at ABN AMRO North America. I am pleased to appear before you today on behalf of the Financial Services Roundtable and BITS. The Roundtable represents 100 of the largest integrated financial services companies providing banking, insurance, and investment products and services to the American consumer. BITS was established in 1996 as a not-for-profit industry consortium and a sister organization to The Roundtable. We share many of the same members.

    I want to begin by commending the Members of this subcommittee and indeed all Members of the 106th Congress for passing the ESIGN Act. ESIGN represents the kind of supportive yet minimalist legislation that is needed to encourage and facilitate the continued growth of electronic commerce in the United States. It levels the playing field between electronic and paper-based methods of doing business by granting legal recognition to electronic signatures, contracts and records, and creates a consistent and uniform legal environment for electronic commerce by preempting State laws.

    Perhaps the most important principles embodied in ESIGN are those of party autonomy, technology neutrality, and uniformity. For the most part, ESIGN allows the parties to electronic commercial transactions to decide for themselves how they wish to do business and to structure their business relationships in the manner most appropriate to their needs. By not prescribing standards or mandating the use of any particular technology, ESIGN permits parties to select from a broad array of electronic methods for doing business, thus helping to ensure that technological innovation will continue to flourish.

    Finally, by preempting inconsistent State laws, ESIGN enables businesses to offer electronic services and products to their customers on a nationwide basis without having to worry whether their contracts and relationships will in fact be legally recognized and enforced.
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    Shortly after ESIGN was passed, BITS created an ESIGN working group to assist our members in addressing these issues on a cross-industry basis. I am especially pleased to be here as the chairman of that working group, which consists of approximately 50 member companies. The ESIGN working group has served as a valuable discussion forum and information clearinghouse regarding the approaches and steps being taken by the financial services companies, Government entities, and technology providers to implement ESIGN. Through these meetings we have identified a number of challenges to the successful implementation of ESIGN.

    Our members do not necessarily see these challenges as roadblocks preventing them from going forward, but rather as hurdles to address so that they do not threaten their ability to provide the kind of streamlined and cost-effective services their customers want and expect. To a large degree, whether these hurdles prove to be major problems or simply minor irritants depends on how ESIGN is interpreted and applied.

    If it is broadly interpreted with common sense and in line with its underlying purpose of facilitating electronic commerce, we believe these hurdles can be overcome without undue burden. If, however, it is interpreted narrowly and restrictively, they could well be major impediments.

    As the subcommittee is no doubt aware, ESIGN contains fairly complex consumer consent requirements for the electronic delivery of required written disclosures. Consumers must be provided with a clear and conspicuous statement containing a number of mandatory disclosures, after which they must affirmatively consent to receiving information in electronic form. In addition, consumers must either consent or confirm their consent electronically in a manner that reasonably demonstrates that they can receive the information in the form in which it will be provided. For example, by e-mail on an HTML format on a website.
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    Our members fully support the concept of informed consumer consent to electronic delivery of information and all would build meaningful consent processes into their electronic offerings, regardless of whether it were required by ESIGN. Unfortunately, the ESIGN consent requirements go beyond ensuring that consumers are afforded the same level of protection in the electronic world as in the paper world, and instead impose requirements that have no equivalent in the paper world.

    This is particularly true with respect to the reasonable demonstration requirement, which has emerged as posing the most significant practical challenge to fully implementing ESIGN. ESIGN does not define what is meant by a reasonable demonstration, and firms have been working diligently to come up with real-world solutions that meet both ESIGN's consumer protection goals and its underlying purpose of facilitating electronic commerce. In our view, if this requirement is interpreted broadly and with common sense to permit consumers to demonstrate their ability to receive electronic documents in a variety of ways, the burden it imposes will likely be manageable. If narrowly construed, the burden can well impede the use of electronic delivery in the future.

    Even if construed broadly, however, the reasonable demonstration requirement poses particularly difficult challenges when firms interact with consumers both through electronic and non-electronic means, which most of our members do. For example, if a consumer wishes to open an account at a firm's office or by telephone and at the same time consents to receive subsequent disclosures through electronic communications, both the consumer and the business must go through the added step of confirming electronically that the consumer can receive the disclosures. This is true even if the disclosures are to be made through e-mail and the consumer gives the business an e-mail address as part of the paper-based consent process.
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    It is also true even if the disclosures are to be made in HTML format on a firm's website and the consumer assures the firm that she or he has internet access, has previously visited the firm's website, and is fully capable of viewing HTML documents.

    ESIGN creates a uniform national framework for the use of electronic signatures, contracts and other records. ESIGN does, however, authorize States to legislate in this area if they meet certain requirements in Section 102(a). As a result, over 20 States have enacted uniform versions of UETA that are consistent with ESIGN. For example, Illinois is amending its electronic commerce law with language taken verbatim from ESIGN, and Michigan has used virtually identical language in adoption of UETA.

    Other States, however, have adopted non-conforming versions of UETA. At this point, these issues are somewhat theoretical, and they may well end up being resolved in the courts. Nevertheless, we urge Congress to pay close attention to how States are reacting to ESIGN and to take appropriate action if States pass laws that threaten to undermine it.

    Our members are also greatly concerned by the need for uniformity in the international marketplace. We have spent some time reviewing the laws of our trading partners, and there are inconsistencies in the laws of sovereign countries that could impede implementation globally. However, as is the case in areas mentioned previously, it is too early to tell what if any disruption these inconsistencies may cause and what, if any, recommendations we would have for lawmakers. In the interim, we urge Congress to ensure that the Government takes all necessary steps to implement the provisions of Title III of ESIGN, which outlines the principles to guide the use of electronic signatures in international commerce.
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    Finally, our members are concerned that some Federal regulatory agencies are interpreting ESIGN in an overly restrictive manner. We urge Congress to continue to review agency interpretations, along with the OMB Guidance on which many of them are based, to ensure regulations implementing ESIGN are consistent with the goals of the Act.

    Once again, Mr. Chairman, The Roundtable and BITS congratulate Congress on passing ESIGN. While the Act has some provisions that make its implementation cumbersome, we are not proposing that Congress reopen ESIGN. Once our members and our customers have a chance to operate under the Act for a while, The Roundtable may have proposals to bring back to the subcommittee. At the present time, however, The Roundtable believes the marketplace should be allowed to come up with practical methods for implementing the Act.

    We would also urge Congress to remain watchful that its provisions are not being restrictively interpreted and applied so as to frustrate its underlying purpose of removing barriers to electronic commerce.

    On behalf of both BITS and The Roundtable, Mr. Chairman, thank you for the opportunity to testify today, and I would be happy to answer any questions later.

    Chairman KING. Thank you, Mr. Rosenthal.

    Ms. Saunders.

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    Ms. SAUNDERS. Mr. Chairman, Mrs. Maloney, Members of the subcommittee. I testify today on behalf of the low-income clients of the National Consumer Law Center and also on behalf of Consumers Union, Consumer Federation of America, and U.S. PIRG.

    Contrary to popular belief, we are not troglodytes. We agree with all here that facilitating e-commerce will be good for consumers, and we do not want to stand in the way of that facilitation. But we believe that the electronic consent requirement in ESIGN or some similar provision is necessary to ensure that consumers are protected in this brand new world.

    As Mr. Oxley in his opening statement specifically said, ESIGN was designed to facilitate the communication between a consumer operating from his home computer to a business also operating from its computer. If this Act only applied between parties operating computer-to-computer, we would not need the same protections. Our concern, however is that it also applies to the physical world. We need to keep in mind that the majority of the Nation is different from most of the people in this room. I am virtually certain that everyone in this room has at least access to one computer, if not two.

    The vast majority of Americans do not have computers or internet access in their home. According to the Department of Commerce's Digital Divide report, 59 percent of the households do not have internet access in their home. The numbers of people in rural areas who do not have internet access, and the numbers of low-income and elderly households who do not have internet access are much higher.

    Given those dynamics, until those numbers change significantly, we have to make sure that consumers transacting business in the real world are not tricked into receiving electronic disclosures that they have no reasonable ability to access or retain. Those are the realities that drove the electronic requirement in the consumer consent provision in ESIGN.
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    In our view, and backed by the Congressional Record statements of the Congressmen involved in the passage of this bill, there are three distinct related protections afforded by the electronic consent requirement:

    One, it ensures that the consumer has reasonable access to a computer and the internet to be able to access the information provided electronically.

    Two, it ensures that the consumer's means of access to electronic information includes software necessary to read and retain the electronic information.

    And three, it is meant to underscore to the consumer the fact that by electronically consenting, the consumer is agreeing to receive information in the future electronically as well.

    Delivery of electronic records is significantly different than delivery of physical world mail. It takes money to access your electronic records. It takes money to maintain a computer. It takes money to maintain access to an internet service provider. It does not take money to receive physical world mail. According to the Digital Divide report, even as more and more households in America obtain internet access, there's a 10 percent or greater drop-off rate every year.

    So we have to keep in mind that, even if a consumer on day one agrees to receive electronic transactions, that consumer may be the 1 in 10 consumers the following year who no longer has access to electronic information. The electronic consent provision in ESIGN does provide some protection against this.
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    We agree with everyone on this panel that there are significant problems with the lack of uniformity and the application of the consumer consent provisions to State law. Our reading of the law is that every State that passed UETA prior to ESIGN automatically has the consumer consent provisions applicable in that State. This is because the State is required to take a deliberate action before it can be seen to have displaced ESIGN. Not everyone agrees with us.

    If that reading is correct, then at least half the States will have a consumer consent provision applicable and another half may or may not, depending on what happens in the future in those States. There are significant questions. We would argue that the simplest way to resolve this is simply to make the consumer consent provisions applicable nationally. Obviously, not everyone would agree to that.

    We have spelled out a number of examples of what could happen without the electronic consent provision in our testimony. Given the time restraints, I won't go into them now. But I would request that you look at them and consider them strongly before you consider changing the law.

    We also have several suggestions that if you do decide to change the law, we see other ways that it can be improved.

    Thank you.

    Chairman KING. Thank you, Ms. Saunders. We have been joined by Mr. Inslee. Do you have an opening statement?
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    Mr. INSLEE. Mr. Chairman, I just want to thank you for the opportunity to be involved in this review, and I really appreciate you conducting this. And I need to leave. I just wanted to tell you, I really appreciated all of the testimony. The one thing I would ask perhaps all of you is I have a particular interest in this ''reasonable demonstration'' issue of the ability to obtain access to the information.

    I would be interested if all the panelists if they can give us any thoughts on how we could at some point—this may not be the moment—help folks obtain a little more certainty of what that may be. I think that is one area that listening to all of you, that we might be able to help at some point. So Ms. Saunders and others, if any of you could favor me with your thoughts over time and I will share with other members of the panel when we receive them, that would be helpful.

    Rulemaking, orders, further colloquies, anything that you think might be of assistance, I would be happy to try to facilitate that.

    Thank you very much. And I am sorry, but I must leave at this moment, and will look forward to further discussion.

    Chairman KING. Thank you, Mr. Inslee.

    Mrs. MALONEY. If I could, Mr. Chairman, I would just like to publicly thank Mr. Inslee, who is a Member of the full Financial Services Committee. He fought incredibly hard last year for these consumer provisions, and I wanted to acknowledge his hard work and welcome him to the subcommittee.
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    Chairman KING. Thank you, Mrs. Maloney.

    I had just a few questions. One, I don't want to start a debate among the panel. But Ms. Harrington, in your statement, you say that the FTC report concludes that the benefits outweigh the burdens when it comes to the reasonable demonstration requirement.

    Mr. Rosenthal seems to be saying that the reasonable demonstration requirement is probably the most significant practical challenge to the full implementation of ESIGN. Is there any way you can reconcile that difference? Or do we just have a difference of opinion here?

    Ms. HARRINGTON. I don't think we do have a difference of opinion. I think that we have been very careful to say that there is very little information available right now that is based on the implementation of the reasonable demonstration requirement because, as you have heard from all of the panelists, there aren't many businesses that are doing business with consumers who have a lot of experience to date with ESIGN generally and implementation of this provision specifically.

    The participants in our study identified both burdens and benefits. And looking at what was identified, without there being enough data to do any kind of quantitative analysis of benefits and burdens, Mr. Chairman, we see that there is agreement on what the benefits are across the board. That is, both business commentors and consumer advocates and State authorities agree about what the benefits are from that specific provision. And also some of the business commentors identify challenges.
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    What we learned and heard is very similar to what you've heard this morning. That is, that the reasonable demonstration requirement in the minds of some businesses may be a hurdle, but in terms of providing evidence of burden, the record there is very thin. There is a concern, but not a body of information that we can look at that lets us say aha, here's how we measure that burden. It's very early.

    Chairman KING. Any of you wish to comment on that?

    Mr. Rosenthal.

    Mr. ROSENTHAL. Yes, Mr. Chairman. I would just say that I would agree with Ms. Harrington. The jury is still out. It's still early. There aren't lots of examples of application of ESIGN within the industry. We have spent the better part of the past year trying to work together in The Roundtable identifying what some of these issues are. Our concern is that in fact this becomes interpreted in such a way that it does become a burden.

    We would not be viable businesses if we created mechanisms that alienated customers and if they weren't able to conduct their transactions the way they wish, I would tell you that we've spent the past year implementing the privacy provisions of Gramm-Leach-Bliley, so we're now focusing our efforts on what some of the ESIGN provisions are.

    Chairman KING. Anybody else wish to comment?

    Mr. ROE. I would like to add that that issue of burden and interpretations and questions around consent feeds into State regulation and how this will play out in the States. And you've got questions here, you'll end up having different interpretations, different conclusions in the 50 States. And the more differences that exists in the States, the more you break down the efficiencies of having the internet in a 50-State marketing strategy.
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    Mr. BUCKLEY. I would just, Mr. Chairman, like to add that the ''reasonably demonstrates'' requirement in my experience is not a deal breaker. It has not caused people not to use the ESIGN Act. What is of more concern in the consumer consent provisions is the material risk that you have to go through the whole procedure again at some unspecified point, and there is a vagueness and lack of specificity as to when that point might be.

    And as to the need for the standard, I think it's important to keep in mind that in financial transactions, there is going to be an ongoing need for both parties to communicate. There is something of an assumption that we have to put everybody through this process, which is not absolutely clear. If it were clear it would be fine, but it's not absolutely clear what they have to go through. I don't know that it would be fine if it were clear either, but the idea that businesses would want to, having spent the time and money to attract a customer, do business with a customer who wasn't able to communicate with them electronically and set up an electronic procedure is contrary to the way businesses operate. Businesses are going to be just as interested in making sure that their notices get to consumers, because there's an ongoing transaction here.

    So I think both parties have an interest in making sure that this is going to work, and imposing this legislative requirement, which is vague and uncertain just standards in the way of letting the market forces move forward.

    I understand Ms. Saunders' concerns about well there might be people out there who would dupe people into agreeing to receive things electronically, that this is happening already in the paper world, and we don't want to see it happen in the electronic world. But I don't think that these provisions are going to stand in the way of people who want to commit fraud, any more than current law does. So why put people through this test? Why put people through these hurdles?
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    We don't say to someone before they get a mortgage, now we're going to test you to see whether you understand what an amortization table is. We let them make their own decisions. And we shouldn't in the electronic medium say, well, we aren't going to trust you to operate in this medium. We're going to put you through a test to make sure you can do it, and you'd better go back and confirm electronically that you can do business with us electronically. It reflects a lack of faith in this medium which we think is not justified.

    Chairman KING. Ms. Saunders, you seem very anxious to reply.

    Ms. SAUNDERS. I think the first question that perhaps should be resolved is what does that reasonable demonstration test mean? Many here seem to think that it means a test of the consumer's mental ability to access documents. In my opinion, it doesn't mean that at all. It means the consumer's accessibility to electronic documents via software and hardware. So it's not testing the consumer's acumen. It's testing the consumer's—what do they have? Do they have a computer or do they have regular access to a computer?

    My other point that I want to make is I think that the substantial risk, the material risk issue I agree is an issue, but I think it is probably a temporary issue. Eventually all the electronic records should be readable or accessible by all types of computers and software. So if technology continues to move forward as it has been in the past, access to different software techniques will not be an issue. Eventually, the seamless movement from one electronic record to another won't create any material risk so that you won't need to go through the consumer consent.

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    But there is very much a risk today. I would bet that everybody in this room has received an e-mail which had an attachment that they couldn't open. And given that reality, until all technology has reached the point that everyone can access everything sent to them, we have to recognize that consumers need to be sure to be able to read what is sent to them. Thank you.

    Chairman KING. We've been joined by Mr. Grucci from New York. Felix, do you have any opening statement you would like to make?

    Mr. GRUCCI. No, Mr. Chairman. I'm just learning a lot, though, by listening to this panel and the discussions today. I have no opening statements, thank you.

    Chairman KING. OK. We have also been joined by Mr. Hinojosa. Ruben, do you have any statement?

    Mr. HINOJOSA. Thank you, Mr. Chairman. I would like to ask Margot Saunders what—let me restate my question. Are the consumer protection provisions in ESIGN superior to those in the Uniform Electronic Transfer Act which many States have adopted?

    Ms. SAUNDERS. Undoubtedly. Yes they are. The ESIGN includes the consumer consent provisions. UETA has no similar provision. UETA allows a consumer's agreement to receive records electronically to be determined from the circumstances so that a consumer could be deemed to have agreed to receive electronic records by signing a piece of paper which includes that agreement in fine print on the back. And that is a serious problem to us for the reasons that I have already articulated.
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    Also, ESIGN includes superior record retention and integrity requirements in Section 101(d) and 101(e) over UETA. And ESIGN specifically has exemptions from electronic records in Section 103(b) for certain essential records such as utility disconnect and eviction notices and foreclosure notices that is not in the Uniform version of UETA, although UETA leaves room for those to be added.

    Mr. HINOJOSA. Well, tell me as a consumer, what are the benefits of receiving the electronic versions of information previously required by law to be provided in written form?

    Ms. SAUNDERS. Well, for a consumer who is transacting business electronically who wants to receive electronic notices rather than mail notices, there is substantial benefits. Many of us are beginning to organize all of our affairs on our hard drives and rather than in file drawers, and those consumers want to receive their notices and records electronically and be allowed to store them electronically. And we don't want to hamper that in any way.

    Our concern is that the consumer actually be able to read it and retain it if they want to.

    Mr. HINOJOSA. Would the accounting trail information be readily available to a consumer to maybe in a dispute to be able to show what happened?

    Ms. SAUNDERS. I'm not sure I understand the question.
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    Mr. HINOJOSA. Well, the way we do it today, there is a lot of written material, checks and statements and correspondence, and if there is a dispute, you can always go to the files, pull up that what we call the accounting trail, and be able to say that someone in their organization made the mistake or the bank made the mistake. Somebody made a mistake and I have proof of what I'm talking about.

    Ms. SAUNDERS. I see. That issue goes to record retention ability, which is a very important issue to us. Let me walk you through a transaction, for example. If you go to a local large hardware store and apply for an open-end account to buy some carpet, for example, you will given, if you're operating this is in the physical world, a piece of paper describing the terms of your open-end credit agreement. Then you'll sign another piece of paper, and then you will go home with copies of both of those pieces of paper. And if 3 months down the line, there is a dispute between you and the creditor regarding what the amount that you owe or the interest rate that's being applied, you will always have those pieces of paper to refer to, as you have already noted.

    Our concern is that if you are, again, in the exact same transaction, but if that transaction becomes electronic rather than paper, you might not have that. For example, if you are allowed to consent to receiving all of those disclosures electronically when you're standing in the store by signing a piece of paper and then the store posts the disclosures to a website, which you then have to go home or to a library to download and retain, you may not, a, be able to do that because you don't have a computer; or b, your computer may not have the capability to access that particular website; or c, you may not know to do it because many of us actually don't look at our disclosures until the dispute has arisen. So one important question would be how long those disclosures have to stay up on the website for you to be able to look at.
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    So there are substantial differences in the electronic and paper world in that situation. And we would hope that while the electronic transaction should be facilitated, the consumer should always be able to access that electronic record electronically and download it, even at some point long in the future so that they would be able to resolve the dispute with access to the information in the same way that we know the creditor will have access to that information.

    Mr. HINOJOSA. Well, that last statement you made——

    Chairman KING. Excuse me, Ruben.

    Mr. HINOJOSA. I'll end it right quick, Mr. Chairman.

    That last statement you made, ''the consumer should be able to access,'' is the key, and I just hope that as we move along that our subcommittee will ensure that that will occur for the protection of the consumer.

    Thank you, Mr. Chairman.

    Chairman KING. The time of the gentleman has expired.

    Mrs. Maloney.

    Mrs. MALONEY. I would like to thank all of the panelists for their very informative testimony. And many of you raised the challenge of a Federal standard and a State standard and some of the complications that it is causing. And Ms. Saunders raised the idea of a national consent provision, and I wonder how the other panelists feel about that.
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    And I would like to go back to a theme that Christopher Roe raised and Louis Rosenthal likewise raised, and the confusion sometimes between a State and a Federal standard. And I would like to know whether you think we should have a Federal standard in all respects. And I would like to open that up. If we are having different standards in the States—Mr. Roe raised the insurance industry. If you are a national insurance company, that is going to cause more headaches than benefits.

    So I would like comments on Ms. Saunders' idea of a national consent provision and really the theme raised by Mr. Rosenthal and Mr. Roe about conflicting standards from the State and the Federal. Would we be better off with a Federal standard? What are your feelings on this? Anyone?

    Mr. ROSENTHAL. OK. The way we see the confusion or the conflicting issues between State application of the law and the Federal preemption is that e-commerce bridges borders, it bridges the boundaries. And, in fact, that is what is very interesting to businesses, to be able to do business across all borders.

    The burdens that we would have to bear to maintain electronic compliance if you will with individual State laws is enormously burdensome and in fact confusing. For fear of making an error, we would wind up not offering the kind of access we think we can offer to consumers just for fear of making a mistake. So uniformity I think would be beneficial, provided that uniformity is not overly burdensome or in fact confusing to the consumer.

    Mrs. MALONEY. And about the consent provision. A uniform consent provision on privacy?
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    Mr. ROSENTHAL. Related to E-Sign, I think it's early right now. We think that anything that is a standard would be beneficial for both the consumer as well as our industry.

    Mrs. MALONEY. And, Mr. Roe.

    Mr. ROE. Yes. I'd like to add that a universal standard would be greatly appreciated as long as it's a standard that doesn't overregulate the internet, that's not set too high or doesn't have unintended consequences. For example, in the Federal consent provision, it allows for the consumer to withdraw consent at any time.

    When you couple that with insurance laws, which put very severe restrictions on insurance companies on terminating coverage or canceling a risk or non-renewing, what you may be doing unintentionally is interfering with a virtual insurer business model where that specific insurance company would only handle online transactions.

    Or let's say you wanted to encourage traffic to your website and provide a discount or a price break for your insurance product. That individual, once they withdraw consent, would automatically jump back into the paper world and you may end up having to carry forward that price break.

    So there are some consequences that the ESIGN consent provision puts forward that we may not fully comprehend yet.

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    Mrs. MALONEY. I agree. I think there are a lot of challenges, particularly in insurance. Because, as you say, the product changes. There are all types of agreements. Some are different from State to State. I think there are a lot of challenges there.

    A national consent provision for privacy, would you support that?

    Mr. ROE. A national consent provision for privacy or for electronic signatures?

    Mrs. MALONEY. For electronic signatures. Would you support that?

    Mr. ROE. We would support it as long as the consent provision really preempted State law, was a universal consent provision, and it was something that was not set too high that would overregulate the internet.

    Mrs. MALONEY. Mr. Crocker, would you support it? Or not?

    Mr. CROCKER. I think that the interplay between the Federal law and the State law is one of the most problematic aspects of this legislation. There are a lot of complicated reasons why we had that. It was part of the political price of getting the Federal legislation.

    If you go back to the original goal of uniformity, legal certainty and consistency, that a Federal standard, not just in the consumer consent area, but in other areas covered by the ESIGN Act would be beneficial.
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    Mrs. MALONEY. OK. Great.

    And what do you think, Mr. Buckley?

    Mr. BUCKLEY. I would agree. But I'd like to point out that most financial services firms are going to have to comply with the ESIGN requirements and obtain the consumer consents in order to deliver the federally mandated disclosures that have to be in writing.

    States enacting UETA are fine, but that does not authorize the delivery of Federal disclosures electronically. So for all practical purposes with respect to a mortgage where you have to give truth in lending and RESPA disclosures, with respect to other transactions that are going to be conducted by banks and mortgage companies and others, as a practical matter, you're going to have to go through the Federal consent process right now for most financial services that this subcommittee has jurisdiction over. That's just a reality. So it's not hard for me to say it's not a bad idea to have a national standard and not worry about variations at the State level.

    Mr. CROCKER. If I could just respond to that, I would agree with what Jerry just said, but I would also like to stress that this is a different issue in case there's any question about it from privacy. And we're talking about electronic signatures, and it should not——

    Mr. BUCKLEY. I hope I didn't imply that.
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    Mr. CROCKER. No, you did not.

    Mrs. MALONEY. OK. Now Mr. Rosenthal, you raised really the challenge—and this is a particularly important one I think for financial services—the uniformity in the international marketplace. I could see, you know, just internationally ESIGN taking off probably faster than domestically, because of the need to communicate. How would we go about setting a uniformity in the international marketplace? What are your ideas? I think that you're right. We need uniformity or you're going to have more problems than answers.

    Mr. ROSENTHAL. Yes. It's true that ESIGN covers some of the international issues. We've obviously been focused since last year on the domestic issues. But the Basel Committee on Banking Supervision published guidelines for e-commerce and it addresses some of the issues there. And I would suggest that to echo the theme of standards uniformly applied that a closer look by this subcommittee at some of the provisions in the Basel guidelines might be beneficial. We would certainly like to be on an equal playing field with our counterparts overseas.

    Mrs. MALONEY. OK. Anybody else want to comment on the international challenge? Anybody?

    Mr. CROCKER. If I could just briefly say a word on that. I think there are very significant differences between the approach in the United States and the approach in the EU. If you look at the EU Digital Signature Directive, it basically boils down to being not technology neutral. It probably endorses PKI, Public Key Infrastructure. And in order for U.S. electronic signatures to be recognized in the EU, they have to be approved by a regulatory body there.
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    And the whole question of interface between what is being developed in the United States and elsewhere is a vast and complicated and vexing subject that needs attention.

    Mrs. MALONEY. OK. Great. Thank you. You raised in your testimony, Mr. Crocker, you know, what does ''reasonably demonstrate'' mean? And the difficulties of not having it more spelled out and as being just too vague. But you say it's workable. Would you like to comment further? Do you think we need to change that language? ''Reasonably demonstrates.'' I mean, what does it mean?

    Mr. CROCKER. I think the key is that industry has to have some flexibility to devise solutions that meet that term. It is a vague term. But I think concomitant with that is the idea of some flexibility. And I think industry has been groping to do that, and in most cases they've come up with solutions that seemed to pass a reasonableness test of reasonably demonstrating, through a pingback or an e-mail response.

    And again, I think it's important that the regulatory agencies and the Congress just keep a view to keeping some flexibility and reasonableness in allowing how people meet that test.

    Mrs. MALONEY. I think that in our Federal system one of the strengths is that we provide for flexibility and innovation. We look to see what States are doing. We allow them to experiment and come forward with their own formulas. But in something as important as e-commerce and communication, you need to have standards. Otherwise, it's going to really cause a lot more problems.
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    I'd like to ask Mrs. Saunders, could you provide examples of specific consumer protection provisions in existing law that ESIGN transfers to the online and how effective is that doing that, if at all?

    Ms. SAUNDERS. What ESIGN's consumer consent provision does is ensure that a consumer actually gets electronically what they would have received by paper in the real world. At least that's the intent of the provision.

    So let me detail just a few types of papers that a consumer would receive in real-world transactions. As Mr. Buckley described, when you are signing a mortgage on your house, there's a number of important documents that you receive that are required by Federal law that you want to be able to hold onto. If you are refinancing the mortgage you will get an early disclosure required under truth in lending describing your rates and points and fees. You will get a good faith estimate required under the Real Estate Settlement Procedures Act which describes your closing cost.

    When you close the loan, assuming you do that electronically as well, you get the contract itself, which in all States is required to be in writing, and you get truth in lending disclosures that describes when your payments are due and what your interest rate is, and you get a very important document, again required under RESPA called the HUD One, which describes the exchange of monies at the table. And you also get a notice of your right to cancel the transaction, which you may want to do if you find that the transaction is not as you thought it was, and that's why you've got 3 days to cancel.

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    All of those papers, which we all currently get and stick in a drawer and then look at if and when we have questions, you would get electronically by virtue of ESIGN.

    Mrs. MALONEY. Thank you. And my time has expired.

    Chairman KING. Thank you, Mrs. Maloney.

    We have been joined by Ms. Hart of Pennsylvania who is going back and forth between committees and subcommittees and she has asked to make a statement. Ms. Hart.

    Ms. HART. Thank you very much for your indulgence, Mr. Chairman. I also very much appreciate you having this hearing. I apologize to the presenters. I'm going to bring all the testimony with me and make sure I get a chance to really review it over our break.

    I simply wanted to make a statement up front, and I may have questions that I'll address later to the witnesses. But I'm a freshman here and was the sponsor of our ESIGN legislation in Pennsylvania. We passed it in December of 1999. We basically followed the Uniform Electronic Transactions Act. However, we were very careful to try to make ours more technology neutral than the Uniform Act was.

    I think it's important that we do all we can to make sure that this is a user-friendly law and that it is something that both businesses and individuals alike will look at as something that they will use and that is practical. I think the input of the witnesses today is going to help us I think move in that direction.
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    The advantage I think to this is far beyond our borders in the United States. And in fact, as we dealt with the issue in Pennsylvania, the input I got was mostly from multinational corporations or fledgling internet corporations that were basically starting their work by trying to use ESIGN and using ESIGN without the benefit of our law to begin with, which I didn't think was very smart, but they wanted to try to do.

    Because I'm a lawyer, I thought that was ill-advised. Obviously, we're all concerned about the enforceability of the contracts made over the internet. But I do know that now we've gotten up to 34 States I think that have adopted their own versions of either the Uniform Electronic Transactions Act or ESIGN to govern their electronic transactions, and I think 13 additional States obviously have bills pending.

    I think it's important for us on the Federal level to try to make them as uniform as possible. As I said, it's really not going to be that effective if we have 50 different laws that don't obviously comport with each other. But we're still—if we try to make sure that somehow we can control what goes on throughout the world, because we're not going to be able to do that. I think our goal here is to have an acceptable standard, an acceptable, especially from the things that I've gotten through in some of the testimony, a standard dealing with consent.

    I believe that it should be less regulated rather than more regulated. That is, I think whatever is agreed to between the parties should be effective. Now when it comes from a large corporation to a bunch of customers, I think that's where we start to get into a sticky situation, and obviously customer error or misunderstandings and things like that have to be I think provided for by our law.
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    But I certainly don't want to take the responsibility of the consumer off the consumer. I think we have to make sure that our requirements for consent are clear, especially in those levels where we have a large company and consumer.

    As I said, I will take the time to review the testimony. I just want to share that. I've talked with several groups who are struggling to fully implement their own e-commerce into their business practice, both small corporations and very large multinationals. Some of them have been successful with it. Their problems still do stem from I think the things that I'm hearing, at least that I've seen so far in the testimony regarding consent. So I'll be looking forward to what we do further.

    I also obviously agree with the Chairman that we certainly don't want to jump into doing anything that might make it worse, since this is a very new law and we're still trying to shake out exactly what we need to do, if anything.

    So again, I want to thank the Chairman for this hearing. I want to thank the witnesses for appearing today and for my colleagues who I know have also been in and out of the hearing. So thank you, Mr. Chairman, for your indulgence. I yield back.

    Chairman KING. Thank you very much, Ms. Hart.

    Mr. Hinojosa.

    Mr. HINOJOSA. I just have one last question, Mr. Chairman, and I'll be brief.
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    Margot, in your presentation—am I pronouncing it correct? Margot?

    Ms. SAUNDERS. Actually, it's Margot.

    Mr. HINOJOSA. Margot.

    Chairman KING. I would just say for the record, if anybody has a difficult name to pronounce, it's Mr. Hinojosa.


    Mr. HINOJOSA. You're very kind, Mr. Chairman.

    Ms. SAUNDERS. My mother decided to make life difficult for me.

    Mr. HINOJOSA. In the testimony on page 7, I was reading with great interest the portion about the danger. And you give an example of a person going in to buy an automobile and the salesman saying that it would be cheaper and better if they could just do this electronically. The lady didn't have a computer, as 50 percent of Americans do not have computers. And you go on through this.

    And the concern that really is like a red flag to me is that if in this example the lady were to sign the contract and they would say that they would send it electronically and let her go to a public library and get the documents, there would be opportunities to change the electronic record after the signature was affixed to the contract. And you say that there is nothing in ESIGN which requires that the process of electronically signing a record would prevent alteration of the record. How can we in this subcommittee help consumers so that that will not happen?
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    Ms. SAUNDERS. Well, I have a lot of ideas. We presented during the debate of ESIGN that language be added to the electronic signature statement very similar to what was in Mr. Bliley's original bill, which was that once an electronic signature was applied to a document it would prevent alterations to that document afterward. That was seen to be not technology neutral, I believe, because an electronic signature under ESIGN can be anything from a digital signature, which in fact does lock a document once it's supplied, to a click or just typing your name at the bottom. It's anything.

    So there is language that we could certainly add to the definition of electronic signature that would say something like once an electronic signature is applied to an electronic record, it should be essentially locked or not alterable. That seems to me to be technology neutral, but obviously not everyone agreed.

    But there are a number of State laws around the country that have similar standards. The status of those State laws given ESIGN I think is in some disarray. There is a question as to the extent to which ESIGN preempts them if they are not considered technology neutral.

    So there are things you can do. As to whether this Congress will do them, that's another question.

    Mr. HINOJOSA. Well, that's our responsibility and we thank you, Ms. Saunders. Thank you. Thank you, Mr. Chairman.

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    Chairman KING. Thank you, Mr. Hinojosa.

    Mr. Rosenthal, I just have one question. At the end of your testimony, and it sort of reaffirms what you said earlier, you talk about some of the provisions making implementation cumbersome. But you seem somewhat sanguine about it, suggesting that the marketplace can work out these difficulties. In the course of the marketplace resolving the difficulties, are you concerned about any potential litigation, massive litigation? And would any of your members be willing to be the one on the spot as far as that litigation?

    Mr. ROSENTHAL. Well, first let me tell you that I'm not a lawyer so I am always concerned about litigation.


    Mr. ROSENTHAL. This is an evolving field right now. And the fear that I have as I am charged with implementing these kinds of technologies is that we become overly prescriptive up front and it limits the ability of our organizations to do business with consumers. And I don't think that that was the intent of ESIGN. In fact, I'm not sure it's the intent of most of the legislation coming out of Congress to do that.

    So I would tell you that I would guess there is most likely going to be litigation on certain issues, and the industry is going to have to work itself out or work through some of these issues. But to be prescriptive about the solution in fact may work against what I think ESIGN was intended to deliver to businesses and consumers.

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    Chairman KING. Anybody want to comment on that? Especially any of the lawyers?

    Mr. CROCKER. Well, I think that the fear of litigation is certainly affecting people's use of ESIGN. I do know instances where financial institutions have decided to not rely on it because of that concern.

    Chairman KING. We just had a bell here for a vote on the House floor. I have concluded my questions. Does anybody else have any comment they want to make on that question?

    [No response.]

    Chairman KING. If not, I want to thank the Ranking Member, Mrs. Maloney, for her assistance, cooperation today. I want to thank the staff. And most of all, I want to thank the witnesses for coming here, for your testimony. It was very enlightening. You were very patient. You endured a lot. You have given us certainly a considerable amount of information which we're going to have to digest and analyze, and this really is an evolving area. So you really have contributed immeasurably, and I thank you very much for your cooperation and your testimony.

    The meeting stands adjourned. And without objection, the record of today's hearing will remain open for 30 days to receive additional material and supplementary written responses from the witnesses to any question posed by a Member of the panel. This hearing of the Subcommittee on Domestic Monetary Policy, Technology, and Economic Growth is adjourned.
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    [Whereupon, at 11:51 a.m., the hearing was adjourned.]