Motor vehicle financing via the Internet

INTRODUCTION

(1) When a vehicle is financed through a web site or when financing is facilitated through a web site, the full array of federal and state laws(2) which apply to the traditional delivery of financing may also apply to the web site operators and the finance entities linked with such web sites. In addition, laws specifically related to electronic transactions must be considered. In the context of consumer loans,(3) credit sales,(4) and leases(5) of motor vehicles, this Article will examine: (i) what business licenses are necessary to engage in Internet financing

THRESHOLD ISSUES: BUSINESS LICENSING AND FORM OF FINANCE COMPANY

INTRODUCTORY ISSUES

Two threshold issues will confront every organization contemplating motor vehicle financing via the Internet: (i) what form of finance company or web site operation or combination thereof should provide the financing

CONSUMER LOANS AND CREDIT SALES

As a general rule, national and federal savings banks will be exempt from state licensing requirements for the origination of consumer loans or financing of credit sale contracts.(14) State chartered banks, industrial loan companies, and credit unions may also be exempt from such licensing requirements, but to a lesser extent than national banks or federally chartered savings banks. Several states exempt national banks, federal savings banks, and state chartered banks under laws of the state regulating consumer loans or credit sale contracts, but require licensing of “foreign” banks or those which are chartered outside of the state imposing the licensing requirement.(15) Non-bank subsidiaries of banks, independent finance companies, and captive finance companies will likely have to be licensed as consumer lenders and motor vehicle retail installment sale finance companies in a significant number of jurisdictions.(16)

CONSUMER LEASES

With respect to consumer motor vehicle leasing, at least ten states will require lessor licensing regardless of the form of business organization.(17) In these states, there are no exemptions or federal pre-emption shelters for national or state-chartered banks. Some states, such as New Jersey,(18) will distinguish between direct, two-party lease transactions and indirect lease transactions, where an originating dealer assigns the leased vehicle and lease contract to a finance entity immediately after the execution of the lease contract, and require lessor licenses only in the direct, two-party scenario. In Texas, it is likely that web site operators will have to be licensed as “lease facilitators” because they are soliciting or procuring persons to enter into lease contracts.(19)

REFERRAL FEES

If a web site operator is being paid a fee for the referral of a customer for a consumer loan, the operator will likely have to be licensed as a consumer loan broker in at least eighteen states.(20) Note that the fee could be paid in advance or after the loan has been closed by either the consumer or the finance company. Whether the web site operator receives a referral fee versus a document processing fee will be dependent upon the structure of the transaction. The brokering of consumer leases and retail installment sale contracts appears to be subject to minimal license regulation.(21) If a web site operator is not making the actual consumer loan or providing credit sale or lease financing, but rather is referring the customer to a licensed financial organization, then the operator generally will not have to be licensed under consumer lending, sale finance, or leasing statutes or regulations,(22) except for the possible brokering licenses discussed above.

SUPPLEMENTAL PRODUCTS

As a by-product of the Internet, the average vehicle purchaser is armed with a tremendous amount of information when he or she negotiates the sale of the vehicle, including the manufacturer’s suggested retail price of the vehicle (MSRP), the vehicle’s wholesale price (the price the dealer paid to acquire the vehicle from the manufacturer), incentives, rebates, and holdback reserves.(23) This information has enabled informed purchasers to narrow the profit margins derived from the sale of new motor vehicles. Consequently, motor vehicle dealers will look to offset the lower margins through the finance income and supplemental products sold in connection with the vehicle. Property and casualty insurance, credit life and disability insurance, vendor’s single interest insurance, vehicle warranty contracts, mechanical breakdown protection contracts, and GAP products(24) are examples of these supplemental products. If the web site operator or finance company or both share fees or premiums either directly or indirectly from the sale of those supplemental products which are deemed insurance, then insurance agent licensing requirements will be triggered.(25) In addition, the web site operator or finance company could be subject to insurance premium finance licensing where the cost of the insurance product is built into the motor vehicle financing.(26)

ELECTRONIC DOCUMENTATION STATE AND FEDERAL LAWS

Once the business licensing issues and structure of the e-business operation have been resolved, a prospective Internet finance entity must determine how consumer loans, retail installments sales transactions, or consumer leases will be offered and consummated on-line. Although a transaction may be offered and consummated electronically, it nevertheless remains subject to the “traditional” state and federal consumer credit laws. These laws include state and federal consumer lending laws for loan transactions, retail installment sales laws for credit sale transactions and consumer leasing laws for lease transactions, state consumer loan broker laws for brokered transactions, state and federal credit reporting laws and regulations, state and federal collection laws, state and federal consumer privacy laws and regulations, and other disclosure, fair lending, and consumer protection statutes.

Beyond these traditional laws, a new frontier of laws designed expressly for electronic transactions is emerging. Among the most important of these new laws is the federal Electronic Signatures in Global and National Commerce Act (ESIGN),(27) which generally became effective October 1, 2000.(28) ESIGN addresses, in part, the following unique cyber-lending concerns: Is an electronic document “in writing”?

State legislation is also important. The Uniform Electronic Transactions Act (UETA), as approved and recommended for enactment in 1999 by the National Conference of Commissioners on Uniform State Laws (NCCUSL),(34) allows the use of electronic records and electronic signatures in consumer credit transactions.(35) As of the writing of this Article, the UETA has been adopted in twenty-four states, with some modifications from the 1999 official text.(36) Some states have adopted non-UETA electronic signature laws, which vary in their approach to this delivery medium.(37)

Prospective on-line finance entities must consider the interrelationship between ESIGN, UETA, and non-UETA state laws. Section 102 of ESIGN permits states to modify, limit, or supersede the general authorization provisions of section 101 of ESIGN, including the section 101 (c) disclosure provisions. State preemption authority, however, is limited. Federal writing, signature, and disclosure requirements remain subject to ESIGN. Section 101 of ESIGN may be modified, limited, or superseded with respect to state law in a state that has adopted or subsequently adopts the official version of UETA.(38) States may also adopt other provisions authorizing alternative procedures or requirements for the use or acceptance of electronic records or signatures, provided that such alternatives are consistent with the substantive provisions of ESIGN and do not favor a particular technology.(39) These preemption provisions create some uncertainty as to which state requirements remain effective. Accordingly, prospective Internet finance entities must review existing and subsequent state adoptions of modified versions of UETA and non-UETA electronic signature legislation to determine whether these state laws are preempted under ESIGN.(40)

UETA does not contain the same consent and notification provisions as ESIGN. If a state adopts UETA, without modification, a finance entity could, for purposes of state law, provide a consumer contract and any state-required disclosures electronically without complying with the consumer consent process and detailed disclosures required under ESIGN. If, however, state law also requires consumer contracts to include the disclosures required under the federal Truth in Lending Act,(41) a creditor may be required to comply with the section 101 (c) consent and disclosure provisions under ESIGN in order to deliver the contract electronically. This latter result could also be reached in any consumer loan, retail installment sale, or lease transaction in which federal disclosures are required to be made.

ESIGN authorizes state and federal regulatory agencies to issue regulations, orders, or guidance interpreting the requirements of the statute.(42) Although the Federal Reserve Board (FRB) had previously published both proposed and interim rules(43) regarding the electronic delivery of disclosures required under the Consumer Credit Protection Act,(44) at this writing the FRB, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency and Office of Thrift Supervision (collectively, the bank regulatory agencies) have not published a proposed rule interpreting ESIGN as it applies to the various statutes for which the bank regulatory agencies have authority. The bank regulatory agencies, however, have invited comment on certain types of communications between financial institutions and consumers via an electronic medium. In the Supplementary Information to a proposed rule(45) published by the bank regulatory agencies prescribing, among other things, the content and format of the affiliate sharing opt-out disclosure under the Fair Credit Reporting Act,(46) which must be included as part of a financial institution’s privacy notices, the bank regulatory agencies invited comment on whether and how the proposed rule should be modified in light of ESIGN.(47) Although ESIGN prohibits any agency rule-making from adding to the statutory requirements, it remains unclear whether interpretive guidance from the bank regulatory agencies might, nevertheless, add to a finance entity’s compliance burden under section 101 (c).

CREDIT APPLICATIONS, ADVERSE ACTION NOTICES, AND FINANCE CONTRACTS

ESIGN and UETA permit credit applications and finance contracts to be delivered electronically. ESIGN, however, does not affect any state or federal law prescribing the format, content, timing, type-size, or conspicuousness of any required disclosures. UETA does not modify any similar requirements at the state level. Although the overall “look and feel” of electronic forms may vary from their paper counterparts, on-line credit applications and finance contracts must be designed to include any disclosures and notices required to be provided under state or federal law within these existing constraints. For example, the “federal box” in an on-line closed-end loan agreement should be identical to the same disclosures provided in paper form. Also, if state law requires a notice to appear in bold type immediately above the borrower’s signature, this notice must be provided in bold type immediately above the space designated for the borrower’s electronic signature on the on-line finance contract. Because on-line credit applications may be underwritten and declined at Internet speed, finance entities may also elect to provide approvals, counteroffers, or adverse action notices electronically. As with any other federally-required disclosures, these electronic notices remain subject to the content and timing requirements of the Equal Credit Opportunity Act(48) and the Fair Credit Reporting Act.(49)

GOVERNING LAW

Finance entities must select the applicable governing state law for consumer finance transactions in the cyber-frontier. This selection may depend on the organization of the finance entity, the location of the finance entity, the state of residence of the consumer, the location of the originating dealer, or the type of transaction to be offered electronically. For example, in a direct loan originated by a state-chartered bank, the bank may choose to have the law of the state in which the bank is chartered govern the transaction. In an indirect transaction, the finance entity may choose to apply the law of the state in which the originating dealer is located. In both examples, even though the consumer may be signing the finance contract electronically in his or her state of residence, the law of the consumer’s state of residence may not apply. Neither ESIGN nor UETA provide guidance on what choice of governing law may be enforceable.

SIGNATURES

A prospective Internet finance entity must determine the means that will be used to document an individual’s electronic signature on the finance contract and other documents. ESIGN and UETA both define an “electronic signature” as “an electronic sound, symbol, or process, attached to or logically associated with a contract or other record and executed or adopted by a person with the intent to sign the record.”(50) This definition is technology neutral. Digital signature products using the “public key infrastructure” (PKI) may be used. The definition is also broad enough to include a simple “click through” signature. Prospective Internet finance entities should carefully weigh the practical and legal issues associated with the use of more secure forms of electronic signatures, the costs of offering and recognizing several technologies (e.g., a number of companies offer PKI products, but the products cannot operate with each other), and the risks associated with the use of less sophisticated electronic signatures, in determining the means that will be used to document electronic signatures.

PRIVACY NOTICE

Under the regulations adopted by the bank regulatory agencies and the Federal Trade Commission to implement the privacy provisions(51) of the Gramm-Leach-Bliley Act (privacy regulations),(52) a financial institution(53) must generally provide its customers(54) with a privacy notice no later than the time the customer relationship(55) is established.(56) A financial institution must also provide consumers,(57) with whom a customer relationship is not established, with a privacy notice before the financial institution discloses any nonpublic personal informations(58) regarding the consumer to any non-affiliated third party outside of one of the regulatory exceptions to disclosure.(59) The privacy regulations will generally be effective July 1, 2001.(60)

Every on-line applicant will be considered a consumer of the financial institution and may be entitled to a privacy notice at the time of application depending on the financial institution’s proposed information sharing practices. A customer relationship is established, however, in all direct financing transactions consummated over the Internet. Accordingly, a financial institution must ensure that its on-line customers are provided a copy of the institution’s initial privacy notice no later than the time of execution of the finance contract.

The privacy regulations permit a financial institution to provide any privacy notice electronically provided that the consumer agrees to this delivery method.(61) The regulations suggest that the notice be posted on the electronic site and that the consumer be required to acknowledge receipt of the notice as a necessary step to obtaining a particular financial product or service.(62) Although the regulations do not provide guidance on how a financial institution should document the consumer’s consent to the use of electronic delivery or the consumer’s acknowledgment of receipt of the electronic privacy notice, the consumer’s consent and acknowledgment should presumably be documented in accordance with the requirements of section 101(c) of ESIGN.

The privacy regulations also include other “visual” disclosure rules. If a financial institution provides a privacy notice on a web page, the notice must be designed to call attention to the nature and significance of the information in the notice. Text or visual cues should be used to encourage scrolling down the page if necessary to view the entire notice. Other elements on the web site, such as navigation bars, text, graphics, hyperlinks, or sound, should not distract attention from the notice. Further, the notice must be placed on a screen that consumers frequently access, such as the page on which the credit application appears, or hypertext links must be placed on that page to facilitate direct access to the notice. If links are used, the links must be labeled appropriately to convey the importance, nature, and relevance of the notice.(63) The electronic notice also remains subject to the unique “clear and conspicuous” disclosure requirements under the privacy regulations.(64)

SPECIAL RESTRICTIONS UNDER STATE LAW

Captive finance companies may face significant restrictions on their Internet financing activities. For example, effective July 18, 2000, Arizona law precludes motor vehicle manufacturers and their captive finance companies from providing direct financing arrangements to Arizona residents, including such arrangements offered and negotiated through the Internet.(65) This law appears to have been passed in response to concern by motor vehicle dealers that the Internet will allow consumers and finance companies to by-pass local “brick and mortar” dealerships for both the sale and financing of vehicles. The Alliance of Automobile Manufacturers and the Association of International Automobile Manufacturers filed suit against the State of Arizona in July 2000 challenging the constitutionality of the law.(66) Similar restrictions on Internet financing activities might be proposed in other states during their 2001 legislative sessions. Prospective Internet finance entities should monitor similar state developments before and after rolling out an on-line financing program.

CONCLUSION

A prospective Internet finance entity will need to assess a variety of issues before launching their on-line enterprise. They will first have to determine the structure of the business organization for their web site and financing platforms and obtain applicable state brokering and finance licenses. In providing the financing, they will need to follow ESIGN and applicable state UETA and non-UETA statutory guidelines for electronic documentation, including any applicable consent and notification procedures. The traditional consumer disclosure laws will apply to the electronic documents. In addition, the finance entity will need to consider the governing state law for their on-line transactions, the means to be used to document electronic signatures, and the delivery of privacy notices. Captive finance companies may face extraordinary barriers in the Internet finance markets if state laws prohibiting direct financing withstand legal scrutiny. State and federal laws are evolving to address the transition from “bricks and mortar” financing to on-line financing, but navigating the path to this new frontier may be challenging.

(1.) Tracy Boyd, Potential is Huge, but Deals Remain Elusive, AUTOMOTIVE NEWS, Oct. 23, 2000, at 40. Mr. Boyd reports that only about 2% of all new vehicle buyers submit an online application and 0.8% get loans from an on-line source.

(2.) The major federal consumer protection laws include: the Truth in Lending Act (TILA), 15 U.S.C. [subsections] 1601-1666j (1994 & Supp. V 1999)

(3.) A “consumer loan” will be subject to TILA where the loan is offered to consumers, the offering is done regularly, the loan is subject to a finance charge or is payable by a written agreement in more than four installments, the credit is primarily for personal, family, or household purposes, and the total amount financed is $25,000 or less. Id. [sections] 1603(3) (1994).

(4.) A “consumer credit sale” is “a sale in which the seller is a creditor.” 12 C.F.R. [sections] 226.2(a)(16) (2000). The sale will be subject to TILA where it is offered to consumers, the offering is done regularly, the credit sale is subject to a finance charge or is payable by a written agreement in more than four installments, the credit is primarily for personal, family, or household purposes, see id. [sections] 226.1 (c) (2000), and the total amount financed is $25,000 or less, see 15 U.S.C. [sections] 1603(3).

(5.) “Consumer lease” under the CLA is defined as:

a contract in the form of a lease or bailment for the use of personal
property by a natural person for a period of time exceeding four months,
and for a total contractual obligation not exceeding $25,000, primarily for
personal, family, or household purposes, whether or not the lessee has the
option to purchase or otherwise become the owner of the property at the
expiration of the lease….

15 U.S.C. [sections] 1667 (1994).

(6.) National banks are incorporated and authorized to do business under the federal law governing national banking associations. 12 U.S.C. [subsections] 21-216d (1994 & Supp. V 1999). National banks are regulated by the Office of the Comptroller of the Currency. 12 U.S.C. [subsections] 1-15 (1994).

(7.) Federal savings banks are incorporated and authorized to do business under the federal law governing federal savings associations. 12 U.S.C. [subsections] 1461-1470 (1994 & Supp. V 1999). Federal savings banks are regulated by the Office of Thrift Supervision. 12 U.S.C. [subsections] 1462a-1463 (1994).

(8.) State chartered banks are incorporated and authorized to conduct business under the laws of a particular state. See generally 1A MICHIE ON BANKS AND BANKING ch. 1, [sections] 3 (1999).

(9.) Credit unions may be organized under either federal law and regulated by the National Credit Union Administration Board, see 12 U.S.C. [subsections] 1752-1795k (1994 & Supp. V 1999), or under state law and regulated by state credit union or financial institution agencies.

(10.) Industrial loan companies are organized under and governed by state laws. These types of lenders include industrial savings banks, industrial loan and thrift companies, loan and investment companies, and Morris plan banks. An example under state law is Utah “industrial loan corporations” regulated by the Utah Commission of Financial Institutions. UTAH CODE ANN. [sections] 7-8-3 (1995 & Supp. 2000).

(11.) Non-bank subsidiaries of national and state chartered banks generally will be subject to regulation by the same regulatory agency overseeing the applicable bank. For example, non-bank subsidiaries of national banks will be regulated by the Office of the Comptroller of the Currency. 12 U.S.C. [subsections] 1-15.

(12.) Independent finance companies are those companies which are not national or federal savings banks, credit unions, or industrial loan companies. Examples include Franklin Capital Corporation, GE Capital Corporation, and World Omni Financial Corporation.

(13.) Examples of captive finance companies include BMW Financial Services NA, LLC, Ford Motor Credit Company, GMAC, Toyota Financial Services, and VW Credit, Inc.

(14.) State consumer loan licensing laws and retail installment sales finance licensing laws will typically exempt national banks and certain state-chartered banks. For example, national and state-chartered banks are exempt from Arizona’s consumer lender licensing requirements. ARIZ. REV. STAT. ANN. [sections] 6-602 (West 1999 & Supp. 2000). Similarly, national and state chartered banks are exempt from Florida’s motor vehicle sales finance company licensing requirements. FLA. STAT. ANN. [sections] 520.03(1) (West 1997). In addition, federal laws and regulations may preempt state consumer protection laws. See generally Darrell L. Dreher & Elizabeth L. Anstaett, Federal Savings Banks–The Vehicle of Choice, 52 CONSUMER FIN. L.Q. REP. 407 (1998).

(15.) Several states do not exempt “foreign banks” from consumer loan licensing. As an example, the California Finance Lenders Law only exempts persons doing business under any law of the State of California or of the United States relating to “banks, trust companies, savings and loan associations, insurance premium finance agencies, credit unions, small business investment companies, California business and industrial development corporations, or licensed pawn brokers.” CAL. FIN. CODE [sections] 22050(a) (West 1999 & Supp. 2001).

(16.) Under state laws, independent finance companies and captive finance companies generally do not qualify for statutory exemptions from loan and credit sale licensing requirements. Similarly, nonbank finance companies may not always be able to piggyback off the bank exemptions.

(17.) These states include: Connecticut (motor vehicle lessor) CONN. GEN. STAT. ANN. [sections] 14-15 (West 1999)

(18.) The term “leasing dealer” under New Jersey law means a person who, in the ordinary course of business, offers or enters into motor vehicle leases or who, in the course of any twelve month period, offers or enters into more than three motor vehicle leases, but the term does not include a person to whom a lease is assigned by a leasing dealer (i.e., an indirect lessor). N.J. STAT. ANN. [sections] 56:12-61 (West Supp. 2000).

(19.) See TEX. REV. CIV. STAT. ANN. art. 4413(36), [sections] 1.03(18) (West Supp. 2001).

(20.) Arizona (advance fee loan broker) ARIZ. REV. STAT. ANN. [sections] 6-1302(A) (West 1999)

(21.) Louisiana and Texas regulate lease facilitators. LA. REV. STAT. ANN. [sections] 32:1254 (N)(1)(c) (West 1989)

(22.) Contrast Illinois’ sales finance agency laws, which are triggered if a person is in the business of making or purchasing retail installment contracts, 205 ILL. COMP. STAT. ANN. [sections] 660/2 (West 2000), with Michigan’s sale finance company laws which extend to any principal, employee, agent, or broker who may solicit the financing of installment sale contracts, MICH. COMP. LAWS ANN. [subsections] 492.102(6), 492.103 (West 1998).

(23.) The range of incentives, rebates, and holdback reserves will vary by vehicle and manufacturer/captive finance company.

(24.) A “GAP product” may be structured as a debt cancellation agreement or insurance product and is designed to protect the consumer against the so-called “gap” between: (i) liability of the consumer on the contract resulting from the vehicle’s total loss and (ii) insurance proceeds received for such total loss.

(25.) State insurance statutes will usually prohibit persons from soliciting or negotiating insurance in any manner without an insurance agent license. See MINN. STAT. ANN. [sections] 60K.02 (West 1999 & Supp. 2001).

(26.) As an example, Georgia requires licensing of insurance premium finance companies, but exempts banks or other lending institutions if they do not acquire any right, title, or interest in the insurance policy financed. GA. CODE ANN. [subsections] 33-22-2(2)-(3), 33-22-16(2) (2000).

(27.) Pub. L. No. 106-229, 114 Stat. 464 (2000) (to be codified at 15 U.S.C. [subsections] 7001-7031) [hereinafter ESIGN].

(28.) Id. [sections] 107(a).

(29.) The term “electronic signature” is defined under ESIGN as “an electronic sound, symbol, or process, attached to or logically associated with a contract or other record and executed or adopted by a person with the intent to sign the record.” Id. [sections] 106(3).

(30.) The term “electronic record” is defined under ESIGN as “a contract or other record created, generated, sent, communicated, received, or stored by electronic means.” Id. [sections] 106(4).

(31.) Id. [sections] 101(a)(1).

(32.) See id. [sections] 101(c).

(33.) Id. [sections] 101(c)(1). Section 101(c)(1) of ESIGN provides as follows:

CONSUMER DISCLOSURES-

(1) CONSENT TO ELECTRONIC RECORDS.–Notwithstanding subsection (a) [which generally provides that a signature, contract or other record shall not be denied legal effect solely because it is in electronic form], if a statute, regulation, or other rule of law requires that information relating to a transaction or transactions in or affecting interstate or foreign commerce be provided or made available to a consumer in writing, the use of an electronic record to provide or make available (whichever is required) such information satisfies the requirement that such information be in writing if

(A) the consumer has affirmatively consented to such use and has not withdrawn such consent

(B) the consumer, prior to consenting, is provided with a clear and conspicuous statement–

(i) informing the consumer of (I) any right or option of the consumer to have the record provided or made available on paper or in nonelectronic form, and (II) the right of the consumer to withdraw the consent to have the record provided or made available in an electronic form and of any conditions, consequences (which may include termination of the parties’ relationship), or fees in the event of such withdrawal

(ii) informing the consumer of whether the consent applies (I) only to the particular transaction which gave rise to the obligation to provide the record, or (II) to identified categories of records that may be provided or made available during the course of the parties’ relationship

(iii) describing the procedures the consumer must use to withdraw consent as provided in clause (i) and to update information needed to contact the consumer electronically

(iv) informing the consumer (I) how, after the consent, the consumer may, upon request, obtain a paper copy of an electronic record, and (II) whether any fee will be charged for such copy

(C) the consumer–

(i) prior to consenting, is provided with a statement of the hardware and software requirements for access to and retention of the electronic records

(ii) consents electronically, or confirms his or her consent electronically, in a manner that reasonably demonstrates that the consumer can access information in the electronic form that will be used to provide the information that is the subject of the consent

(D) after the consent of a consumer in accordance with subparagraph (A), if a change in the hardware or software requirements needed to access or retain electronic records creates a material risk that the consumer will not be able to access or retain a subsequent electronic record that was the subject of the consent, the person providing the electronic record–

(i) provides the consumer with a statement of (I) the revised hardware and software requirements for access to and retention of the electronic records, and (II) the right to withdraw consent without the imposition of any fees for such withdrawal and without the imposition of any condition or consequence that was not disclosed under subparagraph (B)(i)

(ii) again complies with subparagraph (C).

(2) OTHER RIGHTS.–

(A) PRESERVATION OF CONSUMER PROTECTIONS.–Nothing in this title affects the content or timing of any disclosure or other record required to be provided or made available to any consumer under any statute, regulation, or other rule of law.

(B) VERIFICATION OR ACKNOWLEDGMENT.– If a law that was enacted prior to this Act expressly requires a record to be provided or made available by a specified method that requires verification or acknowledgment of receipt, the record may be provided or made available electronically only if the method used provides verification or acknowledgment of receipt (whichever is required).

(3) EFFECT OF FAILURE TO OBTAIN ELECTRONIC CONSENT OR CONFIRMATION OF CONSENT–The legal effectiveness, validity, or enforceability of any contract executed by a consumer shall not be denied solely because of the failure to obtain electronic consent or confirmation of consent by that consumer in accordance with paragraph (1)(C)(ii).

(4) PROSPECTIVE EFFECT.—Withdrawal of consent by a consumer shall not affect the legal effectiveness, validity, or enforceability of electronic records provided or made available to that consumer in accordance with paragraph (1) prior to implementation of the consumer’s withdrawal of consent. A consumer’s withdrawal of consent shall be effective within a reasonable period of time after receipt of the withdrawal by the provider of the record. Failure to comply with paragraph (1)(D) may, at the election of the consumer, be treated as a withdrawal of consent for purposes of this paragraph.

(5) PRIOR CONSENT.–This subsection does not apply to any records that are provided or made available to a consumer who has consented prior to the effective date of this title to receive such records in electronic form as permitted by any statute, regulation, or other rule of law.

(6) ORAL COMMUNICATIONS.–An oral communication or a recording of an oral communication shall not qualify as an electronic record for purposes of this subsection except as otherwise provided under applicable law.

(34.) UNIFORM ELECTRONIC TRANSACTIONS ACT (1999), available at <http://www. law.upenn.edu/bll/ulc/uecicta/uetast84 htm> [hereinafter UETA].

(35.) Id. [sections] 7. UETA does not apply to transactions governed by the Uniform Commercial Code, as in effect in any state, other than sections 1-107 and 1-206, Article 2, and Article 2A. Id. [sections] 3(b). States may also identify other laws not subject to UETA. Id.

(36.) As of March 2001, the following states had adopted UETA: Arizona, California, Delaware, Florida, Hawaii, Idaho, Indiana, Iowa, Kansas, Kentucky, Maine, Maryland, Michigan, Minnesota, Nebraska, North Carolina, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Dakota, Utah, Virginia, and Wyoming. See UETA Online web site, available at <http: //www.uetaonline.com>.

(37.) Some state laws validate any type of electronic signature, others require some form of security, and others only validate digital signatures. The laws also vary with respect to the types of transactions that are covered.

(38.) ESIGN, supra note 27, [sections] 102(a)(1).

(39.) Id. [sections] 102(a)(2)(A).

(40.) See Jane K. Winn & Robert A. Wittie, E-Sign of the Times, E-COMMERCE L. REP.,July 2000

(41.) 15 U.S.C. [subsections] 601-1666j (1994 & Supp. V 1999).

(42.) ESIGN, supra note 27, [sections] 104(b).

(43.) In May 1996, the Federal Reserve Board (FRB) published a proposed rule to permit financial institutions to use electronic communication to deliver the disclosures required by Regulation E. Electronic Fund Transfers, 61 Fed. Reg. 19,696 (1996) (to be codified at 12 C.F.R. pt. 205) (proposed May 2, 1996). In March 1998, the FRB published an interim rule under Regulation E and proposed rules under Regulations B, M, Z, and DD regarding the electronic delivery of required disclosures. Electronic Fund Transfers, 63 Fed. Reg. 14,598 (1998) (to be codified at 12 C.F.R. pt. 205) (proposed Mar. 25, 1998)

(44.) 15 U.S.C. [subsections] 1601-1693r (1994 & Supp. V 1999).

(45.) Fair Credit Reporting, 65 Fed. Reg. 63,120 (2000) (to be codified at 12 C.F.R. pts. 41, 222,334, 571) (proposed Oct. 90, 2000).

(46.) 15 U.S.C. [subsections] 1681-1681u (1994 & Supp. V 1999).

(47.) Fair Credit Reporting, 65 Fed. Reg. at 63,124.

(48.) 15 U.S.C. [subsections] 1691-1691f(1994 & Supp. v 1999).

(49.) 15 U.S.C. [subsections] 1681-1681u (1994 & Supp. v 1999).

(50.) ESIGN, supra note 27, [sections] 106(5)

(51.) The bank regulatory agencies’ privacy regulations were published at 65 Fed. Reg. 35,162 (2000) (codified at 12 C.F.R. pts. 40, 216, 332,573). The Federal Trade Commission’s privacy regulations were published at 65 Fed. Reg. 33,646 (2000) (codified at 16 C.F.R. pt. 313). The privacy regulations published by the bank regulatory agencies and the Federal Trade Commission are hereinafter collectively referred to as the privacy regulations. Each agency’s regulations are published under different chapters and parts of the Code of Federal Regulations, but are generally consistent in organization. For ease of reference to the agencies’ regulations, the section numbers are hereinafter referred to by subpart only, e.g.,–C.F.R. [sections] –.3(k).

(52.) Gramm-Leach-Bliley Financial Modernization Act, Pub. L. No. 106-102, 113 Stat. 1338 (1999) (codified at scattered sections of 12 U.S.C. and 15 U.S.C.).

(53.) The term “financial institution” is defined under the privacy regulations as “any institution the business of which is engaging in activities that are financial in nature or incidental to such financial activities as described in section 4(k) of the Bank Holding Company Act of 1956 (12 U.S.C. [sections] 1843(k)).”–C.F.R.[sections] –.3(k)(2001).

(54.) The term “customer” is defined under the privacy regulations as “a consumer who has a customer relationship with a [bank or financial institution.]” Id. [sections] –.3(h).

(55.) The term “customer relationship” is defined under the privacy regulations as “a continuing relationship between a consumer and a [bank or financial institution] under which the [bank or financial institution] provides one or more financial products or services to the consumer that are to be used primarily for personal, family, or household purposes.” Id. [sections] –.3(i)(l). A “continuing relationship” exists when a consumer obtains a loan from a bank or financial institution. Id. [sections] –.3(i)(2)(B).

(56.) See id. [sections] –.4(a).

(57.) The term “consumer” is defined under the privacy regulations as “an individual who obtains or has obtained a financial product or service from a [bank or financial institution] that is to be used primarily for personal, family, or household purposes, or that individual’s legal representative.” Id. [sections] –.3(e)(1). This includes “[a]n individual who applies to a [bank or financial institution] for credit for personal, family, or household purposes….regardless of whether the credit is extended.” Id. [sections] –.3(e)(2)(i).

(58.) The term “nonpublic personal information” is defined under the privacy regulations as “[p]ersonally identifiable financial information

(59.) Id. [sections] –.4(a)(2).

(60.) Id. [sections] –.18.

(61.) Id. [sections] –.9(a).

(62.) Id. [sections] –.9(b)(1)(iii).

(63.) Id. [sections] –.3(b)(2)(iii).

(64.) Id. [sections] –.3(b)(1).

(65.) ARIZ. REV. STAT. ANN. [sections] 28-4460 (West Supp. 2000). The statute prohibits a “factory” from directly or indirectly competing with or unfairly discriminating among its dealers. Id. [sections] 28-4460(A). The term “factory” includes captive motor vehicle finance companies. Id. [sections] 28-4460(C)(3). The practices prohibited include a factory “selling, leasing or providing, or offering to sell, lease or provide, vehicles or products, services or financing to any retail consumer or lead.” Id. [sections] 28-4460(B)(2). Three-party retail installment sale or lease transactions in which the dealer assigns the contract to a captive finance company are not prohibited.

(66.) Complaint, Alliance of Auto. Mfrs. v. Hull, No. CV-00-1324-PHX-PGR (D. Ariz. July 12, 2000). A temporary restraining order has been entered blocking enforcement of the law pending the outcome of the litigation. On March 5, 2001, a hearing was held on the Alliance’s request for a preliminary injunction. The judge has taken this request under advisement.

Kenneth J. Rojc and Elena A. Lovoy(*)

Kenneth J. Rojc is a partner with the law firm of Nisen & Elliott and manages the firm’s automotive financial services legal practice in Chicago, Illinois. Mr. Rojc is a member of the Illinois bar and has been extensively involved with federal and state regulators in connection with consumer lease and credit sale disclosure laws. Elena A. Lovoy is a senior associate with Nisen & Elliott and concentrates her practice in consumer financial services. Ms. Lovoy is a member of the Alabama and Louisiana bars.