electronic credit department - bell nunnally & martin llp · © 2013 bell nunnally & martin...

© 2013 Bell Nunnally & Martin LLP. All Rights Reserved.

THE ELECTRONIC CREDIT DEPARTMENT

BY RANDALL K. LINDLEY

NACM ALL SOUTH CONFERENCE SEPTEMBER 23, 2013

DALLAS, TEXAS


Good Afternoon!!


THE ELECTRONIC CREDIT DEPARTMENT


What does that mean?


A. A department open 24/7 where applicants complete and submit documents entirely on-line

B. A department filled with credit managers and credit analysts, each described as having an…

“Electric Personality”


FATHER OF ELECTRICITY

Change…

…can be daunting at times…


Taking the paper credit application

and turning it into an electronic credit application

…can also be daunting…


Each of you are a modern-day

Benjamin Franklin!!


We have traveled a long way from Benjamin’s kite

To the Consumer Electronics Convention…


CUTTING EDGE ELECTRONICS

Includes

• Smart Phones

• Tablets

• HDTVs

And now … we move into the Electronic Future…


TODAY,

OUR 2½ HOUR MISSION IS…


…TO BOLDLY GO WHERE

NO CREDIT DEPARTMENT

HAS GONE BEFORE!!!


WE ARE NOW ENTERING THE

ERA OF THE ELECTRONIC

CREDIT DEPARTMENT


CREDIT MANAGER’S

Job Description for 2013:

• effectively implement electronic documents

• learn how to make them legally enforceable

• become an “Internet Aficionado"


TODAY, WE WILL DISCUSS

1. The World of E-Commerce

― Legal Issues and E-Contract Formation

2. Electronic Documents – implementation of

― Credit Application

― Guaranty

3. Using the Internet and Social Media


POWERPOINT IS AVAILABLE

INSTRUCTION SHEET WITH DIRECTIONS TO A LINK ON LAW FIRM’S WEBSITE

OR

“LEAVE A BUSINESS CARD”


THE WORLD OF E-COMMERCE

LEGAL ISSUES AND E-CONTRACT FORMATION


THE AGE OF THE INTERNET

Quite literally – the world is now “connected”

The business world is marching toward the “Paperless Office”


GLOBAL ECONOMY

Indeed, we have an…

E-conomy


INTERNET USE…

…has expanded dramatically for two reasons:

• Smart phones • tablets


THE NUMBERS FOR 2012

• 75% of Americans are online (239 million people)

• 114 million people are mobile internet users

— includes smart phone and tablet users

— this number increased 17.1% from 2011


THE NUMBERS FOR 2013

• Over 50% of American adults now have a smart phone with access to the internet

• 75% of those smart phones run out of battery power by 3:00 PM


TO SURVIVE

Businesses must connect via the internet with customers and potential customers

• a competitive advantage


WRITTEN CONTRACTS…

…are the backbone of free enterprise Two concerns:

• are they enforceable • are they secure


E-CONTRACTS

We have the same concerns

• are they enforceable

• are they secure


THREE TYPES OF CONTRACTS

• Traditional Paper Contract

• Hybrid Contract

• E-Contract

All three governed by the well-defined principles of contract law


TRADITIONAL PAPER CONTRACT

The terms are within the “four corners” of the document

The document is signed by the parties


TRADITIONAL PAPER CONTRACT

“The Credit Application”

Face-to-face meeting – Applicant signs contract

or

Electronic Transmission – via e-mail or download Signature of applicant is faxed Signature of applicant is scanned and e-mailed


HYBRID CONTRACT

Paper contract references terms and conditions posted online

Courts are beginning to enforce terms posted on web that are incorporated “by reference” into written agreements


THE FUTURE IS NOW!!

Today – we will learn about E-contracts that are Electronically…

• Formed • Stored • Signed


E-CONTRACTS

Governed by the same basic legal principles as written contracts


E-CONTRACT FORMATION

The mouse is mightier than the pen!


ONE KEY DIFFERENCE BETWEEN…

Written Contracts

And

Electronic Contracts

is…

the Signature

BELLNUNNALLY.COM


SIGNATURES

• Identification of the signer

• Conveys the requisite consent to the contract’s specific terms (i.e. acceptance)

• It’s your…


FORMATION OF AN E-CONTRACT

Requires that the parties…

• identify themselves – verify they are who they say

• establish they are aware of the terms, and

• confirm they accept and agree to the specific terms


IDENTIFICATION

Face-to-face business transaction

― not a problem

Electronic business transaction

― verification is problematic


E-CONTRACT ENFORCEABILITY

• The Law of the “Mouse”

• Two laws:

– E-SIGN

– UETA


E-SIGN “ELECTRONIC SIGNATURES IN GLOBAL AND NATIONAL COMMERCE ACT”

• Enacted June 30, 2000

• To ensure the legality of electronic contracts and signatures

• Applies to on-line business in all 50 states and across state lines

• Makes electronic contracts just as enforceable as if written on paper


CONSENT OF SIGNATURE

A Writing —

A Mark —

Electronic —

X

?????


“ANY ELECTRONIC SOUND, SYMBOL OR PROCESS LOGICALLY

ASSOCIATED WITH A CONTRACT OR OTHER RECORD AND EXECUTED OR

ADOPTED BY A PERSON WITH THE INTENT TO SIGN”

E-SIGN defines E-Signatures as:


Ding:

“You’ve got mail!”

“Chicks dig me!!”

Electronic Sound?


UETA

• Uniform Electronic Transactions Act

• Effectively makes the E-SIGN rules applicable under state law

• Adopted in 47 states (not in the states of New York, Illinois or Washington)


NEW YORK, ILLINOIS AND WASHINGTON

• Still have laws enforcing contracts

• Signatures are enforceable to show consent

• E-Sign and UETA make it easier to prove

• Validates by law the electronic process


Same challenges as ink-and-paper counterparts:

• Mistaken identity,

• Mistake as to the terms

• Forgery, and

• Unauthorized alteration of terms

BELLNUNNALLY.COM

E-CONTRACT PROBLEMS


E-CONTRACT PROBLEMS

The Solution:

• Obtain a “credible” e-signature

• Maintain the security of the e-contract


THE E-SIGNATURE SOLUTION

A valid and enforceable E-Signature… • gathers identification information; and • uses an authentication process

― which captures an IP address in an audit trail

― created by an Information Technology Department or an Electronic Signature Service Provider


THE E-SIGNATURE SOLUTION

Maintain Security by…

• establishing a secure web portal where customers can access the company’s contracts, which are

— stored on independent server; and

— completed securely on-line

© 2013 Bell Nunnally & Martin LLP. All Rights Reserved. BELLNUNNALLY.COM

Server for Business

Website

E-contract

Terms

Internet

E-Signature

ESSP Server


Legally and technologically…

Electronic Signature and

the Digital Signature are

DIFFERENT


THE PROBLEM…with the simple Electronic Signature

In other words, the

• single mouse-click;

• push of one button; or

• typing of a name

…these are UNRECORDED actions within the computer

(i.e. NO AUDIT TRAIL)


LORRAIN V. MARKET AM. INS. CO. (2007)

— US District Court of Maryland

Landmark ruling on the admissibility of

electronically stored information (“ESI”),

including electronically signed contracts

Does the Electronic Signature cut it in Court?


Essential elements of an effective e-contracting process:

“creating and securely archiving and retrieving an audit trail of the entire ESI management process, from the steps to verify the identity of the person signing the record all the way through to sealing electronically the document and then securely archiving and retrieving the e-contract”

LORRAIN V. MARKET AM. INS. CO.


How to build a better mousetrap?

RELIABLE ELECTRONIC RECORDS


…the Digital Signature to the Rescue

MIGHTY MOUSE


DIGITAL SIGNATURE/SEAL

If the contract is changed or altered, the change is noted in the hidden code

ensures the integrity of the underlying contract

secures the content of the document against alterations


Practically speaking, think of it as …

Tupperware with a pad lock

(i.e. the Digital Seal)



The digital record created inside the electronic document provides…

A time-stamped audit log or audit trail that enables the parties to verify when a document was created, viewed, signed and archived

And it records the changes to the document and the time such changes were made




Verifies identity / stops forgery

Also, the audit trail includes the Internet Protocol address of the sending computer (i.e. physical address)

YOU KNOW WHO THE DOG IS!!


How does the IP Address track

to the Applicant’s location?


COMPUTER GEEK ALERT!!


Creditor’s Workstation (IP Address)

Applicant (IP Address)

Creditor’s Server

(Business Website)

Domain Name Service

(DNS Server)

Applicant’s Server

(IP Address)


Where is the Applicant??

New technology known as…

GEOLOCATION SOFTWARE

uses the IP Address and cross-references a web traffic database in order to map the computer to a specific postal address


And this might be the Dog…


…digital signature on its Electronic Credit Application?

Answer: Electronic Signature Service Provider

SPECIALIZED BUSINESS that

sets up a platform or process that is connected with your business website

completes the e-signature process

How Do You Create a…


THE ELECTRONIC SIGNATURE SERVICE PROVIDER PROCESS…

COMPUTER GEEK ALERT!!


Provides a separate server which holds the electronic document and facilitates the electronic signature

The electronic document is converted into a “hash value” (numbers), then encrypted with a private key containing the debtor’s IP address (location information)

The debtor electronically signs the document

The creditor then verifies receipt of the signature


How does the Digital Seal

lock this data?


Server for Business

Website

E-contract

Terms

Internet

E-Signature

ESSP Server


Business Website ESSP Server

E-Contract

Hash #s

Converted into

Encrypted with key


Business Website ESSP Server E-Contract

Applicant completes Credit App and signs

Copy of signed E-Contract is sent…

Applicant

Then, Key verifies it is the same

Credit Manager


Enough Legal/Technical “Mumbo Jumbo”

Now Let’s Discuss Why You “Go Green” and

How To Do So


ELECTRONIC DOCUMENTS

CREDIT APPLICATION AND GUARANTY


PRIOR TO E-CONTRACTING

In the past…several day process

Salesman meets with Customer

Customer signs

Delivery to Credit Department (hand delivery, mail or fax)

BELLNUNNALLY.COM


ADVANTAGES OF E-CONTRACTING

Today, the Electronic Credit Department hours extend from 9-5 to 24/7

Greater accessibility

Increased speed of processing


ADVANTAGES OF E-CONTRACTING

contracts signed faster

reduce paper and postage costs

more legally enforceable than paper

satisfied customers


CONVERSION PROCESS: FROM PAPER TO ELECTRONIC

1. Design the ECA

2. Keep Security in mind: Safeguard Against Fraud

3. Utilize Tech Savvy Personnel


#1. DESIGN THE E-CREDIT APP FROM THE CUSTOMER’S POINT OF VIEW

You are the “Electronic” Architect

• Design the online navigational features to replicate the traditional practice of reviewing and signing a paper contract


THE SIGNING PROCESS

Traditional

#1 Hand the document to the customer

#2 Review and analyze

#3 Find a pen and sign before a notary

Electronic

Click to open the document

Review and analyze

Key into e-signature fields personal data or codes, adopt the signature, and confirm intent

Design the ECA


DESIGN THE ECA

• Make it “user friendly” with online fill-in forms

• Emphasis on ease of use

• Obtain a valid e-signature


#2. SECURITY: SAFEGUARDING AGAINST FRAUD

Electronic Safeguards…

Verification of IP address

Password requirement via ESSP

Website needs to be capable of collecting customer’s information securely


#3. UTILIZE TECH SAVVY PERSONNEL

In-house web department or outside third-party, e.g., an “ESSP”…

VeriSign

EnTrust

DocuSign


Let’s now walk through the

process of signing your new

Electronic Credit Application

BELLNUNNALLY.COM


THE ELECTRONIC SIGNING PROCESS

DocuSign – an e-signature service provider

Microsoft

Wells Fargo Bank

BELLNUNNALLY.COM


See Handout


EXHIBIT - 1

BELLNUNNALLY.COM


THE CUSTOMER’S 4 STEP PROCESS

1. Provide personal data

2. Review the document

3. Sign the document

4. Save your copy BELLNUNNALLY.COM


STEP 1: PERSONAL DATA

Ask for personal/business information

a name and e-mail address of the debtor

this information will be used to automatically populate fields

BELLNUNNALLY.COM


EXHIBIT - 2

BELLNUNNALLY.COM

• Add data and select document type


EXHIBIT - 3

BELLNUNNALLY.COM

• Review instructions for completing document


STEP 2: REVIEW THE ECA

The customer arrives at the electronic credit application Presented with general instructions Security features include an audit trail that

will monitor and record the location — i.e. the IP address, and — time stamp of the click

BELLNUNNALLY.COM


EXHIBIT - 4

BELLNUNNALLY.COM

Read the fine print


EXHIBIT - 5 • Automatic population features


EXHIBIT - 6 • Customer asked via pop-ups and electronic sticky notes to complete fields


EXHIBIT - 7 • Once a customer clicks

on the “Sign Here” tab, customer is presented with a separate pop-up

• Choose a signature with the scroll bar


EXHIBIT - 8 • Now the debtor can “confirm” the signing


EXHIBIT - 9


MISSION ACCOMPLISHED

Electronic Credit Application is Signed!!!

BELLNUNNALLY.COM


Electronic Credit Application is Signed!!! …and, you now have the customer’s completed electronic credit application

BELLNUNNALLY.COM

MISSION ACCOMPLISHED


Thank you for your desire to establish an account with ABC Corp. We appreciate the opportunity to take care of your equipment needs as we build a long-term relationship that is mutually beneficial. To begin the online process of opening a credit account with ABC Corp., please provide your name and e-mail address, and click on the “Business Credit Application and Personal Guaranty” link below to fill out the information requested.

Once your application is completed, click on the “ADOPT SIGNATURE” button at the end of the document and the completed Business Credit Application and Personal Guaranty will be automatically delivered to an ABC Corp. credit account representative for processing.

It is important that you understand that by checking the boxes and entering your name and personal information, you are authorizing your signature to the Business Credit Application and Personal Guaranty and you are personally guaranteeing the obligations of the company to ABC Corp.

The process of checking the boxes and entering your name and/or your company’s name into the Business Credit Application and Personal Guaranty will have the same weight and effect as if you had completed a paper copy version of the Business Credit Application and Personal Guaranty and had executed it with your ink signature. If you have any questions about the online process of opening an account with ABC Corp. and your contractual responsibilities under the Business Credit Application a Personal Guaranty, please call one of the ABC Corp. local offices.

TO SECURE AND MAINTAIN YOUR PRIVACY, THE CREDIT APPLICATION AND PERSONAL GUARANTY DOCUMENT IS TRANSMITTED VIA A SECURE CONNECTION. IF YOU WOULD LIKE A COPY FOR YOUR RECORDS, PLEASE PRINT OR SAVE YOUR COMPLETED FORM PRIOR TO SUBMISSION.

Once your account is established, you will be entitled to do business with all ABC Corp. locations.

Once again, thank you for choosing ABC Corp. We are pleased to be a partner in your success and genuinely appreciate your business.

EXHIBIT - 11

Business Credit Application and Personal Guaranty

• Detailed information about the signing procedure on website


With the E-Credit App signed,

…let’s focus on the E-Guaranty


EXHIBIT - 12 • The E-Guaranty


3 REASONS THE ELECTRONIC GUARANTY IS SUPERIOR

Solves all three guaranty mishaps:

reduces “Misidentification of Guarantor” by forcing the collection of personal data

increases clarity of “Personal Liability” – no more corporate title issues

clearly links the guarantor to debt by auto-populating the fields


What is the basic principle behind every Guaranty?

Here is a scene from the

movie “Jerry Maguire” that illustrates the very essence of

a Guaranty


I guarantee…

“to pay the indebtedness”…

SHOW ME THE MONEY!!


If you need assistance … Enforcing your Contracts,

electronic or otherwise…

I leave you with one FINAL POINT…


HIRE A FIRE-BREATHING ATTORNEY

BELLNUNNALLY.COM


BELLNUNNALLY.COM

…that covers the entire State of Texas