Auto lenders are a long way from getting the entire car loan process online, but the industry took a step in that direction this month. All 50 states as of July 1 agreed to accept electronic signatures.
Lenders already can accept a credit application online. They also can make an automated credit decision in seconds and notify the customer of that decision at the same time.
But even then, a signed, paper contract still must change hands for the deal to be official. Online finance contracts may be the next step, and electronic signatures will help.
'Legally, an electronic signature can be just about anything,' said Michael Benoit, an attorney for Hudson Cook LLP, a law firm in Crofton, Md., that specializes in auto industry law.
Customers could create a confidential password, similar to that of an automated teller machine at the bank, he said.
More likely, lenders will opt for an electronic signature pad, where the customer actually signs a piece of paper with an 'electronic pen,' and the signature is transmitted electronically to the document, Benoit said.
'A deal could be structured today to avoid the necessity of an actual signature, but nobody does it that way now,' he said.
That is beginning to change, but slowly.
DealerTrack is an Internet-based joint venture among J.P. Morgan Chase & Co., Wells Fargo & Co. and AmeriCredit Corp. DealerTrack already accepts and administers online credit applications, and it has plans to introduce online finance contracts this year. State approval for electronic signatures is a significant milestone, said Craig Stokum, director of sales and product development.
Another company, Toronto-based dealerAccess Inc., plans to introduce online finance contracts in the United States by early 2002, said Pat Doran, president of U.S. operations. He agreed that electronic signatures will help speed the process.
Federal law recognized electronic signatures as valid a year ago. Next, the states had to sign off on the federal law or adopt their own version.
Meanwhile, the Federal Reserve Board still has not issued final guidelines on electronic signatures.
At the most basic level, the customer's signature on the contract means the customer agrees to repay the lender. But the signature serves another important function, legally. The signature also is the lender's way of proving that the customer received all the disclosures legally required by the Truth in Lending laws.
The Fed issued what it calls 'interim final rules' in March to permit lenders to give certain disclosures electronically. Those interim rules were supposed to take effect Oct. 1, but according to Benoit, lenders complained that the rules were too complicated.
So it now looks as if the Fed will come up with a new set of rules. That will postpone the final rules.
Doran said that with the dealerAccess online system, F&I managers will be able to print out letter-perfect contracts for the customer's signature, using plain white paper, instead of different letterhead for every lender. The system is designed so the document will not print if the form is not filled out properly.
Doran said auto loans - especially leases - are complicated products. He said research shows that for some lenders, 35 percent to 45 percent of the leases can't be funded because of a problem with the paperwork. But at dealerAccess, he said, 'We're now on our fourth generation of software. Less than 5 percent of the leases can't be funded the first time through. And 75 percent of that 5 percent is because the dealer had everything else filled out right, but they forgot some attachment.'
DealerTrack CEO Mark O'Neil believes state-by-state and lender-by-lender differences make it next to impossible to create a one-size-fits-all contract.