Susan L. Hodges 2017-07-26 06:54:31
BUY A HOUSE IN 2017 and you’re likely to get a crash course in electronic signatures. Not that there’s much to learn. Th e soft ware is user-friendly, and in moments you’re skimming through paragraphs and clicking to sign or initial everywhere your authorization is required in a sales contract.
Finance a piece of equipment, however, and there’s nearly a 70% chance you’ll be using ink and paper. Although the equipment finance industry is renowned for innovative products and maneuvering through an economic crisis, we’re surprisingly old-school when it comes to using digital processes that together constitute electronic or “e”-leasing.
ELFA’s 2017 Survey of Equipment Finance Activity (SEFA) bears this out. Just 31% of respondents reported using electronic documents to transact a portion of their new business in 2016. And although the percentage rose slightly from 2015, when 23% said they used e-leasing, it would still be a stretch to say we’re progressive in our use of this technology.
Initiating Change
Thus ELFA’s initiative to expand the use of electronic documents and “e-chattel paper” in equipment finance. Th e association will be collaborating with providers of electronic- signature capabilities, electronic-document management services and others to promote widespread adoption of these technologies. Education is available through webinars, conference sessions, magazine and newsletter articles and social media (see p. 27).
Dave Schaefer, CEO of Mintaka Financial, LLC, in Gig Harbor, Washington, and head of the ELFA Board of Directors’ Task Force on E-Leasing, says companies’ adoption of fully electronic leasing generates three major benefits. “First, increased use of electronic documents makes transactions easier and more convenient for customers,” he says. “E-documents are already common on the consumer side in mortgages and auto loans, and we should be using them as well to enhance the customer experience.”
Second, competitors inside and outside of equipment finance are providing electronic documents. “Fintech companies are leading the transformation, and use of e-leasing by traditional equipment finance companies helps level the playing field,” says Schaefer. “[But] new competitors like Amazon are entering our space and changing the way business is transacted. We must adopt these new methods so we continue to maintain our position in the market.”
Third, electronic leases are legally enforceable and easier to transfer between industry participants. “I don’t think the laws and regulations pertaining to e-leasing are more complicated than anything else,” Schaefer says. “Electronic chattel paper improves the efficiency of capital fl owing between buyers of paper and banks lending to leasing companies. Yes, you have to pay a law fi rm or your internal counsel to investigate it and become familiar with it. But it’s not all that complicated.”
Learning about best practices for electronic transactions can help companies establish good ground rules and processes for going forward. Brian Kelly, Vice President of Business Development at eOriginal, Inc., a Baltimore-based provider of digital transaction-management solutions, says established practices include sending all required lease/ loan documents to the customer in one digital package. “Th is accelerates the origination process by preventing errors and omissions,” he explains. “From there, loan packages become an asset that can be trusted by funders and investors and quickly moved to the secondary market to access capital.”
Th e point is not lost on Schaefer. “I’ve actually had lost paper files in my company,” he says. “And when they’re lost, you can’t borrow on that contract or sell it to anyone. It’s like losing money.”
E-leasing is here to stay. The sooner you convert, the sooner you and your customers will benefit. BY SUSAN L. HODGES
Scott Stewart of OnePlace Capital got tired of the frustrations he experienced with paper leasing, so his company converted to full e-leasing in 2013 (see his story at left ).
Unlike traditional chattel paper, e-chattel paper can be moved in seconds from the electronic vault of one party to that of another. “It takes someone in possession of an authentication key to enter a few keystrokes and the task is done,” says Schaefer. “There’s no banker box, no shipping and no storage of paper documents.”
Addressing Resistance
But if e-leasing is brimming with benefits, why aren’t more companies diving in? Dominic Liberatore, Deputy General Counsel at DLL in Wayne, Pennsylvania, notes that the Equipment Leasing & Finance Foundation’s study of the issue, “Digital Documents: Financing Paperless Transactions,” unearthed a number of possible barriers:
● Equipment finance firms have used traditional chattel paper for decades and, to date, many mistakenly view e-chattel paper as an option but not a necessity.
● No on-point case law exists to support or refute the use of electronic equipment leases, even though federal legislation (the Electronic Signatures in Global and National Commerce Act, or ESIGN) regarding the use of e-signatures and electronic records was enacted in 2000 and 47 states have adopted the Uniform Electronic Transactions Act. Three states have enacted similar laws. “Th e Uniform Commercial Code was first revised to allow for electronic equipment leases in 2001 and in the nearly 20 years since such laws were enacted there has been no on-point adverse case law—none,” says Liberatore. “Further, there has been very good analogous case law that does support and uphold electronic lending in other finance markets.”
● For banks or companies lending against e-leases or buying them, questions have been raised as to what specific legal- opinion language and due diligence inquiries should be considered. Th e Equipment Leasing & Finance Foundation responded by commissioning an article published in the Journal of Equipment Lease Financing Spring 2015 issue that provided helpful sample language and due diligence steps.
“Due diligence is not a stumbling block,” emphasizes Liberatore. “Much of the transaction is already electronic in other finance markets, so it’s puzzling why we aren’t moving quickly to do it, too.”
Worries of fraud are also largely misplaced, he says, because putting a careful authentication process in place ensures that you’ll know the identity of your lease signer. “Plus, keep in mind that you already have similar considerations in the paper-based leasing world,” Liberatore says.
Kelly agrees. “We can use technology to fight fraud on many levels,” he says. “On the e-signing side, identity verification can be executed via email, text or phone call or through third-party services. Furthermore, aft er the e-signature, technology can be used to create an authenticated digital original document that cannot be altered, which is an example of where the digital process is clearly more secure than existing paper-based methods.”
Of course, the more authentication you require, the less user-friendly your process may seem. “But people are used to multiple layers of authentication with their bank accounts,” Liberatore observes.
Concerns that control (the electronic equivalent to physical possession of paper-based leases) of e-chattel paper doesn’t have the same benefits as possession of paper chattel are also unfounded, Liberatore says, because federal and state law provides similar benefits. “With a paper original, one achieves the priority benefits by physically obtaining the original,” he says. “With an electronic ‘original,’ you get the same benefits from controlling it. Th e electronic original is the single authoritative copy, and whoever acquires the original under the UCC and follows certain parameters takes priority over someone who has a prior lien obtained by virtue of filing a UCC financing statement. Again, the same benefits apply to having control of the electronic original as to holding the paper original.”
With over 23 million transactions and $1 trillion in transferable assets already under management in e-vaults, it’s hard to believe equipment leasing and finance won’t soon be fully electronic. “If today’s leaders think paper-based leasing isn’t broken and that therefore there’s no need to fix it, they’re out of sync with the times and the available technology,” says Liberatore. “Th e business world is increasingly populated with young thought leaders who are used to doing everything on their computers or their phones. It’s going to be hard to turn the tide against doing things electronically. If you don’t do it, you’re going to be in trouble.”
Leaders at Pawnee Leasing reached the same conclusion aft er researching the technologies in 2013 (see their story below).
eOriginal’s Kelly lists five top things equipment finance companies need to do before implementing e-leasing:
1.Know the law and compliance requirements.
2.Require the highest level of security in your document ecosystem.
3.Understand electronic chattel paper.
4.Understand and expand your digital ecosystem for lenders and investors.
5.Implement best practices.
“Because of the gains in efficiency, increasing confidence and speed to capital, there is a growing digital ecosystem of originators, funders and investors,” he says. “As a result, there is also a greater expectation to the conduct business digitally—and lenders who do not may be left behind.”
Susan Hodges writes about equipment finance and other business topics from her office in Wilmette, Illinois.
LEARN MORE
Visit ELFA’s Electronic Documents web page at www.elfaonline.org/edocs to learn more about this topic. Access articles and research studies, register for upcoming webinars and access recordings of recent webinars, including these:
● eChattel Ops and Tech Deep Dive: Implementation and Technology Insights
● Educational Gateway: Your Guide to eChattel and Digital Technology
● Educational Gateway: Legal and Compliance Considerations for an eLeasing Transition
CASE STUDY
OnePlace Capital
OnePlace Capital is a small Des Moines, Iowa–based bank-owned company that competes with larger firms to finance medical, dental and veterinary equipment through vendors. Before opening the company, President Scott Stewart spent 10 years at GE Capital as a technology and business leader. He saw e-leasing as a way to differentiate and to gain more control over transactions.
“As a smaller fi rm, you have to do more than say you’re a good company and provide great service; you have to provide concrete differences,” says Stewart. “I’m always thinking about what I can do to help my vendor partners sell more, and I knew if I could tell them that I can turn a deal around 50% faster than many of my competitors, it would make a big difference.”
With convenience as a top priority, Stewart also knew that a fully electronic process would be easier for borrowers and his employees. “It’s frustrating to take an application, identify and underwrite the borrower, create the documents and forward them to the client—and then wait and wait,” he says. “We lost complete control of the process. I saw electronic documents and e-signatures as a simple, secure and friendly way to take back control and prompt people to act faster.”
Stewart worked with his attorney and his risk manager for several months to understand how contracts with no wet signatures or paper would work. The more they learned the more excited they became. Because e-signature software prevents electronic documents from being fully executed until all blanks are filled and all signatures are complete, OnePlace Capital would be able to receive all information needed to process a transaction in a single sitting. “This is enormous,” says Stewart. “Whether it’s banking or insurance information or the correct legal name of the company, with paper-based financing I might spend from several hours to several weeks gathering all the data required to close.”
What’s more, many small-ticket transactions look similar, requiring superior processes to avoid errors while still working quickly. “And since the market determines my price, the better we can be at operational efficiencies, the easier it is to influence margins in my favor,” Stewart says.
About eight months elapsed from the time OnePlace Capital decided to go forward until implementation was complete. Due diligence included researching case law (after 20 years there still isn’t any), working with providers to draw up equitable agreements and coordinating with the company’s leasing-software provider on integration. “Back then I was the first client who wanted to integrate e-signatures and e-documents with my financing software,” says Stewart. “Today if someone wants to do this, it could all be integrated and functional in a couple months.”
Today 80% of OnePlace Capital vendors use the company’s e-leasing capabilities. “People are excited that they can do a $100,000 transaction in as little as 30 minutes,” says Stewart. “You need participation from both borrower and vendor, but if everyone’s ready to go, it’s simple.”
The remaining 20% still use paper. “I can understand having doubts if you’re doing multimillion-dollar transactions,” says Stewart. “But in a small-ticket environment like ours, you’re already at a competitive disadvantage if you’re not using e-signatures and e-chattel. We as an industry are in the risk business. But if we’re going to continue lending in the markets we choose, we must evolve and offer our partners and clients successful solutions. Integrating e-leasing technologies is simply the next step.”
CASE STUDY
Pawnee Leasing
Three years ago this Fort Collins, Colorado-based small-ticket equipment finance company advanced its technology to offer fully electronic leasing. “We saw it as an opportunity to differentiate ourselves,” says Brian Schonfeld, Manager of Information Systems & Analytics. “Customers would be able to receive, sign and send documents electronically at no cost to them, and everyone would benefit from the efficiencies.”
First, Schonfeld and company attorneys reviewed the laws and regulations pertaining to electronic signatures and e-documentation. “We looked for red flags and there weren’t any. It was a ‘go’ for us,” Schonfeld says.
Next Pawnee contacted Vision Commerce, the St. Louis–based provider of the company’s front-end system. “We told them we were looking at incorporating e-documents and asked about their experience,” says Schonfeld. Vision Commerce referred them to Docu-Sign.
After discussing integration processes and requirements with Docu-Sign, Pawnee authorized the implementation. “Our goal was to do this as seamlessly as possible so that our brokers would only have to click on a button,” says Schonfeld. Pawnee’s front-end system already generated documents that could be turned into PDFs. A second button was added to facilitate e-signing. “The system gathers all necessary information and populates it into documents for customers’ signatures,” Schonfeld says. “Once the documents are signed electronically, they’re immediately returned to us and we move forward with funding.”
Pawnee’s e-leasing capabilities launched six months after the company’s decision to invest, and Schonfeld says the benefits are multiple. “Brokers no longer have to send documents overnight or track the originals,” he says. “The [technology] platform is enabled for tablets, phones and desktops, and customers can see exactly where to sign. And since the software won’t allow document packages to be returned until all signatures are inserted, incomplete documents are no longer a problem.”
Signed documents are returned to the sender immediately. “The speed really cuts down on funding time,” says Schonfeld. “And when brokers call, we can tell them exactly where we are in the process.”
An electronic vault maintained by eOriginal stores certified copies of all documents and keeps a history of transactions and protocols. “If we didn’t have the vault and that sole authenticated copy, someone could alter a document and sell copies to different funding sources,” Schonfeld explains. Vault access requires an authentication key, possessed only by a few senior executives at Pawnee and the vendor.
Schonfeld says brokers who use Pawnee’s e-leasing like the speed, ease of use and ability to see the status of documents. Just one aspect of e-leasing remains undone, Schonfeld says, and that’s an electronic notary option. “I think this is in process, and one or two states may already have it,” he says, “but we’ll get there. We think electronic documents are the future.”
Several Pawnee broker partners don’t yet use the feature, and Schonfeld thinks it’s because they may not understand how easy it is to use. “But we believe customers will start to request it,” he says. “We think e-leasing will soon be required for companies to be competitive.”
©Equipment Leasing and Finance Association. View All Articles.