Can you e-sign a loan agreement?

Why a loan agreement can be e-signed

Under ESIGN, a contract in or affecting interstate commerce can't be denied legal effect because an electronic signature or record was used to form it (15 U.S.C. § 7001(a)). UETA, adopted by every state except New York, says an electronic signature satisfies a law requiring a signature (section 7). Loan agreements aren't on either law's list of exceptions, so a business loan, an equipment financing agreement or a loan between family members can be signed electronically once both sides agree to it.

Consumer loans: consent first

When a law requires information to be given to a consumer in writing, ESIGN lets an electronic copy count only after the consumer affirmatively consents, having first been told about their right to paper, how to withdraw consent and update their contact details, and the hardware and software they'll need (§ 7001(c)). The consent has to show they can open the records. Federal lending rules build on this: Regulation Z lets a lender provide its required credit disclosures electronically, subject to compliance with ESIGN (§ 1026.17(a)(1)).

The promissory note catch

A promissory note that's a negotiable instrument is governed by Article 3 of the Uniform Commercial Code, and both ESIGN and UETA exclude most of the UCC (ESIGN § 7003(a)(3); UETA section 3(b)(2)). Negotiability matters because it lets a note be sold and lets a buyer enforce it free of many defenses. The two laws handle electronic notes through a special category, the transferable record:

• Under ESIGN (§ 7021), a transferable record is an electronic record that would be an Article 3 note if it were on paper, that the issuer expressly agreed is a transferable record, and that relates to a loan secured by real property. That's the basis for mortgage eNotes.
• Under UETA (section 16), the issuer must also expressly agree, but the record doesn't have to relate to real estate.
• Either way, a person who has control of the record, through a system that reliably shows who it was issued or transferred to, is treated as its holder.

For most small loans, negotiability isn't the point. Nobody plans to sell the note; the lender just needs to prove the debt. UETA still applies to an electronic record excluded under section 3(b) to the extent other law governs it (section 3(c)), and the borrower's e-signed promise to repay is a contract and evidence of the debt. If a lender does plan to sell or pledge notes, it should use a system built to create and control transferable records.

Notices that stay on paper

ESIGN doesn't apply to notices of default, acceleration, repossession, foreclosure or eviction, or the right to cure, under a credit agreement secured by a person's primary residence (§ 7003(b)(2)(B)). A loan agreement secured by a home can be e-signed, but those notices go out the traditional way. Collateral other than real estate is governed by UCC Article 9, which has its own rules for electronic records, so ask the lender how it documents a security interest.

What to put in the agreement

• The amount, the interest rate and how it's calculated, and the repayment schedule.
• What happens on a late payment or a default, and any late fees.
• Any collateral, described specifically.
• A clause in which both parties agree to sign and receive records electronically.
• Each borrower's and lender's full legal name, and a signature line for every borrower and any guarantor.

Mistakes to avoid

• Skipping the consent step on a consumer loan. Without ESIGN consent, electronically delivered disclosures may not count as given in writing.
• Letting one person sign for a couple. Each co-borrower signs from their own email, so the record shows two separate signatures.
• Changing terms after signing. If the rate or schedule changes, send an amendment for everyone to sign rather than editing the signed copy.
• Losing the signed copy. Download the completed PDF and certificate and keep them with the loan file for the life of the loan and beyond.

Sending one with SignMaster

1. 1

   Start from a template

   Use the promissory note or personal loan agreement template, or upload your own.

2. 2

   Fill in the terms

   Enter the amount, rate and schedule as the sender, and leave the borrower's details for them to fill in.

3. 3

   Add access codes

   Require a code sent to the borrower's email, or one you share by phone, before they can open the document.

4. 4

   Sign in order

   Set the borrowers to sign first and the lender to countersign. Everyone gets the signed PDF with a certificate of completion.

Each signer agrees to sign electronically before they can sign, and the certificate records when, from which IP address and with which email. SignMaster doesn't create transferable records or eNotes, so use a dedicated system if you need a negotiable electronic note.