E-Signatures Increase Fraud Risk

Roger Nettie
December 1, 2010 | COMMENTS

The risk of fraud has elevated over the last year with credit unions’ increased use of electronic signatures. More credit unions are using e-signatures for consumer loans now—although this is a convenient new service for members, it requires a new level of risk management.

The primary risk exposure in remote loan events that include e-signatures is the ability (or inability) to authenticate a signer’s identity. It’s now easier for criminals to secure loans when they no longer need to present identification in person. An electronic signature isn’t witnessed or notarized, and credit unions don’t see a wet-ink signature to compare with a previous signature.

The fastest growing loss area under CUNA Mutual’s Fidelity Bond coverage is remote transaction fraud, which includes unauthorized access to online banking.

How can you address this risk? Consider these steps:

• Use multiple layers of security. For example, your vendor may provide an online registration process that requires signers to validate their identity, and verifies that information against a third-party database. Delivering individual security codes by alternate means of communication can add a level of security, as will other ID validation services. Be sure you understand the layers of security your e-signature providers can offer.
   
• Work with your bond provider to transfer the risk. Traditional bond policies only provide forgery coverage for handwritten signatures on original written (paper) documents. Since 2000, CUNA Mutual has been rolling out coverage options for multiple types of e-signatures. It’s important to work with your bond providers if you use e-signatures, or if you’re adding or expanding these services. Be sure the specific e-signature technologies you’re using—and the product lines on which e-signatures are allowed—are protected from this additional exposure to fraud.

Electronically signed documents can significantly streamline the lending process, in part because e-signatures can be validated more quickly than a signed paper document. Just be sure to manage the additional risk with secure procedures and up-to-date insurance.

What Is an Electronic Signature?
The term “electronic signature” can be confusing, because it refers to a broad category of signatures. In short, laws allow any type of sound, symbol, or process to be considered an electronic signature, including: 

• A member typing his or her name on an electronic form or website
• A member clicking a box on a website
• A recording of a member’s voice
• Signing on an electronic pad, also referred to as a digitized signature (usually done in-person, not remotely)
• A digital signature, which is different than the digitized signature and the most complex Digital signatures use a mathematical encryption process involving digital certificates and public/private keys to create a secure digital signature on an electronic document

Vendors use digital signatures in different ways, which adds to the complexity. For example, some vendors issue individual digital certificates to each signer of a document, while other vendors use a common digital certificate to protect the document at the server level. 

More credit unions are moving to emerging technologies, such as electronic signatures, because it improves their operations and member service. Unfortunately, technologies such as electronic signatures bring their own unique risks for credit unions to address.

Roger Nettie is a staff underwriting specialist for CUNA Mutual Group’s Fidelity Bond program. Reprinted with permission from the Texas Credit Union League (www.tcul.coop).