Debt Suspension Contracts (DSC) and Debt Cancellation Contracts
(DCC) are banking products that substitute for credit insurance.
The Comptroller of the Currency, Administrator of National
Banks (OCC) finalized it's regulation, 12 CFR part 37 effective June 16, 2003.
This regulation covers DCCs and DSAs issued by national banks. These
are banking products, not insurance products thus federal law, not state law,
governs them and state insurance regulators have no role in the regulation of
these products.
Debt Cancellation Contracts
The regulation
broadly defines debt cancellation contracts and debt suspension agreements. A
debt cancellation contract is defined as a loan term or contractual arrangement
modifying loan terms under which a bank agrees to cancel all or part of a
customer's obligation to repay an extension of credit upon the occurrence of a
specified event.
The regulation does not otherwise define what is a "specified
event." Thus, a national bank is free to design its contracts to address not
only traditional events such as death, disability or involuntary unemployment
of a borrower, but also any event that may reasonably be expected to occur in
the life of a borrower.
Debt Suspension Agreements
A debt
suspension agreement is defined as a loan term or contractual arrangement
modifying loan terms under which a bank agrees to suspend all or part of a
customer's obligation to repay an extension of credit from that bank upon the
occurrence of a specified event. This definition is intended to cover debt
suspension agreements under which interest continues to accrue during the
suspension period, as well as those under which the accrual of interest is
suspended. It also provides that a debt suspension agreement does not include
arrangements in which the borrower unilaterally decides to defer a payment or
the bank unilaterally decides to allow a deferral of a payment, so-called
"skip-a-payment" agreements.
National banks, federal thrifts, and federal credit unions
are authorized to enter into DCCs;
National banks and federal credit unions are authorized to
enter into DSAs; and
Depending upon the jurisdiction, some state chartered
entities may also be authorized to enter into DCCs and DSAs.
Although debt cancellation contracts seem similar to credit
insurance, there is no insurance company involved so the lender can keep the
entire fee. The OCC and the National Credit Union Administration have
determined that national banks, federal thrifts and federal credit unions can
sell DCCs (and, in the case of national banks and federal credit unions, DSAs)
without being subject to state insurance laws.
The DCC/DSA must be offered by the lender making the loan, not
by an affiliate of the lender. A national bank cannot require the borrower to
enter into a DCC or DSA in order to receive a loan, or in order to obtain
better terms on a loan. For example, a bank may not give a better interest rate
to a borrower who purchases a DCC. This is similar to the OCC regulation on
credit insurance.
The OCC has elected not to impose price controls on the
products, relying instead on an existing OCC regulation that allows national
banks to set non-interest charges and fees competitively in accordance with
safe and sound banking principles. Single fee contracts connected to
residential mortgage loans are banned. If a single fee contract is
offered in connection with other types of loans, a customer must be given a
periodic fee option. No-refund contracts must be offered with an option to buy
a refund feature. This refund requirement does not apply to open-end
credit.
What disclosures are required?
Banks must
tell customers that purchase is optional, must explain applicable fee options,
(e.g., lump sum payments, refunds), and must disclose eligibility requirements,
conditions and exclusions applicable to contracts.
How must the disclosures be given?
Regulation includes both short and long form disclosures. Short form
disclosures may be used in telephone sales, take-ones and in advertisements.
Long form disclosures must be used in person-to-person solicitations.
Disclosures must be given before a sale is final, and a bank must obtain a
customer?s acknowledgment of the receipt of the disclosures.
Must a customer affirmatively elect to purchase the
product?
As a general rule, a customer must affirmatively elect,
in writing, to purchase a DCC/DSA. Oral affirmations are acceptable in
telephone sales.
Prohibited Practices
The regulation
prohibits banks from extending credit or altering the terms of an extension of
credit on the condition that a customer enters into a debt cancellation
contract or debt suspension agreement. This anti-tying prohibition effectively
requires that these contracts be optional features of a loan.
View the entire
12 CFR part 37.