[Federal Register Volume 66, Number 75 (Wednesday, April 18, 2001)]
[Proposed Rules]
[Pages 19901-19907]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-9585]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Parts 7 and 37

[Docket No. 01-07]
RIN 1557-AB75


Debt Cancellation Contracts and Debt Suspension Agreements

AGENCY: Office of the Comptroller of the Currency, Treasury.

ACTION: Notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: The Office of the Comptroller of the Currency (OCC) is 
proposing to add a new part 37 to its regulations that addresses debt 
cancellation contracts (DCCs) and debt suspension agreements (DSAs). 
The purposes of the customer protections set forth in the proposed rule 
are to facilitate customers' informed choice about whether to purchase 
DCCs and DSAs, based on an understanding of the costs, benefits, and 
limitations of the products and to discourage inappropriate or abusive 
sales practices. In addition, the proposed rule promotes safety and 
soundness by requiring national banks that provide these products to 
maintain adequate loss reserves.

DATES: Comments must be received by June 18, 2001.

ADDRESSES: Comments should be directed to Office of the Comptroller of 
the Currency, Public Information Room, 250 E Street, SW., Mail Stop 1-
5, Washington, DC 20219, Attention: Docket No. 01-07; Fax number (202) 
874-4448 or Internet address: [email protected]. Comments may 
be inspected and photocopied at the OCC's Public Reference Room, 250 E 
Street, SW., Washington, DC. You can make an appointment to inspect the 
comments by calling (202) 874-5043.

FOR FURTHER INFORMATION CONTACT: Stuart Feldstein, Assistant Director, 
or Jean Campbell, Attorney, Legislative and Regulatory Activities 
Division, (202) 874-5090; or Suzette Greco, Special Counsel, Securities 
and Corporate Practice Division, (202) 874-5210, Office of the 
Comptroller of the Currency, 250 E Street, SW., Washington, DC 20219.

[[Page 19902]]


SUPPLEMENTARY INFORMATION:

Background

    A debt cancellation contract (DCC) is a bank product that consists 
of a contract entered into by a bank providing for cancellation of all 
or part of the customer's obligation to repay an extension of credit 
from that bank upon the occurrence of a specified event. A debt 
suspension agreement (DSA) is a bank product that consists of a 
contract entered into by a bank providing for suspension of all or part 
of the repayment obligation under an extension of credit from that bank 
upon the occurrence of a specified event. Under a DCC or DSA, the 
customer agrees to pay an additional fee to the bank in exchange for 
the bank's promise to cancel or temporarily suspend payments on the 
debt. The fee may be paid in a single lump sum or in periodic 
installments.
    The authority of national banks to offer DCCs and DSAs is well-
recognized.\1\ The OCC currently has one regulation in this area. 
Section 7.1013 of our rules addresses a national bank's authority to 
enter into DCCs. In 2000, we published an advance notice of proposed 
rulemaking (ANPR) requesting comment on whether additional regulations 
governing DCCs and DSAs were necessary or appropriate. 65 FR 4176 
(January 26, 2000).
---------------------------------------------------------------------------

    \1\ 12 CFR 7.1013 (authorizing national banks to enter into DCCs 
upon the death or disability of a borrower). See First National Bank 
of Eastern Arkansas v. Taylor, 907 F.2d 775 (8th Cir. 1990), cert. 
denied, 498 U.S. 972 (1990) (offering DCCs is permissible for 
national banks pursuant to 12 U.S.C. 24 (Seventh)); Interpretive 
Letter No. 827 (April 3, 1998) (national banks may offer DSAs 
pursuant to the same authority).
---------------------------------------------------------------------------

    The ANPR invited comment on the following issues: (1) Whether we 
should issue regulations governing DCCs that, for example, establish 
standards for the disclosure of terms, notices, contract termination, 
contract charges, and dispute resolution; (2) whether we should include 
DSAs in any regulations covering DCCs; and (3) whether we should 
address other areas or issues by regulation. The ANPR also invited 
commenters to recommend specific provisions that would protect 
customers, prohibit abusive practices, and ensure the safety and 
soundness of national banks offering these products.
    The OCC received 41 comments in response to the ANPR. Virtually all 
commenters agreed that any new rules should govern both DCCs and DSAs. 
Twenty-one commenters said that the OCC should issue customer 
protection regulations. State insurance regulators, consumer advocates, 
insurance companies and several banks generally favored regulations, 
some urging regulations similar to state laws that govern sales of 
credit life insurance. The details of various state insurance laws 
differ, but generally include rate regulation, requirements for the 
advance review and approval of insurance forms, and claims procedures.
    Twenty commenters, including bank trade groups and most bank 
commenters, opposed new regulations. Many of these commenters said that 
regulations are unnecessary because there is no evidence of widespread 
abusive sales practices or customer complaints. These commenters also 
noted that banks offering DCCs are already covered by the Truth in 
Lending Act (TILA), 15 U.S.C. 1601 et seq., and by state law. If the 
OCC were to provide additional standards applicable to DCCs, they urged 
the OCC to issue guidelines rather than regulations.
    On balance, the OCC agrees with those commenters who believe that 
some additional regulations in this area would be beneficial. We note 
that the Federal Reserve Board's Regulation Z requires banks offering 
DCCs to make disclosures that are limited in scope and applicable only 
if the bank wishes to exclude the fees for the DCC from the finance 
charge on the underlying loan.\2\ The customer protections set forth in 
the proposed rule have a broader purpose, however. They are designed to 
facilitate customers' informed choice about whether to purchase DCCs 
and DSAs, based on an understanding of the costs, benefits, and 
limitations of the product, as well as to discourage inappropriate or 
abusive sales practices. In addition, the proposed rule promotes safety 
and soundness by requiring national banks to maintain adequate reserves 
to cover the potential losses attributable to the DCCs and DSAs they 
issue.
---------------------------------------------------------------------------

    \2\ See 12 CFR 226.4(d)(3) (providing, among other things, that 
a bank may exclude from the finance charge fees for debt 
cancellation coverage if the coverage is optional for the customer; 
the fee for the coverage is disclosed; the term of the coverage is 
disclosed (if the term is shorter than the terms of the loan); and 
the customer affirmatively requests the coverage in writing).
---------------------------------------------------------------------------

    Compliance with OCC rules on DCCs would not affect a national 
bank's obligation to comply with the applicable provisions of 
Regulation Z. Many national banks already comply with TILA rules 
because they wish to exclude the fees for the DCC from the finance 
charge. In order to avoid burdensome overlap, we have drafted the 
proposal to be consistent with TILA-required disclosures where 
possible. We invite recommendations on additional changes to the 
proposed rule that would further reduce any burden arising from the 
requirement to comply with both rules.
    In addition, we request comments on all aspects of the proposed 
rules and on the specific issues highlighted in the section-by-section 
description.

Section-by-Section Description

Section 37.1  Authority, Purpose, and Scope

    The OCC's rules, at 12 CFR 7.1013, recognize that national banks 
may provide DCCs as permissible banking products. Section 7.1013 
further provides that national banks may impose an additional charge 
for the product and may establish the necessary loss reserves. The 
proposed rule removes 12 CFR 7.1013, replacing it with Sec. 37.1, which 
states the authority of national banks under 12 U.S.C. 24 (Seventh) to 
enter into both DCCs and DSAs as authorized bank products and to charge 
a fee for these products. Section 37.1 omits the statement in the 
current rule specifically permitting the establishment of reserves, 
however, because the proposal, at new Sec. 37.7, requires the bank to 
establish loss reserves or obtain from a third party insurance that is 
adequate to cover expected losses.
    Section 37.1 sets forth the purposes of the new regulations, which 
are, generally, to set forth the standards that apply to a national 
bank's provision of DCCs and DSAs, enhance consumer protections for 
customers who buy DCCs or DSAs from banks, and ensure that national 
banks providing DCCs or DSAs do so on a safe and sound basis. Section 
37.1 also clarifies that since DCCs and DSAs are banking products, they 
are governed by this part and not by 12 CFR part 14 (consumer 
protections for depository institution sales of insurance).
    The regulations apply to the provision of DCCs and DSAs by national 
banks and Federal branches and agencies.

Section 37.2  Definitions

    The proposed rule defines a DCC as a contract entered into by a 
bank providing for cancellation of all or part of the amount due under 
an extension of credit from that bank upon the occurrence of a 
specified event. A DSA is similarly defined as a contract entered into 
by a bank providing for suspension of all or part of the repayment 
obligation under an extension of credit from that bank upon the 
occurrence of a specified event.\3\ The OCC invites comment on

[[Page 19903]]

the definition of DCC and DSA and particularly whether other elements 
should be added to cover specific products.
---------------------------------------------------------------------------

    \3\ This definition does not cover so-called ``skip-a-payment'' 
agreements that are a feature of a loan contract and that permit a 
customer to skip a certain number of loan payments at the customer's 
option, without reference in the contract to a specified triggering 
event and without incurring a late fee or other penalty.
---------------------------------------------------------------------------

    The rule uses the term ``bank'' to include a national bank as well 
as a Federal branch or agency. A customer is defined as an individual 
who obtains a loan or other extension of credit from a bank primarily 
for personal, family or household purposes.

Section 37.3  Prohibited Practices

    The proposed rule contains several types of customer protections 
that are standard when a bank provides products associated with a loan. 
The proposal contains an anti-tying provision that precludes a bank 
from extending credit or changing the terms or conditions of an 
extension of credit conditioned upon the purchase of a DCC or DSA from 
the bank.
    The proposed rule also prohibits a bank from engaging in any 
practice that could mislead a reasonable person with respect to certain 
information that must be disclosed under proposed Sec. 37.6(a).
    The proposed rule also prohibits use of two types of contractual 
provisions that present high risks of unfair dealing with customers. 
First, the proposal prohibits a bank from including in a DCC or DSA any 
term that the bank routinely does not enforce. Inclusion of such a term 
misleads customers and discourages them from obtaining the debt relief 
for which they have paid. However, we recognize that a bank's failure 
to enforce contractual provisions sometimes permits the bank to work 
with customers who are experiencing financial difficulty so that the 
customer ultimately can fully repay the obligation to the bank. The 
proposed rule uses the word ``routinely'' so that a bank retains the 
discretion to make exceptions in certain situations.
    Second, the proposed rule prohibits a bank from retaining a 
unilateral right to modify or cancel the contract. The OCC believes 
retaining such a right has the potential to be abusive because it could 
be exercised in such a way as to deny the customer the otherwise 
enforceable right to debt relief for which the customer has paid.

Section 37.4  Affirmative Election Required

    Proposed Sec. 37.4 requires the customer to affirmatively elect to 
purchase a DCC or DSA in writing in a document that is separate from 
the documents pertaining to the credit transaction. This provision 
addresses the practice of ``negative enrollment,'' where a customer may 
automatically purchase a DCC or DSA unless the customer opts out. 
Negative enrollment causes some customers to pay for a product they did 
not want or intend to buy. The proposed rule is consistent with 
Regulation Z, which requires that a customer sign or initial an 
affirmative written request for debt cancellation coverage if fees for 
such coverage are to be excluded from the finance charge. See 12 CFR 
226.4(d)(3)(I)(C). This provision helps to prevent coercion and 
customer confusion, and enables customers to make informed decisions 
about whether to purchase a DCC or DSA. The acknowledgment may be made 
electronically if it complies with the requirements of the Electronic 
Signatures in Global and National Commerce Act (E-Sign), 15 U.S.C. 7001 
et seq.
    We invite comment on whether any additional customer protections 
should be included, as well as on whether modifications to any of those 
proposed would be appropriate.

Section 37.5  Refunds of Fees in the Event of Termination of the 
Agreement or Prepayment of the Covered Loan

    Some banks that offer DCCs and DSAs may structure those products so 
that the customer does not receive a refund of any unearned portion of 
the fee paid for the product if the DCC or DSA is terminated or the 
customer prepays the loan covered by the contract or agreement. Banks 
have suggested that customers benefit from a ``no-refund'' product 
because the total fee paid by a customer is substantially less than the 
fee that would be charged for the same product with a fee refund 
feature. On the other hand, a no-refund product could be structured in 
a way that is unfair to customers if, for example, the customer pays 
most of the fee early in the term of the contract but also prepays the 
loan well before the end of the term. The proposal does not preclude a 
bank from offering a no-refund product, but instead requires a bank 
that provides a no-refund product also to offer a product that provides 
for a refund of the unearned portion of the fee. Requiring both options 
should encourage the availability of products that allow a customer to 
choose between a lower total fee or the availability of a refund.
    If a customer is entitled to a refund, the amount due the customer 
may vary greatly depending on the method used to calculate the refund. 
The two most commonly used formulas for computing refunds are ``the 
Rule of 78's'' and the actuarial method. Both of these methods 
recognize that the initial payment of a loan includes more interest 
than later payments. However, under the Rule of 78's, a customer will 
receive a substantially lower refund than if the actuarial method had 
been used to compute the refund. Because application of the Rule of 
78's creates substantial inequities for the customer, proposed 
Sec. 37.5(b) requires banks to calculate the amount of any refund due a 
customer based on a method at least as favorable to the customer as the 
actuarial method. This provision uses language similar to the TILA 
provision relating to refunds of unearned interest charges. See 15 
U.S.C. 1615(b).

Section 37.6  Disclosures

Content of Required Disclosures
    The first disclosure under proposed Sec. 37.6(a) requires a bank to 
inform the customer that its approval of an extension of credit and the 
terms and conditions of such extension are not conditioned on the 
purchase of a DCC or DSA from the bank. Requiring a bank to disclose 
the anti-tying provision to customers prior to their decision to 
purchase a DCC or DSA helps ensure that the customer evaluates the 
coverage on the basis of the economic benefit it provides and not 
because the customer believes that credit will be denied or the terms 
of credit will be altered without the coverage.
    The second and third disclosures under proposed Sec. 37.6(a) relate 
to the fee banks charge for a DCC or DSA. The proposed rule requires a 
bank to inform customers of the total fee for the DCC or DSA and the 
method of payment, including whether the payment will be collected in a 
lump sum or periodic payments, and whether the fee is included in the 
loan amount. The method of payment is an important factor in 
determining the total cost to the customer. For example, if the fee is 
paid in a lump sum and included in the amount financed, the customer 
will pay interest on the fee, in addition to the interest charged on 
the underlying loan. Information about the amount of the fee and the 
method the bank uses to collect it helps customers understand the costs 
and benefits of the product and enables them to make an informed 
decision about whether the product meets their needs.
    The fourth disclosure requires a bank to describe any material 
limitations relating to the DCC or DSA. A DCC or DSA may contain 
important conditions that limit the circumstances under which a 
customer may take advantage of the debt cancellation or debt suspension 
features of the product. Examples of

[[Page 19904]]

material limitations in a DSA or DCC include imposing a waiting period 
before a customer may activate benefits; limiting the number of 
payments a customer may defer; limiting the term of coverage to a 
specific number of months; limiting the maximum amount of indebtedness 
the bank will cancel; or terminating coverage when the customer reaches 
a particular age. Disclosure of material limitations assists a bank to 
avoid inappropriate sales practices that could subject the bank to 
substantial reputation or litigation risk.
    The fifth disclosure requires a bank to inform the customer if the 
customer's activation of the contract will prohibit the customer from 
incurring additional charges or using the credit line. This disclosure 
promotes informed choice because the inability to use a credit line or 
incur new charges may be a factor in some customers' decisions whether 
to purchase the DCC or DSA.
    The sixth disclosure requires a bank to disclose whether the 
customer is not entitled to a refund of the unearned portion of the fee 
in the event the customer terminates the contract or prepays the loan 
prior to the scheduled termination date, and that the customer has the 
option of purchasing a DCC or DSA that provides for a refund in those 
circumstances. This information is particularly important when a loan 
is repaid in full prior to its scheduled termination date.
    The seventh disclosure requires a bank to explain the circumstances 
under which a customer or the bank may terminate the contract if 
termination is permitted during the life of the loan. Even if a 
customer has a right to terminate the contract, there may be 
substantial limitations on that right. This information may be an 
important component of a customer's decision whether to purchase the 
product. The fact that the bank may terminate the contract and the 
conditions under which it may do so are also critical factors in a 
customer's decision whether to purchase the product.
    The eighth disclosure requires a bank to describe the procedures a 
customer must follow to notify the bank that a triggering event has 
occurred. This information is important because a customer wishing to 
activate the debt suspension or debt cancellation feature of the 
contract must follow the procedures outlined in the contract. Requiring 
banks to disclose this information will help to eliminate customer 
confusion.
    The OCC invites comment on each of these disclosures and any others 
that commenters believe would be desirable.
Method of Making Disclosures
    The proposed rule sets forth the timing and manner in which a bank 
is required to provide disclosures. Proposed Sec. 37.6(a) requires 
banks to make these disclosures before a customer completes the 
purchase of a DCC or DSA. Under proposed Sec. 37.6(b), a bank may make 
the disclosures in writing, or electronically, if done in a manner 
consistent with the requirements of E-Sign.
Form of Disclosures
    Proposed Sec. 37.6(c) requires disclosures to be clear, 
conspicuous, readily understandable, and designed to call attention to 
the nature and significance of the information provided. These 
standards are similar to those contained in 12 CFR part 14, consumer 
protection in sales of insurance. Many banks are already familiar with 
these types of requirements because the OCC's insurance sales rule 
provides specific examples that will satisfy this requirement. See 12 
CFR 14.40(c)(6), 65 FR 75840 (Dec. 4, 2000). The examples included in 
Sec. 37.6(c) are modeled on those examples.

Section 37.7  Safety and Soundness Requirement

    To ensure that the offering of DCCs and DSAs does not unduly 
increase the bank's risk exposure, loss reserves must be established 
and maintained at a level adequate to cover expected losses related to 
DCCs and to cover the debt service on loans during debt suspension 
periods.
    National banks offering DCCs and DSAs typically set aside reserves 
from the fees paid by bank customers for these products. Such reserves 
are used to absorb losses arising from debt cancellation and to service 
the interest accrual during the debt suspension period. If the bank 
maintains a separate reserve, the bank's own risk managers and our 
examiners will be able to determine more easily the adequacy of the 
reserves, the accuracy of the accounting for the reserves, and 
appropriateness of the methodology used to determine the amount of the 
reserve. Proposed Sec. 37.7 requires national banks to establish a 
separate loss reserve and to maintain the reserve at a level adequate 
to conduct this business line in a safe and sound manner.
    Consistent with longstanding OCC practice, the proposed rule also 
permits a national bank to elect to obtain insurance to cover risks 
associated with offering DCCs and DSAs.
    The OCC requests comment on alternative approaches, including any 
approaches that could be designed for community banks in particular.
Part 7--Bank Activities and Operations
    The proposed rule removes 12 CFR 7.1013 and replaces it with 
several of the new provisions in part 37.

Regulatory Analysis

A. Paperwork Reduction Act

    For purposes of compliance with the Paperwork Reduction Act of 
1995, 44 U.S.C. 3501 et seq., the OCC invites comment on:
    (1) Whether the proposed collection of information contained in 
this notice of proposed rulemaking is necessary for the proper 
performance of the OCC's functions, including whether the information 
has practical utility;
    (2) The accuracy of the OCC's estimate of the burden of the 
proposed information collection;
    (3) Ways to enhance the quality, utility, and clarity of the 
information to be collected;
    (4) Ways to minimize the burden of the information collection on 
the respondents, including the use of automated collection techniques 
or other forms of information technology; and
    (5) Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    Respondents are not required to respond to this collection of 
information unless the final regulation displays a currently valid 
Office of Management and Budget (OMB) control number.
    The collection of information requirements contained in this notice 
of proposed rulemaking have been submitted to the OMB for review in 
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)). Comments on the collection of information should be sent to 
the Office of Information and Regulatory Affairs, Office of Management 
and Budget, Attention: Alexander Hunt, Desk Officer, Washington, DC 
20503, with a copy to Jessie Dunaway, Legislative and Regulatory 
Activities Division, Office of the Comptroller of the Currency, 250 E 
Street, SW., Mailstop 8-4, Washington, DC 20219.
    The proposed rule requires banks to make certain disclosures to a 
customer before the customer completes the purchase of a DCC or DSA. 
The bank may make the disclosures in writing or electronically. The 
disclosure requirements are as follows:
    Section 37.6(a)(1) requires a bank to inform the customer that its 
approval of

[[Page 19905]]

an extension of credit and the terms and conditions of such extension 
are not conditioned on the purchase of a DCC or DSA from the bank.
    Sections 37.6(a)(2) and 37.6(a)(3) require a bank to inform 
customers of the total fees for the DCC or DSA and the method the bank 
will use to collect the payments.
    Section 37.6(a)(4) requires a bank to describe any material 
limitations on the customer's ability to collect benefits relating to 
the DCC or DSA.
    Section 37.6(a)(5) requires a bank, if applicable, to inform the 
customer that activation of the contract will prohibit the customer 
from incurring additional charges or using the credit line.
    Section 37.6(a)(6) requires a bank to disclose, if applicable, that 
the customer is not entitled to a refund of the unearned portion of the 
fee in the event the customer terminates the contract or prepays the 
loan prior to the scheduled termination date, and that the customer has 
the option of purchasing a DCC or DSA that provides for a refund in 
those circumstances.
    Section 37.6(a)(7) requires a bank to explain the circumstances 
under which a customer or the bank may terminate the contact if 
termination is permitted during the life of the loan.
    Section 37.6(a)(8) requires a bank to describe the procedures a 
customer must follow to notify the bank that a triggering event has 
occurred.
    The estimated total annual burden with respect to extensions of 
credit will depend on the number of banks that offer DCCs and DSAs, the 
number of consumer loan transactions per bank per year where 
disclosures are provided, and the amount of time per transaction. The 
OCC cannot at this time accurately estimate the total number of 
participating banks or the total number of consumer loan transactions 
in which disclosures are provided to individual customers because the 
OCC does not currently collect this type of data. Solely for the 
purpose of complying with the Paperwork Reduction Act, the OCC has 
estimated the annual paperwork burden assuming that 2,300 national 
banks will provide DCCs and DSAs, and the average burden associated 
with developing the disclosures would be approximately 10 hours.
    The OCC specifically requests comment on appropriate ways to 
estimate the total number of participating banks, the total number of 
consumer loan transactions in which these disclosures will be provided 
to individual customers, and the burden associated with developing the 
disclosures and providing the disclosures to individual customers.
    The likely respondents are national banks.
    Estimated Number of Respondents: 2,300 respondents.
    Estimated Number of Responses: 2,300 responses.
    Estimated Burden Hours per Response: 10 hours.
    Estimated Total Annual Burden Hours: 23,000 hours.
    The OCC will revisit these estimates when we have more information 
on the scope of the rule and the number of potential respondents and 
consumer loan transactions. The revised estimates will also reflect all 
comments received concerning the burden estimates.

B. Regulatory Flexibility Act Analysis

    The Regulatory Flexibility Act (RFA) requires federal agencies 
either to certify that a proposed rule would not, if adopted in final 
form, have a significant impact on a substantial number of small 
entities or to prepare an initial regulatory flexibility analysis 
(IRFA) of the proposal and publish the analysis for comment. See 5 
U.S.C. 603, 605. On the basis of the information currently available, 
the OCC is of the opinion that this proposal, if it is adopted in final 
form, is unlikely to have a significant impact on a substantial number 
of small entities, within the meaning of those terms as used in the 
RFA.

C. Executive Order 12866 Determination

    The OCC has determined that the proposed rule, if adopted as a 
final rule, would not constitute a ``significant regulatory action'' 
for the purposes of Executive Order 12866. Under the most conservative 
cost scenarios that the OCC can develop on the basis of available 
information, the impact of the proposal falls short of the thresholds 
established by the Executive Order.

D. Unfunded Mandates Act of 1995

    Section 202 of the Unfunded Mandates Act of 1995 (Unfunded Mandates 
Act) requires that an agency prepare a budgetary impact statement 
before promulgating a rule that includes a Federal mandate that may 
result in the annual expenditure of $100 million or more in any one 
year by State, local, and tribal governments, in the aggregate, or by 
the private sector. If a budgetary impact statement is required, 
section 205 of the Unfunded Mandates Act requires an agency to identify 
and consider a reasonable number of alternatives before promulgating a 
rule.
    The OCC has determined that the proposed rule will not result in 
expenditures by State, local, and tribal governments, or by the private 
sector, of $100 million or more in any one year. Accordingly, the OCC 
has not prepared a budgetary impact statement or specifically addressed 
the regulatory alternatives considered.

Solicitation of Comments on Use of ``Plain Language''

    Section 722 of the G-L-B Act requires that the Federal banking 
agencies use ``plain language'' in all proposed and final rules 
published after January 1, 2000. We invite your comments on how to make 
the proposed rules easier to understand.

List of Subjects

12 CFR Part 7

    Credit, Insurance, Investments, National banks, Reporting and 
recordkeeping requirements; Securities; Surety bonds.

12 CFR Part 37

    Banks, banking, Consumer protection, Debt cancellation contract, 
Debt suspension agreement, National banks, Reporting and recordkeeping 
requirements, Safety and soundness.

Authority and Issuance

    For the reasons set forth in the preamble, the OCC proposes to 
amend chapter I of Title 12 of the Code of Federal Regulations by 
amending part 7 and adding a new part 37 as follows:

PART 7--BANK ACTIVITIES AND OPERATIONS

    1. The authority citation for part 7 continues to read as follows:

    Authority: 12 U.S.C. 1 et seq. and 93a.

    2. Section 7.1013 is removed.
    3. Add part 37 to read as follows:

PART 37--DEBT CANCELLATION CONTRACTS AND DEBT SUSPENSION AGREEMENTS

Sec.
37.1   Authority, purpose and scope.
37.2   Definitions.
37.3   Prohibited practices.
37.4   Affirmative election required.
37.5   Refunds of fees in the event of termination of the agreement 
or prepayment of the covered loan.
37.6   Disclosures.
37.7   Safety and soundness requirement.

    Authority: 12 U.S.C. 1 et seq., 24(Seventh).


Sec. 37.1  Authority, purpose, and scope.

    (a) Authority. A national bank may enter into debt cancellation 
contracts and debt suspension agreements and charge a fee therefor, 
pursuant to 12 U.S.C. 24(Seventh).
    (b) Purpose. The purpose of this part is to set forth the standards 
that apply to a national bank's provision of debt

[[Page 19906]]

cancellation contracts and debt suspension agreements, enhance consumer 
protections for customers who buy debt cancellation contracts or debt 
suspension agreements from national banks, and ensure that national 
banks providing debt cancellation contracts or debt suspension 
agreements do so on a safe and sound basis.
    (c) Scope. This part applies to the provision of debt cancellation 
contracts and debt suspension agreements by national banks and Federal 
branches and agencies. Sales of debt cancellation contracts and debt 
suspension agreements are governed by this part and not by part 14 of 
this chapter.


Sec. 37.2  Definitions.

    For purposes of this part:
    (a) Bank includes a national bank and a Federal branch or Federal 
agency as those terms are defined in part 28 of this chapter.
    (b) Customer means an individual who obtains a loan or other 
extension of credit from a bank primarily for personal, family or 
household purposes.
    (c) Debt cancellation contract means a contract entered into by a 
bank providing for cancellation of all or part of the amount due under 
an extension of credit from that bank upon the occurrence of a 
specified event.
    (d) Debt suspension agreement means a contract entered into by a 
bank providing for the suspension of all or part of the repayment 
obligation under an extension of credit from that bank upon the 
occurrence of a specified event.


Sec. 37.3  Prohibited practices.

    (a) Anti-tying. A bank may not extend credit or alter the terms or 
conditions of an extension of credit conditioned upon the purchase of a 
debt cancellation contract or debt suspension agreement from the bank.
    (b) Misleading or deceptive representations. A bank may not engage 
in any practice that could mislead a reasonable person with respect to 
the information that must be disclosed under Sec. 37.6(a) of this part.
    (c) Terms not routinely enforced. A debt cancellation contract or 
debt suspension agreement may not contain any term that the bank 
routinely does not enforce.
    (d) Unilateral right to modify. A debt cancellation contract or 
debt suspension agreement may not give the bank the unilateral right to 
modify the contract or agreement.


Sec. 37.4  Affirmative election required.

    The customer must affirmatively elect to purchase a debt 
cancellation contract or debt suspension agreement. The customer's 
election must be in writing in a document that is separate from the 
documents pertaining to the credit transaction. The election may be 
made electronically in a manner consistent with the requirements of the 
Electronic Signatures in Global and National Commerce Act, 15 U.S.C. 
7001 et seq.


Sec. 37.5  Refunds of fees in the event of termination of the agreement 
or prepayment of the covered loan.

    (a) Refunds. If a debt cancellation contract or debt suspension 
agreement is terminated, including when the the customer prepays the 
loan covered by the contract or agreement, a bank shall refund to the 
customer any unearned portion of the fee paid for the product unless 
the contract or agreement provides otherwise. A bank may offer a 
customer a contract or agreement that does not provide for a refund of 
the unearned portion of the fee upon termination or prepayment if the 
bank also offers that customer the option of purchasing a contract or 
agreement that provides for such a refund.
    (b) Method of calculating refund. The bank shall calculate the 
amount of the refund using a method at least as favorable to the 
customer as the actuarial method.


Sec. 37.6  Disclosures.

    (a) Content of disclosures. A bank must disclose the following 
information to a customer before the customer completes the purchase of 
a debt cancellation contract or debt suspension agreement:
    (1) That the approval of an extension of credit and the terms and 
conditions of such extension are not conditioned on the customer's 
purchase of a debt cancellation contract or debt suspension agreement 
from the bank;
    (2) The amount of the total fee for the debt cancellation contract 
or debt suspension agreement;
    (3) The method the bank will use to collect the payment, including 
whether the payment must be paid in a lump sum or in periodic payments, 
and whether the fee is included in the loan amount;
    (4) A description of any material limitations on the customer's 
ability to collect benefits pursuant to the terms of the contract or 
agreement and where the customer may find further information regarding 
these limitations;
    (5) If applicable, a statement that activation of the debt 
cancellation contract or debt suspension agreement will cause the bank 
to preclude the customer from incurring additional charges or using a 
credit line;
    (6) If applicable, a statement that the customer will not be 
entitled to a refund of the unearned portion of the fee in the event 
the customer terminates the contract or prepays the loan in full prior 
to the scheduled termination date, and a statement that the customer 
has the option of purchasing a debt cancellation contract or debt 
suspension agreement that provides for a refund in those circumstances;
    (7) An explanation of the circumstances under which the customer or 
the bank may terminate the contract or, if applicable, a statement that 
the customer has no right to terminate the contract; and
    (8) A description of the procedures a customer must follow to 
notify the bank that a triggering event under the debt cancellation 
contract or debt suspension agreement has occurred.
    (b) Method of making disclosures. The bank may make the disclosures 
required under Sec. 37.6(a) of this section in writing or, if the 
customer consents, electronically. Electronic disclosures must be made 
in a manner consistent with the requirements of the Electronic 
Signatures in Global and National Commerce Act, 15 U.S.C. 7001 et seq.
    (c) Form of disclosures. Disclosures required by this part must be 
clear, conspicuous, readily understandable, and designed to call 
attention to the nature and significance of the information provided. 
Examples of methods that could call attention to the nature and 
significance of the information provided include:
    (1) A plain-language heading to call attention to the disclosures;
    (2) A typeface and type size that are easy to read;
    (3) Wide margins and ample line spacing;
    (4) Boldface or italics for key words; and
    (5) Distinctive type style, and graphic devices, such as shading or 
sidebars, when the disclosures are combined with other information.


Sec. 37.7  Safety and soundness requirement.

    A national bank must establish and maintain a separately 
identifiable loss reserve for debt cancellation contracts and debt 
suspension agreements at a level sufficient to meet expected losses or 
interest payments for suspended or canceled debt. Instead of 
maintaining a separate loss reserve, a national bank may obtain from a 
third party insurance that is adequate to cover the expected losses.

[[Page 19907]]


    Dated: April 9, 2001.
John D. Hawke, Jr.,
Comptroller.
[FR Doc. 01-9585 Filed 4-17-01; 8:45 am]
BILLING CODE 4810-33-P