[Federal Register Volume 67, Number 182 (Thursday, September 19, 2002)]
[Rules and Regulations]
[Pages 58962-58978]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-23765]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Parts 7 and 37
[Docket No. 02-14]
RIN 1557-AB75
Debt Cancellation Contracts and Debt Suspension Agreements
AGENCY: Office of the Comptroller of the Currency, Treasury.
ACTION: Final rule.
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SUMMARY: The Office of the Comptroller of the Currency (OCC) is adding
a new part 37 to its regulations that addresses debt cancellation
contracts (DCCs) and debt suspension agreements (DSAs). The purpose of
the final rule is to establish standards governing these products in
order to ensure that national banks provide such products consistent
with safe and sound banking practices and subject to appropriate
consumer protections.
EFFECTIVE DATE: This rule is effective June 16, 2003.
FOR FURTHER INFORMATION CONTACT: Jean Campbell, Attorney, Legislative
and Regulatory Activities Division, (202) 874-5090; Suzette Greco,
Special Counsel, Securities and Corporate Practices Division, (202)
874-5210; or Rick Freer, Compliance Specialist, Compliance Division,
(202) 874-4862, Office of the Comptroller of the Currency, 250 E
Street, SW., Washington, DC 20219.
SUPPLEMENTARY INFORMATION:
I. Background
National Banks' Authority to Offer DCCs and DSAs
A DCC is a loan term or a contractual arrangement modifying loan
terms linked to a bank's extension of credit, under which the bank
agrees to cancel all or part of a customer's obligation to repay an
extension of credit from that bank upon the occurrence of a specified
event. A DSA is a loan term or a contractual arrangement modifying loan
terms linked to a bank's extension of credit, under which the 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.
Under a DCC or a DSA, the customer typically agrees to pay an
additional fee to the bank in exchange for the bank's promise to cancel
or temporarily suspend the borrower's obligation to repay the loan. The
fee may be a lump sum that is payable at the outset of a loan (that may
be financed over the term of the loan), or the fee may take the form of
a monthly or other periodic charge. The fee compensates the bank for
releasing borrowers from loan obligations under the circumstances
specified in the DCC or DSA. These arrangements also provide customers
a convenient method of extinguishing debt in times of financial or
personal hardship, and enable the bank to avoid the time and expense of
collecting the balance of the loan from a borrower's estate in the
event of the borrower's death or other specified circumstances.\1\
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\1\ See generally, Joseph L. Moore & James W. Smith, Debt
Cancellation Contracts: A Neglected Asset, 112 Banking L. J. 918
(1995).
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The authority of national banks to offer DCCs and DSAs is well-
established.\2\ Nearly 40 years ago, in 1963, the OCC concluded that
offering DCCs was a lawful exercise of the powers of a national bank in
connection with the business of banking.\3\ The following year various
OCC issuances affirmed that position.\4\ As explained by Comptroller
James Saxon:
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\2\ 12 U.S.C. 24(Seventh). See Memorandum from Julie L.
Williams, First Senior Deputy Comptroller and Chief Counsel, to John
D. Hawke, Jr., Comptroller of the Currency, dated June 25, 2002
(discussing national banks' authority to offer DCCs and DSAs).
\3\ See Comptroller of the Currency, The National Banking Review
264 (Dec. 1963).
\4\ See Letter from James J. Saxon to the President of a
National Bank (Mar. 10, 1964); Letter from James J. Saxon to the
President of a National Bank (Mar. 26, 1964); James J. Saxon,
Statement of the Comptroller of the Currency on Debt Cancellation
Contracts and Their Relation to State Law (May 18, 1964); James J.
Saxon, Letter to the Presidents of all National Banks (July 21,
1964).
[[Page 58963]]
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The debt cancellation ruling issued by this Office [OCC] is not
intended as a means for National Banks to invade the field of
insurance. Rather, it is a recognition by this Office of a National
Bank's right to protect itself by the establishment and maintenance
of appropriate reserves against anticipated losses in connection
with its lending activities under 12 U.S.C. 24. The necessity to
maintain such reserves and to adjust its charges in relation to both
reserves and the risk involved in a particular transaction has long
been recognized as an essential part of the business of banking.\5\
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\5\ James J. Saxon, Statement of the Comptroller of the Currency
on Debt Cancellation Contracts and Their Relation to State Law (May
18, 1964).
In 1971, the OCC codified the interpretive ruling on DCCs as 12 CFR
7.7495.
The only Federal circuit court of appeals that has considered DCCs
or DSAs upheld the OCC's determination that the National Bank Act
authorizes national banks to enter into DCCs with their borrowers and
that DCCs were banking products, not part of the ``business of
insurance.'' \6\ In First Nat'l Bank of Eastern Arkansas v. Taylor, the
Eighth Circuit Court of Appeals considered whether DCCs provided by a
national bank to its loan customers were subject to Arkansas State
insurance regulation. The court held that the National Bank Act
authorized national banks to offer DCCs. Further, it held that Federal
law precluded the State insurance commissioner from requiring the
national bank to obtain a State insurance license and from taking
enforcement action against the national bank for failing to do so.\7\
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\6\ See First Nat'l Bank of Eastern Arkansas v. Taylor, 907 F.2d
775(8th Cir.), cert. denied, 498 U.S. 972 (1990).
\7\ ``Because national banks are considered federal
instrumentalities, states may neither prohibit nor unduly restrict
their activities. Thus, the National Bank Act preempts the
Commissioner's authority to prohibit FNB from offering debt
cancellation contracts.'' Id. at 778 (citations omitted).
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The Eighth Circuit found that DCCs do not constitute the ``business
of insurance'' under the McCarran-Ferguson Act because the product
falls within the powers incidental to banking granted by the National
Bank Act.\8\ The court emphasized that DCCs offered by banks in
connection with their loans differ significantly from traditional
insurance contracts. DCCs do not require the bank to take an investment
risk or make payment to the borrower's estate. The loan simply is
extinguished when the borrower dies. Thus, the court reasoned, ``the
primary and traditional concern behind state insurance regulation--the
prevention of [the insurer's] insolvency--is not of concern to a
borrower who opts for a debt cancellation contract.''\9\ The court
concluded that further support for its holding that DCCs do not
constitute the ``business of insurance'' derives from the fact that
national banks fulfilling their obligations under DCCs do not implicate
this central concern of insurance regulation.\10\
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\8\ The court recognized that whether an activity falls within
the ``business of insurance'' for purposes of the McCarran-Ferguson
Act is a federal question and not determined by State law defining
insurance. Id. at 780, n.8 (citing SEC v. Variable Annuity Life Ins.
Co., 359 U.S. 65, 69(1959)). See also Steele v. First Deposit Nat'l
Bank, 732 So.2d 301 (Ala. Civ. App. 1999) (finding a credit
protection debt deferral product was not within the meaning of the
``business of insurance'').
\9\ Taylor, 907 F.2d at 780.
\10\ See id.
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In 1996, the OCC amended the interpretive ruling (renumbered as
Sec. 7.1013) to expressly include offering DCCs for the disability of
the borrower, in addition to death.\11\ The OCC also has issued various
interpretive letters concerning DCCs and DSAs over the years.\12\ In
1998, for example, the OCC confirmed that a national bank may offer
DSAs as well as DCCs, as part of its express authority to make
loans.\13\
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\11\ See 61 FR 4849 (Feb. 9, 1996).
\12\ See, e.g., Interpretive Letter No. 641 (Jan. 7, 1994);
Interpretive Letter No. 827 (Apr. 3, 1998); Interpretive Letter No.
903 (Dec. 28, 2000).
\13\ See Interpretive Letter No. 827 (Apr. 3, 1998).
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The OCC's Rulemaking
On January 26, 2000, the OCC published in the Federal Register an
advance notice of proposed rulemaking (ANPR) requesting comment on
whether regulations addressing DCCs and DSAs were necessary or
appropriate (65 FR 4176).\14\ In particular, in the ANPR, we noted the
absence of a comprehensive Federal consumer protection scheme governing
DCCs and DSAs.
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\14\ The comments we received on the ANPR are summarized in the
notice of proposed rulemaking (66 FR 19901, Apr. 18, 2001).
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We OCC received 41 comments in response to the ANPR. Commenters
were evenly divided on whether additional regulations were necessary.
On balance, we agreed with those who favored additional standards in
this area.
On April 18, 2001, we published a notice of proposed rulemaking
(NPRM) requesting comment on proposed regulations governing DCCs and
DSAs (66 FR 19901). The preamble to the proposal said that the proposed
rules were designed to facilitate consumers' informed choice about
whether to purchase DCCs or DSAs, to discourage unfair or abusive sales
practices, and to promote national banks' ability to offer DCCs and
DSAs on a safe and sound basis.
The OCC received 51 comment letters in response to the NPRM.\15\
The commenters included bank trade associations, national banks, credit
card companies, and consumer groups. Comments were also filed by
insurance trade associations, insurance companies, and State insurance
regulators. Finally, we received comments from a number of individuals
and companies. The vast majority of commenters favored the proposed
regulation, but most of these commenters recommended changes.
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\15\ Several commenters filed multiple comments.
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The final rule makes a number of changes to the proposal, many in
response to suggestions provided by commenters. The next section of
this discussion sets out a general overview of the final rule.
II. Overview
The final rule includes the following significant features:
[sbull] It codifies the OCC's longstanding position that DCCs and
DSAs are permissible banking products.
[sbull] It establishes important safeguards to protect against
consumer confusion and areas of potential customer abuse. In
particular, the final rule prohibits national banks from offering lump
sum, single premium DCCs or DSAs in connection with residential
mortgage loans.
[sbull] The rule provides for standardized disclosures of key
information in connection with the offer and sale of DCCs and DSAs. The
disclosure requirements are structured to accommodate widely used
methods of marketing DCCs and DSAs, including telephone solicitations,
mail inserts, and so-called ``take one'' applications.
[sbull] To the extent feasible, the rules apply consumer
protections modelled on the framework of consumer protections that
Congress directed the OCC (and the other Federal banking agencies) to
apply to banks' insurance sales. National banks are familiar with these
insurance sales requirements, which are contained in part 14 of the
OCC's regulations, and the approach taken in the final rule enables
banks to harmonize their policies, procedures, and employee training
programs across the two product lines.
[sbull] The rule addresses safety and soundness considerations
presented by DCCs and DSAs by requiring national banks to manage the
risks associated with these products according to safe and sound
banking principles,
[[Page 58964]]
including appropriate recognition and financial reporting of income,
expenses, assets, and liabilities associated with DCCs and DSAs,
adequate internal controls, and risk mitigation measures.
Section III of this preamble discussion describes the most
significant comments we received on the proposed rule and responds to
the commenters' principal concerns. Section IV summarizes the final
rule.
III. Summary of Comments
Authority, Purpose, and Scope (Section 37.1)
The proposed rule removed 12 CFR 7.1013 and replaced it with 12 CFR
37.1. Section 37.1(a) stated the authority of national banks under 12
U.S.C. 24 (Seventh) to enter into both DCCs and DSAs and to charge a
fee for these products. Section 37.1(b) set forth the purposes of the
new regulations. Section 37.1(c) stated that the regulations applied to
the provision of DCCs and DSAs by national banks and Federal branches
and agencies. In addition, it clarified that the sale of DCCs and DSAs
are governed by new part 37 and not by 12 CFR 14 (Consumer Protections
for Depository Institution Sales of Insurance).
Applicability of State Law
Many commenters sought clarification about the regulatory framework
that governs DCCs and DSAs. They urged the OCC to clarify that DCCs and
DSAs offered by national banks are not subject to regulation under
State insurance law. One commenter, however, asserted that DCCs and
DSAs are ``authorized'' insurance products under the Gramm-Leach-Bliley
Act (GLBA)\16\ and that States have express authority to regulate them
as insurance, subject only to the preemption standards set forth in
section 104 of the GLBA.
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\16\ Pub. L. No. 106-102, 113 Stat. 1338 (Nov. 12, 1999).
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As is described in the Background section of this preamble
discussion, DCCs and DSAs are banking products authorized under 12
U.S.C. 24(Seventh). This final rule, together with any other applicable
requirements of Federal law and regulations, are intended to constitute
the entire framework for uniform national standards for DCCs and DSAs
offered by national banks. Accordingly, the final rule states that DCCs
and DSAs are regulated pursuant to Federal standards, including part
37, and not State law.
Establishment of Fees
Many commenters urged that the OCC regulate the amount of fees
banks can charge for DCCs and DSAs. The premise of a number of these
comments was the assertion that DCCs and DSAs are substitute products
for credit insurance. These commenters contended that the market for
DCCs is analogous to the market for credit insurance, which is
characterized by ``reverse competition.'' ``Reverse competition''
refers to market conditions that result in increased prices because
insurers compete with each other for the business of the agents who
control placement of the product. To obtain this business, insurance
companies pay high commissions or provide other compensation or
services, resulting in higher costs that are then passed on to the
consumer. These commenters expressed concern that disclosure
requirements are inadequate to address this market failure, and they
recommended that the OCC impose the same type of regulation--including
fee, form, and claims regulation--on the sale of DCCs or DSAs as is
commonly required by State insurance regulators with respect to the
sale of credit insurance.
For several reasons, we decline to depart from the basic regulatory
approach we proposed, although the final rule does contain enhanced
consumer protection features beyond those contained in the proposal.
First, as the Taylor court explained, DCCs and DSAs are distinct from
credit insurance as a matter of law. Moreover, we see no evidence that
the market for DCCs and DSAs suffers from the same flaws as the
commenters assert prevail in the credit insurance market. Issuers of
DCCs and DSAs do not compete to enlist independent, third-party sellers
to place their product. Instead, every national bank that issues DCCs
or DSAs is its own seller because these products are provided in
conjunction with loans that the bank itself makes. Commenters provided
no evidence of impairment in the market for DCCs and DSAs, but instead
relied on concerns regarding distortions and abuses in the credit
insurance market. Thus, we cannot conclude that the strongest reason
given by the commenters in support of fee regulation--dysfunction in
the market that disclosures are inadequate to overcome--is present in
the market for DCCs and DSAs. Moreover, as the rule's express
prohibition on tying makes clear, the choice of purchasing the product
is left exclusively to the customer. We have concluded, therefore, that
a regulatory approach that includes price controls as a primary
component is not warranted.
The OCC's regulations reflect the fact that national banks may set
fees subject to standards of prudent banking practices. Section 7.4002
of our rules authorizes national banks to establish non-interest
charges and fees ``according to sound banking judgment and safe and
sound banking principles.'' \17\ A bank satisfies this standard if it
employs a decision making process to set fees that involves
consideration of four factors identified in the regulation. The
standards of Sec. 7.4002 apply to the fees charged by a national bank
for a DCC or DSA.
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\17\ 12 CFR 7.4002(b)(2).
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Several commenters stated that, in some cases, either banks do not
charge customers a fee for a DCC or DSA or a third party pays the fee.
These commenters urged the OCC to clarify that the regulation does not
apply if the customer does not pay a fee for the DCC or DSA, or to
create an exemption to some of the provisions of the rule. We have not
modified the final rule in this way because, in our view, such a
modification could create an incentive for banks to evade the
requirements of the rule. This could occur if, for example, a bank
structures its fees so that it does not explicitly charge the customer
for a DCC or DSA but builds that fee into some other component of the
transaction.
For these reasons, Sec. Sec. 37.1(a), (b), and (c) are
substantively the same in the final rule as in the proposal, with
certain stylistic changes to improve clarity. For stylistic purposes,
the regulation text uses both the terms ``extension of credit'' and
``loan;'' we do not intend this usage to create any substantive
distinctions. In addition, we have added a phrase in subsections (a)
and (c) to clarify that DCCs and DSAs are offered in connection only
with extensions of credit made by the same bank.
Definitions (section 37.2)
The proposed rule defined a DCC as a contract entered into between
a bank and its customer providing for cancellation of all or part of
the amount a customer owes under an extension of credit from that bank
upon the occurrence of a specified event. A DSA was similarly defined
as a contract entered into between a bank and its customer providing
for suspension 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. The rule used the term ``bank'' to include a national bank as
well as a Federal branch or agency. A customer was defined as an
individual who obtains a loan or other extension of credit from a bank
primarily for personal, family or household purposes.
[[Page 58965]]
A number of commenters sought clarification of the terms defined in
the proposal, and we have, accordingly, made a number of clarifying
changes to the text. For example, many commenters were concerned that
the definitions of a DCC and a DSA implied that they are products
separate from the underlying extension of credit. The text of the final
rule adds language to clarify this point.
The final rule makes stylistic changes in all the definitions and
adds five definitions: actuarial method, closed-end credit, contract,
open-end credit, and residential mortgage loan. In response to
suggestions from commenters, we have added a sentence to the definition
of a DSA to clarify that the rule does not cover so-called ``skip-a-
payment'' agreements in which the triggering event for a deferral
arrangement is either the borrower's unilateral election to defer
payment or the bank's unilateral decision to allow a deferral of
repayment. The rule covers ``hybrid'' arrangements that contain both
debt suspension and debt cancellation features. It also covers DSAs
where interest continues to accrue during the suspension period, as
well as DSAs where the accrual of interest is suspended.
Both the proposal and the final rule require that if a refund
feature is part of the DCC or DSA, the bank must compute that refund
using a method no less favorable to the consumer than the actuarial
method. In response to requests from commenters, the final rule defines
that term. The rule adopts the definition of ``actuarial'' found in the
Truth in Lending Act (TILA), because banks are already familiar with
the TILA definition and its implementation in the Federal Reserve
Board's Regulation Z.\18\ For the same reason, the terms ``open-end
credit'' and ``closed-end credit'' are defined based on Regulation
Z.\19\
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\18\ See 15 U.S.C. 1615(d)(1). See also 12 CFR 226, app. J
(appendix to the Federal Reserve Board's Regulation Z, implementing
the TILA, explaining the use of the actuarial method for purposes of
computing the annual percentage rate).
\19\ See 12 CFR 226.2(20) and 226.2(10), respectively.
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For purposes of the prohibition on single-payment fees for DCCs and
DSAs issued in connection with residential mortgage loans, we have
added the term ``residential mortgage loan'' and defined it to mean a
loan secured by one-to-four family, residential property.
Finally, the rule adds the new term ``contract'' as a less
cumbersome, short-form reference to a debt cancellation contract or a
debt suspension agreement in the remainder of the regulation text.
Prohibited Practices (section 37.3)
Anti-Tying Provision
The proposed rule contained several types of customer protections
that would be standard when a bank provides products associated with a
loan, including an anti-tying provision precluding 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.
Several commenters supported the anti-tying prohibition. These
commenters thought that a bank's authority to deny a consumer's request
for credit gives the bank a unique ability to seek to coerce consumers
to purchase a DCC or DSA. They asserted that disclosures alone are not
effective to dispel the potentially coercive effect that tying has in
this context.\20\
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\20\ In support of this view, one commenter cited a study
indicating that even when consumers receive disclosures informing
them that the lender's decision to grant a loan is not conditioned
on the purchase of insurance, some consumers still believe that
there is a connection between their ability to obtain the loan or to
obtain favorable loan terms and their purchase of insurance. See
John M. Barron & Michael E. Staten, Credit Research Center, Purdue
University, Credit Insurance: Rhetoric and Reality (1994).
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A number of commenters opposed this provision, however. These
commenters offered different objections, depending on their view of the
effect on these products of the anti-tying provision in section 106 of
the Bank Holding Company Act Amendments of 1970.\21\ Section 106
generally forbids a bank from extending credit, leasing or selling
property, furnishing services, or fixing or varying prices of these
transactions, on the condition or requirement that the customer obtain
additional credit, property, or service from the bank, subject to
certain exceptions. One of these exceptions, the statutory
``traditional bank product'' exemption, permits a bank to extend
credit, lease or sell property, furnish services, or fix or vary prices
on these transactions, on the condition that a customer obtain a loan,
discount, deposit or trust service from the same bank.\22\ Some
commenters argued that section 106 does not apply because DCCs and DSAs
are an integral term of the loan agreement and the tying prohibition
only applies to separate products. Others thought that section 106
applies but would operate to permit tying either because the DCC or DSA
is part of the loan and section 106 permits the tying of loan products,
or because the DCC or DSA is a ``traditional bank product'' and may be
tied to a loan on that basis. On the other hand, one commenter argued
that the rule's anti-tying provision is unnecessary because section 106
already applies to prohibit tying a loan to a customer's purchase of a
DCC or DSA from the bank.
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\21\ Section 106 is codified at 12 U.S.C. 1972.
\22\ See 12 U.S.C. 1972(1)(A).
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DCCs and DSAs may be offered and purchased either contemporaneously
with the other terms of the loan agreement or subsequent to the
execution of that agreement. In either case, the effect of the DCC or
DSA is to extinguish or suspend the borrower's obligation to repay
under the otherwise operative provisions of the loan. Since a bank's
ability to adjust the terms of loan repayment is an integral component
of its authority to lend, in our view, a DCC or DSA could properly be
treated as a component of the loan and, as such, would not be subject
to the tying prohibitions in section 106 because a DCC or DSA is a term
of the loan rather than a separate product. Thus, the final rule
retains a tying prohibition specifically applicable to DCCs and DSAs.
Misleading Practices
The proposed rule prohibited a bank from engaging in any practice
that could mislead a reasonable person with respect to the information
that the proposal required to be disclosed.
Several commenters objected to the ``reasonable person'' standard
on the grounds that it was vague, subjective, or so broad that it would
be impossible to enforce.\23\ Yet, the proposed standard was very
similar to the standard governing misleading practices found in the
regulations of the OCC (and the other Federal banking agencies)
implementing consumer protections in the insurance sales context.\24\
National banks' sale of DCCs and DSAs, which may be solicited and
marketed using methods similar to insurance solicitation and marketing,
can present similar consumer protection issues as
[[Page 58966]]
the sale of insurance products. Moreover, national banks are already
generally familiar with the standard contained in the insurance sales
regulations. Thus, the final rule retains the substance of the
prohibition as proposed but with changes in wording so that the
language conforms more closely with the language of part 14. We have
also added an express reference to misleading advertisements, as well
as practices, to make clear that the scope of the prohibition is no
less than that in part 14.
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\23\ A few commenters also argued that this provision is
unnecessary because national banks are already subject to the
prohibitions in the Federal Trade Commission Act against fraud and
misleading or deceptive advertising. Section 5 of the Federal Trade
Commission Act (15 U.S.C. 41 et seq.) (FTC Act) generally prohibits
``unfair or deceptive acts or practices in or affecting commerce.''
The prohibition retained in the final rule is consistent with, but
not duplicative of, the standards in the FTC Act.
\24\ See 12 CFR 14.30(b). This provision is included in part 14
of the OCC's regulations, which implements the insurance sales
consumer protections prescribed by section 305 of the GLBA. The
statute requires the regulators to prohibit advertising or
statements that could mislead any person or cause a reasonable
person to reach an erroneous belief with respect to several
enumerated facts. See 12 U.S.C. 1831x (codifying section 305 of the
GLBA).
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Unilateral Modification of the Contract
The proposed rule prohibited a bank from retaining a unilateral
right to modify or cancel the contract.
A commenter representing several organizations supported this
provision, but the majority of the commenters who addressed it either
were opposed or recommended modifications. Many commenters stated that
modifying the terms of credit is standard business practice in the
credit card industry. They noted that modifications are subject to the
protections of the TILA and Regulation Z, which permit changes in
certain terms upon notice and agreement by the customer. Other
commenters suggested that the OCC create an exemption in the case of
customers who pay the fee on a monthly basis and have the right to
cancel at any time. Several commenters urged the OCC to permit banks to
make unilateral changes, provided the change benefits the customer.
The OCC remains of the view that retaining a unilateral right to
modify or cancel the DCC or DSA, whether the product is associated with
open-or closed-end credit, has the potential to be abusive because it
could be exercised in such a way as to deny a customer debt relief for
which the customer has paid. We agree, however, that some of the
circumstances described by the commenters do not present this potential
for abuse. Accordingly, the final rule excepts unilateral changes from
the prohibition in two circumstances: first, if the modification is
favorable to the customer and is made without additional charge to the
customer; and, second, if the customer is notified of the proposed
change and provided a reasonable opportunity to cancel the contract
without penalty before the change goes into effect. For example, the
OCC would generally regard a 30-day notice period as reasonable. This
time period is consistent with the time requirements imposed by TILA in
an analogous situation.\25\ The final rule does not require that the
contract language specify the circumstances under which the bank may
make a unilateral modification, though inclusion of explicit provisions
in the contract may be helpful to avoid misunderstandings. Rather, the
rule operates to prohibit the bank from requiring its customer to abide
by a unilateral modification unless it meets one of the exceptions
described in the rule.
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\25\ The types of changes that might occur if a bank made a
unilateral modification to a DCC or DSA are analogous to changes for
which Regulation Z requires 30 days prior notice. See, e.g., 12 CFR
226.9(e) and (f).
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Single, Lump Sum Payment
Several commenters urged the OCC to include in the final rule a
provision prohibiting banks from requiring a customer to pay the fee
for a DCC or DSA in a single payment. These commenters focused on
abuses that have occurred in the sale of credit insurance in the
subprime market for residential mortgage loans and argued that the sale
of DCCs and DSAs present a similar potential for abuse. They noted that
customers who pay the fee in a single payment routinely add the amount
of the fee to the amount borrowed, which means that customers will pay
interest on the fee for the life of the loan. They contended that
lenders marketing credit insurance target borrowers who are
unsophisticated about financial products and thus unlikely to realize
that financing the fee has the effect of reducing the homeowner's
equity in his or her home.
The issues identified with respect to single premium credit
insurance in the home mortgage market are particularly problematic
because they highlight practices targeting consumers whose economic
choices may be circumscribed or who may be especially vulnerable to
predatory sales practices. Moreover, we are aware, as commenters
pointed out, that some large financial institutions have voluntarily
abandoned the practice of financing single payment credit insurance
premiums for home mortgage loans. In addition, both Fannie Mae and
Freddie Mac have announced that they will no longer purchase mortgages
that carry single premium credit insurance.\26\ The reaction of these
market participants supports the conclusion that the potential for
abuse in the marketing and sale of these products outweighs any
potential consumer benefits.
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\26\ See Freddie Mac Unveils Policy on Insurance To Protect
Borrowers, Wall St. J., Mar. 27, 2000, at A6; Fannie Mae Chairman
Announces New Loan Guidelines to Combat Predatory Lending Practices,
New Release (Fannie Mae), Apr. 11, 2000.
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In the absence of evidence that the abuses identified by the
commenters are occurring in the DCC or DSA market, we have declined to
adopt an across-the-board prohibition on lump sum fees. We remain
concerned, however, that abuses similar to those occurring in the
credit insurance market not develop with respect to DCCs or DSAs
provided in connection with home mortgage loans. To guard against that
result, the final rule prohibits a national bank from requiring a
customer to pay the fee for a DCC or DSA in a single payment, payable
at the outset of the contract, if the debt that is the subject of the
contract is a residential mortgage loan. The rule permits single
payment contracts in the case of all other consumer loans, but requires
banks that offer the option of paying the fee in a single payment to
also offer the bona fide option of paying for that contract in periodic
payments. In such cases, the bank must also make certain disclosures
related to the fee.
Terms Not Routinely Enforced
The proposed rule prohibited a bank from including in a DCC or DSA
any term that the bank routinely does not enforce.
Twelve commenters addressed this provision and they unanimously
opposed it. They contended, among other things, that it sets a standard
that is unclear and difficult to administer. In addition, they argued
that the provision could harm customers because it would have a
chilling effect on banks' flexibility to work with customers to resolve
delinquent debt issues and rehabilitate credit relationships. Several
commenters stated that legal means already exist to address instances
in which the failure routinely to enforce a term would mislead
consumers, such as the OCC's general authority to enforce unfair or
deceptive business practices laws applicable to national banks.
We agree with these commenters that this prohibition would be
counterproductive if it produced the unintended result of deterring
banks from negotiating with their customers to work out or restructure
delinquent debt. Accordingly, we have deleted this prohibition from the
final rule.
Refunds of Fees in the Event of Termination of the Agreement or
Prepayment of the Covered Loan (section 37.4)
The proposal required a bank that provides a no-refund DCC or DSA
also to offer a product that provides for a refund of the unearned
portion of the
[[Page 58967]]
fee in the event of termination of the agreement or prepayment of the
covered loan. In addition, the proposal required 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.
Several commenters opposed this provision. Some argued that fees
charged in connection with DCCs and DSAs should be treated the same as
any other fee a bank charges in connection with a loan. Others thought
that no-refund DCCs and DSAs are inherently unfair to consumers and
recommended that the OCC prohibit them. Many commenters stated that the
refund provision should not apply to open-end credit where customers
pay for DCCs or DSAs on a month-to-month basis.
As we noted in the proposal, 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. Banks have suggested that customers benefit from a ``no-
refund'' product because the total fee paid by the 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.
We continue to believe that the approach that best balances
encouraging banks to provide a viable choice of products for consumers
with discouraging unfair practices is to require banks to offer both
options so that a customer can choose between a lower total fee or the
availability of a refund. In our view, the potential for unfairness in
a no-refund product lies principally in the fact that the customer may
be induced to pay ``up front'' for coverage that he or she never
receives because the loan is prepaid. This result is substantially
mitigated if the consumer has the option of DCC or DSA coverage on a
``pay as you go'' basis.
Accordingly, the final rule retains this provision (as renumbered)
with one substantive change. The text of the final rule requires that a
bank that offers a no-refund DCC or DSA must also offer the customer a
bona fide option to purchase a comparable contract that provides for a
refund. The option to purchase is bona fide if the refund product is
not deliberately structured in such a way, including pricing of the
product, as to deter a customer from selecting that option.
In response to questions raised by commenters, we clarify that the
refund provision does not apply in the case of open-end credit where
customers pay for the contract on a month-to-month basis. In that case,
there are no ``unearned'' fees to refund. Nor does it apply if the fee
for the contract is paid by the bank or some other third party rather
than the customer.
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. 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, the final rule retains the requirement that banks calculate
the amount of any refund due a customer based on a method at least as
favorable to the customer as the actuarial method. As described earlier
in this discussion, we have added to the final rule a definition of the
term ``actuarial method.''
Method of Payment of Fees (section 37.5)
As we have described, section 37.3(c)(2) prohibits a bank from
requiring a customer to pay the fee for a DCC or a DSA in a single lump
sum where the associated credit is a residential mortgage loan. Several
commenters urged the OCC to prohibit a bank from requiring a customer
to pay the fee for any DCC or DSA in a single payment. While we do not
believe the available evidence supports that result, we agree that
single payment fees have potential to be problematic even outside the
home mortgage loan context. Accordingly, for DCCs or DSAs associated
with any other type of loan, Sec. 37.5 of the final rule requires a
bank that offers a customer the option to pay the fee for a contract in
a single payment also to offer that customer a bona fide option to pay
the fee for that contract in periodic payments. The option is ``bona
fide'' if it is not deliberately priced in such a way as to deter a
customer from selecting that option.
Disclosures (section 37.6)
Content of Short and Long Form of Disclosures in General
The proposed rule listed eight disclosures that a bank, where
applicable, was required to give.
Many commenters objected to the number of required disclosures.
They noted that banks already are required to provide disclosures under
the TILA and argued that the new disclosures were too burdensome for
banks and too confusing for customers. Several commenters who supported
rate, form, and claims regulation similar to the regulation of the
insurance industry challenged the usefulness of disclosures and
criticized the OCC for relying too heavily on disclosures. For the
reasons we have earlier described, in our view, regulation of DCCs and
DSAs as if they were insurance products is not appropriate. We agree
with the commenters who thought the proposed disclosure requirements
could be improved, however.
Therefore, the final rule retains much of the content of the
disclosures prescribed by the proposal, but revises the disclosure
process so that it more readily accommodates the methods banks use to
market and sell DCCs and DSAs. The final rule specifies which
disclosures must be given at different stages of the marketing and
sales process and provides forms of disclosure that serve as models for
satisfying the requirements of the rule.
In the final rule the disclosures have been reorganized into two
types: a short form of disclosure suitable for use in telemarketing and
various abbreviated written solicitations, and a more detailed long
form of disclosure that a customer generally will receive prior to
purchasing the contract. A sample short form is provided as Appendix A
to the regulation and a sample long form is provided as Appendix B. Use
of these forms is not mandatory. A bank may adjust the form and wording
of its disclosures so long as the requirements of the regulation are
met. Because many of the disclosures will appear in both the short and
long form, we discuss the short and long form disclosures together.
Anti-Tying Disclosure
The proposed rule required a bank to inform the customer that
neither its decision whether to approve a loan nor the terms and
conditions of the loan are conditioned on the purchase of a DCC or DSA
from the bank.
Commenters opposed to the anti-tying prohibition also opposed the
anti-tying disclosure. Most of these commenters contended that the
anti-tying disclosure is necessary only if the DCC or DSA is being sold
while a customer's application for credit is pending. If the OCC
retains this disclosure, they recommended creating an exemption for
[[Page 58968]]
DCCs and DSAs sold subsequent to the extension of credit.
As described earlier in this discussion, the final rule retains the
prohibition on tying either the availability or the terms of credit to
a customer's purchase of a DCC or DSA. Because the effectiveness of the
prohibition is greatly enhanced if the customer knows that the bank may
not tie DCCs or DSAs to its loan products, the final rule also retains
the requirement that the bank provide an anti-tying disclosure. The
disclosure appears in both the short form and long form and, insofar as
appropriate,\27\ is similar in content to the anti-tying disclosure
required by the insurance sales consumer protection rules. The
appendices suggest a wording that is simpler than the text of the
proposed rule, however, and contain a statement that purchase of the
product is optional and will not affect either the bank's credit
decision or the terms of credit already extended.
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\27\ See 12 CFR 14.40(b)(2). The insurance sales rules also
require a bank to disclose that it may not condition an extension of
credit on its customer's not obtaining insurance from an entity
unaffiliated with the bank. A similar disclosure is not appropriate
in the case of a DCC or DSA, since the DCC or DSA must be offered by
the bank extending the credit.
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Explanation of Effect of Debt Suspension Agreement
Certain commenters asserted that there is a potential for increased
customer confusion regarding DSAs when compared with credit disability
insurance products and DCCs where disability is the triggering event.
They noted that these products are similar to DSAs in that they address
the health status of customers in relation to their ability to continue
employment. In response to these commenters' suggestions, the final
rule requires a bank to explain in the long form the nature of a debt
suspension agreement. The bank must disclose that if a customer
activates the agreement, the customer's duty to pay the loan principal
and interest is only suspended and the customer must fully repay the
loan after the period of suspension has expired.
Disclosure of the Amount of the Fee
The proposed rule required a bank to inform customers of the total
fee for the DCC or DSA.
Many commenters argued that it is not possible to compute the total
fee for a DCC sold in connection with open-end credit because the fee
is based on the customer's outstanding balance which fluctuates from
month to month. The commenters urged the OCC to eliminate this
disclosure in the case of open-end credit or to adopt a more flexible
alternative. Most commenters recommended that an appropriate disclosure
would be the unit-cost approach under Regulation Z or the formula used
to compute the fee.
We agree that it may be impracticable to require disclosure of the
amount of the fee at the time the bank first solicits the purchase of a
DCC or DSA, particularly in the case of open-end credit. The final rule
therefore requires a bank to make disclosures regarding the amount of
the fee only in the long form. However, the disclosure must differ
depending on whether the credit is open-end or closed-end. In the case
of closed-end credit, the bank must disclose the total fee. In the case
of open-end credit, the bank must either: (1) disclose that the
periodic fee is based on the account balance multiplied by a unit-cost
and provide the unit-cost, or (2) disclose the formula used to compute
the fee.
Disclosure Concerning Lump Sum Payment of Fee
The proposed rule required a bank to disclose the method of
payment, including whether the payment would be collected in a single
payment or periodic payments, and whether the fee was included in the
loan amount.
Only two commenters directly addressed this disclosure. One
commenter recommended that the OCC eliminate this disclosure, and the
second commenter stated that this disclosure would be confusing in the
context of open-end credit.
The final rule modifies this disclosure to reflect the requirements
in Sec. 37.5. As modified, this disclosure, which is included in both
the short and long form, requires a bank to disclose, where
appropriate, that a customer has the option to pay the fee in a single
payment or in periodic payments. This disclosure is not appropriate in
the case of a DCC or DSA provided in connection with a home mortgage
loan, since, under the final rule, the option to pay the fee in a
single payment is not available in that case. The rule also requires a
bank to disclose that adding the fee to the amount borrowed will
increase the cost of the contract.
Disclosure Concerning Lump Sum Payment of Fee With No Refund
The proposed rule required 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.
A few commenters urged the OCC to clarify that this disclosure does
not apply to open-end credit accounts where the fee is billed monthly.
One commenter recommended that the OCC replace this disclosure with a
statement as to whether the customer will 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.
In response to these comments, the final rule deletes part of this
disclosure and adds a new sentence. The revised disclosure appears in
both the short and long form. The final rule eliminates the requirement
that a bank must state whether or not the customer will 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. Instead, if a customer may elect to pay the
fee in a single payment, the rule requires a bank to disclose that the
customer has the option to choose a contract with or without a refund
provision. An additional sentence in both the short and long form
states that prices of refund and no-refund products are likely to
differ.
Disclosure Concerning Refund of Fee Paid in Lump Sum
A bank's cancellation policy may be a material factor in a
customer's decision whether to purchase the product, particularly if
the customer has elected to pay the fee for a DCC or DSA in a single
payment and also has elected to finance the fee. The final rule
accordingly requires, at Sec. 37.5, that (for DCCs or DSAs associated
with loans other than residential mortgage loans) if a bank permits a
customer to pay the fee in a single payment and to add the fee to the
amount borrowed, the bank must disclose the bank's cancellation policy.
This disclosure is required in both the short and long form. It
apprises the customer that the DCC or DSA may be canceled at any time
for a refund, within a specified number of days for a full refund, or
at any time with no refund. The method the bank uses to calculate any
refund due is addressed in Sec. 37.4(b).
Disclosure Concerning Whether Use of Credit Line Is Restricted
The proposed rule required a bank to inform a customer if the
customer's activation of the contract would prohibit
[[Page 58969]]
the customer from incurring additional charges or using the credit
line.
Only two commenters addressed this disclosure. One commenter
contended that the phrase ``activation of the debt cancellation
contract'' might be ambiguous and suggested that the OCC clarify that
this phrase refers to the customer's assertion of the right to cancel
or suspend payments on the debt. The second commenter recommended that
the OCC amend this disclosure to state that it does not apply to
closed-end loans.
The final rule retains this disclosure, but only in the long form
because the information, while relevant to the customer's final
decision to purchase a DCC or DSA, is not necessarily central to the
customer's initial evaluation of the product.
Disclosure Concerning Termination of a DCC or DSA
The proposed rule required a bank to explain the circumstances
under which a customer or the bank could terminate the contract if
termination is permitted during the life of the loan.
Two commenters urged the OCC to eliminate this disclosure. One of
these commenters argued that it was unnecessary and burdensome and
recommended that the OCC require this information to be contained in
the DCC, provided the customer has 30 days within which to cancel the
DCC. The final rule retains this disclosure, but requires it only in
the long form.
Additional Disclosures To Be Provided
The final rule adds a disclosure in the short form requiring banks
to inform consumers that the bank will provide additional information
before the customer is required to pay for the product. The adjustments
made in the rule to accommodate marketing practices that do not lend
themselves to detailed disclosures mean that some important information
will not be conveyed when the bank first solicits the purchase of a DCC
or DSA. This disclosure apprises the customer that more information
will be available for consideration before the customer is obligated to
pay for the product.
Disclosure Pertaining to Eligibility Requirements, Conditions, and
Exclusions
The proposed rule required a bank to describe any material
limitations relating to the DCC or DSA.
Many commenters objected to this disclosure, and the majority of
them urged the OCC to eliminate it. They contended that the term
``material limitations'' is ambiguous and creates the potential for
litigation over its meaning.
Several commenters noted that the ``material limitations'' are
included in the contract that is mailed to the customer. They said that
almost all of the provisions of a DCC impact in some way on the
customer's ability to collect benefits and these limitations are
therefore so lengthy that they are not suitable for disclosures apart
from the contract. Commenters recommended a number of alternatives,
including modifying the required timing of the disclosure and
permitting a bank to refer the customer to the contract for a
description of its limitations.
The final rule retains this disclosure. The DCC and DSA contracts
we have reviewed often contain provisions imposing requirements on a
customer's eligibility to claim benefits under the contract, or
conditions or exclusions that could effectively preclude the customer
from obtaining those benefits. Examples 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. Knowledge of these limitations may be dispositive to
the customer's decision whether to purchase the product. Moreover,
disclosing them may enable the bank to avoid sales practices that could
subject it to substantial reputation or litigation risk.
We have modified the disclosure significantly, however, to address
the concerns expressed by the commenters. In both the short and long
form, the final rule replaces the phrase ``material limitations'' with
the phrase ``eligibility requirements, conditions and exclusions'' and
requires a bank to disclose that these features could prevent a
customer from receiving benefits under the contract. The content of the
short and long form may vary, depending on whether a bank elects to
provide a summary of the conditions and exclusions in the long form
disclosures or refer the customer to the pertinent paragraphs in the
contract. The short form requires a bank to instruct the customer to
read carefully both the long form disclosures and the contract for a
full explanation of the terms of the contract. In response to
commenters' suggestions, the long form gives a bank the option of
either separately summarizing the limitations or advising the customer
that a complete explanation of the eligibility requirements,
conditions, and exclusions is available in the contract and identifying
the paragraphs where a customer may find that information.
Disclosure Concerning Procedures
The proposed rule required a bank to describe the procedures a
customer must follow to notify the bank that a triggering event has
occurred.
Several commenters contended that disclosing this information would
be lengthy and cumbersome, particularly if the DCC was offered in
connection with a credit card or other marketing material where
available space is limited. Some of these commenters urged the OCC to
eliminate this disclosure while others proposed permitting a bank to
deliver this information to a customer post-sale.
We agree that, while this information is relevant to a customer who
has purchased the contract and wishes to activate the debt suspension
or debt cancellation feature, it is unlikely to be a factor in the
customer's decision whether to purchase the product. Therefore, the
final rule eliminates the requirement for this disclosure.
Disclosure Requirements; Timing and Method of Disclosures (Section
37.6(c))
The proposal required a bank to provide certain disclosures to a
customer before the customer completes the purchase of a DCC or DSA. It
also required that the disclosures be made in writing, or
electronically, if done in a manner consistent with the requirements of
the Electronic Signatures in Global and National Commerce Act (15
U.S.C. 7001 et seq.) (E-Sign).
Most commenters objected to the requirement that the disclosures be
made in writing as impracticable where a bank advertises or solicits
the purchase of DCCs or DSAs through telemarketing, so-called ``take
one'' applications, statement inserts, and direct mail solicitations.
Commenters recommended a variety of alternatives to the proposal,
including mailing written disclosures to the customer within a
prescribed number of days or permitting the customer to cancel the
product without charge. A number of commenters urged the OCC to adopt
the approach of Regulation Z, which permits a bank to make limited
initial disclosures in the case of open-end credit if the bank provides
the full disclosures before the customer is obligated to pay, and
permits oral disclosures in certain cases.
The final rule makes significant modifications in the timing and
method requirements. It addresses the concerns raised by the commenters
by
[[Page 58970]]
establishing different timing and method requirements for short form
and long form disclosures. Creating two separate forms also eliminates
the need for banks to provide the most detailed and complicated
information--information about eligibility requirements, conditions,
and exclusions that limit the customer's ability to obtain benefits--in
the short form.
Section 37.6(c)(1) requires a bank to disclose certain information
in the short form orally at the time the bank first solicits the
purchase of a contract. Section 37.6(c)(2) requires a bank to disclose
the applicable information in the long form in writing before the
customer completes the purchase of the contract. However, if the bank
solicits a customer's purchase of a DCC or DSA in person--for example,
at the time the customer applies for credit in person--then the bank
must also provide the long form disclosures in writing at that time.
The final rule creates special exceptions for transactions by
telephone, solicitations through written materials such as mail inserts
or ``take one'' applications, and electronic transactions. The first
exception, in Sec. 37.6(c)(3), addresses the concern that lengthy
disclosures are not practical for solicitations via telemarketing.
Under the telemarketing exception, banks may give the short form
disclosures orally, provided they mail the written disclosures within 3
days after the telephone solicitation. These telemarketing provisions
are similar to those in the insurance sales consumer protection rules
with which banks are already familiar.\28\ The rule requires that the
customer have an opportunity to review the more detailed information
before being obligated to pay for the contract.
---------------------------------------------------------------------------
\28\ See 12 CFR 14.40(c)(3).
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The second exception, in Sec. 37.6(c)(4), is for written
solicitations such as mail inserts and ``take one'' applications.
Similar to the telemarketing exception, it permits a bank to give only
the short form disclosures in mail inserts or ``take one'' applications
where space is limited, provided the bank mails the written disclosures
within 3 days after the customer contacts the bank to respond to the
solicitation. The effect of this exception is the same as the effect of
the provision in the insurance sales consumer protection rules that
covers mail and ``take one'' solicitations. No oral disclosures are
required and the short form disclosures may be made in this written
material.
The third exception, in Sec. 37.6(c)(5), permits disclosures to be
made electronically in a manner consistent with the requirements of E-
Sign.
Form of Disclosures (Section 37.6(d))
Proposed Sec. 37.6(c) required disclosures to be clear,
conspicuous, readily understandable, and designed to call attention to
the nature and significance of the information provided.
The only commenter that addressed the form of the disclosures
thought that Regulation Z sets forth a standard for disclosures and
that a new standard is unnecessary.
In our view, however, the better model for requirements as to form
is part 14 of the OCC's rules, which governs products that are often
marketed and sold using methods similar to the methods used to market
and sell DCCs and DSAs. Accordingly, the final rule modifies this
provision so that its text is more similar to part 14.\29\ Section
37.7(d)(1) therefore requires that the disclosures must be simple,
direct, readily understandable and designed to call attention to the
nature and significance of the information provided. Section 37.7(d)
requires that the disclosures must be meaningful. The examples of
methods, such as spacing and type style, that a bank could use to
satisfy the requirements for the form of disclosures have not been
changed.
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\29\ See 12 CFR 14.40(c)(5) and (6).
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Advertisements and Other Promotional Material for Debt Cancellation
Contracts and Debt Suspension Agreements (Section 37.6(e))
As described earlier, the final rule conforms more closely with
part 14\30\ because it covers advertising and promotional material. See
Sec. 37.3(b). Accordingly, the final rule adds a new subsection (e)
requiring that short form disclosures must be made in advertisements
and promotional material for DCCs unless the advertising and
promotional material is of a general nature describing or listing the
services or products offered by the bank.
---------------------------------------------------------------------------
\30\ See 12 CFR 14.40(d).
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Affirmative Election to Purchase and Acknowledgment of Receipt of
Disclosures Required (Section 37.7 )
Proposed Sec. 37.4 required that the customer affirmatively elect
to purchase a DCC or DSA in writing in a document that was separate
from the documents pertaining to the credit transaction. The proposal
permitted the acknowledgment to be made electronically if the bank
complied with the requirements of E-Sign.
Most of the commenters who addressed this provision opposed it
because, they said, the written election would have the effect of
curtailing or prohibiting current marketing practices. They urged the
OCC to eliminate these requirements or to modify them to permit oral
elections with certain safeguards.
Several commenters stressed that requiring separate documents also
would create significant compliance difficulties in the case of ``take
one'' credit applications where space is limited to a single sheet of
paper, and in the case of auto financing, where procedures are not as
readily monitored by the bank. Many commenters contended that this
provision was not consistent with the TILA, which permits a customer's
affirmative election to be in the same document as the loan contract.
The final rule retains the requirement that the bank obtain the
customer's affirmative election to purchase a DCC or DSA before
obligating the customer to pay for the product. We have made
substantial revisions, however, to address the commenters' concerns
about the effects of the proposed requirements on methods widely used
to market DCCs and DSAs and to conform the rule with the insurance
sales regulations with which banks already are familiar. The final rule
also adds a requirement, like that contained in the insurance sales
regulations, that the bank obtain a customer's written acknowledgment
of receipt of the disclosures required by Sec. 37.6.\31\
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\31\ See 12 CFR 14.40(c)(7).
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In the case of telephone solicitations, the final rule permits the
customer's affirmative election to be made orally, provided the bank:
(1) Maintains sufficient documentation to show that the customer
received the short form disclosures and then affirmatively elected to
purchase the contract; (2) mails the affirmative written election and
written acknowledgment, together with the long form disclosures to the
customer within 3 business days after the telephone solicitation, and
maintains sufficient documentation to show that it made reasonable
efforts to obtain the documents from the customer; and (3) permits the
customer to cancel the purchase of the contract without penalty within
30 days after the bank has mailed the long form disclosures to the
customer.
In the case of solicitations conducted through written materials
such as mail inserts or ``take one'' applications, the final rule
permits the bank to provide
[[Page 58971]]
only the short form disclosures in the written materials, provided the
bank mails the acknowledgment of receipt of disclosures and the long
form disclosures to the customer within 3 business days, beginning on
the first business day after the customer contacts the bank or
otherwise responds to the solicitation. The bank may not obligate the
customer to pay for the contract until after the bank receives the
customer's written acknowledgment of receipt of disclosures, unless the
bank: (1) Maintains sufficient documentation to show that the bank
provided the acknowledgment of receipt of disclosures to the customer
as required by this section; (2) maintains sufficient documentation to
show that the bank made reasonable efforts to obtain from the customer
a written acknowledgment of receipt of the long form disclosures; and
(3) permits the customer to cancel the purchase of the contract without
penalty within 30 days after the bank has mailed the long form
disclosures to the customer.
The final rule also eliminates the requirement that the customer's
election to purchase be in a separate document, and thus better
harmonizes this provision with the requirements of the TILA.\32\
Similarly, the rule imposes no requirement that the customer's written
acknowledgment of receipt of disclosures be in a separate document. The
final rule clarifies that the standard for the form of the election and
acknowledgment information is the same as for the form of disclosures
(which is also the same standard contained in part 14 of our rules).
The information must be conspicuous, simple, direct, readily
understandable, and designed to call attention to their significance.
The rule also adds a statement that the election and acknowledgment
will satisfy these standards if they conform with the requirements in
Sec. 37.6.
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\32\ Regulation Z permits a creditor to exclude from the finance
charge the charge or premium paid for voluntary debt cancellation
coverage provided certain conditions are met. One of those
conditions requires that the consumer sign or initial an affirmative
written request for coverage after receiving the disclosures
required by Regulation Z, but there is no requirement that the
affirmative written request be contained in a separate document. See
12 CFR 226.4(d)(3)(i)(C).
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Finally, the provision in proposed Sec. 37.4 permitting the
customer's affirmative election to be made electronically has been
moved to Sec. 37.7(d) and modified to include the customer's
acknowledgment of receipt of the disclosures.
Safety and Soundness Requirement (Section 37.8)
The OCC's prior regulation on DCCs (12 CFR 7.1013) permitted, but
did not require, banks to establish the reserves necessary to enable
them to enter into DCCs. The proposed rule required national banks to
establish a separate loss reserve and to maintain the reserve at a
level adequate to conduct this business in a safe and sound manner. As
an alternative, the proposed rule also permitted a national bank to
obtain third-party insurance to cover ``expected losses.''
The commenters were divided about whether the OCC should retain the
proposed requirement for an ``identifiable loss reserve.'' Some
commenters, however, pointed out that the reserve requirement, as
drafted, may not accurately reflect current accounting practices and
the standards established by generally accepted accounting principles
for recording the income and liabilities associated with DCCs and DSAs.
One commenter, for example, said that the OCC should distinguish
between reserve requirements for DCCs, which are based on future losses
in the credit accounts and already included in the loan loss reserves,
and DSAs, which need only address foregone interest payments. This
commenter also said that losses on the two types of products may vary
widely and that banks should be permitted to reserve separately on
each.
The OCC's recent supervisory experience indicates that
methodologies for recognizing losses may appropriately vary depending
on whether the product requires the bank to forgive the debt or only
forego interest income for a period of time. These methodologies vary
further and are more complex if the product has both debt cancellation
and debt suspension features or if the bank securitizes the loans
associated with the DCCs or DSAs.
For these reasons, we have concluded that the loss reserve
requirement contained in the proposal is not sufficiently flexible to
permit appropriate management and recording of anticipated losses in
the variety of situations that occur in actual practice. Accordingly,
the final rule replaces that requirement with a requirement that banks
must establish and maintain effective risk management and control
processes over its DCCs and DSAs. Such processes include appropriate
recognition and financial reporting of income, expenses, assets,
liabilities, and appropriate treatment of all expected and unexpected
losses associated with the products. The final rule also requires a
bank to assess the adequacy of its internal control and risk mitigation
activities, which would include, if appropriate, the bank's purchase of
third-party insurance, in view of the nature and scope of its DCC and
DSA programs.
IV. Summary of the Final Rule
New part 37 defines the relevant terms, including ``debt
cancellation contract'' and ``debt suspension agreement.''
The rule prohibits certain practices for banks that provide DCCs or
DSAs. These practices are: tying the approval or terms of an extension
of credit to a customer's purchase of a DCC or DSA; engaging in
misleading advertisements or practices; retaining a right to modify a
DCC or DSA unilaterally, unless the modification benefits the customer
or the customer has a reasonable opportunity to cancel without penalty;
and charging a single, lump-sum fee for a DCC or DSA issued in
connection with a residential mortgage loan.
The rule permits a bank to offer a DCC or DSA that makes no
provision for a refund of fees but, if the bank does so, it also must
offer the customer a bona fide option to buy the product that includes
a refund feature.
For loans other than residential mortgage loans, the bank may offer
the customer the option of paying the fee for the associated DCC or DSA
in a single, lump sum; but if it does, it also must offer a bona fide
option of paying the fee for that contract in monthly or other periodic
payments. If the bank offers the option to finance the single payment
fee, it must disclose to the customer whether the customer may cancel
the product and receive a refund and any time limits that apply to the
customer's right to cancel.
The rule also requires that national banks disclose certain
information to their customers. The rule accommodates the methods that
national banks use to market DCCs and DSAs by permitting the use of
abbreviated disclosures in marketing circumstances--including telephone
solicitations and ``take one'' applications--where full disclosure of
the terms most relevant to the consumer's decision to purchase is not
practicable.
The abbreviated or ``short form'' disclosures that the rule
requires include:
[sbull] Disclosure that the decision to buy a DCC or DSA is
optional and whether or not the customer purchases the product will not
affect the customer's application for credit or terms of any existing
loan;
[[Page 58972]]
[sbull] Disclosure that if a no-refund product is offered, a
product with a refund feature also is available;
[sbull] Disclosure for DCCs or DSAs offered in connection with
loans other than residential mortgage loans, that if the customer may
elect to finance a single payment, lump sum fee, the customer also has
the option to pay the fee in periodic payments, and a statement about
the effect of the customer's cancellation of the DCC or DSA before
expiration of the term of the loan;
[sbull] A statement that the customer will receive additional
information before being obligated to pay for the DCC or DSA; and
[sbull] A statement that certain eligibility requirements,
conditions, and exclusions apply that may affect the customer's ability
to claim benefits under the DCC or DSA are described more fully in the
``long-form'' disclosures that the rule also requires.
The ``long-form'' disclosures may be given after the bank's initial
marketing occurs but generally must be given prior to the completion of
the sale of the product. If the solicitation occurs when the customer
applies for credit in person, then the long form disclosures must be
given at that time. The information required to be disclosed in the
long form includes:
[sbull] Disclosure that the decision to buy a DCC or DSA is
optional and whether or not the customer purchases the product will not
affect the customer's application for credit or terms of any existing
loan;
[sbull] Disclosure that in the case of a DSA, the DSA only
suspends, and does not cancel, the customer's obligation to pay the
associated debt;
[sbull] Disclosure, if applicable, that the customer may not incur
additional charges under its loan agreement if the DCC or DSA is
activated;
[sbull] An explanation of the circumstances in which the customer
has the right to cancel the DCC or DSA; and
[sbull] A description of any applicable eligibility requirements,
conditions, or exclusions, which may be provided either in the
disclosure form itself or by reference to particular provisions of the
DCC or DSA.
The disclosure requirements are complemented by a requirement that
a national bank generally obtain the customer's written acknowledgment
of his or her receipt of the required disclosures and an affirmative
election to purchase the DCC or DSA before completing the sale. Like
the disclosure requirements, these provisions of the rule are also
tailored to accommodate the use of sales methods--such as by
telephone--where immediate receipt of a written acknowledgment is not
practicable.
The rule requires that disclosures and acknowledgments and
affirmative elections be presented in a form that is simple, direct,
readily understandable, and designed to call attention to the nature
and significance of the information provided. Disclosures must also be
meaningful, and the rule gives examples of methods--such as spacing and
type styles--that may be used to satisfy that standard.
Appendices to the rule contain the two sample forms of disclosure:
the ``short form'' for use in situations where the abbreviated
disclosures may be used, and the ``long form'' for use thereafter to
ensure that the customer is adequately informed about the key terms of
the DCC or DSA prior to completing the purchase. Banks are required to
make only the disclosures that are appropriate to the product offered.
The forms of disclosure are illustrative of the wording and format a
bank could use to comply with the rule's disclosure requirements. Banks
that make disclosures in a form substantially similar to the forms
provided in the rule will be deemed to satisfy the disclosure
requirements. These particular forms are not mandatory, however, and a
bank may elect to use different wording or a different format, as long
as the approach chosen satisfies the substance of the applicable
requirements.
Finally, the rule contains a safety and soundness requirement that
a national bank that offers DCCs or DSAs must manage the risks
associated with these products in accordance with safe and sound
banking principles.
The rule also requires a bank to establish and maintain effective
risk management and control processes, including appropriate
recognition and financial reporting of income, expenses, assets, and
liabilities associated with the products and adequate internal control
and risk mitigation measures.
Effective Date
Two commenters requested that the OCC delay the effective date of
the final rule until one year from the date of its publication. Another
commenter requested a delayed effective date of six months to a year.
Each of these commenters stressed that the rule will require banks that
currently offer DCCs and DSAs to review their programs, create new
forms, and train employees to comply with new procedures. One commenter
thought that the adjustments to marketing and methods necessary to
implement the regulations governing DCCs would be comparable to those
required to implement the consumer protections for bank sales of
insurance, which also required new disclosures. Part 14 originally had
an effective date of 120 days, but that transition period was later
extended to a total of nine months.
The final rule has a delayed effective date of nine months. We
agree with the commenters that we should be guided by our experience in
implementing part 14. The final rule requires two types of disclosures
and prohibits a number of practices that currently are not barred.
Furthermore, unlike the sale of insurance products, DCCs and DSAs are
offered in connection with an extension of credit, which will require
banks to coordinate the disclosures in the final rule with disclosures
they are required to make under TILA.
V. Regulatory Analysis
A. Paperwork Reduction Act
In accordance with the requirements of the Paperwork Reduction Act
of 1995, the OCC may not conduct or sponsor, and a respondent is not
required to respond to, an information collection unless it displays a
currently valid Office of Management and Budget (OMB) control number.
The OCC submitted the collection of information requirements
contained in the notice of proposed rulemaking to the Office of
Management and Budget
(OMB) for review and received approval under OMB Control Number
1557-0224.
The revision of the collection of information requirements
contained in this final rule have been submitted to the OMB for review.
The final rule retains much of the content of the disclosures
prescribed by the proposed rule, but revises the disclosure process so
that it more readily accommodates the methods banks use to market and
sell DCCs and DSAs. The final rule specifies which disclosures must be
given at different stages of the marketing and sales process.
The final rule provides two forms of disclosure that serve as
models for satisfying the requirements of the rule. Those two
disclosure forms are set forth in appendices to the final rule.
Appendix A sets out a short form of disclosure suitable for use in
telemarketing and various written solicitations, while Appendix B
provides a more detailed long form of disclosure that a customer
generally will receive prior to purchasing the contract. Use of the
forms is not mandatory. A
[[Page 58973]]
bank may adjust the form and wording of its disclosures so long as the
requirements of the regulation are met.
The final rule generally requires a bank to disclose information
about a DCC or DSA orally in the short form and in writing in the long
form. In the case of solicitations through written materials such as
mail inserts or ``take one'' applications, however, the bank may
provide the short form disclosures in writing. The final rule also
permits short and long form disclosures to be made electronically.
Comments Received
The OCC received two comments regarding the burden imposed by the
proposed rule. Both commenters stated that the amount of time required
to develop the required disclosures was greater than the OCC's estimate
of 10 hours. The first commenter, a large national bank, stated that
developing the required disclosures would involve approximately 25
hours to consider legal, operational, and marketing issues. However, if
the disclosures were modified in accordance with the recommendations in
its comment letter, the commenter estimated that the amount of time
would be approximately 15 hours. We believe that modifications to the
timing and manner of the required disclosures address most of the
commenter's objections.
Notwithstanding these changes, upon further consideration of the
paperwork burdens likely to be imposed as a result of the final rule,
the OCC has estimated that the burden imposed on the average national
bank offering DCCs and DSAs is likely to be 24 hours per bank.
The second commenter mentioned the increased burden associated with
the requirements that the disclosures be in writing and separate from
the loan application. The commenter contended that, particularly for
credit cards banks, the total cost of creating, print, and distributing
new forms could outweigh any benefit a national bank might gain from
selling DCCs and DSAs. As described in the discussion above,
modifications in the proposed rule eliminate the separate document
requirement and permit oral disclosure in certain circumstances. In
addition, we believe that the 9-month delayed effective date will
enable banks to minimize costs. They should have sufficient lead time
to deplete their current supply of forms, revise forms to be used once
the rule becomes effective, and include the required disclosure in
their next print run.
Disclosure Requirements
Section 37.6 requires a bank to provide the following disclosures,
as appropriate:
[sbull] Anti-tying disclosure--The final rule requires a bank to
inform the customer that neither its decision whether to approve a loan
nor the terms and conditions of the loan are conditioned on the
purchase of a DCC or DSA. This disclosure appears in both the short
form and the long form (``This product is optional'').
[sbull] Explanation of debt suspension agreement--The final rule
requires a bank to disclose that if a customer activates the agreement,
the customer's duty to pay the loan principal and interest is only
suspended and the customer must fully repay the loan after the period
of suspension has expired. This disclosure appears in the long form
(``Explanation of debt suspension agreement'').
[sbull] Disclosure of the amount of the fee--The final rule
requires a bank to make disclosures regarding the amount of the fee.
The disclosure must differ depending on whether the credit is open-end
or closed-end. In the case of closed-end credit, the bank must disclose
the total fee. In the case of open-end credit, the bank must either:
(1) disclose that the periodic fee is based on the account balance
multiplied by a unit cost and provide the unit cost, or (2) disclose
the formula used to compute the fee. This disclosure appears in the
long form (``Amount of fee'').
[sbull] Disclosure concerning lump sum payment of fee--The final
rule requires a bank to disclose, where appropriate, that a customer
has the option to pay the fee in a single payment or in periodic
payments. This disclosure is not appropriate in the case of a DCC or
DSA provided in connection with a home mortgage loan since, under the
final rule, the option to pay the fee in a single payment is not
available in that case.
The final rule also requires a bank to disclose that adding the fee
to the amount borrowed will increase the cost of the contract. This
disclosure appears in the both the short form and long form (``Lump sum
payment of fee'').
[sbull] Disclosure concerning lump sum payment of fee with no
refund--The final rule requires a bank to disclose that the customer
has the option to choose a contract with or without a refund provision.
This disclosure appears in both the short form and long form (``Lump
sum payment of fee with no refund''). This disclosure also contains a
sentence that states that prices of refund and no-refund products are
likely to differ.
[sbull] Disclosure concerning refund of fee paid in lump sum--The
final rule requires that if a bank permits a customer to pay the fee in
a single payment and to add the fee to the amount borrowed, the bank
must disclose the bank's cancellation policy. The disclosure informs
the customer that the DCC or DSA may be canceled at any time for a
refund, within a specified number of days for a full refund, or at any
time with no refund. This disclosure appears in both the short form and
long form (``Refund of fee paid in lump sum'').
[sbull] Disclosure concerning whether use of credit line is
restricted--The final rule requires a bank to inform a customer if the
customer's activation of the contract would prohibit the customer from
incurring additional charges or using the credit line. This disclosure
appears in the long form (``Use of card or credit line restricted'').
[sbull] Disclosure concerning termination of a DCC or DSA--The
final rule requires a bank to explain the circumstances under which a
customer or the bank could terminate the contract if termination is
permitted during the life of the loan. This disclosure appears in the
long form (``Termination of [PRODUCT NAME]'').
[sbull] Disclosure concerning additional disclosures--The final
rule requires a bank to inform consumers that the bank will provide
additional information before the customer is required to pay for the
product. This disclosure appears in the short form (``Additional
disclosures'').
[sbull] Disclosure pertaining to eligibility requirements,
conditions, and exclusions--The final rule requires a bank to describe
any material limitations relating to the DCC or DSA. This disclosure
appears on both the short form and the long form (``Eligibility
requirements, conditions, and exclusions''). The content of the short
and long form may vary, depending on whether a bank elects to provide a
summary of the conditions and exclusions in the long form disclosures
or refer the customer to the pertinent paragraphs in the contract. The
short form requires a bank to instruct the customer to read carefully
both the long form disclosures and the contract for a full explanation
of the terms of the contract. The long form gives a bank the option of
either separately summarizing the limitations or advising the customer
that a complete explanation of the eligibility requirements,
conditions, and exclusions is available in the contract
[[Page 58974]]
and identifying the paragraphs where a customer may find that
information.
Affirmative Election To Purchase and Acknowledgment of Receipt of
Disclosures Required
Section 37.7 requires a bank to obtain a customer's written
affirmative election to purchase a contract and written acknowledgment
of receipt of the disclosures required by Sec. 37.6.
If the sale of the contract occurs by telephone, the customers
affirmative election to purchase and acknowledgment of receipt of the
required short form may be made orally, provided the bank maintains
certain documentation.
If the contract is solicited through written materials such as mail
inserts or ``take one'' applications and the bank provides only the
short form disclosures in the written materials, then the bank shall
mail the acknowledgment, together with the long form disclosures, to
the customer. The bank may not obligate the customer to pay for the
contract until after the bank has received the customer's written
acknowledgment of receipt of disclosures unless the bank maintains
certain documentation.
The affirmative election and acknowledgment may also be made
electronically.
Burden Estimate
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 2,200 national
banks will provide DCCs and DSAs, and the average burden associated
with developing the disclosures would be approximately 24 hours.
The likely respondents are national banks.
Estimated number of respondents: 2,200 respondents.
Estimated number of responses: 2,200 responses.
Estimated burden hours per response: 24 hours.
Estimated total annual burden hours: 52,800 hours.
Comments
The OCC 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 OCC will revisit the burden estimates when we have more
information on the number of potential respondents and consumer loan
transactions. The revised estimates will also reflect all comments
received concerning the burden estimates.
The OCC also invites comment on:
Whether the collection of information contained in this final rule
is necessary for the proper performance of the OCC's functions,
including whether the information has practical utility;
The accuracy of the OCC's estimate of the burden of the information
collection;
Ways to enhance the quality, utility, and clarity of the
information to be collected;
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
Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of services to provide information.
Comments on the collection of information should be sent by mail to
Joseph F. Lackey, Jr., Desk Officer, Office of Information and
Regulatory Affairs, Attention: 1557-0224, Office of Management and
Budget, Washington, DC 20503, or by e-mail to [email protected].
Comments should also be sent to Jessie Dunaway, OCC Clearance
Officer, Legislative and Regulatory Activities Division, Attention:
1557-0224, Office of the Comptroller of the Currency, 250 E Street, SW,
Mailstop 8-4, Washington, DC 20219. Due to disruptions in the OCC's
mail service, commenters are encouraged to send comments by fax to
(202) 874-4889, or by e-mail to [email protected].
B. Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act, 5
U.S.C. 605(b) (RFA), the regulatory flexibility analysis otherwise
required under section 604 of the RFA is not required if the agency
certifies that the rule will not have a significant economic impact on
a substantial number of small entities and publishes its certification
and short, explanatory statement in the Federal Register along with its
rule.
Pursuant to section 605(b) of the RFA, the OCC hereby certifies
that this rulemaking will not have a significant economic impact on a
substantial number of small entities.
The final rule will apply only to those national banks that choose
to offer DCCs or DSAs. However, the OCC has very limited data as to the
number of national banks that currently offer these products. For
purposes of this analysis, we have conservatively assumed that all
national banks will offer these products.
Compliance and Recordkeeping Requirements of the Final Rule
The final rule imposes the following conditions or requirements:
[sbull] A national bank that offers a DCC or DSA with no refund of
unearned fees in the event the customer terminates the DCC or DSA must
also offer that customer the bona fide option to purchase the product
with a refund feature;
[sbull] A national bank is prohibited from requiring a customer to
pay the fee for a DCC or DSA in a single payment, payable at the outset
of the contract, if the debt that is the subject of the contract is a
residential mortgage loan;
[sbull] A national bank must provide customers with the short form
disclosures at the time of solicitation;
[sbull] A national bank must provide customers with the long form
disclosures before the customer completes the purchase of a DCC or DSA;
[sbull] A national bank must obtain a customer's written
affirmative election to purchase the DCC or DSA; and
[sbull] A national bank must obtain a customer's written
acknowledgment of receipt of the disclosures.
The rule provides banks significant flexibility in meeting these
requirements. For example, in the case of telephone solicitations the
rule permits an oral affirmation, provided the bank makes reasonable
efforts to obtain a written affirmative election, and waives the
requirement obtain a written acknowledgment, provided the bank makes
reasonable efforts to obtain the acknowledgment. A bank that takes
advantage of the special exceptions must maintain sufficient
documentation to demonstrate that it made reasonable efforts to obtain
the written affirmative election and written acknowledgment.
[[Page 58975]]
Costs Associated With Compliance and Recordkeeping Requirements of the
Final Rule
Based on input from OCC examiners and other staff, we have
determined that national banks typically offer refundable products and
are moving away from offering customers a lump sum DCC or DSA in
conjunction with a mortgage loan. We have therefore concluded that
there will be only minimal costs associated with complying with the
requirement that a bank offer offers a DCC or DSA with a no refund DCC
or DSA must also offer that customer the bona fide option to purchase
the product with a refund feature and the prohibition on paying the fee
in a single, lump sum. Accordingly, our cost estimate focuses on costs
associated with the short form disclosure, long form disclosure,
affirmative election, and written acknowledgment.
We expect that national banks will incur four types of costs
associated with these requirements: (1) Development of the short form
disclosure, long form disclosure, affirmative election and
acknowledgment forms; (2) distribution of the documents; (3)
documentation requirements; and (4) employee training.
We estimate these costs per bank to be $4,992. To determine whether
this will have a significant impact on small banks, we considered the
average annual net income for a small bank, which was $796,000 as of
March 31, 2002. In light of the fact that these costs are approximately
0.6 percent of net income, we do not find them to be significant.
C. Executive Order 12866
The OCC has determined that the final rule does 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. Executive Order 13132
Executive Order 13132 requires Federal agencies, including the OCC,
to certify their compliance with that Order when they transmit to the
Office of Management and Budget (OMB) any draft final regulation that
has Federalism implications. Under the Order, a regulation has
Federalism implications if it has ``substantial direct effects on the
States, on the relationship between the national government and the
States, or on the distribution of power and responsibilities among the
various levels of government.'' In the case of a regulation that has
Federalism implications and that preempts State law, the Order imposes
certain consultation requirements with State and local officials;
requires publication in the preamble of a Federalism summary impact
statement; and requires the OCC to make available to the Director of
the OMB any written communications submitted to us by State and local
officials. By the terms of the Order, these requirements apply to the
extent that they are practicable and permitted by law and, to that
extent, must be satisfied before the OCC promulgates a final
regulation.
Some commenters raised issues concerning whether DCCs and DSAs
should be regulated as insurance that could be construed as falling
within the scope of Executive Order 13132. In the opinion of the OCC,
however, the final regulation on DCCs and DSAs does not have Federalism
implications. The GLBA designates the States as the appropriate
functional regulators of national bank insurance activities.\33\ As we
have described earlier in this preamble discussion, as a matter of law
DCCs and DSAs are not insurance, but rather, bank products. This
conclusion was confirmed, as to DCCs, by the Taylor case decided in
1990. The reasoning and conclusions of the Taylor court are equally
applicable to DSAs. Because these products are bank products and not
insurance the framework of State insurance regulation would not apply
to them, even in the absence of Federal regulations. While this
regulation establishes new standards that govern national banks
providing DCCs and DSAs, the standards are therefore not in derogation
of State insurance law or regulation. For this reason, the regulation
does not directly affect the States, substantially or otherwise; it
does not alter the relationship between the national government and the
States; and it does not alter the distribution of power and
responsibilities among the various levels of government.
---------------------------------------------------------------------------
\33\ GLBA sec. 301, codified at 15 U.S.C. 6711.
---------------------------------------------------------------------------
Since the regulation does not satisfy any of the components of the
definition of actions that have Federalism implications under Executive
Order 13132, the provisions of the Executive Order do not apply. The
OCC nonetheless believes that it has in material respects satisfied the
requirements of the Order. First, the OCC has received and considered a
number of comments from State insurance authorities, as described
earlier in the preamble. In addition, at the end of the public comment
period and very early in the development of the final rule, on June 18,
2001, senior representatives of the OCC met with members of the
National Association of Insurance Commissioners (NAIC). The concerns of
the NAIC were memorialized in its written comment which is a part of
the record of this rulemaking. Principally, the NAIC urged the OCC to
adopt DCC/DSA regulations that were similar to the rate, form, and
claims regulation imposed on insurance products under many State
insurance regulatory regimes. For the reasons described earlier in this
preamble, including the reason that DCCs and DSAs are not insurance,
the OCC declined to follow that recommendation. Finally, prior to the
publication of this final rule, the OCC has transmitted to the Director
of OMB the written communications--that is, the comment letters--we
have received from State officials.
E. 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 final 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 GLBA 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
[[Page 58976]]
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 amends part 7 of
chapter I of Title 12 of the Code of Federal Regulations and adds 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., 93a, and 1818.
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 Refunds of fees in the event of termination or prepayment of
the covered loan.
37.5 Method of payment of fees.
37.6 Disclosures.
37.7 Affirmative election to purchase and acknowledgment of receipt
of disclosures required.
37.8 Safety and soundness requirement.
Appendix A to Part 37--Short Form Disclosures
Appendix B to part 37--Long Form Disclosures
Authority: 12 U.S.C. 1 et seq., 24(Seventh), 93a, 1818.
Sec. 37.1 Authority, purpose, and scope.
(a) Authority. A national bank is authorized to enter into debt
cancellation contracts and debt suspension agreements and charge a fee
therefor, in connection with extensions of credit that it makes,
pursuant to 12 U.S.C. 24(Seventh).
(b) Purpose. This part sets forth the standards that apply to debt
cancellation contracts and debt suspension agreements entered into by
national banks. The purpose of these standards is to ensure that
national banks offer and implement such contracts and agreements
consistent with safe and sound banking practices, and subject to
appropriate consumer protections.
(c) Scope. This part applies to debt cancellation contracts and
debt suspension agreements entered into by national banks in connection
with extensions of credit they make. National banks' debt cancellation
contracts and debt suspension agreements are governed by this part and
applicable Federal law and regulations, and not by part 14 of this
chapter or by State law.
Sec. 37.2 Definitions.
For purposes of this part:
(a) Actuarial method means the method of allocating payments made
on a debt between the amount financed and the finance charge pursuant
to which a payment is applied first to the accumulated finance charge
and any remainder is subtracted from, or any deficiency is added to,
the unpaid balance of the amount financed.
(b) Bank means a national bank and a Federal branch or Federal
agency of a foreign bank as those terms are defined in part 28 of this
chapter.
(c) Closed-end credit means consumer credit other than open-end
credit as defined in this section.
(d) Contract means a debt] cancellation contract or a debt
suspension agreement.
(e) Customer means an individual who obtains an extension of credit
from a bank primarily for personal, family or household purposes.
(f) Debt cancellation contract means 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
from that bank upon the occurrence of a specified event. The agreement
may be separate from or a part of other loan documents.
(g) Debt suspension agreement means 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. The agreement
may be separate from or a part of other loan documents. The term debt
suspension agreement does not include loan payment deferral
arrangements in which the triggering event is the borrower's unilateral
election to defer repayment, or the bank's unilateral decision to allow
a deferral of repayment.
(h) Open-end credit means consumer credit extended by a bank under
a plan in which:
(1) The bank reasonably contemplates repeated transactions;
(2) The bank may impose a finance charge from time to time on an
outstanding unpaid balance; and
(3) The amount of credit that may be extended to the customer
during the term of the plan (up to any limit set by the bank) is
generally made available to the extent that any outstanding balance is
repaid.
(i) Residential mortgage loan means a loan secured by 1-4 family,
residential real property.
Sec. 37.3 Prohibited practices.
(a) Anti-tying. A national bank may not extend credit nor alter the
terms or conditions of an extension of credit conditioned upon the
customer entering into a debt cancellation contract or debt suspension
agreement with the bank.
(b) Misrepresentations generally. A national bank may not engage in
any practice or use any advertisement that could mislead or otherwise
cause a reasonable person to reach an erroneous belief with respect to
information that must be disclosed under this part.
(c) Prohibited contract terms. A national bank may not offer debt
cancellation contracts or debt suspension agreements that contain
terms:
(1) Giving the bank the right unilaterally to modify the contract
unless:
(i) The modification is favorable to the customer and is made
without additional charge to the customer; or
(ii) The customer is notified of any proposed change and is
provided a reasonable opportunity to cancel the contract without
penalty before the change goes into effect; or
(2) Requiring a lump sum, single payment for the contract payable
at the outset of the contract, where the debt subject to the contract
is a residential mortgage loan.
Sec. 37.4 Refunds of fees in the event of termination or prepayment
of the covered loan.
(a) Refunds. If a debt cancellation contract or debt suspension
agreement is terminated (including, for example, when the customer
prepays the covered loan), the bank shall refund to the customer any
unearned fees paid for the contract unless the contract provides
otherwise. A bank may offer a customer a contract that does not provide
for a refund only if the bank also offers that customer a bona fide
option to purchase a comparable contract that provides for a refund.
(b) Method of calculating refund. The bank shall calculate the
amount of a refund using a method at least as favorable to the customer
as the actuarial method.
[[Page 58977]]
Sec. 37.5 Method of payment of fees.
Except as provided in Sec. 37.3(c)(2), a bank may offer a customer
the option of paying the fee for a contract in a single payment,
provided the bank also offers the customer a bona fide option of paying
the fee for that contract in monthly or other periodic payments. If the
bank offers the customer the option to finance the single payment by
adding it to the amount the customer is borrowing, the bank must also
disclose to the customer, in accordance with Sec. 37.6, whether and,
if so, the time period during which, the customer may cancel the
agreement and receive a refund.
Sec. 37.6 Disclosures.
(a) Content of short form of disclosures. The short form of
disclosures required by this part must include the information
described in appendix A to this part that is appropriate to the product
offered. Short form disclosures made in a form that is substantially
similar to the disclosures in appendix A to this part will satisfy the
short form disclosure requirements of this section.
(b) Content of long form of disclosures. The long form of
disclosures required by this part must include the information
described in appendix B to this part that is appropriate to the product
offered. Long form disclosures made in a form that is substantially
similar to the disclosures in appendix B to this part will satisfy the
long form disclosure requirements of this section.
(c) Disclosure requirements; timing and method of disclosures--(1)
Short form disclosures. The bank shall make the short form disclosures
orally at the time the bank first solicits the purchase of a contract.
(2) Long form disclosures. The bank shall make the long form
disclosures in writing before the customer completes the purchase of
the contract. If the initial solicitation occurs in person, then the
bank shall provide the long form disclosures in writing at that time.
(3) Special rule for transactions by telephone. If the contract is
solicited by telephone, the bank shall provide the short form
disclosures orally and shall mail the long form disclosures, and, if
appropriate, a copy of the contract to the customer within 3 business
days, beginning on the first business day after the telephone
solicitation.
(4) Special rule for solicitations using written mail inserts or
``take one'' applications. If the contract is solicited through written
materials such as mail inserts or ``take one'' applications, the bank
may provide only the short form disclosures in the written materials if
the bank mails the long form disclosures to the customer within 3
business days, beginning on the first business day after the customer
contacts the bank to respond to the solicitation, subject to the
requirements of Sec. 37.7(c).
(5) Special rule for electronic transactions. The disclosures
described in this section may be provided through electronic media in a
manner consistent with the requirements of the Electronic Signatures in
Global and National Commerce Act, 15 U.S.C. 7001 et seq.
(d) Form of disclosures--(1) Disclosures must be readily
understandable. The disclosures required by this section must be
conspicuous, simple, direct, readily understandable, and designed to
call attention to the nature and significance of the information
provided.
(2) Disclosures must be meaningful. The disclosures required by
this section must be in a meaningful form. Examples of methods that
could call attention to the nature and significance of the information
provided include:
(i) A plain-language heading to call attention to the disclosures;
(ii) A typeface and type size that are easy to read;
(iii) Wide margins and ample line spacing;
(iv) Boldface or italics for key words; and
(v) Distinctive type style, and graphic devices, such as shading or
sidebars, when the disclosures are combined with other information.
(e) Advertisements and other promotional material for debt
cancellation contracts and debt suspension agreements. The short form
disclosures are required in advertisements and promotional material for
contracts unless the advertisements and promotional materials are of a
general nature describing or listing the services or products offered
by the bank.
Sec. 37.7 Affirmative election to purchase and acknowledgment of
receipt of disclosures required.
(a) Affirmative election and acknowledgment of receipt of
disclosures. Before entering into a contract the bank must obtain a
customer's written affirmative election to purchase a contract and
written acknowledgment of receipt of the disclosures required by Sec.
37.6(b). The election and acknowledgment information must be
conspicuous, simple, direct, readily understandable, and designed to
call attention to their significance. The election and acknowledgment
satisfy these standards if they conform with the requirements in Sec.
37.6(b) of this part.
(b) Special rule for telephone solicitations. If the sale of a
contract occurs by telephone, the customer's affirmative election to
purchase may be made orally, provided the bank:
(1) Maintains sufficient documentation to show that the customer
received the short form disclosures and then affirmatively elected to
purchase the contract;
(2) Mails the affirmative written election and written
acknowledgment, together with the long form disclosures required by
Sec. 37.6 of this part, to the customer within 3 business days after
the telephone solicitation, and maintains sufficient documentation to
show it made reasonable efforts to obtain the documents from the
customer; and
(3) Permits the customer to cancel the purchase of the contract
without penalty within 30 days after the bank has mailed the long form
disclosures to the customer.
(c) Special rule for solicitations using written mail inserts or
``take one'' applications. If the contract is solicited through written
materials such as mail inserts or ``take one'' applications and the
bank provides only the short form disclosures in the written materials,
then the bank shall mail the acknowledgment of receipt of disclosures,
together with the long form disclosures required by Sec. 37.6 of this
part, to the customer within 3 business days, beginning on the first
business day after the customer contacts the bank or otherwise responds
to the solicitation. The bank may not obligate the customer to pay for
the contract until after the bank has received the customer's written
acknowledgment of receipt of disclosures unless the bank:
(1) Maintains sufficient documentation to show that the bank
provided the acknowledgment of receipt of disclosures to the customer
as required by this section;
(2) Maintains sufficient documentation to show that the bank made
reasonable efforts to obtain from the customer a written acknowledgment
of receipt of the long form disclosures; and
(3) Permits the customer to cancel the purchase of the contract
without penalty within 30 days after the bank has mailed the long form
disclosures to the customer.
(d) Special rule for electronic election. The affirmative election
and acknowledgment may be made electronically in a manner consistent
with the requirements of the Electronic
[[Page 58978]]
Signatures in Global and National Commerce Act, 15 U.S.C. 7001 et seq.
Sec. 37.8 Safety and soundness requirements.
A national bank must manage the risks associated with debt
cancellation contracts and debt suspension agreements in accordance
with safe and sound banking principles. Accordingly, a national bank
must establish and maintain effective risk management and control
processes over its debt cancellation contracts and debt suspension
agreements. Such processes include appropriate recognition and
financial reporting of income, expenses, assets and liabilities, and
appropriate treatment of all expected and unexpected losses associated
with the products. A bank also should assess the adequacy of its
internal control and risk mitigation activities in view of the nature
and scope of its debt cancellation contract and debt suspension
agreement programs.
Appendix A to Part 37--Short Form Disclosures
[sbull] This product is optional
Your purchase of [PRODUCT NAME] is optional. Whether or not you
purchase [PRODUCT NAME] will not affect your application for credit
or the terms of any existing credit agreement you have with the
bank.
[sbull] Lump sum payment of fee
[Applicable if a bank offers the option to pay the fee in a single
payment]
[Prohibited where the debt subject to the contract is a residential
mortgage loan]
You may choose to pay the fee in a single lump sum or in
[monthly/quarterly] payments. Adding the lump sum of the fee to the
amount you borrow will increase the cost of [PRODUCT NAME].
[sbull] Lump sum payment of fee with no refund
[Applicable if a bank offers the option to pay the fee in a single
payment for a no-refund DCC]
[Prohibited where the debt subject to the contract is a residential
mortgage loan]
You may choose [PRODUCT NAME] with a refund provision or without
a refund provision. Prices of refund and no-refund products are
likely to differ.
[sbull] Refund of fee paid in lump sum
[Applicable where the customer pays the fee in a single payment and
the fee is added to the amount borrowed]
[Prohibited where the debt subject to the contract is a residential
mortgage loan]
[Either:] (1) You may cancel [PRODUCT NAME] at any time and
receive a refund; or (2) You may cancel [PRODUCT NAME] within ----
days and receive a full refund; or (3) If you cancel [PRODUCT NAME]
you will not receive a refund.
[sbull] Additional disclosures
We will give you additional information before you are required
to pay for [PRODUCT NAME]. [If applicable]: This information will
include a copy of the contract containing the terms of [PRODUCT
NAME].
[sbull] Eligibility requirements, conditions, and exclusions
There are eligibility requirements, conditions, and exclusions
that could prevent you from receiving benefits under [PRODUCT NAME].
[Either:] You should carefully read our additional information
for a full explanation of the terms of [PRODUCT NAME] or You should
carefully read the contract for a full explanation of the terms of
[PRODUCT NAME].
Appendix B to Part 37--Long Form Disclosures
[sbull] This product is optional
Your purchase of [PRODUCT NAME] is optional. Whether or not you
purchase [PRODUCT NAME] will not affect your application for credit
or the terms of any existing credit agreement you have with the
bank.
[sbull] Explanation of debt suspension agreement
[Applicable if the contract has a debt suspension feature]
If [PRODUCT NAME] is activated, your duty to pay the loan
principal and interest to the bank is only suspended. You must fully
repay the loan after the period of suspension has expired. [If
applicable]: This includes interest accumulated during the period of
suspension.
[sbull] Amount of fee
[For closed-end credit]: The total fee for [PRODUCT NAME] is --
--.
[For open-end credit, either:] (1) The monthly fee for [PRODUCT
NAME] is based on your account balance each month multiplied by the
unit-cost, which is ------; or (2) The formula used to compute the
fee is ----------].
[sbull] Lump sum payment of fee
[Applicable if a bank offers the option to pay the fee in a single
payment]
[Prohibited where the debt subject to the contract is a residential
mortgage loan]
You may choose to pay the fee in a single lump sum or in
[monthly/quarterly] payments. Adding the lump sum of the fee to the
amount you borrow will increase the cost of [PRODUCT NAME].
[sbull] Lump sum payment of fee with no refund
[Applicable if a bank offers the option to pay the fee in a single
payment for a no-refund DCC]
[Prohibited where the debt subject to the contract is a residential
mortgage loan]
You have the option to purchase [PRODUCT NAME] that includes a
refund of the unearned portion of the fee if you terminate the
contract or prepay the loan in full prior to the scheduled
termination date. Prices of refund and no-refund products may
differ.
[sbull] Refund of fee paid in lump sum
[Applicable where the customer pays the fee in a single payment and
the fee is added to the amount borrowed]
[Prohibited where the debt subject to the contract is a residential
mortgage loan]
[Either:] (1) You may cancel [PRODUCT NAME] at any time and
receive a refund; or (2) You may cancel [PRODUCT NAME] within ----
days and receive a full refund; or (3) If you cancel [PRODUCT NAME]
you will not receive a refund.
[sbull] Use of card or credit line restricted
[Applicable if the contract restricts use of card or credit line
when customer activates protection]
If [PRODUCT NAME] is activated, you will be unable to incur
additional charges on the credit card or use the credit line.
[sbull] Termination of [PRODUCT NAME]
[Either]: (1) You have no right to cancel [PRODUCT NAME]; or (2)
You have the right to cancel [PRODUCT NAME] in the following
circumstances: ----------.
[And either]: (1) The bank has no right to cancel [PRODUCT
NAME]; or (2)The bank has the right to cancel [PRODUCT NAME] in the
following circumstances: ----------.
[sbull] Eligibility requirements, conditions, and exclusions
There are eligibility requirements, conditions, and exclusions
that could prevent you from receiving benefits under [PRODUCT NAME].
[Either]: (1) The following is a summary of the eligibility
requirements, conditions, and exclusions. [The bank provides a
summary of any eligibility requirements, conditions, and
exclusions]; or (2) You may find a complete explanation of the
eligibility requirements, conditions, and exclusions in paragraphs
------ of the [PRODUCT NAME] agreement.
Dated: August 16, 2002.
John D. Hawke, Jr.,
Comptroller of the Currency.
[FR Doc. 02-23765 Filed 9-18-02; 8:45 am]
BILLING CODE 4810-33-P