How are these programs regulated?

Yes, debt cancellation-suspension type programs are permitted in most lending transactions. Federal and state chartered lenders, thrifts and credit unions can create programs, offer them to customers and charge a fee.

  • For Banks authority was originally granted by the Office of the Comptroller of the Currency (OCC) through its interpretive letter of March 10, 1964 (subsequently codified at 12 CFR section 7.1013). This action stated a national bank has the right to issue a debt cancellation agreement on loans issued through the bank.
    On August 26, 1971, the OCC, through its Interpretive Ruling 12 CFR 7.7495, stated that a national bank may collect a fee and may provide for losses (set up necessary reserves) arising from cancellation of outstanding loans upon the death of the borrower. Their rulings are based on the National Bank Act which authorizes national banks to exercise "incidental powers" that are necessary to carry on the business of banking.

    The authority to create debt cancellation agreements for a broader range of circumstances was later granted. In 1972 and again in 1993, the OCC stated that debt cancellation agreements were permitted for theft, loss, or destruction of collateral. On January 7, 1994, an OCC Interpretive Letter (#640) stated that national banks may offer debt cancellation agreements that cancel debt upon disability and/or unemployment as well as death of the borrower.

    The authority to mitigate risk (losses) associated with debt cancellation agreements was gained in 1985. An expansion of the OCC's 1964 ruling said a bank may obtain insurance from a third party vendor to cover its exposure under a debt cancellation agreement. In 1998, the OCC stated that by purchasing a contractual liability insurance policy, the bank is offering debt cancellation agreements in a "safe and sound manner".

    The OCC Final Rule (12 CFR Parts #7 and #31) states it may be appropriate for a national bank to offer a debt cancellation agreement that is triggered by other events. Therefore, today we see some programs offering benefits triggered by family leave, divorce, marriage, accidental disability, and hospitalization.

    The authority to offer different types of "debt cancellation agreements" was provided in 1998. An OCC Interpretive Letter (#827) on April 3, 1998, stated that a national bank may enter into a "debt suspension" agreement. This allowed banks to "freeze" a customer account for a specified number of months for involuntary unemployment, disability, family leave and hospitalization. Cancellation of the outstanding balance may still take place upon customers death. On April 21, 1998, the OCC stated that national banks could offer debt deferment to credit card members whereby minimum payments are deferred and interest charges are waived as well as late fees for up to a specified time period. Again, the debt deferment benefit is triggered by the defined events listed.

    On September 19, 2002, the OCC issued its final regulation, adding a new part 37 to its regulations that addresses debt cancellation contracts and debt suspension agreements. 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 protections. This final regulation took effect on June 16, 2003.

  • For Thrifts since September 15, 1993, the Office of Thrift Supervision (OTS) has consistently concluded through a series of formal published opinion letters that federal savings associations may include debt cancellation/suspension provisions in their consumer loan contracts. On September 15, 1993, it was stated that thrifts may offer debt cancellation contracts with the authority of the Federal Savings Associations to make loans. Later on December 18, 1995, it was stated that a federal thrift may sell debt cancellation directly and does not need to use an operating subsidiary. In 1998, an OTS opinion letter affirmed the authority of the Federal Savings Association to offer debt cancellation/suspension due to disability or loss of employment.

  • For Credit Unions federally chartered credit unions are authorized to sell and finance debt cancellation agreements. On July 26, 2001, the NCUA Board approved a revision to Rule 721 (12 CFR Part 721), known as the Incidental Powers Regulation. This regulation clarifies and broadens the ability for federally chartered credit unions to offer many additional service options to their members, including debt cancellation:

    "Loan-related products are the products, activities, or services you provide to your members in a lending transaction that protect you against credit-related risks or are otherwise incidental to your lending authority. These products or activities may include debt cancellation agreements, debt suspension agreements, letters of credit and leases."

Debt cancellation agreements sold by federally chartered banks, thrifts, and credit unions are not deemed insurance products, and therefore are not governed by state insurance departments. Two court decisions addressed this issue some time ago:

  • First National Bank of Eastern Arkansas vs. Commissioner of the Insurance Department for the State of Arkansas (1989): the U.S. Eighth Circuit Court of Appeals upheld a lower court ruling that debt cancellation agreements were not credit insurance but were loan products that national banks were authorized to sell as part of their incidental powers under the National Bank Act.
  • Steel vs. First Deposit National Bank (1999): the Court of Civil Appeals of Alabama ruled that a debt suspension product offered by national banks within the State of Alabama was not insurance and therefore the McCarran-Ferguson Act does not preempt a national banks exercise of incidental powers under the National Bank Act.
    Further, Aon Integramark has done extensive work to secure written opinions from state insurance departments on debt cancellation agreements. And for state chartered lenders, we have also worked with the state banking departments to gain clear authority for these lenders to offer debt cancellation. Today, debt cancellation agreements are being sold in all 50 states and Puerto Rico.