How did debt cancellation come about?


No matter what type of lender you are or charter you have, debt cancellation agreements find their origin with the Office of the Comptroller of the Currency (OCC). It was March 1964 when the OCC issued regulation 12 C.F.R. 7.7495 stating:

Debt Cancellation Contract. A national bank may provide for losses arising from cancellation of outstanding loans upon death of borrowers. The imposition of an additional charge and the establishment of necessary reserves in order to enable the bank to enter into such debt cancellation contracts are a lawful exercise of the powers of a national bank and necessary to the business of banking.

The authority to issue these debt cancellation contracts is granted under federal law and supercedes state banking or insurance laws or regulations. Despite the newfound powers in 1964, little to no debt cancellation products were offered by banks or any lender until the late 1980s.

Most would say the marketplace originated in 1986. That year the state of Arkansas adopted a new credit insurance regulation that severely limited the compensation that could be paid to a bank. This prompted one bank, First National Bank of Eastern Arkansas, to offer Debt Cancellation Agreements (DCAs) in an effort to restore its lost revenue and continue to serve its customers. The bank believed that the DCA regulations would be less restrictive than the new credit insurance regulation and they advised the Arkansas Insurance Department of their intentions. The department sent a reply to the bank affirming that DCAs would not be regulated by the insurance department, and therefore the bank began offering DCAs to its lending customers.

Credit insurers did not like this event and the precedent it set. The industry leaders contacted the insurance department and argued that DCAs were insurance products and should therefore be regulated as such. The department reversed its early ruling and advised the bank it would take action if it issued DCAs. The bank filed a lawsuit and won. Later, the Eighth Circuit Court of Appeals upheld the local court decision that DCAs are not insurance when issued by a national bank. Credit insurers continued the fight, yet the U.S. Supreme Court chose not to review the case and the debt cancellation marketplace came to life.

With the end of the court battles, some innovative lenders began launching debt cancellation agreements and today the program is the preferred choice among many. Meanwhile, regulators have recognized the unique ability of a lender to cancel the debt owed by a customer through these debt cancellation and debt suspension agreements.