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The Third Quarter 2004 issue of Compliance Corner contained the first installment of an informational paper that discussed debt cancellation contracts (DCCs) and debt suspension agreements (DSAs), including comparisons of DCCs and DSAs to credit insurance programs. As part of the discussion, the respective definitions and features of DCCs and DSAs were presented, together with arguments by proponents and opponents of DCCs and DSAs.
The final installment of this paper examines consumer protections relative to DCCs and DSAs, and contains an appendix of model disclosure forms approved and issued by the OCC that a financial institution may use to comply with the OCC’s regulation that governs DCCs and DSAs (12 CFR 37). 1
The OCC regulation includes several important consumer protections designed to provide additional information to a consumer prior to the approval of a credit protection agreement. These new protections include the following.
Customer disclosures relating to the purchase and sale of DCC and DSA products comprise a significant portion of the new regulation. Specifically, disclosure requirements designed to protect consumers in the purchase of these products now include the following.
The required disclosures must be given in either long or short form. Links to sample formats on the OCC's website appear at the end of this article. Short form disclosures may be used in advertisements, telephone sales, and take-ones, while long form disclosures apply to person-to-person solicitations. Verbal affirmation of an agreement to purchase a DCC or DSA is acceptable in telephone sales.
In a press release announcing the rule change, former Comptroller of the Currency John D. Hawke, Jr. voiced his support for the new consumer protections, noting, "The rule we have approved today prohibits or restricts bank practices that have the greatest potential for abuse and also requires banks to provide disclosures on issues that are likely to be most important to customers in deciding to purchase these products." 2
Interestingly, the new regulation does not impose price controls or loss reserve requirements on national banks. The OCC decided not to impose price controls, since evidence supporting a link between the DCC and DSA market to difficulties attributed to credit insurance products could not be proven. As an alternative, the OCC decided to rely on an existing regulation that allows banks to set non-interest charges and fees competitively in accordance with safe and sound banking principles. Moreover, national banks are not required to establish a reserve for DCC and DSA contracts or to purchase a contingent liability policy. However, national banks are expected to establish and maintain risk management and control processes.
A number of credit card issuers are considering DCC and DSA programs as a method to enhance product diversity and to meet changing customer expectations. Comments provided by industry observers and banking regulators indicate that the sale of DCCs and DSAs is likely to grow in importance. The Federal Reserve has indicated that anecdotal evidence suggests that the sale of these products in lieu of credit insurance has increased and that coverage is expanding. In light of these developments, the standards outlined by the OCC for the purchase and sale of DCC and DSA products will benefit credit card issuing banks searching for product diversification. The OCC's regulation also clearly defines DCCs and DSAs as national banking products, not insurance products, essentially ending the lengthy debate regarding state regulatory authority and supervision. In the end, credit card customers may view DCC and DSA products as a valuable alternative in an uncertain economy.
Short Form Disclosure
(Link to OCC's website)
Sample Long Form Disclosure
(Link to OCC's website)
The views expressed in this article are those of the author and are not necessarily those of this Reserve Bank or the Federal Reserve System.