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DEPARTMENT OF AUDIT
DIVISION OF BANKING
(307) 777-7797 Fax (307) 777-3555 Email:
jvogel@wyaudit.state.wy.us
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Dave Freudenthal
Governor
Michael Geesey
Director
Jeffrey C. Vogel
Commissioner
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Memorandum
To: President
& CEO
Wyoming State Chartered Banks
From: Jeffrey C. Vogel, Commissioner
Date: September 26, 2003
Re: Debt Cancellation Contracts
and Debt Suspension Agreements
The
Division of Banking has received several inquiries as to whether Wyoming state chartered
financial institutions are authorized to sell and finance debt cancellation
contracts (DCC’s) and debt suspension agreements (DSA’s) in Wyoming.
A Debt Cancellation Contract is an
agreement between a lender and borrower pursuant to which any remaining debt of
the borrower is extinguished upon the occurrence of a specified event. A specified event may include but is not
limited to a borrower’s death, disability, or loss of employment. Another common specified event, known as a
“GAP”, is when the insured value of an automobile is not sufficient to cure a
loan balance after an accident or disaster.
The consideration received by the bank is normally a fee received at the
time the loan is made.
A Debt Suspension Agreement 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.
The
Wyoming Banking Statutes do not directly address DCC’s or DSA’s. Although there is no specific statutory
citation in Wyoming Banking Law, DCC’s/DSA’s are authorized under general
banking powers statutes. Wyoming
Statute 13-2-101(a)(i) expressly authorizes banks to make contracts in its
corporate name. It is the determination
of the Division of Banking that these products are permissible for Wyoming
state chartered financial institutions subject to certain policy provisions of
the Division to assure that these products are not misleading or harmful to
financial institutions or customers.
Safety and
Soundness
The
Division’s goal in monitoring the safety and soundness of DCC’s and DSA’s is to
ensure that financial institutions have properly analyzed the risks associated
with offering these products, they have established adequate controls and
safeguards to limit and mitigate these risks, and that they have appropriate
staffing to properly administer these programs. The Division shall consider the amount of risk that the financial
institutions are taking on. Depending
on the amount of risk being incurred by institutions they shall establish risk
management and control procedures to quantify the risk inherent in these
products. Institutions engaging in these
products must demonstrate that risks are properly managed and controlled.
Prohibited
Practices
There
are certain practices that must be avoided so that these products are not
harmful or misleading to customers.
These practices apply to all financial institutions offering DCC’s and
DSA’s. Failure to maintain these
practices will be considered an unsafe and unsound practice, and will be
subject to administrative action as appropriate. These practices include the following:
1. Anti-tying
State chartered financial institutions shall not
incorporate the approval or terms of an extension of credit to a customer upon
the purchase of a DCC or DSA. It shall
not be indicated in any way that the credit granting process is contingent or
dependent upon the borrower’s decision to purchase such a product.
2. Misleading advertising or practices
State chartered financial institutions shall not engage in any practice
or make any disclosures in advertising, marketing or customer disclosures that
are misleading, which could otherwise cause a reasonable person to reach a
faulty belief regarding the information contained within.
3. Unilateral Modification
State chartered financial institutions may not offer
DCC’s or DSA’s that contain terms giving the institution the right to
unilaterally modify the contract unless:
a)
The
modification is favorable to the customer and is made without additional charge
to the customer; or
b)
The
customer is notified of any proposed change and is provided a reasonable
opportunity to cancel the contract without penalty before the change is
effective.
4. Single lump-sum fees
State chartered financial institutions are
prohibited from using a single fee product associated with DCC or DSA coverage,
or rolling the cost of the fee into the balance of the loan on residential
mortgages. Monthly fee products are
permissible for residential mortgages.
Institutions may offer a customer the option of
paying the fee for a DCC or DSA product in a single payment (except for
residential mortgages) provided that the institution also offers the customer a
bona fide option to pay the fee in monthly or other periodic installments. If the institution offers the customer the
option of financing the single payment by adding the balance to the amount the
customer is borrowing, they must also disclose to the customer the time period
during which the customer can cancel the agreement and receive a refund.
Refunds in the
event of prepayment or termination of the loan
If
a DCC or DSA is terminated, prepaid or otherwise cancelled prior to the
maturity of the loan, the institution shall refund to the customer any unearned
fees paid for the contract unless otherwise provided. An institution may offer a customer a contract that does not
provide for a refund only if they also offer that customer a bona fide option
to purchase a comparable contract that provides a refund feature. Such a feature is a refund that is at least
as favorable to the customer as the actuarial method. In no event shall refunds be permitted under DCC or DSA
agreements using any method that is less favorable to the customer then the
actuarial method.
Disclosures
Short
form:
The
financial institution shall provide the short form disclosures orally at the
time they first solicit the purchase of a DCC or DSA product to a customer, as
well as during telephone and electronic solicitations. Institutions must disclose:
1)
The
decision to purchase a DCC or DSA is optional;
2)
Single
payment feature, if applicable;
3)
If
the institution uses a single payment feature without a refund feature;
4)
Terms
of a refund if DCC/DSA fees are paid in a single payment and the program has a
refund feature;
5)
An
indication that additional disclosures are required and will be provided to the
customer before being required to pay for the product, and
6)
An
indication that there may be eligibility requirements, the details of which
will be provided in the long form disclosures.
Long
form:
The
financial institution shall make long form disclosures in writing before the
customer completes the purchase of the contract. If the initial solicitation occurs in person, then the
institution shall provide the long form disclosures in writing at that
time. Institutions must disclose:
1)
The
decision to purchase a DCC or DSA is optional;
2)
An
explanation of the features of a DSA (as opposed to a DCC) and that a DSA only
suspends the obligation it does not cancel it;
3)
Amount
of fees for the DCC or DSA product;
4)
The
single payment feature, if applicable;
5)
If
the institution uses a single payment feature without a refund feature;
6)
Terms
of a refund if DCC or DSA fees are paid in a single payment and if the program
has a refund feature;
7)
Whether
the use of a credit line would be restricted or impacted by the activation of
the DCC or DSA;
8)
Description
of the termination provisions, if applicable, of a DCC or DSA product, and
9)
Any
eligibility requirements, limitations, or exclusions under the contract.
Short
form disclosures are permitted in marketing materials, statement inserts, and
direct mail solicitations, provided that the long form disclosures are provided
to the customer in writing within three business days after the customer
contacts the institution to respond to a solicitation.
Affirmative Election
A
financial institution’s customers shall be required to affirmatively elect to
purchase a DCC or DSA product. This
election shall be in writing and may be included in the loan documentation or
in a separate document. In the case of
telephone solicitations the customers election may be obtained orally, as long
as the institution provides the customer the required disclosures and signature
forms within three business days. In
this case the customer also has the right to cancel the contract with in 30
days without penalty. The
acknowledgement and election language must be conspicuous, direct, and readily
understandable and designed to call attention to their significance.
If
you have any additional questions or need additional information, please do not
hesitate to contact the Division of Banking at (307) 777-7797.