What is Debt Protection?
Debt protection is the common industry term that describes a suite of protection products available to consumers through creditors. Creditors may offer debt pro- tection in one of two forms, debt cancellation and/or debt suspension. Protection is generally available for auto purchases/loans, secured or unsecured (signature) loans, credit cards, and home equity loans. A consumer?s decision to undertake a new indebtedness changes the consumer’s financial exposure – debt protection products can help consumers protect that new risk.
What is Debt Cancellation?
Debt cancellation is a two-party agreement between a creditor and a consumer under which the creditor agrees to cancel/waive all or a portion of the debt if a specified protected event occurs, and typically in return for a fee paid by the consumer.
What is Debt Suspension?
Debt suspension is a two-party agreement between a creditor and a consumer under which the creditor agrees to suspend all or part of a consumer’s obligation to repay an extension of credit if a specified protected event occurs, in return for a fee paid by the consumer. Principal is not cancelled and the requirement to make a monthly payment (which typically includes interest and fees) is waived during the protected event period.
What protected events trigger benefits?
Creditors offer a variety of protected events in their products to protect consumers. Packages can include, but are not limited to: death, disability, involuntary un- employment, unpaid family leave, hospitalization/nursing home care, marriage, divorce, birth / adoption of a child, entering college, military deployment, or relocation.
Why would a creditor want to offer Debt Protection?
Debt protection products help creditors foster goodwill and generate growth. That is, the products allow creditors to meet consumers’ continued and growing need to secure their financial well being with protection designed to address unforeseen adverse events. The products also offer a means by which creditors can foster growth by extending their brand and market reputation and generating non-interest income. Debt protection products also work to mitigate loan risk by reducing defaults / delinquencies, thereby augmenting the safety and soundness of the institution.
How did Debt Protection agreements evolve?
Debt protection originated with the credit union movement in the early 1900’s. Later, in March 1964, the Office of the Comptroller of the Currency (OCC) announced that national banks may enter into debt cancellation / suspension products, and that doing so constitutes a lawful exercise of the powers of a national bank and is necessary to the business of banking. Moreover, as a result of the Eighth Circuit Court of Appeals’ 1990 decision in First National Bank of Eastern Arkansas v. Taylor, debt cancellation is not treated as insurance when issued by a national bank.
In 2003, the OCC issued regulations for the sale of debt protection agreements by national banks. The Office of Thrift Supervision (OTS) and the National Credit Union Administration (NCUA), as well as many states, have either adopted the OCC regulations, held them out as “best practice,” or established similar rules/ guidelines that authorize creditors in their jurisdiction to offer debt protection products to consumers
Who regulates Debt Protection products?
Debt protection products are regulated by the creditor’s governing body – the Office of the Comptroller of the Currency (OCC) for national banks, Office of Thrift Supervision (OTS) for thrifts, National Credit Union Association (NCUA) for credit unions, the State Banking Department for state chartered institutions, and other various state agencies for non-depository creditors.
What consumer disclosures are required?
Disclosures to consumers include that the product is optional, the amount of the fee, credit restrictions, if any, termination provisions, benefit eligibility require- ments and exclusions. Generally, the disclosures follow the requirements of the OCC regulation and Federal Regulation Z (Truth-in-Lending).
Are there any prohibited practices?
Yes, creditors are prohibited from altering the terms of an extension of credit on the condition that a customer enters a debt protection agreement. This anti-tying prohibition effectively requires the acceptance of such agreements to be an optional feature of an extension of credit. Further, since debt protection agreements are loan addenda, they are subject to all regulations governing loan instruments, such as Regulation Z and Regulation B (Equal Credit Opportunity).
What financial risk manifests for creditors’
The creditor can choose to establish and maintain reserves per the interagency (OCC) guidance for future benefits or transfer all (or some) of the risk to an insurance company through a contractual liability insurance policy.