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Consumer Credit Regulation: Amendment History

[65 Fed. Reg. 58,911 (Oct. 3, 2000); 66 Fed. Reg. 17,339 (Mar. 30, 2001); 72 Fed. Reg. 63,475 (Nov. 9, 2007); 72 Fed. Reg. 71,059 (Dec. 14, 2007); 74 Fed. Reg. 5244 (Jan. 29, 2009); 75 Fed. Reg. 7848 (Feb. 22, 2010); 75 Fed. Reg. 7925 (Feb. 22, 2010); 75 Fed. Reg. 37,583 (June 29, 2010); 76 Fed. Reg. 23,007 (Apr. 25, 2011); 76 Fed. Reg. 79,772 (Dec. 22, 2011); 81 Fed. Reg. 84,369 (Nov. 22, 2016); 82 Fed. Reg. 18,975 (Apr. 25, 2017); 83 Fed. Reg. 6364 (Feb. 13, 2018)]

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Consumer Credit Regulation: 12 C.F.R. § 37.2 Definitions.

For purposes of this part:

(a) Actuarial method means the method of allocating payments made on a debt between the amount financed and the finance charge pursuant to which a payment is applied first to the accumulated finance charge and any remainder is subtracted from, or any deficiency is added to, the unpaid balance of the amount financed.

(b) Bank means a national bank and a Federal branch or Federal agency of a foreign bank as those terms are defined in part 28 of this chapter.

Consumer Credit Regulation: 12 C.F.R. § 37.3 Prohibited practices.

(a) Anti-tying. A national bank may not extend credit nor alter the terms or conditions of an extension of credit conditioned upon the customer entering into a debt cancellation contract or debt suspension agreement with the bank.

(b) Misrepresentations generally. A national bank may not engage in any practice or use any advertisement that could mislead or otherwise cause a reasonable person to reach an erroneous belief with respect to information that must be disclosed under this part.

Consumer Credit Regulation: 12 C.F.R. § 37.4 Refunds of fees in the event of termination or prepayment of the covered loan.

(a) Refunds. If a debt cancellation contract or debt suspension agreement is terminated (including, for example, when the customer prepays the covered loan), the bank shall refund to the customer any unearned fees paid for the contract unless the contract provides otherwise. A bank may offer a customer a contract that does not provide for a refund only if the bank also offers that customer a bona fide option to purchase a comparable contract that provides for a refund.

Consumer Credit Regulation: 12 C.F.R. § 37.5 Method of payment of fees.

Except as provided in § 37.3(c)(2), a bank may offer a customer the option of paying the fee for a contract in a single payment, provided the bank also offers the customer a bona fide option of paying the fee for that contract in monthly or other periodic payments. If the bank offers the customer the option to finance the single payment by adding it to the amount the customer is borrowing, the bank must also disclose to the customer, in accordance with § 37.6, whether and, if so, the time period during which, the customer may cancel the agreement and receive a refund.

Consumer Credit Regulation: 12 C.F.R. § 37.6 Disclosures.

(a) Content of short form of disclosures. The short form of disclosures required by this part must include the information described in appendix A to this part that is appropriate to the product offered. Short form disclosures made in a form that is substantially similar to the disclosures in appendix A to this part will satisfy the short form disclosure requirements of this section.

Consumer Credit Regulation: 12 C.F.R. § 37.7 Affirmative election to purchase and acknowledgment of receipt of disclosures required.

(a) Affirmative election and acknowledgment of receipt of disclosures. Before entering into a contract the bank must obtain a customer’s written affirmative election to purchase a contract and written acknowledgment of receipt of the disclosures required by § 37.6(b). The election and acknowledgment information must be conspicuous, simple, direct, readily understandable, and designed to call attention to their significance. The election and acknowledgment satisfy these standards if they conform with the requirements in § 37.6(d) of this part.

Consumer Credit Regulation: 12 C.F.R. § 37.8 Safety and soundness requirements.

A national bank must manage the risks associated with debt cancellation contracts and debt suspension agreements in accordance with safe and sound banking principles. Accordingly, a national bank must establish and maintain effective risk management and control processes over its debt cancellation contracts and debt suspension agreements. Such processes include appropriate recognition and financial reporting of income, expenses, assets and liabilities, and appropriate treatment of all expected and unexpected losses associated with the products.

Consumer Credit Regulation: APPENDIX A TO PART 37—SHORT FORM DISCLOSURES

  • ● This product is optional

Your purchase of [PRODUCT NAME] is optional. Whether or not you purchase [PRODUCT NAME] will not affect your application for credit or the terms of any existing credit agreement you have with the bank.

  • ● Lump sum payment of fee

[Applicable if a bank offers the option to pay the fee in a single payment]

[Prohibited where the debt subject to the contract is a residential mortgage loan]

Consumer Credit Regulation: APPENDIX B TO PART 37—LONG FORM DISCLOSURES

  • ● This product is optional

Your purchase of [PRODUCT NAME] is optional. Whether or not you purchase [PRODUCT NAME] will not affect your application for credit or the terms of any existing credit agreement you have with the bank.

  • ● Explanation of debt suspension agreement

[Applicable if the contract has a debt suspension feature]

Consumer Credit Regulation: 6.1 Introduction

One of the most remunerative methods for imposing extra costs on either an open-end or closed-end credit transaction is through the sale of credit insurance or debt protection (i.e., debt cancellation or suspension) products. The sale of credit insurance and debt protection is often a central component of lending by banks, credit unions, finance companies, auto dealers, and other retailers because the sale provides creditors with substantial compensation and other benefits.

Consumer Credit Regulation: 6.2.1.1 Growth and Decline of Debt Protection Products

Credit insurance is now rarely sold to protect credit card obligations, and instead lenders offer debt cancellation or suspension agreements (collectively “debt protection products”).2 These products are sometimes called “payment protection” plans. Debt protection products are sold as an “add on” to the credit card agreement, and specify that the lender will cancel or suspend the borrower’s required minimum payments if certain events occur.

Consumer Credit Regulation: 6.2.2 How Debt Protection Products Work

Both credit insurance and debt cancellation agreements eliminate some or all of the consumer’s indebtedness. Credit insurance, however, usually involves a third-party insurer, whereas debt protection products are sold by the lender directly to the consumer. The absence of a third-party insurer is part of the reason these products are more profitable for lenders.17 (Even so, an insurance company may issue a contractual liability policy to the lender to insure against losses under the debt protection products.

Consumer Credit Regulation: 6.2.4.2 OCC Regulation

The OCC debt protection regulations—applicable to national banks and federal savings associations—provide only minimal substantive consumer protections, predominately in the mortgage context.55 Unlike state insurance regulators’ oversight of credit insurance, the OCC and other federal banking regulators do not address the reasonableness of the pricing of debt protection products.56 The OCC primarily relies on disclosure of the terms of the agreement to protect consumers.

Consumer Credit Regulation: 6.2.4.3 TILA and CFPB Regulation

The Truth in Lending Act contains provisions regarding the disclosure of debt suspension, debt cancellation, and credit insurance products, all three of which are treated the same for purposes of disclosure requirements.63 Under these rules, mandatory debt protection or credit insurance fees are treated as finance charges, whereas voluntary products are not.64 In order for the products to qualify as voluntary, lenders must make certain disclosures.65

Consumer Credit Regulation: 6.2.5.1 Nature of Abusive or Deceptive Sales Practices

In addition to concerns over the pricing and benefits of debt protection products, there have been allegations of abusive or deceptive practices in the sale of these products to consumers. These include allegations that cardholders were involuntarily enrolled into these programs, and that they were enrolled using deceptive or misleading representations.

Consumer Credit Regulation: 6.2.5.3 State Attorney General Enforcement

A number of state regulators have taken enforcement action against credit card lenders over deceptive or abusive practices in the sale of debt protection products. The Minnesota attorney general filed a lawsuit against Discover Bank, alleging that telemarketers for Discover Bank used deception to sell debt protection to credit card customers.

Consumer Credit Regulation: 6.2.5.4 Private Litigation over Unfair and Deceptive Sales Practices

A number of private lawsuits have also been filed alleging deception and unfair practices in the sale of debt protection products, although the courts in these cases are split as to whether the claims were preempted by the OCC regulations.94 Several lawsuits alleging that consumers were involuntarily enrolled in debt protection products have survived preemption and other challenges.95 A California lawsuit alleging deceptive practices in the handling of claims when consumers tried to use the benefits

Consumer Credit Regulation: 6.3.1 Overview

Credit insurance is sold as an add-on product by banks, credit unions, auto dealers, finance companies, and retailers, including department, furniture, jewelry, and home improvement stores. The credit insurance policy pays claims on a covered loan if designated events occur, such as the borrower’s death, illness, or unemployment, or loss or damage to the collateral.