Kardonick v. JP Morgan Chase & Co. et al

Filing 71

REPLY to Response to Motion re 30 MOTION to Intervene, 31 MOTION to Intervene Memorandum of Law in Support of filed by George Cleaver, David Lundy, Warren Prince, Harold Smith, Trudy Smith, Ennis White. (Attachments: # 1 Exhibit A, # 2 Exhibit B, # 3 Exhibit C, # 4 Exhibit D, # 5 Exhibit E)(Dominguez, Manuel)

EXHIBIT B

The Impact of Debt Cancellation Contracts on State Insurance Regulation
A Report to the FIRST
By the Center for Economic Justice
July 2003

1.

Introduction

Debt Cancellation Contracts (DCCs) and related products like Debt Suspension
Agreements (DSAs) are products sold in connection with a consumer loan and which
promise to provide some debt relief to the consumer if certain events occur. The events
triggering the benefit under the DCCs/DSAs are typically events that impair the
borrower’s income or place a financial burden on the borrower. DCCs/DSAs are part of
the group of debt protection products that include credit insurance and which promise,
among other things, to preserve the borrower’s credit rating in adverse circumstances.
Over the past three years, lenders have shifted their debt protection product offerings
from credit insurance to DCCs/DSAs, most notably in connection with credit cards. The
majority of major credit card issuers, including Citicorp, Discover (Sears), Bank of
America, Fleet Bank, Advanta, Bank One, Chase, MBNA, Providian and private label
card issuers like Target, have replaced credit card credit insurance with credit card
DCCs/DSAs
This report will examine both credit insurance and DCCs/DSAs to help explain how
DCCs/DSAs are a substitute for credit insurance and why lenders have moved away from
credit insurance to DCCs/DSAs. We will also examine the impact DCCs/DSAs on credit
insurance regulation and on consumers who purchase debt protection products. We also
review regulatory activity related to DCCS/DSAS and conclude with a set of
recommendations for regulatory oversight of DCC.

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Debt Cancellation Contracts and State Insurance Regulation
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July 2003

2.

Credit Insurance versus DCCs/DSAs

DCCs/DSAs are part of the group of debt protection products that include credit
insurance and which promise, among other things, to preserve the borrower’s credit
rating in adverse circumstances. A complete understanding of DCCs/DSAs requires an
understanding of how DCCs/DSAs compare and relate to credit insurance.
2.1

Credit Insurance

Credit insurance refers to a group of insurance coverages sold in connection with a loan,
credit agreement or credit card account. Credit insurance generally makes payments for
the consumer to the lender for a specific loan or credit agreement in particular
circumstances. Credit insurance protects the lender’s loan in the event something
happens to impair the consumer’s ability to pay. The common types of credit insurance
sold include:
•

Credit Life, which pays off the consumer’s remaining debt on a specific loan or
credit card account if the borrower dies during the term of the coverage.

•

Credit Accident and Health, also known as Credit Disability, which makes
monthly payments on a specific loan or credit card account if the borrower
becomes disabled during the term of coverage.

•

Credit Involuntary Unemployment, which makes monthly payments, often limited
in number, on a specific loan or credit card account if the borrower becomes
involuntarily unemployed during the term of coverage.

•

Credit Leave of Absence, which makes a limited number of monthly payments on
a specific loan or credit card if the borrower takes an unpaid family leave from
work for specific reasons, including care for a newborn or care for a seriously ill
family member.

•

Credit Property, which pays to repair or replace personal property purchased with
the loan or credit proceeds and/or serving as collateral for the credit if the
property is lost or damaged. Unlike the first four credit insurance coverages,
credit property insurance is not directly related to an event affecting a consumer’s
ability to pay his or her debt.

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Debt Cancellation Contracts and State Insurance Regulation
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July 2003

There are three parties to a credit insurance agreement – the borrower, the lender and the
credit insurer. The credit insurer sells a group policy to the lender who, in turn, sells
credit insurance in connection with individual loans or credit cards to borrowers. The
lender typically issues an insurance certificate for the group policy to the borrower. In
exchange for specified premium payments, the credit insurer agrees to make the
borrower’s payments to the lender on behalf of the borrower when a covered event
occurs. A covered event is the death, disability, involuntary unemployment or leave of
absence specified in the credit insurance policy. Appendix 1 contains an example of a
credit insurance certificate.
2.2

Debt Cancellation Contracts and Debt Suspension Agreements

There are two parties to DCC/DSA products – the borrower and the lender. The
DCC/DSA is an amendment or addition to the loan agreement between the lender and the
borrower. The DCC/DSA loan agreement amendment states that, for a fee, the lender
will waive certain payments, charges and/or fees when certain covered events occur. The
covered events include death, disability, involuntary unemployment, leave of absence
and/or other events specified in the DCCS/DSAS agreement. Unlike credit insurance, no
payment is made on behalf of the consumer when a covered event triggers a DCC/DSA
benefit. Rather, the lender “cancels” or “suspends” a payment, charge and/or fee.
Appendix 2 contains an example of a DCC agreement provided to a consumer.
Although there are technically two parties to a DCC/DSA, lenders offering a DCC/DSA
product typically rely on credit insurers for administration of the program. The DCC
agreement in Appendix 2 cites American Bankers – the largest credit insurer in the
country – as the Plan Administrator. In addition, lenders typically purchase an insurance
policy – a contractual liability policy – from a credit insurer to cover the cost of any
DCC/DSA program benefits. Therefore, in practice, a DCC/DSA program is
administered almost identically to a credit insurance program – the credit insurer
administers the program, markets the program to borrowers and pays benefits on behalf
of the consumer to the lender while the lender reaps large revenues for providing a list of
borrowers to the credit insurer.

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Debt Cancellation Contracts and State Insurance Regulation
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July 2003

2.3

Credit Insurance and DCCs Can Be Functional Equivalents

To a consumer, DCCs and credit insurance are very similar – or even identical –
products. For example, a credit card credit insurance program containing credit life,
credit disability and credit involuntary unemployment coverages provides the identical
benefits for a consumer as a DCC program for death, disability and involuntary
unemployment. We will show later in the report how lenders have modified the
triggering events (and, consequently, the benefits) from credit insurance when moving to
a DCC/DSA program – with very unfavorable results for consumers. But, in this
example, the benefits under the two programs are identical from the consumer’s
perspective – in the event of the death, the entire outstanding debt is eliminated and in the
event of qualifying disability or involuntary unemployment, the minimum monthly
payment is eliminated.
Table 1
Comparison of Credit Insurance and DCC Benefits
Event
Death
Disability

Credit Insurance
Outstanding Debt Paid Off
Minimum Monthly
Payment Made

Involuntary Unemployment

Minimum Monthly
Payment Made

DCC
Outstanding Debt Canceled
Minimum Monthly
Payment and Related Fees
Canceled
Minimum Monthly
Payment and Related Fees
Canceled

Another important similarity between credit insurance and DCCS/DSAS is the methods
of payment. Both products are offered with a monthly payment method in some
circumstances and with a single payment method in others. With the single payment
method, the premium (credit insurance) or fee (DDC/DSA) is added to the underlying
loan and financed. Generally, credit insurance or DCCs/DSAs sold in connection with
open-end or revolving loans, such as credit cards, utilize a monthly payment method with
the premium or fee based on the average or period-ending outstanding loan balance.
Generally, credit insurance or DCCs/DSAs sold in connection with closed-end or
installment loans utilize the financed single premium / financed single fee payment
method. 1

1

There are important exceptions. Credit unions have historically sold monthly payment (“monthly
outstanding balance) credit insurance in connection with installment loans because these products are far
more favorable to consumers than financed single premium (‘single premium) products.

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Debt Cancellation Contracts and State Insurance Regulation
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July 2003

The table below compares the terminology used for credit insurance and DCCs/DSAs:
Table 2
Comparison of Credit Insurance and DCC/DSA Terminology
Credit Insurance
benefit
claim
contingency
coverage
credit
Creditor
insurance
insurer
Insured
life insurance
paid
Pay
policy
premium
premium rate

2.4

Debt Cancellation/Debt Suspension
protection, feature
activate protection
protected event
protection, feature
debt
bank, creditor
protection
bank, creditor
protected cardholder, debtor
death protection
canceled, waived
cancel, waive
agreement, addendum, contract
fee
fee rate

Differences between Credit Insurance and DCCs/DSAs

There are significant differences between credit insurance and DCCs/DSAs, the most
important of which is the nature of regulatory oversight of the two products. Credit
insurance is an insurance product and, consequently, is regulated primarily by state
insurance regula tors. 2 The national Comptroller of the Currency, credit union regulator,
2

The Center for Economic Justice has published two national reports on state credit insurance regulation
in collaboration with Consumers Union (1999) and the Consumer Federation of America (2001). In
addition, CEJ has published a number of state-specific credit insurance analyses. See www.cejonline.org.
There are a few instances of federal regulation related to credit insurance. For example, regulations
implementing the federal Truth in Lending Act provide requirements for calculation of the Annual
Percentage Rate (APR). If the offer of credit insurance offered in connection with a loan meets certain
requirements, then the cost of credit insurance does not have to be included in the APR calculation. If
the credit insurance offer does not meet these requirements, then the cost of credit insurance must be
included in the APR. As a result of Regulation Z, virtually all credit insurance sold meets these
disclosure requirements.
A second example of federal regulatory action affecting credit insurance relates to financed single
premium credit insurance sold in connection with real-estate secured loans. Recent changes to HOEPA
regulations require that the costs of single premium credit insurance be included in the APR calculation
for these types of loans. These regulatory changes, along with other actions by secondary lenders Fannie
Mae and Freddie Mac and advocacy by fair housing and fair lending organizations, led to the virtual
elimination of financed single premium credit insurance sold in connection with real estate secured loans
and its replacement with monthly pay products.

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July 2003

and thrift regulator have all determined that DCCS/DSAS are a banking product and,
consequently, are not subject to the state insurance regulation. The decisions by federal
banking regulators about regulatory jurisdiction over DCCS/DSAS have developed over
a lengthy period of time and reflect strong disagreements between these federal regulators
and state insurance regulators. We discuss the history of DCCS/DSAS regulatory
decisions in Section 5.
The differences in regulatory jurisdiction over credit insurance and DCCs/DSAs result in
major differences in the scope and nature of regulatory oversight for the products and
consumer protections for potential purchasers of the products. We discuss these
important differences in Section 6.
Another difference between credit insurance and DCCS/DSAS is the number of parties
involved. As stated above, credit insurance involves three parties – borrower, lender and
insurer. Since the provisio n of benefits under the credit insurance policy requires the
insurer to pay the lender under certain circumstances, there is a need to ensure that the
insurer maintains the ability to pay. Stated differently, there is a regulatory interest in the
solvency of the credit insurer. With DCC, there is no payment of benefits to the lender.
Rather, the benefits for the consumer under the DCCs/DSAs are a cancellation of certain
payments and/or interest charges. Although federal regulators certainly have an interest
in the solvency of lenders, there is no need for solvency to provide the DCCs/DSAs
benefit. A lender could be insolvent and still be able to cancel or waive a fee 3 .
There are important benefit differences between credit insurance and DCCs/DSAs. The
DSA benefit is a debt suspension – the consumer can skip a payment and not accrue
additional interest charges or late fees. Unlike credit insurance, which makes the
monthly payment on behalf of the consumer, and therefore pays down some of the loan
princ ipal, a DSA does not reduce the amount owed by the consumer. In addition, some
credit insurance products provide a monthly benefit greater than the minimum monthly
payment due on a loan. For example, instead of the minimum monthly payment which
may be only 1.8% or 2.0% of the outstanding balance, some credit unemployment
policies provide a monthly payment of 3% or more of the monthly payment.

3

DCCs/DSAs are typically amendments to loan agreements. If a DCC/DSA were a separate agreement
from the underlying loan agreement, a consumer may not receive the benefits of the DCC/DSA
agreement if the lender became insolvent.

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Debt Cancellation Contracts and State Insurance Regulation
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July 2003

3.

Market Structure and Regulatory Oversight

Credit insurance is characterized by reverse competition – a market structure in which
market forces cannot be relied upon to protect consumers from overcharges by insurers.
This market structure leads to, in theory, strict regulatory oversight of credit insurance by
state insurance regulators. In this section, we examine the market structure for credit
insurance and DCCs/DSAs and the regulatory structures for each set of products.
3.1

Reverse Competition in Credit Insurance Markets

One of the principal responsibilities of state insurance regulators is monitoring the
financial condition of insurance companies to ensure that insurers are able to pay the
benefits under the insurance contracts for which consumers have paid premiums to the
insurers. Consequently, state insurance regulators will monitor the financial condition of
credit insurers as they would insurers offering other products. However, state regulatory
oversight of credit insurance has typically been, at least in theory4 , far more extensive for
credit insurance than for other types of products, such as life, auto or homeowners
insurance. The reason for the more extensive regulatory structures for credit insurance
arises from the reverse-competitive market structure of credit insurance.
A useful description of credit insurance markets is found in NY State Insurance
Department Regulation 27A (11NYCCR 185).
185.0(b) In the marketing of credit insurance, the inferior bargaining position of
the debtor creates a "captive market" in which, without appropriate regulation of
such insurance, the creditor can dictate the choice of coverages, premium rates,
insurer and agent, with such undesirable consequences as: excessive coverage
(both as to amount and duration); excessive charges (including payment for
nonessential items concealed as unidentifiable extra charges under the heading
of insurance); failure to inform debtors of the existence and character of their
credit insurance and the charges therefore, and consequent avoidance of the
protection provided the debtor by such coverage.
(c) In the absence of regulation, premium rates and compensation for credit
insurance tend to be set at levels determined by the rate of return desired by the
creditor in the form of dividends or retrospective rate refunds, commissions, fee
or other allowances, instead of on the basis of reasonable cost. Such “reverse
competition,” unless properly controlled, results in insurance charges to debtors
that are unreasonably high in relation to the benefits provided to them.

4

See CEJ national reports for state failures in credit insurance regulation

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Debt Cancellation Contracts and State Insurance Regulation
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July 2003

In a normally competitive market, competition for the consumer’s business leads to lower
prices and reasonable profits. In a reverse competitive market, the credit insurer, who
requires a lender to produce credit insurance sales, competes for the lender’s business.
This competition typically takes the form of offering higher commissioners and
compensation and additional services to the lender. Consequently, competition to sell
credit insurance policies drives up the price of credit insurance. In a reverse competitive
market, the consumer is unable to exert market pressure leading to lower prices or
reasonable profits.
The National Association of Insurance Commissioners (NAIC) recently adopted a
model law regarding the regulation of credit property insurance in an effort to promote
more effective and more uniform regulation of the product across the states. One of the
purposes of the model is to:
Address the problems arising from reverse competition in credit
insurance markets.
The model law defines reverse competition:
“Reverse competition” means competition among insurers that regularly
takes the form of insurers vying with each other for the favor of persons
who control, or may control, the placement of the insurance with insurers.
Reverse competition tends to increase insurance premiums or prevent the
lowering of premiums in order that greater compensation may be paid to
persons for such business as a means of obtaining the placement of
business. In these situations, the competitive pressure to obtain business
by paying higher compensation to these persons overwhelms any
downward pressures consumers may exert on the price of insurance, thus
causing prices to rise or remain higher than they would otherwise. In a
reverse competitive market, powerful market forces work to the
disadvantage of the consumer.
3.2

Regulatory Oversight of Credit Insurance

The reverse competitive nature of credit insurance markets requires stringent
regulatory oversight of products, sales practices and prices (rates) to ensure that
consumers are treated fairly in the sales and claim process and that benefits provided
under the credit insurance policy are reasonable in relation to the premiums charged.
Towards this end, every state requires prior approval of credit insurance policies to
ensure unreasonable restrictions on eligibility and coverage are not included. Many
states have also established loss ratio standards as the measure of reasonable benefits in
relation to premium. The loss ratio standards for credit life and credit disability range
from 40% to 70% with the vast majority of states using loss ratio standards in the 50% to
60% range. The NAIC model regulations for credit insurance specify a 60% loss ratio

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Debt Cancellation Contracts and State Insurance Regulation
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July 2003

standard – meaning that claims paid on behalf of consumers to lenders should be at least
60% of the premiums earned by insurers from the related policies.
There is substantial variation among states in the regulatory requirements for
credit insurance, most notably in the states’ implementation of the rate standard – that
benefits must be reasonable in relation to premium. There is also variation among states
in the degree to which policy forms (product filings) are reviewed. Some states routinely
approve product filings, while other states challenge the same filings as having unfair or
misleading provisions.
The degree of variation among states creates a challenge for national lenders to
offer a product across states. For example, if a lender wanted to offer a credit insurance
package of life, disability, involuntary unemployment and leave of absence, some of the
regulatory hurdles would include:
•

Filing and approval of a group insurance policy, insurance certificates and
application forms for each coverage for each jurisdiction. A national lender
operating in 50 states and the District of Columbia would have to make 204
filings – four filings each in 51 jurisdictions. While the filings will be similar
and identical across many states, differing state requirements mean that all of
the filings will have some state-specific issues. It is important to point out
that an insurer wishing to file and gain approval for this package of coverages
will have to use two different types of insurance companies. Insurance
companies that write life and health insurance are not permitted to write
property and casualty coverages. The filings for credit involuntary
unemployment and credit leave of absence must be submitted by a property
casualty insurance company.

•

Filing and approval of rates for each coverage for each jurisdiction. For credit
life and credit disability, most credit insurers will file for the maximum
permissible rate – the so-called prima facie rate – which an insurer can use
without any justification. However, if the lender’s particular credit insurance
clientele exhibits much higher than average losses, the insurer can and will
file for a higher rate – so-called upward deviations. For involuntary
unemployment and leave of absence, the rate filings must include an actuarial
analysis and justification for the proposed rate. Even after initial approval of
rates, the lender and the insurer must monitor the states for changes in the
prima facie rates, which will necessitate changes in the both the rates charged
in those states and changes in the product disclosures.

•

Licensing of agents in each jurisdiction. Although many states have
simplified the licensing of agents selling only credit insurance, the lender and
the insurer must identify and comply with agent licensing requirements in the
states.

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Debt Cancellation Contracts and State Insurance Regulation
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July 2003

3.3

Market Structure for DCCs/DSAs

The market structures of credit insurance and DCCS/DSAS products are, to some extent,
different. Because the sale of DCCs/DSAs involves two parties, one principal structure
of reverse competitive markets – the seller competing for sales to a producer and not
directly selling to the ultimate buyer – is missing. Other characteristics of the markets in
which credit insurance and DCCs/DSAs are sold are similar, including:
•

The credit insurance or DCCs/DSAs is a side issue to the major transaction.
The major transaction is the underlying loan or credit for which the consumer
is applying.

•

An absence of choice for the consumer. The lender selects the coverage or
package of coverages to offer and the consumer has only the choice to accept
or not accept the package of coverages. Although a few states require credit
insurers to offer individual coverages, a consumer who wants to purchase, say,
credit disability, must purchase the package of life, disability, involuntary
unemployment, etc., even if he or she is ineligible for benefits under the other
coverages.

•

Limited product information and consumer misperceptions. Typical
disclosures for both credit insurance and DCCs/DSAs identify the events that
trigger benefits, some eligibility requirements and rates. There is never any
information about, for example, the likelihood of a particular event occurring
on average. Consumers typically have misperceptions about their likelihood
of encountering a triggering event, such as disability or involuntary
unemployment.

The absence of the credit insurer from DCC/DSA markets5 does not eliminate the reverse
competition. The inferior bargaining position of the borrower, the fact that the
DCC/DSA purchase is tangential to the principal transaction, the ability of the lender to
dictate terms and fees and the unique ability of the lender to access the business are all
elements of a reverse-competitive market. Although the market structure for
DCCs/DSAs is not the classic three-party reverse competition market structure,
consumers of DCCs/DSAs products do not have market power sufficient to force lenders
to offer DCCs/DSAs products at reasonable rates. As we show below in Section 7, the
market results for DCCs/DSAs products – both the relationship of benefits to fees and the
nature of coverages and exclusions – vividly document the absence of consumer power in
the DCCs/DSAs markets.

5

In practice, a number of lenders will secure a group insurance policy to insure their DCC and DSA
exposure.

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Debt Cancellation Contracts and State Insurance Regulation
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July 2003

3.4

Regulatory Oversight of DCCs/DSAs

DCCs/DSAs are regulated by both federal and state agencies. DCCs/DSAs offered by
national banks, savings and loan associations and credit unions are subject to the
regulatory oversight of the Office of the Comptroller of the Currency, the Office of Thrift
Supervision and the National Credit Union Administration, respectively. DCCs/DSAs
offered by state banks, state savings and loan associations and state credit unions are
subject to the regulatory oversight of state banking and credit union regulators. We
discuss the regulatory oversight of DCCs/DSAs in more detail in Section 6, but the most
salient points include:
•
•
•

4.

The OCC has taken the lead among federal agencies on both establishing
DCCs/DSAs as a banking product and establishing the federal regulatory
framework for DCCs.
The OCC’s recently-promulgated DCCs/DSAs regulation provides no
regulation of the fee amount that can be charged for DCCs/DSAs and few
requirements for minimum product standards.
Most states, even those who continue to believe that DCCs/DSAs are
insurance products and should be subject to the same type of regulatory
oversight as credit insurance, have adopted the same state requirements for
DCCs/DSAs as those created for national banking institutions to avoid putting
state-charted institutions at a competitive disadvantage. The development of
DCCs/DSAs regulatory structures is a graphic example of regulatory arbitrage
– a race to the lowest common denominator of consumer protection.

History of DCCs/DSAs and the Fight over Regulatory Jurisdiction

In 2002, the Comptroller of the Currency (OCC) promulgated a regulation governing the
sale of DCCs/DSAs by nationa l banks. The 2002 OCC rule culminates a long fight
between state insurance regulators and federal banking regulators regarding the
regulation of DCCs/DSAs. The fight started in the early 1960’s. This section reviews
the history and development of regula tion of DCCs/DSAs.
4.1

Initial Rulings by the OCC and Opposition by State Insurance Regulators

In a December 1963 issue of The National Banking Review, the OCC discussed DCCs as
a legal activity of a national bank. In response to a letter of inquiry on DCCs, the OCC
issued a letter on March 10, 1964 stating that that a national bank has the right to issue
DCCs on loans issued through the bank. Appendix 3 contains a copy of that letter.
Comptroller of the Currency James J. Saxon stated:

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Debt Cancellation Contracts and State Insurance Regulation
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July 2003

The use of debt cancellation contracts, the imposition of an additional charge and
the establishment of reserves as protection against losses arising out of such
contracts is a lawful exercise of the posers of a National Bank. The exercise of
such powers is necessary to and is part of the business of banking. Such activities
may not therefore, properly be considered as engaging in the business of
insurance.
On March 26, 1964, the OCC issued another letter to a national bank stating that the
March 10, 1964 ruling was also applicable to installment loans as well as to any other
obligation owing to a national bank.
Later in 1964, the National Association of Insurance Commissioners (NAIC) issued a
resolution in opposition to the OCC’s ruling on DCCs stating that DCCs constit ute the
business of insurance and, therefore, are subject to state insurance regulation. The NAIC
resolution stated that, under the OCC’s ruling, the public would be “of the protection of
such state laws and regulations with respect to credit life insurance.” Appendix 4
contains a copy of the NAIC resolution and a legal memorandum prepared by the Life
Insurance Association of America examining whether DCCs constitute the business of
insurance.
On August 26, 1971, the OCC promulgated 12 C.F.R. 7.7495 permitting national banks
to enter debt cancellation agreements, charge a fee for the agreement, and set up reserves
to cover liabilities. In 1972, the OCC issued letters permitting national banks to offer
debt cancellation agreements for theft, loss, and destruction of collateral. On March 26,
1984, the OCC issued Interpretive Letter No. 283, which provided:
•
•

The sale of credit life and disability insurance is directly related to a bank’s
express lending authority because it protects the bank’s ability to recover the
value of its loan and, therefore, is under the scope of incidental powers.

•

4.2

National banks may sell credit life and disability insurance, as an agent for the
insurer.

The bank is prohibited by statute 12 U.S.C. § 1972(1) from conditioning any
extension of credit on the borrower’s purchase of credit insurance from the bank
or one of its subsidiaries.
The First National Bank of Eastern Arkansas Litigation

Although the OCC had ruled for years that national banks could sell DCCs, the question
of the effect of state regulation of credit insurance on those agreements had not been
litigated. In 1987, First National Bank of Eastern Arkansas began offering debt
cancellation agreements as an alternative to credit insurance. Initially, the Arkansas
insurance department stated that it did not object to the practice. However, given the risk
of losing their credit insurance business, credit insurers urged the Arkansas Department

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Debt Cancellation Contracts and State Insurance Regulation
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July 2003

of Insurance to change its position. The Department reversed itself and ruled that debt
cancellation agreements were an “identical alternative to credit insurance,” were subject
to regulation, and the sale of any such agreements would result in litigation by the
Department against the bank. In response, First National Bank of Eastern Arkansas sued
the state insurance department in 1989 seeking a declaration that the Department had no
regulatory authority over the bank in its sale of the debt cancellation agreements. The
District Court ruled in favor of the bank, concluding that the agreements were not credit
insurance and were an incidental power of national banks. The Eighth Circuit Court of
Appeals upheld the lower court ruling in 1990.
In response to the First National Bank of Eastern Arkansas ruling, the NAIC Credit
Insurance Committee discussed the consumer protection problems with unregulated
DCCs compared to credit insurance. The chair of the Credit Insurance Committee,
Missouri Director of Insurance Lewis Melahn, requested a meeting with the OCC to
better understand the OCC’s positions on regulation of DCCs. In an August 24, 1992
letter, the OCC declined to meet with insurance regulators. Appendix 5 provides a copy
of the OCC letter and the minutes of the Credit Insurance Committee’s discussion of
DCCs.
4.3

The OCC Expands Its Rulings

Perhaps emboldened by the First National Bank of Eastern Arkansas rulings, the OCC
moved to expand the powers of federal banks in this area over the following years. On
January 1, 1994, OCC Interpretive Letter No. 640 stated that nationa l banks may offer
debt cancellation agreements that cancel debt in the event of disability or unemployment,
in addition to agreements that cancel debt upon death. In 1996, the OCC expand ed its
rule to include agreements that cancel debt in the event of disability, in addition to
agreements that cancel debt upon death, by deleting 12 C.F.R. 7.7495 and creating 12
C.F.R. 7.1013, which provides that “national banks may enter into a contract to provide
for loss arising from cancellation of an outstanding loan upon the death or disability of
the borrower.”
On April 3, 1998, OCC Interpretive Letter No. 827 stated that a bank could enter a debt
suspension agreement. Under such an agreement, the bank could freeze the credit card
holder’s account for a set period of time for involuntary unemployment, disability, family
leave, or hospitalization. The agreement could also provide for the cancellation of the
debt upon death.
On June 30, 1998, the OCC issued a letter to a national bank stating that the bank could
offer debt cancellation agreements for death, disability or involuntary unemployment on
retail loan products and could purchase a liability policy from one of its insurance
subsidiaries to cover any losses. On that same date, the OCC issued another letter to a
national bank stating that the bank could offer debt deferment agreements that would
freeze the credit card holder’s account for a set period of time for involuntary
unemployment, disability, family leave, or hospitalization.

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Debt Cancellation Contracts and State Insurance Regulation
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4.4

Gramm- Leach Bliley Act

In 1999, Congress passed a comprehensive overhaul of national banking, Gramm- LeachBliley Act, Public Law 106-102 (GLBA). GLBA has several provisions that arguably
affect the regulation of DCCs/DSAs by national banks. By the time of passage of GLBA,
most state insurance departments had conceded the fight over whether DCCs/DSAs could
be regulated as insurance products. The Texas Department of Insurance (TDI) continued
to press the fight. Appendix 6 is copy of a letter issued by the TDI in May 1999 arguing
that DCCs were subject to some state insurance regulation. The banking industry quickly
responded with an alternative legal brief and rebuttal to TDI, a copy of which is provided
in Appendix 7. As discussed below, both opponents and proponents of state regulation of
DCCS/DSAS by national banks argue that GLBA supports their cause. However, until
the courts rule otherwise, most observers believe that GLBA does not permit state
regulation of DCCS/DSAS by national banks.
4.5

OCC DCC/DSA Rulemaking

In 2001, the OCC initiated a rulemaking proceeding to establish regulations for
DCCs/DSAs. The rulemaking was welcomed by banks who sought specific guidelines
for the sale of DCCs/DSAs. By this time, the NAIC and state insurance regulators had
largely given up the fight for jurisdiction over DCCs/DSAs issued by national banks,
thrifts or credit unions and submitted comments asking the OCC to create regulatory
parity between credit insurance and DCCs/DSAs. The regulators and consumer
organizations argued that, since the two products were functional equivalents, less
regulatory oversight of DCCs/DSAs would cause a migration from credit insurance to
DCCs/DSAs by lenders with troubling results for consumers. Appendix 8 is a copy of
the comments submitted by the Center for Economic Justice and the Consumer
Federation of America. The OCC issued its rulemaking decision in August 2002.

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5.

Current Status of States’ Authority over Debt Cancellation Contracts and
Debt Suspension Agreements

The recent DCC/DSA rule promulgated by the OCC became effective June 16, 2003. 6
The final regulation is found in Appendix 9. The OCC summarized the significant
features for the rule as follows:
•
•

•

•

•

It codifies the OCC’s longstanding position that DCCs and DSAs are
permissible banking products.
It establishes important safeguards to protect against consumer confusion and
areas of potential customer abuse. In particular, the final rule prohibits
national banks from offering lump sum, single premium DCCs or DSAs in
connection with residential mortgage loans.
The rule provides for standardized disclosures of key information in
connection with the offer and sale of DCCs and DSAs. The disclosure
requirements are structured to accommodate widely used methods of
marketing DCCs and DSAs, including telephone solicitations, mail inserts,
and so-called “take one” applications.
To the extent feasible, the rules apply consumer protections modelled on the
framework of consumer protections that Congress directed the OCC (and the
other Federal banking agencies) to apply to banks’ insurance sales. National
banks are familiar with these insurance sales requirements, which are
contained in part 14 of the OCC’s regulations, and the approach taken in the
final rule enables banks to harmonize their policies, procedures, and employee
training programs across the two product lines.
The rule addresses safety and soundness considerations presented by DCCs
and DSAs by requiring national banks to manage the risks associated with
these products according to safe and sound banking principles, including
appropriate recognition and financial reporting of income, expenses, assets,
and liabilities associated with DCCs and DSAs, adequate internal controls,
and risk mitigation measures.

In promulgating this rule, the OCC rejected recommendations by state insurance
regulators and consumer organizations to establish minimum benefit standards. The
OCC explain its decisions as follows:

6

The Comptroller delayed indefinitely implementation of certain provisions in the DCC regulation. The
notice of this action and request for comments on the issue are found in Appendix 10. The comments of
CEJ and Consumer Federation of America in response to the action and notice are found in Appendix 11.

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For several reasons, we decline to depart from the basic regulatory approach we
proposed, although the final rule does contain enhanced consumer protection
features beyond those contained in the proposal. First, as the Taylor court
explained, DCCs and DSAs are distinct from credit insurance as a matter of law.
Moreover, we see no evidence that the market for DCCs and DSAs suffers from
the same flaws as the commenters assert prevail in the credit insurance market.
Issuers of DCCs and DSAs do not compete to enlist independent, third-party
sellers to place their product. Instead, every national bank that issues DCCs or
DSAs is its own seller because these products are provided in conjunction with
loans that the bank itself makes. Commenters provided no evidence of impairment
in the market for DCCs and DSAs, but instead relied on concerns regarding
distortions and abuses in the credit insurance market. Thus, we cannot conclude
that the strongest reason given by the commenters in support of fee regulation -dysfunction in the market that disclosures are inadequate to overcome --is present
in the market for DCCs and DSAs. Moreover, as the rule’s express prohibition on
tying makes clear, the choice of purchasing the product is left exclusively to the
customer. We have concluded, therefore, that a regulatory approach that includes
price controls as a primary component is not warranted.
The OCC also rejected recommendations by consumer organizations to prohibit single
fee products:
In the absence of evidence that the abuses identified by the commenters are
occurring in the DCC or DSA market, we have declined to adopt an across-theboard prohibition on lump sum fees. We remain concerned, however, that abuses
similar to those occurring in the credit insurance market not develop with respect
to DCCs or DSAs provided in connection with home mortgage loans. To guard
against that result, the final rule prohibits a national bank from requiring a
customer to pay the fee for a DCC or DSA in a single payment, payable at the
outset of the contract, if the debt that is the subject of the contract is a residential
mortga ge loan. The rule permits single payment contracts in the case of all other
consumer loans, but requires banks that offer the option of paying the fee in a
single payment to also offer the bona fide option of paying for that contract in
periodic payments. In such cases, the bank must also make certain disclosures
related to the fee.
We continue to believe that the approach that best balances encouraging banks to
provide a viable choice of products for consumers with discouraging unfair
practices is to require banks to offer both options so that a customer can choose
between a lower total fee or the availability of a refund. In our view, the potential
for unfairness in a no-refund product lies principally in the fact that the customer
may be induced to pay “up front” for coverage that he or she never receives
because the loan is prepaid. This result is substantially mitigated if the consumer
has the option of DCC or DSA coverage on a “pay as you go” basis. Accordingly,
the final rule retains this provision (as renumbered) with one substantive change.

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The text of the final rule requires that a bank that offers a no-refund DCC or DSA
must also offer the customer a bona fide option to purchase a comparable contract
that provides for a refund. The option to purchase is bona fide if the refund
product is not deliberately structured in such a way, including pricing of the
product, as to deter a customer from selecting that option.
Despite this explanation, the OCC announced on June 14, 2003 – two days before the
effective date of the rule – an indefinite delay in the implementation of the single fee
provisions for certain types of sellers:
The Office of the Comptroller of the Currency (OCC) has determined to delay the
date when compliance is required with certain provisions of the final rule
governing debt cancellation contracts (DCCs) and debt suspension agreements
(DSAs) in order to allow the OCC to consider issues that have recently been
brought to our attention concerning the application of the DCC/DSA rule in the
context of closed-end consumer loan transactions where DCCs and DSAs are
offered through unaffiliated, non-exclusive agents. The delay of the compliance
date applies only to the extent and to the types of transactions described in this
document. In all other circumstances, national banks are required to comply with
the DCC/DSA rule as of June 16, 2003, which is the date on which the rule takes
effect. The OCC also is inviting comment on issues raised by national banks
related to the sale of DCCs and DSAs in connection with closed-end consumer
loans offered through such non-exclusive agency relationships.
In addition, the rule requires a national bank that offers a customer the option to
pay the fee for a DCC or DSA in a single payment also to offer tha t customer a
bona fide option to pay the fee on a periodic basis (“periodic payment option”).
The final rule takes effect on June 16, 2003.
The OCC recently has received information that the periodic payment option
requirement may present unique issues, of which the OCC was previously
unaware, in connection with DCCs and DSAs offered by national banks through
unaffiliated, non-exclusive agents, with respect to certain types of consumer
purchase transactions, most notably car loans made available through automobile
dealers.

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Accordingly, we have determined that it is appropriate to delay the mandatory
compliance date for the periodic payment option in the case of transactions where
unaffiliated, non-exclusive agents of a national bank offer that bank’s DCC or
DSA in connection with closed-end consumer credit, until the OCC has an
opportunity to further evaluate the feasibility of approaches to providing
appropriate customer protections in connection with that type of transaction.
Because the availability of the periodic payment option also triggers certain
disclosures, we also are delaying the time for compliance with certain other
provisions in the DCC/DSA final rule that are linked to the requirement to offer a
periodic payment option, including the requirement to provide the long form
disclosures.
5.1

Impact of OCC Rule on State Jurisdiction over DCC/DSAs

The regulations by the Office of the Comptroller of the Currency (OCC) deprive the
states of authority to regulate the sale by national banks of Debt Cancellation Contracts
(DCCs) and Debt Suspension Agreements (DSAs). The regulation provides:
Scope. This part applies to debt cancellation contracts and debt suspension
agreements entered into by national banks in connection with extensions
of credit they make. National banks’ debt cancellation contracts and debt
suspension agreements are governed by this part and applicable Federal
law and regulations, and not by … State law.
12 C.F.R. 7.31 (c) (emphasis added). The OCC expressly rejected the Texas Insurance
Commissioner’s position that states retain the power to regulate DCCs and DSAs by
national banks as “insurance.” In the Summary of Comments for the final rule making,
the OCC stated:
Many commenters sought clarification about the regulatory framework
that governs DCCs and DSAs. They urged the OCC to clarify that DCCs
and DSAs offered by national banks are not subject to regulation under
State insurance law. One commenter, however, asserted that DCCs and
DSAs are “authorized” insurance products under the Gramm- Leach-Bliley
Act (GLBA) and that States have express authority to regulate them as
insurance, subject only to the preemption standards set forth in section 104
of the GLBA.

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As is described in the Background section of this preamble discussion,
DCCs and DSAs are banking products authorized under 12 U.S.C.
24(Seventh). This final rule, together with any other applicable
requirements of Federal law and regulations, are intended to constitute the
entire framework for uniform national standards for DCCs and DSAs
offered by national banks. Accordingly, the final rule states that DCCs
and DSAs are regulated pursuant to Federal standards, including part 37,
and not State law.
For national banks, therefore, federal law preempts the state’s ability to regulate the
transaction, barring a lawsuit to overturn the OCC’s position. DCCs and DSAs are used
by a variety of lenders, however. This section addresses the extent to which states retain
regulatory authority over DCCs and DSAs by different types of lenders.
5.1.1

National Banks

The OCC’s regulation applies to national banks. 12 C.F.R. § 37.2 (b). Thus, unless the
OCC’s determination is overruled by a court, the regulation preempts any state regulation
of DCCs and DSAs sold by national banks.
The argument against preemption is that the Gramm- Leach-Bliley Act, Public Law 106102 (GLBA) allows states to regulate DCCs and DSAs. GLBA affirms the right of
national banks to sell DCCs and DSAs as “authorized products.” “Authorized products”
are defined to be products which the OCC as of January 1, 1999, “had determined in
writing that national banks may provide as principal.” GLBA § 302(b). Since the OCC,
prior to the grandfather date, has ruled that national banks have the power under the
National Bank Act to underwrite DCCs (12 C.F.R. § 7.1013) and DSAs (OCC
Interpretative Letter No. 827) and since these determinations have not been overturned by
a court of competent jurisdiction, they qualify as “authorized products”, and may be sold
by national banks.
The issue, however, is whether the sale of the products by national banks can be
regulated by the states. Although GLBA allows national banks to sell DCCs and DSAs,
it also expressly reserves the right of states to regulate insurance:
No person shall engage in the business of insurance in a State as principal
or agent unless such person is licensed as required by the appropriate
insurance regulator of such State in accordance with the relevant State
insurance law . . . .

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GLBA § 104(b). Thus, the OCC’s regulation preempts state laws if DCCs and DCAs are
not “insurance,” but not if the products constitute “insurance.” Historically the decisions
by courts and federal agencies were that DCCs and DSAs are not insurance. See, e.g.,
First National Bank of Eastern Arkansas v. Taylor, 907 F.2d 775, 780 (8th Cir. 1990),
cert. denied, 498 U.S. 972 (1990) (holding that DCCs are not insurance). The Texas
Insurance Commissioner, however, has made a well-reasoned argument that DCCs and
DSAs are “insurance” under GLBA. Until a court accepts those arguments, though, the
states will not be able to regulate the sale DCCs and DSAs by national banks.
5.1.2

National Credit Unions

The National Credit Union Administration (NCUA) expressly permits national credit
unions to sell DCCs and DSAs:
The categories of activities in this section are preapproved as incidental to
carrying on your business under Sec. 721.2. The examples of incidental
powers activities within each category are provided in this section as
illustrations of activities permissible under the particular category, not as
an exclusive or exhaustive list. …
(g) Loan-related products. Loan-related products are the products,
activities or services you provide to your members in a lending transaction
that protect you against credit-related risks or are otherwise incidental to
your lending authority. These products or activities may include debt
cancellation agreements, debt suspension agreements, letters of credit and
leases.
12 C.F.R. 721.3 (g). However, unlike the OCC, the NCUA has not preempted state
regulation of those sales. Instead, the NCUA has expressly made those sales subject to
state law:
You must comply with any applicable NCUA regulations, policies, and
legal opinions, as well as applicable state and federal law, if an activity
authorized under this part is otherwise regulated or conditioned.
12 C.F.R. 721.5. Thus, states are not preempted from regulating the sale of these
products by national credit unions.
In a recent Bulletin, NCUA took the position that these products are not insurance:
At least one court has established that a debt cancellation agreement is not
an insurance product regulated by state insurance regulators. It is, in fact, a
two-party contract between the lender and its borrower, outside the
purview of insurance laws.

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May 2003 Letter No. 03-FCU-06, found at http://www.ncua.gov/ref/letters/2003/03FCU-06.pdf. However, whether or not the products are insurance, their rule expressly
makes national credit unions subject to whatever laws the states pass, whether they are
insurance laws or not. And the determination of whether those credit unions are subject
to state insurance laws is up to the state. The definition of “insurance” under federal
laws, which is an issue under federal preemption issues, is not relevant here because this
is not a preemption issue.
5.1.3

National Savings & Loans

The Office of Thrift Supervision (OTS) regulates national savings and savings and loan
associations. The OTS has ruled that national savings and loan associations may sell
DCCs:
Institutions may directly provide debt cancellation contracts on originated
loans, subject to certain safeguards. Debt cancellation typically provides
for the repayment of a loan in the event of the borrower’s death or
disability, with exceptions for late payments, late charges, loans in default
and deaths due to suicide.
Office of Thrift Supervision January 2000 Regulatory Handbook 217.5, found at
http://www.ots.treas.gov/docs/74040.pdf. See also, OTS Letter dated December 18,
1995, found at http://www.ots.treas.gov/docs/56521.pdf. We found no rule preempting
state laws from regulating the sale of DCCs and DSAs by national savings and loan
associations. Therefore, states maintain the power to regulate those sales.
5.1.4

State Banks, Credit Unions, and Savings & Loans

Federal regulations regarding DCCs and DSAs do not apply to state-chartered banks,
credit unions, and savings and loans. Thus, there is no preemption of the states’ right to
regulate their sales of DCCs and DSAs.
Many states, however, have “parity” statutes that give the state-chartered institution the
same rights as its federally-chartered counterpart. For instance, Texas’ constitution
provides:
A state bank created by virtue of the power granted by this section,
notwithstanding any other provision of this section, has the same rights
and privileges that are or may be granted to national banks of the United
States domiciled in this State.
TEX. CONST. ART . § 16 (c). Approximately 40 states have similar parity provisions in
their laws. Thus, for instance, a state-chartered bank in one of those states could argue
that it has the right to sell DCCs and DSAs free of any state regulation because national
banks have that right.

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While the resolution of that argument is outside the scope of this report, it is also not
relevant to the question of state’s power. States can change their parity statutes if they
choose to do so. The issue is whether federal law preempts their power to regulate the
sale of DCCs and DS As by state-chartered institutions. Clearly it does not, for the
applicable federal rules do not apply to state-chartered institutions. Thus, although a state
may need to amend its parity statute, it retains the power to regulate the sale of DCCs and
DSAs by state-chartered institutions.
5.1.5

Installment Sales Contracts and Other Lenders

For similar reasons, the OCC ruling does not prohibit states from regulating the sale of
DCCs and DSAs by other lenders, including installment sales contracts. The OCC ruling
only applies to national banks. Federal preemption of state law is not favored and a party
asserting preemption “must overcome the presumption against finding pre-emption of
state law in areas traditionally regulated by the States.” California v. ARC Am. Corp.,
490 U.S. 93, 101 (1989). States have traditionally had regulatory authority over
installment sales contracts, small consumer loans, pay day loans and other transactions
that could be the subject of a DCC or DSA. Nothing in the OCC regulation even
attempts to extend the preemption doctrine to these other lenders and sellers.
The determination of whether the states retain regulatory authority over DCCs and DSAs
by lenders other than national banks does not depend on whether the product is insurance.
Historically, the debate over states’ ability to regulate DCCs and DSAs sold by national
banks did depend on whether the products were “insurance.” See, First National Bank of
Eastern Arkansas v. Taylor, 907 F.2d 775, 780 (8th Cir. 1990), cert. denied, 498 U.S. 972
(1990). That analysis was necessary in the preemption determination because federal law
expressly left to the state the regulation of insurance. Even if the products are not
insurance, however, states maintain regulatory authority over them in the absence of a
federal law preempting the states’ regulatory powers. Since no federal statute regulates
these products in installment sales contracts and other transactions outside the purview of
the OCC, states retain the authority to regulate these transactions.

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6.

Why Lenders Move from Credit Insurance to DCCs/DSAs

Lenders have moved from credit insurance to DCCs/DSAs because DCCs/DSAs are not
subject to state regulation, which leads to the following advantages compared to credit
insurance:
•
•
•
•
•
•

No oversight or limitations on fees charged
Few limitations on product design and benefit provisions – no restrictions on
bundling, flexibility in product design
Ability to use one product nationally
No agent licensing requirements
No form or rate filing requirements
No premium taxes

The bottom line for lenders is that DCC/DSA programs are far less expensive to develop
and deploy, are not subject to any oversight or limitations on pricing and are not subject
to any oversight or requirements for benefits. In theory, lenders should be able to offer
greater benefits per dollar of fee paid for DCC/DSA than the benefits consumers received
per dollar of credit insurance premium because of substantial reduction in administrative
costs. These cost reductions arise from developing and using one product and one form
countrywide instead of having to file and obtain approval for hundreds of rate and form
filings and keeping current on rate changes in any one of 51 jurisdictions. Other cost
reductions arise from the absence of any agent licensing requirements and premium tax.
If the market for DCCs/DSAs were competitive, the great reduction in administrative
costs for DCCs/DSAs would flow to consumers as greater benefits. However, because,
DCC/DSA markets are not competitive, the benefits to consumers as a percentage of fees
paid has shrunk dramatically for DCCs/DSAs in comparison to credit insurance.

7.

DCCS/DSAS Products Today:
Lack of Regulatory Protections Causes Poor Value for Consumers

DCCS/DSAS products are defined by the type of benefit, types of events covered,
eligibility for coverage and the types of payment methods.
7.1

Types of Benefits

Debt Cancellation: For lump sum benefit programs, such as death, the entire outstanding
loan amount is cancelled. The amount of the benefit is equal to the amount of the
outstanding loan balance. For monthly benefit programs, the requirement to make the
monthly payment is canceled. The amount of the benefit is equal to the monthly payment
– the amount of principal reduction in the required monthly payment plus the loan
interest for the month. Benefits under a debt cancellation program are generally
equivalent to those under a credit insurance program with the same triggering events.
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Under a debt cancellation program, the consumer’s debt is either eliminated (lump sum
benefit) or is reduced (by the principal portion in the monthly payment).
Debt Suspension / Debt Deferment / Debt Freeze: For monthly benefit programs, the
requirement to make a monthly payment is canceled and the interest for the month is
canceled. Stated differently, a consumer can skip a payment without incurring any new
interest charges or any penalty fees. The amount of the benefit is equal to the loan
interest for the month. Under a debt suspension program, the amount of the consumer’s
debt neither decreases nor increases.
Payment Holiday: For monthly benefit programs, the requirement to make a monthly
payment is canceled. The consumer’s debt continues to accrue interest during the
covered month, but no penalty fees are assessed. There is no monetary value to payment
holiday benefit. Under a payment holiday program, the consumer’s debt increases.
7.2

Types of Events Covered

Death – includes death from any cause with exception of certain pre-existing conditions.
Accidental Death – includes only death from certain accidental events. The incidence of
accidental death is a small fraction of the normal death benefit. State insurance
regulators have never permitted credit life policies to be limited to accidental death
events only.
Dismemberment – includes the loss of specified body parts.
Disability – includes total or partial disability, permanent or temporary disability.
Involuntary Unemployment – includes certain types of involuntary unemployment, such
as a layoff or firing or, in some instances, a strike.
Family Leave of Absence – includes an official leave of absence from a job for specified
events, such as childbirth or illness of immediate family member.
Divorce – includes the filing of, or completion of, a divorce.
Life Events – includes marriage, divorce, childbirth, adoption, new home purchase,
moving to a new home or entering college or graduate school for the first time.
Hospitalization – includes admission and stay in a hospital for at least one night with
admission and care directed by a physician.
Military Service – includes being called to active duty in military reserve or guard unit
for at least 31 consecutive days.

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Disaster Relief – includes direct impact by a declared federal disaster and suffering a loss
of at least $500 or missing at least 5 consecutive days of work.
GAP – provides coverage for the difference between the amount owed on a loan and the
actual cash value of the collateral pledged in support for the loan. GAP is typically sold
by auto dealers to cover the difference between the amount remaining on a loan and the
amount an insurance company will pay for a totaled vehicle under the personal auto
policy. The gap that GAP covers arises because of the increased term of auto loans over
the past decade, which results in vehicles depreciating faster than the principal is paid off
on an auto loan.
Appendix 12 provides a table of various DCC/DSA programs. Appendix 13 contains
copies of DCC/DS A offers and/initial disclosures.
7.3

Types of Eligibility

Single versus joint – coverage is provided for either the borrower or the borrower and
spouse. When joint coverage is provided, benefits occur when either the borrower or
spouse encounters a triggering event.
Age restrictions – consumers over a certain age are ineligible for certain benefits in some
DCCs/DSAs programs.
Employment Restrictions – full time employment prior to and at the time of program
initiation is a typical requirement for disability, involuntary unemployment and leave of
absence benefits. Self- employed borrowers are typically ineligible for these three
benefits.
Use of Card Restrictions – many monthly benefit DCCs/DSAs programs and most debt
suspension programs freeze credit card use if a borrower is receiving any benefits under
the DCCs/DSAs program. A borrower who, for example, encounters disability or
unemployment and who is enrolled in a DCCs/DSAs program must choose between the
benefits under the program and the ability to continue using the credit card.

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7.4

Types of Payment Methods

Monthly Pay – typically used for open-end credit, such as credit cards. The monthly fee
is typically based on the amount of the outstanding loan or debt balance. A few monthly
fee programs are offered in connection with closed-end (installment) loans. Given the
great flexibility in designing benefit packages, lenders can structure DCCs/DSAs
programs so the likelihood of covered event does not fluctuate dramatically over the
period of the installment loan. Stated differently, there is no reason why monthly pay
DCCs/DSAs products could not be offered in connection with installment loans.
Single Fee – typically used for installment loans and typically added to the loan amount
and financed.
7.5

Current DCCS/DSAS Programs Offered By Lenders

Lenders’ use of DCCs/DSAs has grown dramatically in the past three years, particularly
in connection with credit cards. Since 1999, most major credit card issuers – Citicorp,
Discover (Sears), Bank of America, Fleet Bank, Advanta, Bank One, Chase, MBNA,
Providian and private label card issuers like Target, have replaced their credit insurance
packages with DCCs/DSAs programs. American Express continues to sell credit
insurance. Several lenders have switched to DCCs/DSAs for installment loans, most
prominently Bank of America, but penetration in the installment loan market remains
small compared to that in the credit card market.
Appendix 12, a summary of the DCC/DSA programs offered by major lenders, shows
that DCCs/DSAs programs have evolved into a set of benefits that differ significantly
from the coverages provided under the credit insurance program. For example, the death
coverage has largely been replaced with an accidental death benefit. The expected claims
for accidental death coverage are a very small fraction – perhaps 5% -- of the expected
claims for the traditional death coverage. Further, the debt cancellation benefit that is
equivalent to the payment benefits provided under credit insurance policies have largely
been replaced with debt suspension products. Debt suspension provides a far smaller
benefit level than debt cancellation or credit insurance.
7.6

Value to Consumers

Consumers receive far fewer benefits in relation to the fees charged for DCCs than under
credit insurance – and consumer organizations have long criticized credit insurance as
providing a poor value to consumers!
The expected loss ratio for a credit insurance package is in the range of 40% to 60%. In
practice, the actual loss ratios – the ratio of claims paid on behalf of consumers to
premiums paid by consumers for the policies in question – are lower. Although the
countrywide average loss ratio for credit life and credit disability has generally been in
42% to 46% range, the addition of credit unemployment and credit property brings the

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overall average down. Actual loss ratios by state for credit life and credit disability in the
1998-2000 period ranged from 30% to 69%. When credit unemployment and credit
property are added, the range of state loss ratios was 25% to 61%. Some improvement in
the low credit unemployment and credit property loss ratios has occurred due to higher
unemployment and some action by state regulators to improve benefits and/or lower
rates.
In contrast, the expected “loss ratio” for the debt suspension agreements offered by credit
card issuers is generally in the 3% to 5% range. Actual ratios of benefits in relation to
fees paid by consumers are likely even lower because of the restriction on card use if a
borrower is receiving a benefit. Many consumers will likely forego the debt suspension
benefit once they recognize they will lose the use of the card if the do so. Given that
benefits are triggered by events that impair a borrower’s income, it is during these times
that the borrower is in greater need of borrowing capacity. When faced with the choice
of a modest benefit or the loss of use of a credit card, we believe many consumers who
paid for benefits and who are eligible for benefits will forego the benefits.
Appendix 9, the comment letter of CEJ and CFA to the OCC on proposed DCC/DSA
rules, contains a comparative analysis of benefits to costs of credit insurance and a
Citicorp DSA program offered at the time. The credit insurance package included credit
life, credit disability and credit involuntary unemployment. The DSA package included
disability and unemployment. The table below compares costs and expected benefits
under the two programs. The cost of the DSA program is almost 80% higher than the
credit insurance program but the expected DSA benefits are only one-seventh of those
from the credit insurance program. Even assuming that the lender incurs some
administrative costs in the DSA program that the lender does not incur with the credit
insurance program, the DSA profit is over 80% of a higher monthly fee.
Table 3
Comparison of 2001 Citicorp DSA program to Texas Credit Insurance Program

Cost per $100 Outstanding Balance
Monthly Fee, $2,000 Balance
Expected Monthly Benefits, $2,000 Balance
Expected Benefits, % of Fee
Expected Monthly Revenue to Lender, $2,000
Balance
Expected Revenue to Lender, % of Fee

27

2001 Citicorp
DSA
$.690
$13.80
$0.56
4.1%
$13.24

2001 TX Credit
Insurance
$.386
$7.72
$3.86
50.0%
$2.32

95.9%

30%

Debt Cancellation Contracts and State Insurance Regulation
A Report to FIRST by the Center for Economic Justice
July 2003

The table below provides estimates of the percentage of expected benefits to fees paid for
several of the DCC/DSA programs summarized in Appendix 12. As stated elsewhere, we
believe that even these tiny benefit levels are likely overstated because of the common
restriction on credit card use if a consumer activates DCC/DSA program benefits. The
Fleet Credit Protector program has a significantly higher benefit ratio than the other
programs (although “higher” is clearly relative given the low values of all programs)
because it is one of the few programs that still offers a death benefit. Most of the other
programs have either eliminated the death benefit completely or switched to an accidental
death benefit, which provides only a small percentage of the benefits of a “regular” death
benefit.
Table 4
Estimated Benefits as a Percentage of Fees for Various DCC/DSA Programs
Program

Ratio of Expected
Benefits to Fees Paid

Fleet Card Credit Protector
Citicorp Card Credit Protection
Bank of America Cardholder Security Plan
Discover Card AccountGuard
Bank One First Protect
Chase Card Payment Protection Plan

7.7

11%
3%
2%
2%
3%
2%

Aggregate Dollar Impact on Consumers

From 1995 to 2000, credit card credit insurance premiums grew to about $2 billion
annually. Appendix 14 reviews the annual written premiums, paid losses and loss ratios
for monthly outstanding balance credit life, credit disability and credit involuntary
unemployment sold in connection with open-end loans. The highest loss ratios – highest
benefit to premiums paid for consumers – came from credit life where about 60% of the
premium was returned as a benefit. The ratios for credit disability were about 45% and
the ratios for involuntary unemployment ranged from 6% to 15%, depending upon
unemployment rates. Most current DCC/DSA credit card programs have eliminated the
coverage providing the greatest value to the consumer – the death benefit. Aggregate
loss ratios for all coverages combined were about 40%.
The table below shows our estimates of the aggregate dollar impact of credit card
lenders’ movement from credit insurance to DCC/DSAs. We estimate, conservatively,
that consumers will lose over 80% of the benefits they received under credit insurance –
around $700 million annually. We also estimate that overall costs to consumers – just for
credit card debt protection – will increase at least 25%. As lenders replace installment
loan credit insurance with DCCs/DSAs, the cost to consumers – in increased fees and
reduced benefits – will grow.
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Debt Cancellation Contracts and State Insurance Regulation
A Report to FIRST by the Center for Economic Justice
July 2003

Table 5
What the Shift from Credit Insurance to DCC/DSA Means
For Credit Card Consumers
Credit Insurance
$2,000,000,000
40%
$800,000,000

Premiums / Fees Annually
Benefit Ratios
Benefit Dollars
Estimate Increase in Costs
Estimate Decrease in Benefits

25.0%
-84.4%

Decrease in Benefits, Constant Fees

8.

DCC/DSA
$2,500,000,000
5%
$125,000,000

$700,000,000

How to Effectively Regulate DCCs/DSAs:
Eliminating Abuses While Relying on Market Forces

The current OCC DCC/DSA rule does not adequately protect consumers from market
abuses in the sale of the products. We suggest the following changes are necessary to
effectively regulate DCCs/DSAs for consumer protection.
8.1

Minimum Ratio of Consumer Benefits to Consumer Costs

Why should there be a required minimum benefit level and a required minimum ratio of
benefits to fees paid? Because the DCC/DSS market is not sufficiently competitive to
enable consumers to exert market pressure on lenders to ensure reasonable benefits or
reasonable benefits in relation to fees paid. We need to examine two markets – revolving
loans (credit cards) and installment loans.
Credit card: There is an absence of information to enable a consumer to make an
informed decision. Consumers have no idea how likely they are to encounter one of the
covered events. For example, very few, if any consumers, will know that there is a huge
difference in a benefit for death versus a benefit for accidental death. To illustrate, credit
life insurance covers death from any cause, including suicide after a waiting period.
Most credit card DCC/DSA programs have limited the coverage to accidental death. The
frequency of accidental death is a small fraction of the frequency of the regular death
benefit – so much so that one actuary helping lenders design the DCC products calls it a
virtual no-cost give away. Consumers will typically make decisions regarding
DCCs/DSAs based on incorrect assumptions about the likelihood of an event happening
to them.

29

Debt Cancellation Contracts and State Insurance Regulation
A Report to FIRST by the Center for Economic Justice
July 2003

Many DCC/DSA programs include a provision that prohibits the consumer from using
the credit card if he or she is receiving any benefit under the program. So, if a consumer
becomes unemployed, the consumer must stop using the card to charge purchases in
order to receive the benefit – which in most cases is only a deferral of payment. Most
consumers who have lost a job will likely have a greater need to use credit – a need
greater than any benefit of deferring the past balance.
Installment Loan: There are the same problems with credit card-based DCCs and DSAs
plus the problems associated with unfair and deceptive sales practices of some lenders.
There are the same opportunities for unfair and deceptive sales practices with DCC
/DSAs sold in connection with installment loans as is the case with credit insurance sold
in connection with installment loans.
The bottom line – as demonstrated by current market results for DCCs/DSAs – is that
consumers are often purchasing products with very few, if any benefits and the value of
the benefits compared to the fees paid is miniscule. These results simply would not occur
in a truly competitive market.
We recommend a requirement for a minimum ratio of benefits to fees. The lender will
keep track of this ratio and if the ratio of benefits to fees collected drops below 60%, the
lender must rebate fees for the period in an amount sufficient to achieve the 60% benefit
ratio. Practically, lenders will plan on benefits that exceed 60% by a few percentage
points to ensure no rebates are required. The minimum benefit ratio requirement must be
accompanied by a date reporting requirement to allow the public to monitor product
benefit levels.
Why is 60% reasonable? State insurance regulators have determined that a 60%
minimum loss ratio for the major credit insurance coverages – life, disability,
unemployment and property. Lenders and retailers offering DCCs/DSAs have much
lower costs to design and deliver the product because:
•
•
•
•
•
•

One national product instead of multiple products in 51 jurisdictions
No agent licensing requirements as with credit insurance
No product filing and approval requirements as with credit insurance, which
requires a form and rate filing for each coverage (covered event) in each state
No maintenance of state-specific rates, rules – one product with one
description
No insurance regulatory filings, such as statutory annual statements
No insurance premium tax

30

Debt Cancellation Contracts and State Insurance Regulation
A Report to FIRST by the Center for Economic Justice
July 2003

Further, the minimum benefit ratio should start at 60% and increase with the cost of the
product:
Cost
up to
$0.500
$0.501
$0.749
$0.750
$0.999
$1.000
$1.249
$1.250
$1.499
$1.500
$1.749
$1.750
$1.999
$2.000 or greater

Min. Ratio
60.0%
62.5%
65.0%
67.5%
70.0%
72.5%
75.0%
77.5%

It should be noted that there is no need to adjust these percentages because of inflation in
lender expenses. Any inflation in lender expenses will likely be met by an increase in the
average amount of the loan balance. Consequently, over time, lenders will get more
expense dollars even with a constant rate and benefit ratio.
Compared to credit insurance, cost of developing and delivering the product is
considerably less. If state insurance regulators have determined that a 60% minimum is
reasonable for credit insurance, and costs are considerably lower for DCCs/DSAs, then a
60% minimum ratio of benefits to fees is certainly reasonable for DCCs/DSAs.
8.2

Prohibit financed debt cancellation / debt suspension products

There is no longer a need for single fee, financed debt cancellation products. The origins
of single premium credit insurance were in an era of short-term loans, low- interest rates
and no automated loan systems. Lenders can easily create DCC programs with benefit
exposure that does not dramatically change over the duration of the loan and, therefore,
are amenable to monthly payments based on outstanding balances. There is an
opportunity – and a need – not to recreate the problems with single premium credit
insurance. There is simply no need for financed single fee DCCs/DSAs – other than
excessive profitability for lenders and auto dealers – because current technology and
flexibility in product design allow the development of monthly benefit / monthly fee
products for use with installment as well as revolving loans.
8.3

Improved Disclosures to Consumers

Disclosures should include information on the number of times any benefit is provided
(benefits for any of the covered events) under the DCC/DSA program per 1,000 loans /
accounts and the number of times a benefit a benefit is paid because of each of the
specific covered events) per 1,000 loans / accounts. For example, with the Citigroup
Credit Protector Program, the disclosure would be:

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Debt Cancellation Contracts and State Insurance Regulation
A Report to FIRST by the Center for Economic Justice
July 2003

Outstanding Balance Canceled
A benefits for long term disability per 1,000 accounts in 12 months
B benefits for accidental death per 1,000 accounts in 12 months
Minimum Due Canceled
D benefits for life events per 1,000 accounts in 12 months
Balance Deferred (24 month maximum)
X benefits for job loss per 1,000 accounts in 12 months
Y benefits for short term disability per 1,000 accounts in 12 months
Balance Deferred (3 month maximum)
R benefits for family leave per 1,000 accounts in 12 months
M benefits for natural disaster per 1,000 accounts in 12 months
Balance Deferred (1 month)
H benefits for hospitalization per 1,000 accounts in 12 months
Balance Deferred (No limit)
G benefits for military call to duty per 1,000 accounts in 12 months
Total
Z benefits for any covered event per 1,000 accounts in 12 months
8.4

Data Reporting / Public Access

There is a need for the public to learn the level of fees and benefits for various types of
products to enable groups like the Center for Economic Justice, the Consumer Federation
of America and Consumers Union, as well as financial advisers, to analyze the
DCC/DSA products and identify the best values. There is a need for public disclosure to
enable fair lending groups to evaluate the availability and affordability of these products
on consumer groups for whom the products would be most useful. There is a need to
make this informatio n public to make the markets for the products more competitive by
empowering consumers with better information. The information to be reported –
number and amount of fees collected broken out by DCC/DSA product package and
number and amount of benefits provided broken out by covered event – is not trade secret
information. There are literally only a few actuaries and product administrators who are
helping lenders and retailers design the products. Any lender or retailer can accurately
judge the cost of any set of benefits by consulting with one of these actuaries or product
administrators. The only people who don’t know how much benefit is provided and how
frequently those benefits are provided are the consumers purchasing the product.

32