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| ## Comptroller of the Currency                                        |
|                                                                       |
| > Administrator of National Banks                                     |
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Washington, DC 20219

**Interpretive Letter #1028**

**May 2005**

May 9, 2005 **12 CFR 37**

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Re: **\[ \]** ("Bank")

Dear **\[ \]**:

We are writing in response to your inquiry for an interpretation of the
Office of the Comptroller of the Currency's ("OCC's) Debt Cancellation
Regulation at 12 C.F.R. Part 37. You asked for our views concerning
application of 12 C.F.R. § 37.3(a) to a national bank's financing for a
debt cancellation feature on an automobile loan. In particular, you
inquired about so-called "Guaranteed Automobile Protection" ("GAP") debt
cancellation.[^1]

We understand national banks and third party providers often offer GAP
in connection with a customer obtaining financing on the purchase of an
automobile.[^2] Specifically, you inquired whether a national bank would
engage in a prohibited arrangement under section 37.3(a) by offering
financing for the bank's own GAP feature in connection with the
automobile loan.[^3] If the customer elects the bank's optional GAP
feature, the customer pays an additional fee in cash or rolled into the
financing of the underlying loan. For the reasons discussed below, we
would not find a violation under section 37.3(a) in the described
situation because we view the underlying loan and the GAP feature as a
single product, and the financing arrangement does not, in our view,
create a separate product.

The OCC promulgated Part 37 to establish standards governing debt
cancellation contracts ("DCCs") offered by national banks and to ensure
the banks provide them consistent with safe and sound banking practices
and subject to appropriate consumer protections.[^4] Part 37 is very
clear that a bank-permissible DCC is a loan term or contractual
arrangement modifying loan terms linked to the bank's extension of
credit.[^5] A DCC does not function as a separate product and the bank
does not separately offer it to third parties as a product. By its
terms, the DCC only arises in the context of a bank's own loans; the
customer typically agrees to pay an additional fee to the bank for the
loan's DCC feature.[^6] The effect of the DCC is to extinguish the
borrower's obligation to repay under the otherwise operative provisions
of the underlying loan.[^7] The bank's ability to adjust the terms of
loan repayment is an integral component to its authority to lend. The
payment of a fee related to the DCC is inseparable from the DCC feature
itself. The fee is just an increase in the price of the loan package in
exchange for the loan incorporating an additional term or provision that
benefits the borrower and reflects the bank's assumption of risk related
to GAP debt cancellation. Thus, we believe the financing arrangement,
which permits the fee to be paid over a period of time, is an integral
part of the loan and its DCC feature, and is not a separate product for
purposes of Part 37.

Part 37 includes an express provision, 12 C.F.R. § 37.3(a), that
prohibits a national bank from making an automobile loan conditioned on
the customer's purchase of a DCC, such as a GAP feature, from the
bank.[^8] The regulation's preamble notes that a DCC may be offered and
purchased either contemporaneously with the other terms of the loan
agreement or subsequently.[^9] The OCC views the loan and the GAP
feature as a single product, and the prohibition in 12 C.F.R. § 37.3(a)
is not intended to apply separately to the financing arrangement for the
DCC.

Accordingly, for purposes of 12 C.F.R. § 37.3(a), the OCC views a
national bank's extension of credit in connection with an automobile
loan with a GAP DCC feature as a single product, and does not
contemplate any separate product related to financing for the GAP
feature. We trust this is responsive to your inquiry.

Sincerely,

**signed**

Daniel P. Stipano

Acting Chief Counsel

[^1]: This letter addresses the OCC's views under 12 C.F.R. § 37.3(a) in
    connection with a national bank's automobile loan that includes a
    GAP feature offered by the bank. We understand the Bank currently is
    in litigation involving tying allegations related to certain
    practices concerning GAP. This letter expresses no opinion on the
    merits of the specific tying allegations against the Bank related to
    its practices concerning GAP offered in connection with its
    automobile loans.

[^2]: GAP provides coverage for the "gap" between what the customer's
    primary insurance company will pay on the vehicle (usually the
    actual present value as determined by the insurance company, less
    any deductible) and what the customer still owes on the extension of
    credit. The "gap" exists because vehicle value typically depreciates
    on a steeper curve than the balance of the extension of credit
    declines in the first years of the transaction.

[^3]: We understand that the bank does not condition the financing for
    the automobile on the customer's purchase of the bank's GAP
    coverage.

[^4]: *See* 67 Fed. Reg. 58962 (Sept. 19, 2002). The OCC has recognized
    national banks may provide GAP as a DCC.

[^5]: As defined in part 37, a DCC is "a loan term or contractual
    arrangement modifying loan terms under which a bank agrees to cancel
    all or part of a customer's obligation to repay an extension of
    credit from that bank upon the occurrence of a specified event."
    12 C.F.R. § 37.2(f). The definition provides the agreement may be
    separate from or a part of other loan documents.

[^6]: *See* 12 C.F.R. § 37.5 (method of payment of fees). The fee may be
    a lump sum payable at the outset of a loan (that may be financed
    over the term of the loan), or the fee may take the form of a
    monthly or other periodic payment.

[^7]: *See* 67 Fed. Reg. at 58965.

[^8]: Section 37.3(a) provides: "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." 12 C.F.R.
    § 37.3(a).

[^9]: *See* 67 Fed. Reg. at 58965.