**Interpretive Letter #903**

December 28, 2000 **January 2001**

**12 USC 24(7)**

**Re: Debt Suspension Products**

Dear **\[ \]**:

This responds to your request that the Office of the Comptroller of the
Currency ("OCC") confirm that **\[ \]** (the "Bank") may offer its
credit card members ("Cardholders") debt suspension agreements. For the
reasons discussed below, we agree that the proposed activity is
permissible for the Bank under Section 24(Seventh) of the National Bank
Act because the activity is part of the expressly-authorized lending
function of national banks and also because it is incidental to the
business of banking.

# Background

Under the proposed debt suspension agreements, the Bank will agree, in
exchange for the payment of a monthly fee by each participating
Cardholder, to "freeze" the Cardholder's account for up to 24 months (up
to 3 months for a leave of absence) in the event that the Cardholder
becomes involuntarily unemployed, hospitalized, disabled, or takes a
voluntary leave of absence from work. While a credit card account is
"frozen," no principal payment, finance charges or other fees will be
due; no finance, late or other charges will accrue; and the bank will
not send any negative report to any credit agency due to the freeze.
During the "freeze," the Cardholder will not be permitted to use the
credit card for additional charges and will be asked to discontinue
preauthorized charges to the account, e.g., subscription payments.[^1]
Once a "freeze" expires, the credit card account will be reactivated and
the Cardholder will be required to resume its minimum monthly payments.
Normal rates and fees will then apply to the account.

Participation will be offered to Cardholders on an optional basis. In
order to enroll or activate a benefit, the Cardholder's account must be
open and not delinquent. The Bank may also establish a waiting period
for new enrollees before they may claim a debt suspension benefit. After
initial qualification for a deferment benefit, the Cardholder must
demonstrate continuing eligibility in order to continue receiving the
benefit. The Cardholder may cancel the agreement at any time and may do
so within 30 days of initial enrollment and receive full credit for any
fees charged.

# Discussion

**A. Business of Banking Relations**

The National Bank Act provides that national banks shall have the power:

> \[to\] exercise\...all such incidental powers as shall be necessary to
> carry on the business of banking; by discounting and negotiating
> promissory notes, drafts, bills of exchange, and other evidences of
> debt; by receiving deposits; by buying and selling exchange, coin, and
> bullion; by loaning money on personal security; and by obtaining,
> issuing, and circulating notes\...

12 U.S.C. § 24(Seventh).

The Supreme Court has held that this "powers clause" is a broad grant of
the power to engage in the business of banking, including the five
specifically recited powers and the business of banking as a whole.
*See* *NationsBank of North Carolina, N.A. v. Variable Life Annuity
Co.*, 513 U.S. 251 (1995) ("*VALIC*"). Many activities that are not
included in the enumerated powers are also part of the business of
banking. Judicial cases reflect three general principles used to
determine whether an activity is within the scope of the "business of
banking": (1) is the activity functionally equivalent to or a logical
outgrowth of a recognized banking activity; (2) would the activity
respond to customer needs or otherwise benefit the bank or its
customers; and (3) does the activity involve risks similar in nature to
those already assumed by banks.[^2]

**1. Functionally Equivalent to or a Logical Outgrowth of Recognized
Banking Functions**

Lending is one of the expressly enumerated powers in 12 U.S.C. §
24(Seventh). Part of any lending transaction is the negotiation of the
terms of the obligation, including the interest rate, due dates of
payment, etc. Loan agreements often state the consequences of default,
whether those consequences are penalties, repossession of collateral, or
acceleration of the debt obligation. In the case of a debt suspension
product, the parties have negotiated an option for the debtor to cease
payments for a time, under specified circumstances, without adverse
consequences. This type of contractual provision is no less a part of
lending than any of the various other terms (covenants, security
interests, etc.) that are part of a loan agreement. The authority of a
national bank to offer debt suspension products is, therefore, an
inherent part of its express authority to make loans.[^3]

Additionally, debt suspension products adjust an outstanding obligation
of a customer in a way resembling, but more limited than, a debt
cancellation agreement.[^4] Like a debt cancellation contract, a debt
suspension product helps to protect the borrower against the risk of
financial hardship in times of adversity. A debt suspension product
simply interrupts the obligation to pay for a specified time, rather
than cancels it. From the bank's perspective, a debt suspension product
provides a mechanism for the bank to manage and obtain compensation for
the credit risk that it undertakes in making a loan. Thus, it is a very
logical outgrowth of the bank's express lending authority.

**2. Respond to Customer Needs or Otherwise Benefit the Bank or its
Customers**

As you note in your letter, a debt suspension product is finely tuned to
the potential duration of financial problems posed by temporary
situations such as involuntary unemployment and hospitalization. For
these types of situations, suspension of the debt serves the customer's
need for relief from financial pressure while also protecting the bank's
interest in the eventual repayment of the obligation. A customer who
otherwise would suffer long-term damage to his or her credit rating can
instead survive a period of difficulty with his or her standing as a
borrower intact.

For the Bank, debt suspension products provide a source of income, from
the fees charged for the debt suspension option, to offset credit losses
on credit cards. The agreements also help both the Bank and the customer
manage temporary situations that might otherwise result in default on
the customer's obligations, thereby enhancing the Bank's ability to
eventually obtain repayment from the customer. Additionally, by
providing a useful option for customers, debt suspension products could
increase the competitiveness of the Bank's credit card offerings.

**3. Risks Similar in Nature to Those Already Assumed by National
Banks**

In times of financial stress, some borrowers will fail to repay with or
without a debt suspension product. The risk assumed when a bank provides
a debt suspension product is similar to the type of risk that the bank
assumes when it makes a loan or provides a debt cancellation contract as
part of a loan. In any of these situations, the bank accepts the risk
that the borrower may be unable to repay some or all of the loan. The
Bank's proposal would permit the Bank to obtain compensation for its
assumption of this risk and the additional cost of temporarily foregoing
the collection of interest.

#  B. Incidental to the Business of Banking

As the Supreme Court established in the *VALIC* decision, national banks
are also authorized to engage in an activity if that activity is
incidental to the performance of an activity that is part of the
business of banking. An activity is incidental to the business of
banking if it is "convenient and useful" in the conduct of the banking
business. *Arnold Tours, Inc. v. Camp*, 472 F.2d 427 (1^st^ Cir. 1972).

The OCC and the courts have long authorized national banks to engage in
credit-related activities that protect the bank and the borrower against
a variety of credit-related risks. The OCC's approvals and court
holdings concluded that these activities are incidental to a bank's
lending activities because they protect banks' interest in their loans
by reducing the risk of loss if borrowers cannot make their loan
repayments.[^5]

The rationale behind these OCC precedents and court cases also is
applicable to the Bank's proposal. A debt suspension product provides a
convenient and useful way for the Bank and its borrowers to manage the
risk of nonpayment due to temporary financial hardship. As was discussed
above, it protects the bank by providing a source of compensation for
the credit risk that is part of the transaction, and it protects the
borrower from long term credit damage during an interval of financial
difficulty.

# Conclusion

Based on the foregoing facts and analysis, we conclude that providing
debt suspension products in connection with a bank's credit card
business is permissible for the Bank pursuant to section 24(Seventh) of
the National Bank Act. This conclusion relates only to the
permissibility of debt suspension agreements under the National Bank
Act. The Bank should, of course, satisfy itself regarding the treatment
of such agreements under any other applicable laws and provide
appropriate disclosures to fully inform consumers about the relevant
costs and terms, such as may be required under the Truth in Lending Act
regulations or other applicable regulation or supervisory guidance. In
this regard, I note that the OCC has issued an advance notice of
proposed rulemaking addressing debt cancellation and suspension
products. The Bank's product would be subject to any final regulation
adopted as a result of that rulemaking. [^6]

Prior to conducting the described activities, the Bank should consult
with its examiner-in-charge or with the appropriate supervisory office
to ensure that its program will comply with reporting and reserving
requirements as associated with providing debt cancellation products.
*See* 61 Fed. Reg. 4852 (1996).

Sincerely,

**-signed-**

Jonathan Rushdoony

District Counsel

[^1]: The initial debt suspension agreements will require the Cardholder
    to discontinue preauthorized transactions, however, the Bank will
    monitor the level of such transactions after implementation of the
    program in order to evaluate other approaches. If the Bank
    concludes, after assessing the risk, that there are more "customer
    friendly" options to discontinuing preauthorized charges, the Bank
    may decide to allow some or all of these charges subject to
    continued monitoring.

[^2]: *See, e.g.,* *Merchants' Bank v. State Bank*, 77 U.S. 604 (1871);
    *M&M Leasing Corp. v. Seattle First National Bank*, 563 F.2d 1377,
    1382 (9^th^ Cir. 1977); *American Insurance Association v. Clarke*,
    865 F.2d 278, 282 (2d Cir. 1988).

[^3]: *See* Interpretive Letter No. 827, *reprinted in* \[1997-1998
    Transfer Binder\] Fed. Banking L. Rep. (CCH) ¶ 81,276 (April 3,
    1998) (confirming the ability of national banks to enter into debt
    suspension agreements).

[^4]: The authority of a national bank to offer debt cancellation
    agreements is well established. *First National Bank of Eastern
    Arkansas v. Taylor*, 907 F.2d 775 (8^th^ Cir.), *cert. denied*, 498
    U.S. 972 (1990); 12 C.F.R. § 7.1013. A national bank may offer debt
    cancellation agreements contingent not only on the death of the
    borrower, but also on other events such as disability or involuntary
    unemployment. *See* Interpretive Letter No. 640, *reprinted in*
    \[1993-94 Transfer Binder\] Fed. Banking L. Rep. (CCH) ¶ 83,527
    (January 7, 1994).

[^5]: *See* Interpretive Letter No. 283, *reprinted in* \[1983-1984
    Transfer Binder\] Fed. Banking L. Rep. (CCH) ¶ 85,447 (March 16,
    1984) (involving sales of credit life, disability, mortgage life,
    involuntary unemployment, and vendors single interest insurance); 12
    C.F.R. Part 2 (regulating sales of credit life insurance); *IBAA v.
    Heimann*, 613 F.2d 1164 (D.C. Cir. 1979), *cert denied*, 449 U.S.
    823 (1980) (confirming the OCC's authority to adopt its credit life
    insurance regulation at 12 C.F.R. Part 2). *See also* Interpretive
    Letter No. 671, *reprinted in* \[1993-1994 Transfer Binder\] Fed.
    Banking L. Rep. (CCH) ¶ 83,619 (July 10, 1995), and Interpretive
    Letter No. 724, *reprinted in* \[1995-1996 Transfer Binder\] Fed.
    Banking L. Rep. (CCH) ¶ 81,039 (April 22, 1996) (involving sales of
    vehicle service contracts); 12 C.F.R. § 7.1013 (1996) (confirming
    the ability of national banks to enter into debt cancellation
    contracts); *First National Bank of Eastern Arkansas v. Taylor*, 907
    F.2d 775 (1990) (same).

[^6]:
    > *See* Debt Cancellation Contracts, 65 Fed. Reg. 4176 (Jan. 26,
    > 2000).