Goodbye, Credit Life. Hello, Debt Cancellation? Pending Regulations from the Comptroller's Office Could Change a Basic Consumer Credit Element and Complement Gramm-Leach-Bliley Moves. (Compliance Clinic) (2002)

There are dramatic changes on the horizon for the consumer credit industry and the parts of the insurance industry that deal with consumer credit. The Office of Comptroller of the Currency is working on new final rules to regulate debt cancellation addendums (DCAs). With a final version of the regulations expected soon, DCAs will quickly begin to replace traditional consumer credit insurance. In the wake of this change, one expert predicts, the credit insurance industry could fall from a $6 billion premium business to a $2 billion business by 2005, with DCAs replacing the rest. Cancellation contracts vs. insurance A DCA is basically the same as credit insurance in function, but generally without the insurance-side regulation (and the requirement in each state of some form of insurance license). A debt covered by a DCA can be canceled due to death, disability, unemployment, property loss, family leave, nursing home stay, critical illness, divorce and other factors, depending on what coverage the lender offers and the customer pays for. (Depending on the scope of coverage, DCAs may also be known as debt cancellation contracts or debt suspension agreements.) Instead of paying insurance premiums, the borrower pays a bank fee; instead of death benefits being remitted by the insurance company to pay off the debt, the debt is canceled by the lender; and most importantly, instead of complying with the 50 different state regulators, lenders comply with OCC's rules. Since 1964, and through later, notable court cases, OCC has insisted that such contracts are banking products and not insurance products, though some states have bucked that assertion. The proposed regulation's language continues the favorable treatment and makes it clear that the agency's insurance sales regulations would not apply to sale of these contracts. However, OCC's proposed regulation, published April 18, 2001, also contained some consumer protection measures that banks will have to examine before moving further into DCA products. In a July 18, 2001, comment letter, ABA supported the aspects of the proposed regulation that would continue favorable treatment during the public comment period and called for still stricter prohibition of state involvement in banks' DCA activities. The association generally disputed the need for additional consumer protections, noting that OCC gave no evidence that any mistreatment on the part of banks had taken place. ABA also made the point that if requirements are to be imposed, that they apply only to debt protection products sold directly by banks to bank customers, and not to third-party arrangements provided at no charge to the customer, such as in an affinity card program. In addition, ABA felt that in some respects the proposed DCA consumer protections were more onerous than the agency's insurance consumer protections. Where the final version comes out remains to be seen, of course. How the landscape will change Overall, the elimination of state-level regulation is a big selling point for moving from credit insurance to debt cancellation addendums, especially for banks doing business in multiple states. Currently credit insurers have to comply with 50 different sets of state regulations, which have a variety of financial strictures, including prima facia rates and loss ratio requirements. Bach state requires the product policy forms to be approved, which may mean 50 different insurance contracts. In addition to this, insurance regulation requires specific reserves to be held as a liability for future benefits, and, as of 2002, every insurance company, no matter how small, will have to complete an asset adequacy analysis. By contrast, debt cancellation addendums have, historically, eliminated all of this and allowed for greater flexibility. The new rule will enhance this aspect of DCAs. …