Alert April 08, 2008

OCC Issues Interpretive Letters Clarifying Treatment of Debt Cancellation Contracts

The OCC issued two interpretive letters (“Letter #1093” and “Letter #1095”), responding to questions from national banks seeking guidance regarding retail installment sales contracts (“RICs”) and debt cancellation contracts (“DCCs”) related to a consumer’s purchase of an automobile. 

In Letter #1093 national banks sought confirmation that they could use automobile dealerships as non-exclusive agents who could offer DCCs to consumers who were entering into RICs, which would be acquired by the national bank sponsoring the DCC.  Any such DCC would be contingent upon the national bank’s acquisition of the underlying RIC from the automobile dealership.  In dealing with this issue, the OCC first noted that it is well established (under 12 CFR § 37) that a national bank has the authority to provide DCCs to consumers.  The OCC also confirmed that a national bank could enter into DCCs for loans that the national bank originated as well as for loans that the national bank purchased.  The OCC stated that it treats the purchase of an RIC by a national bank from an automobile dealership as a permitted application of a national bank’s lending powers, and thus an extension of credit on which a national bank can put forward a DCC.

The OCC clarified that this conclusion is not changed because the offer of the DCC by the automobile dealership is conditioned upon the sale of the underlying RIC to the national bank that is sponsoring the DCC.  Finally, the OCC noted that the consumer protection standards and safety and soundness requirements of 12 CFR § 37 apply to DCC transactions.

Letter #1095 addresses how national banks can charge consumers for the DCCs.  The OCC points out that 12 CFR § 37.5 provides that a national bank is permitted to offer a consumer the option to pay for the DCC with either a single payment or with a bona fide option to pay in monthly or periodic payments.  Letter #1095 makes it explicitly clear that in order to comply with OCC regulations, any monthly or other periodic payment must be made over the full life of the loan or over the period from the sale of the DCC until the underlying loan is repaid.  Any series of payments over a shorter period would not be deemed to constitute “bona fide” monthly or other periodic payments.