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Industry Letters

Guidance on Debt Cancellation Contracts and Debt Suspension Agreements
By State Chartered Banks, Trust Companies, Savings Banks, Savings and Loan Associations, Credit Unions and Licensed Foreign Branches and Agencies.

April 2, 2004

TO THE CHIEF EXECUTIVE OFFICER OF THE INSTITUTION ADDRESSED:


Purpose
This guidance letter is to clarify the position of the New York State Banking Department (the “Department”) on Debt Cancellation Contracts (“DCCs”) and Debt Suspension Agreements (“DSAs”).  This letter also provides guidelines that among other things establish minimum consumer protections required when operating these programs. 

Background
The Department has been asked if New York State chartered banks and trust companies, savings banks, savings and loan associations and credit unions (together, “Banking Organizations”) and New York State licensed branches and agencies of foreign banking corporations are authorized to underwrite and market DCCs and DSAs in connection with extensions of credit by these institutions.  DCCs are loan terms or contractual arrangements modifying loan terms under which a bank agrees to cancel all or part of a customer’s obligation to repay an extension of credit upon the occurrence of a specified event. DSAs are loan terms or contractual arrangements modifying loan terms under which a bank agrees to suspend all or part of a customer’s obligation to repay an extension of credit from that bank upon the occurrence of a specified event.  Specified events include death, disability, involuntary unemployment of a borrower or any other event that may reasonably be expected to affect the ability of the borrower to repay the loan. 

The incidental powers provisions of Articles III, VI and X of the New York Banking Law (the “Banking Law”) provide banks and trust companies, savings banks and savings and loan associations, respectively, with wide authority to engage in activities or offer services incidental to the business of banking. The incidental powers provision of Article XI of the Banking Law similarly provides credit unions with wide authority to engage in activities or offer services incidental to the business of such institutions.[1]

The Department is of the view that DCCs and DSAs represent products that are incidental to the standard loan transaction agreements that Banking Organizations have traditionally offered.  As such, DCCs and DSAs are financial instruments that may be offered together with established banking products.  In the Department’s view, the underwriting and marketing of such products by Banking Organizations in connection with the extension of credit are, therefore, clearly incidental to the business of banking. Accordingly, Banking Organizations may underwrite and sell DCCs and DSAs in connection with the extension of credit subject to the Banking Law and any restrictions imposed under the Banking Law.  In the case of credit unions, we would note that the Department had previously determined that credit unions may engage in various incidental activities permissible for federally chartered credit unions, provided that the exercise of such powers, among other restrictions, also was subject to any restrictions imposed under Section 721 of the National Credit Union Administration’s Regulations. (See May 13, 2002 letter from Sara A. Kelsey, Deputy Superintendent and Counsel.)  Accordingly, in addition to the restrictions provided below on Banking Organizations engaging in these activities going forward, the prior restrictions imposed on credit unions shall be deemed to remain in place as well. 

The Department also has generally viewed the banking and incidental powers of branches and agencies of foreign banking corporations licensed by the Department to be co-extensive with those of banks and trust companies. It follows that branches and agencies of foreign banking corporations may likewise engage in underwriting and selling DCCs and DSAs under the Banking Law in connection with the extension of credit. 

Management Oversight
It is the Department’s position that Banking Organizations and branches and agencies of foreign banking corporations licensed by the Department offering these products to the public must do so with adequate and appropriate consumer protections.   Consequently, the Department is of the view that the guidelines attached to this letter provide the standards needed to ensure that consumers understand the nature of, and costs and risks associated with, the purchase of these products.  These guidelines, which are mirrored after regulations adopted earlier by the Comptroller of the Currency, address prohibited practices, refunds, fee payment methods and required disclosures.  Banking Organizations and licensed branches and agencies engaged in the underwriting and sale to their customers of DCCs and DSAs must follow these guidelines.

Regulatory Oversight
The Department will review compliance with these requirements as part of its normal examination processes and will also review consumer complaints with regard to DCCs and DSAs using the same standards.  The Department of course also will evaluate the safety and soundness of any underwriting and marketing of these products by any Banking Organizations or branches and agencies of foreign banking corporations.  In addition, any such entities offering these products should also ensure that they comply with the applicable provisions, if any, of the New York State Insurance Law and any other law or regulation.

Any questions concerning the foregoing may be directed to Deputy Superintendent and Counsel Sara Kelsey or Acting First Assistant Counsel Gene Brooks in the Legal Division at (212) 709-1663.

Very truly yours,

Diana L. Taylor
Superintendent of Banks 

[1]See Banking Law Sections 96(1), 234(1), 383(14) and 454(34).  Section 96(1) provides banks and trust companies have the power “(t)o … exercise all such incidental powers as shall be necessary to carry on the business of banking.” Section 234(1) provides savings banks have the power “(t)o … exercise all such incidental powers as shall be necessary to conduct the business of a savings bank … .” Section 383(14) provides savings and loan associations with the power “(t)o have and exercise all other powers necessary or appropriate in conducting the business of a savings and loan association.”  Section 454(34) of the Banking Law provides a credit union with the power “(t)o have and exercise all other powers that are necessary or appropriate to enable it to carry out its purpose.”