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Industry Letters

New York State Banking Department Guidelines
 For Debt Cancellation Contracts and Debt Suspension Agreements

Section 1.  Definitions. 

For purposes of these guidelines: 

(a)  Actuarial method means the method of allocating payments made on a debt between the amount financed and the finance charge pursuant to which a payment is applied first to the accumulated finance charge and any remainder is subtracted from, or any deficiency is added to, the unpaid balance of the amount financed.

(b) Financial institution means New York State chartered banks and trust companies, savings banks, savings and loan associations and credit unions and New York State licensed branches and agencies of foreign banking corporations.

(c)  Contract means a debt cancellation contract or a debt suspension agreement.

(d) Customer means an individual who obtains an extension of credit from a financial institution primarily for personal, family or household purposes.

(e) Debt cancellation contract means a loan term or contractual arrangement modifying loan terms under which a financial institution agrees to cancel all or part of a customer’s obligation to repay an extension of credit from that financial institution upon the occurrence of a specified event.  The agreement may be separate from or a part of other loan documents.

(f)  Debt suspension agreement means a loan term or contractual arrangement modifying loan terms under which a financial institution agrees to suspend all or part of a customer’s obligation to repay an extension of credit from that financial institution upon the occurrence of a specified event.  The agreement may be separate from or a part of other loan documents.  The term debt suspension agreement does not include loan payment deferral arrangements in which the triggering event is the borrower’s unilateral election to defer repayment, or the financial institution’s unilateral decision to allow a deferral of repayment.

(g)  Residential mortgage loan means a loan secured by 1-4 family, residential real property. 

Section 2.  Prohibited practices. 

(a)  Anti-tying.  A financial institution 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 financial institution.

(b)  Misrepresentations.  A financial institution may not engage in any practice or use any advertisement that could mislead or otherwise cause a reasonable person to reach an erroneous belief with respect to information that must be disclosed under this part.

(c)  Prohibited contract terms.  A financial institution may not offer debt cancellation contracts or debt suspension agreements that contain terms:

1.    Giving the financial institution the right unilaterally to modify the contract unless:

                       i. The modification is favorable to the customer and is made without additional charge to the customer; or

                      ii. The customer is notified of any proposed change and is provided a reasonable opportunity to cancel the contract without penalty before the change goes into effect; or

2.    Requiring a lump sum, single payment for the contract payable at the outset of the contract, where the debt subject to the contract is a residential mortgage loan. 

Section 3.  Refunds of fees in the event of termination or prepayment of the covered loan. 

(a)  Refunds.  If a contract is terminated (including, for example, when the customer prepays the covered loan), the financial institution shall refund to the customer any unearned fees paid for the contract unless the contract provides otherwise.  A financial institution may offer a customer a contract that does not provide for a refund only if the financial institution also offers that customer a bona fide option to purchase a comparable contract that provides for a refund.

(b)   Method of calculating refund.  The financial institution shall calculate the amount of a refund using a method at least as favorable to the customer as the actuarial method. 

Section 4.  Payment of fees. 

Except as prohibited herein, a financial institution may offer a customer the option of paying the fee for a contract in a single payment, provided the financial institution also offers the customer a bona fide option of paying the fee for that contract in monthly or other periodic payments.  If the financial institution offers the customer the option to finance the single payment by adding it to the amount the customer is borrowing, the financial institution must also disclose to the customer, in accordance with the disclosure provisions hereof, whether and, if so, the time period during which, the customer may cancel the agreement and receive a refund. 

Section 5.  Disclosures. 

(a)  Content of short form of disclosures.  The short form of disclosures required by these guidelines must include information relating to: the fact that a contract is optional; the lump sum payment features; available refunds of lump sum payments; the fact that additional disclosures will be forthcoming; and that there are restrictions on eligibility. The form of disclosures should be consistent with the best practices of the financial services industry in this area.

(b) Content of long form of disclosures.  The long form of disclosures required by these guidelines must include the information relating to: the fact that a contract is optional; an explanation of any debt suspension feature in the product; the cost of the product; the lump sum payment features and any refunds of such fees; any restrictions on the customer’s credit availability triggered by the product; termination of the product by the customer and the institution; and requirements, conditions and exclusions relating to eligibility. The form of disclosures should be consistent with the best practices of the financial services industry in this area.

(c)  Disclosure requirements; timing and method of disclosures.

1.     Short form disclosures.  The financial institution shall make the short form disclosures orally at the time it first solicits the purchase of a contract.

2.    Long form disclosures.  The financial institution shall make the long form disclosures in writing before the customer completes the purchase.  If the initial solicitation occurs in person, then the financial institution shall provide the long form disclosures in writing at that time.

3.    Special rule for transactions by telephone.  If a contract is solicited by telephone, the financial institution shall provide the short form disclosures orally and shall mail the long form disclosures, and, if appropriate, a copy of the contract to the customer within three (3) business days of the first business day after the telephone solicitation.

4.    Special rule for solicitations using written mail inserts or “take one” solicitations.  If the contract is solicited through written materials such as mail inserts or “take one” promotions, the financial institution may provide only the short form disclosures in the written materials if the financial institution mails the long form disclosures to the customer within three (3) business days of the first business day after the customer contacts the bank to respond to the solicitation, subject to the acknowledge requirements of these guidelines.

5.    Special rule for electronic transactions.  The disclosures described in this section may be provided through electronic media in a manner consistent with the requirements of applicable federal and state laws.

(d)   Form of disclosures.

1.     Disclosures must be readily understandable.  The disclosures required by these guidelines must be conspicuous, simple, direct, readily understandable, and designed to call attention to the nature and significance of the information provided.

2.    Disclosures must be meaningful.  The disclosures required by these guidelines must be in a meaningful form, including:

                        i. A plain-language heading to call attention to the disclosures;

                       ii. A typeface and type size that are easy to read;

                      iii. Wide margins and ample line spacing;

                      iv. Boldface or italics for key words; and

                       v. Distinctive type style, and graphic devices, such as shading or sidebars, when the disclosures are combined with other information.

(e)  Advertisements and other promotional material for contracts.  The short form disclosures are required in advertisements and promotional material for these products unless the advertisements and promotional materials are of a general nature describing or listing the services or products offered by the financial institution. 

Section 6.  Acknowledgments. 

(a)  Affirmative election and acknowledgment of receipt of disclosures.  Before entering into a contract, the financial institution must obtain a customer’s written affirmative election to purchase a contract and written acknowledgment of receipt of the disclosures required by these guidelines.  The election and acknowledgment information must be conspicuous, simple, direct, readily understandable, and designed to call attention to their significance.  The election and acknowledgment will satisfy these standards if they conform to the disclosure requirements in these guidelines.

(b)  Special rule for telephone solicitations.  If the sale of a contract occurs by telephone, the customer’s affirmative election to purchase may be made orally, provided the bank:

1.    Maintains sufficient documentation to show that the customer received the short form disclosures and then affirmatively elected to purchase the contract;

2.    Mails the affirmative written election and written acknowledgment, together with the long form disclosures required by these guidelines, to the customer within three (3) business days after the telephone solicitation, and maintains sufficient documentation to show it made reasonable efforts to obtain the documents from the customer; and

3.    Permits the customer to cancel the purchase of the contract without penalty within 30 days after the financial institution has mailed the long form disclosures to the customer.

(c)  Special rule for solicitations using written mail inserts or “take one” solicitations.  If the contract is solicited through written materials such as mail inserts or “take one” promotions and the financial institution provides only the short form disclosures in the written materials, then the financial institution shall mail the acknowledgment of receipt of disclosures, together with the long form disclosures required by these guidelines, to the customer within three (3) business days of the first business day after the customer contacts the financial institution or otherwise responds to the solicitation.  The financial institution may not obligate the customer to pay for the contract until after the financial institution has received the customer’s written acknowledgment of receipt of disclosures unless the financial institution:

1.    Maintains sufficient documentation to show that the financial institution provided the acknowledgment of receipt of disclosures to the customer as required by this section;

2.    Maintains sufficient documentation to show that the financial institution made reasonable efforts to obtain from the customer a written acknowledgment of receipt of the long form disclosures; and

3.     Permits the customer to cancel the purchase of the contract without penalty within 30 days after the financial institution has mailed the long form disclosures to the customer.

(d) Special rule for electronic election.  The affirmative election and acknowledgment may be made electronically in a manner consistent with the requirements of applicable federal and state law.

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