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Banking Interpretations

NYSBL 96(1), 234(1), 383(14), 454(34)

_______________________________________________________
December 6, 2005

[ ]

Dear [ ]:

Your letter dated October 27, 2005 to Diana L. Taylor was referred to me for a
response.

You asked whether, in connection with a personal lease or revolving credit account, a
debt cancellation contract or a debt suspension agreement is permitted to be offered
under Article 10 of New York's Personal Property Law, also known as the Retail
Installment Sales Act (the "Act"). We interpret the Act as permitting a debt cancellation
contract or a debt suspension agreement to be offered so long as the offering is in
compliance with the other requirements of the Act and other applicable law or
regulation.

Our view is based in large measure on the opinions of the New York State Department
of Insurance, some of which are cited in your above-mentioned letter. You cite these
opinions for the proposition that a debt cancellation contract or a debt suspension
agreement is permitted to be offered in New York without first obtaining an insurance
license. We express no opinion to that effect, although we recognize that in their letter
of June 17 2004, the New York State Department of Insurance opined that

The making of debt cancellation contracts or debt suspension agreements by a
New York State or a non-New York depository institution or a Federal or New
York State chartered credit union, in connection with extensions of credit to
customers of such entity, constitutes the doing of an insurance business in
New York. However, the Department has determined that it will not regulate
debt cancellation contracts or debt suspension agreements sold by such
entities in accordance with this opinion. [Emphasis Added.]

We suggest that you confirm any insurance licensing or other insurance-related matters
directly with the New York State Department of Insurance for the Utah industrial bank
you asked about or for any of your other clients.

We note in your letter you state that "...most States, including New York, have
concluded that these [debt cancellation contracts or debt suspension agreements] are
credit products and not insurance." We respectfully point out that your statement is
incorrect given the above-quoted opinion of the New York State Department of
Insurance, which reflects its long-held view that a debt cancellation contract is an
insurance contract.

Indeed, it is this view of the New York State Department of Insurance (and one to which
we defer) that serves as the basis for our interpretation of the Act as permitting a debt
cancellation contract or a debt suspension agreement to be offered under the Act. The
Act permits insurance to be offered and, given that a debt cancellation contract or a
debt suspension agreement is considered to be insurance, it is likewise permitted to be
offered under the Act. Consequently, we have no objection to an out-of-state lender
offering a debt cancellation contract or a debt suspension agreement in connection with
transactions under the Act so long as the offering is in compliance with the other
requirements of the Act and other applicable law or regulation.

Please also note that on April 2, 2004, the New York Banking Department issued the
enclosed guidance letter, which can be found on our website, clarifying the Banking
Department's position that debt cancellation contracts and debt suspension agreements
may be offered with adequate and appropriate consumer protections by New York
chartered banks and trusts companies, savings banks, savings and loan associations,
and credit unions, as well as branches and agencies of foreign banking corporations
licensed by the Banking Department. The guidance letter states that the guidelines
attached to the letter provide the standards needed to ensure that consumers
understand the nature of, and costs and risks associated with, the purchase of these
products and must be followed by these lenders. The guidelines mirror regulations
adopted earlier by the Comptroller of the Currency and address prohibited practices,
refunds, fee payment methods and required disclosures.

We strongly suggest that any debt cancellation contract or a debt suspension
agreement that may be offered in New York by any other lenders should follow the
requirements of the above-mentioned guidelines.

If you have any other questions, you may call me at (212) 709-1660.

Very truly yours,
Alan M. Weinberg, Assistant Counsel

Enclosure

cc: Regina A. Stone, Deputy Superintendent

Guidance on Debt Cancellation Contracts and Debt Suspension Agreements Page 1 of 3

STATE OF NEW YORK BANKING DEPARTMENT
Industry Letter
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

Guidance on Debt Cancellation Contracts and Debt Suspension Agreements Page 2 of 3

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.

Guidance on Debt Cancellation Contracts and Debt Suspension Agreements Page 3 of 3

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
“(to) 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 (to) have and exercise all other powers that are necessary or appropriate to enable it
To carry out its purpose."