7 TAC §12.33
The Finance Commission of Texas (the commission) proposes
new §12.33, concerning debt cancellation contracts (DCCs) and debt suspension
agreements (DSAs). The proposed rule establishes standards governing DCCs
and DSAs in order to ensure that state banks provide such products consistent
with safe and sound banking practices and subject to appropriate consumer
protections.
A DCC is a loan term or a contractual arrangement modifying loan terms
linked to a bank's extension of credit, under which the bank agrees to cancel
all or part of a customer's obligation to repay an extension of credit from
that bank upon the occurrence of a specified event. A DSA is a loan term or
a contractual arrangement modifying loan terms linked to a bank's extension
of credit, under which the 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.
The Department of Banking (department) has long recognized that state banks
may provide DCCs as permissible banking products. See Opinion No. 94-74 (November
14, 1994). The Banking Commissioner (commissioner) more recently reiterated
that position in his letter of November 7, 2002, granting a parity request
relating to the sale of DCCs and DSAs by state banks. This parity request
was based on the regulations of the Office of Comptroller of the Currency
at 12 C.F.R. Part 37 which established standards for the offer and sale of
DCCs and DSAs by national banks. In his letter, the commissioner also noted
that a state bank's use of DCCs and DSAs is incidental or complementary to
a financial activity under Finance Code §32.001(b)(6). The proposed rule,
which codifies the department's position, states the authority of state banks
under Texas Finance Code §32.001 to enter into both DCCs and DSAs as
authorized bank products and to charge a fee for these products.
Subsection (b) of the proposed rule sets forth the purposes of the new
section, which are, generally, to set forth the standards that apply to a
state bank's provision of DCCs and DSAs, enhance consumer protections for
customers who buy DCCs or DSAs from banks, and ensure that state banks providing
DCCs or DSAs do so in a safe and sound manner.
Subsection (c) of the proposed rule prohibits certain practices for banks
that provide DCCs or DSAs. These practices are: tying the approval or terms
of an extension of credit to a customer's purchase of a DCC or DSA; engaging
in misleading advertisements or practices; retaining a right to modify a DCC
or DSA unilaterally, unless the modification benefits the customer or the
customer has a reasonable opportunity to cancel without penalty; and charging
a single, lump-sum fee for a DCC or DSA issued in connection with a residential
mortgage loan.
Subsection (d) of the proposed rule permits a bank to offer a DCC or DSA
that makes no provision for a refund of fees but, if the bank does so, it
also must offer the customer a bona fide option to buy the product that includes
a refund feature.
Under proposed subsection (e), for loans other than residential mortgage
loans, the bank may offer the customer the option of paying the fee for the
associated DCC or DSA in a single, lump sum; but if it does, it also must
offer a bona fide option of paying the fee for that contract in monthly or
other periodic payments. If the bank offers the option to finance the single
payment fee, it must disclose to the customer whether the customer may cancel
the product and receive a refund and any time limits that apply to the customer's
right to cancel.
The proposed rule also requires, in subsection (f) that state banks disclose
certain information to their customers. The rule accommodates the methods
that state banks use to market DCCs and DSAs by permitting the use of abbreviated
disclosures in marketing circumstances--including telephone solicitations
and "take one" applications--where full disclosure of the terms most relevant
to the consumer's decision to purchase is not practicable.
The abbreviated or "short form" disclosures that the rule requires include:
(1) Disclosure that the decision to buy a DCC or DSA is optional and whether
or not the customer purchases the product will not affect the customer's application
for credit or terms of any existing loan;
(2) Disclosure that if a no-refund product is offered, a product with a
refund feature also is available;
(3) Disclosure for DCCs or DSAs offered in connection with loans other
than residential mortgage loans, that if the customer may elect to finance
a single payment, lump sum fee, the customer also has the option to pay the
fee in periodic payments, and a statement about the effect of the customer's
cancellation of the DCC or DSA before expiration of the term of the loan;
(4) A statement that the customer will receive additional information before
being obligated to pay for the DCC or DSA; and
(5) A statement that certain eligibility requirements, conditions, and
exclusions apply that may affect the customer's ability to claim benefits
under the DCC or DSA are described more fully in the "long-form" disclosures
that the rule also requires.
The "long-form" disclosures may be given after the bank's initial marketing
occurs, but generally must be given prior to the completion of the sale of
the product. If the solicitation occurs when the customer applies for credit
in person, then the long form disclosures must be given at that time. The
information required to be disclosed in the long form includes:
(1) Disclosure that the decision to buy a DCC or DSA is optional and whether
or not the customer purchases the product will not affect the customer's application
for credit or terms of any existing loan;
(2) Disclosure that in the case of a DSA, the DSA only suspends, and does
not cancel, the customer's obligation to pay the associated debt;
(3) Disclosure, if applicable, that the customer may not incur additional
charges on a credit card or line of credit under its loan agreement if the
DCC or DSA is activated;
(4) An explanation of the circumstances in which the customer has the right
to cancel the DCC or DSA; and
(5) A description of any applicable eligibility requirements, conditions,
or exclusions, which may be provided either in the disclosure form itself
or by reference to particular provisions of the DCC or DSA.
The disclosure requirements are complemented by a requirement that a state
bank generally obtain the customer's written acknowledgment of his or her
receipt of the required disclosures and an affirmative election to purchase
the DCC or DSA before completing the sale. Like the disclosure requirements,
these provisions of the rule are also tailored to accommodate the use of sales
methods--such as by telephone--where immediate receipt of a written acknowledgment
is not practicable. The proposed rule requires that disclosures and acknowledgments
and affirmative elections be presented in a plain language form that is simple,
direct, readily understandable, and designed to call attention to the nature
and significance of the information provided. Disclosures must also be meaningful,
and the rule gives examples of methods--such as spacing and type styles--that
may be used to satisfy that standard.
The proposed rule contains the two sample forms of disclosure: the "short
form" for use in situations where the abbreviated disclosures may be used,
and the "long form" for use thereafter to ensure that the customer is adequately
informed about the key terms of the DCC or DSA prior to completing the purchase.
Banks are required to make only the disclosures that are appropriate to the
product offered. The forms of disclosure are illustrative of the wording and
format a bank could use to comply with the rule's disclosure requirements.
Banks that make disclosures in a form substantially similar to the forms provided
in the rule will be deemed to satisfy the disclosure requirements. These particular
forms are not mandatory, however, and a bank may elect to use different wording
or a different format, as long as the approach chosen satisfies the substance
of the applicable requirements.
The proposed rule in subsections (f) and (g) permits the disclosure and
election and acknowledgment to be provided electronically in a manner consistent
with the Uniform Electronic Transactions Act (UETA), Texas Business &
Commerce Code Chapter 43, and the Electronic Signatures in Global and National
Commerce Act (E-SIGN), 15 U.S.C. 7001 et seq. While UETA generally controls
for state banks providing disclosures electronically, E-SIGN maintains some
relevance with respect to Texas law not governed by UETA, such as the Texas
Constitution or another state law that is otherwise exempt from UETA to the
extent the other law would purport to make signatures, contracts, or other
records used in interstate and foreign commerce illegal on the sole grounds
they are electronic. Further, the consumer protection provisions of E-SIGN
will continue to apply to electronic transactions otherwise governed by UETA
as a result of a savings provision in the enacting legislation for UETA.
Finally, the rule contains a safety and soundness requirement that a state
bank that offers DCCs or DSAs must manage the risks associated with these
products in accordance with safe and sound banking principles. The rule also
requires a bank to establish and maintain effective risk management and control
processes, including appropriate recognition and financial reporting of income,
expenses, assets, and liabilities associated with the products and adequate
internal control and risk mitigation measures.
Gayle Griffin, Deputy Commissioner, Texas Department of Banking, has determined
that, for each year of the first five years that the section is in effect,
there will be no fiscal implication for state or local government as a result
of enforcing or administering the section.
Mr. Griffin also has determined that, for each of the first five years
the section as proposed is in effect, the public benefit anticipated as a
result of the adoption of the section will be clear guidance on safety and
soundness and consumer protection requirements for the provision of DCCs and
DSAs. There is no anticipated cost to persons who are required to comply with
the section as proposed. There will be no adverse economic effect on small
businesses.
Comments concerning the proposed section should be submitted within 30
days of publication to Steve Martin, Senior Assistant General Counsel, Texas
Department of Banking, 2601 North Lamar Boulevard, Austin, Texas 78705-4294,
or by email to steve.martin@banking.state.tx.us.
The new section is proposed under Texas Finance Code §32.001,
which authorizes a state bank to engage in the financial activity of lending
money and to engage in an activity that is incidental or complementary to
such financial activity.
Texas Finance Code, Chapter 32, is affected by the proposed section.
§12.33.Debt Cancellation Contracts and Debt Suspension Agreements.
(a)
Definitions.
(1)
"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 added to, the unpaid balance
of the amount financed.
(2)
"Closed-end credit" means consumer credit other than open-end
credit as defined in this section.
(3)
"Contract" means a debt cancellation contract or a debt
suspension agreement.
(4)
"Customer" means an individual who obtains an extension
of credit from a bank primarily for personal, family, or household purposes.
(5)
"Debt cancellation contract" means a loan term or contractual
arrangement modifying loan terms under which a bank agrees to cancel all or
part of a customer's obligation to repay an extension of credit from that
bank upon the occurrence of a specified event. The agreement may be separate
from or a part of other loan documents.
(6)
"Debt suspension agreement" means a loan term or contractual
arrangement 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. 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 bank's
unilateral decision to allow a deferral of repayment.
(7)
"Open-end credit" means consumer credit extended by a bank
under a plan in which:
(A)
The bank reasonably contemplates repeated transactions;
(B)
The bank may impose a finance charge from time to time
on an outstanding unpaid balance; and
(C)
The amount of credit that may be extended to the customer
during the term of the plan (up to any limit set by the bank) is generally
made available to the extent that any outstanding balance is repaid.
(8)
"Residential mortgage loan" means a loan secured by a 1-4
family, residential real property.
(b)
Authority, purpose, and scope.
(1)
Authority. A state bank is authorized to enter into debt
cancellation contracts and debt suspension agreements and charge a fee therefor
under Finance Code, §32.001.
(2)
Purpose. This section sets forth the standards that apply
to debt cancellation contracts and debt suspension agreements entered into
by state banks. The purpose of these standards is to ensure that state banks
offer and implement such contracts and agreements consistent with safe and
sound banking practices, and subject to appropriate consumer protections.
(3)
Scope. This section applies to debt cancellation contracts
and debt suspension agreements entered into by state banks in connection with
an extension of credit they make. State banks' debt cancellation contracts
and debt suspension agreements are governed by this section and applicable
provisions in the Finance Code, and not by state insurance laws.
(c)
Prohibited Practices.
(1)
Anti-tying. A state bank 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 bank.
(2)
Misrepresentations. A state bank 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 section.
(3)
Prohibited Contract Terms. A state bank may not offer debt
cancellation contracts or debt suspension agreements that contain terms:
(A)
giving the bank the right unilaterally to modify the contract
or agreement 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
(B)
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.
(d)
Refunds of fees on termination or prepayment.
(1)
Refunds. If a debt cancellation contract or debt suspension
agreement is terminated (including, for example, when the customer prepays
the covered loan), the bank shall refund to the customer any unearned fees
paid for the contract unless the contract provides otherwise. A state bank
may offer a customer a contract that does not provide a refund only if the
bank also offers that customer a bona fide option to purchase a comparable
contract that provides for a refund.
(2)
Method of calculating refund. The bank shall calculate
the amount of a refund using a method at least as favorable to the customer
as the actuarial method.
(e)
Payment of fees. Except as provided in subsection (c)(3)(B)
of this section, a state bank may offer a customer the option of paying the
fee for a contract in a single payment, provided the bank also offers the
customer a bona fide option of paying the fee for that contract in monthly
or periodic payments. If the bank offers the customer the option to finance
the single payment by adding it to the amount the customer is borrowing, the
bank must also disclose to the customer, whether and under what terms the
customer may cancel the agreement and receive a refund.
(f)
Disclosures.
(1)
Content of short form of disclosures. The short form of
disclosures required by this section must include the information described
in subparagraphs (A) through (F) of this paragraph that is appropriate to
the product offered. Short form disclosures made in a form that is substantially
similar to these disclosures will satisfy the short form disclosure requirements
of this subsection.
(A)
This product is optional. "Your purchase of (product name)
is optional. Whether or not you purchase (product name) will not affect your
application for credit or the terms of any existing credit agreement you have
with the bank."
(B)
Lump sum payment of fee (applicable if a bank offers the
option to pay the fee in a single payment, prohibited where the debt subject
to the contract is a residential mortgage loan). "You may choose to pay the
fee in a single lump sum or in monthly or quarterly payments. Adding the lump
sum of the fee to the amount you borrow will increase the cost of (product
name)."
(C)
Lump sum payment of fee with no refund (applicable if a
bank offers the option to pay the fee in a single payment for a no-refund
debt cancellation contract, prohibited where the debt subject to the contract
is a residential mortgage loan). "You may choose (product name) with a refund
provision or without a refund provision. Prices of refund and no-refund products
are likely to differ."
(D)
Refund of fee paid in lump sum (applicable where the customer
pays the fee in a single payment and the fee is added to the amount borrowed,
prohibited where the debt subject to the contract is a residential mortgage
loan). Either:
(i)
"You may cancel (product name) at any time and receive
a refund;"
(ii)
"You may cancel (product name) within _______________
days and receive a full refund;" or
(iii)
"If you cancel (product name) you will not receive a
refund."
(E)
Additional disclosures. "We will give you additional information
before you are required to pay for (product name)." If applicable: "This information
will include a copy of the contract containing the terms of (product name)."
(F)
Eligibility requirements, conditions, and exclusions. "There
are eligibility requirements, conditions, and exclusions that could prevent
you from receiving benefits under (product name)." Either:
(i)
"You should carefully read our additional information for
a full explanation of the terms of (product name);" or
(ii)
"You should carefully read the contract for a full explanation
of the terms."
(2)
Content of long form of disclosures. The long form of disclosures
required by this section must include the information described in subparagraphs
(A) through (I) of this paragraph that is appropriate to the product offered.
Long form disclosures made in a form that is substantially similar to these
disclosures will satisfy the long form disclosure requirements of this subsection.
(A)
This product is optional. "Your purchase of (product name)
is optional. Whether or not you purchase (product name) will not affect your
application for credit or the terms of any existing credit agreement you have
with the bank."
(B)
Explanation of debt suspension agreement (applicable if
the contract has a debt suspension feature). "If (product name) is activated,
your duty to pay the loan principal and interest to the bank is only suspended.
You must fully repay the loan after the period of suspension has expired."
If applicable: "This includes interest accumulated during the period of suspension."
(C)
Amount of fee.
(i)
For closed-end credit: "The total fee for (product name)
is _______________."
(ii)
For open-end credit, either:
(I)
"The monthly fee for (product name) is based on your account
balance each month multiplied by the unit-cost, which is __________;" or
(II)
"The formula used to compute the fee is _____________________."
(D)
Lump sum payment of fee (applicable if a bank offers the
option to pay the fee in a single payment, prohibited where the debt subject
to the contract is a residential mortgage loan). "You may choose to pay the
fee in a single lump sum or in monthly or quarterly payments. Adding the lump
sum of the fee to the amount you borrow will increase the cost of (product
name)."
(E)
Lump sum payment of fee with no refund (applicable if a
bank offers the option to pay the fee in a single payment for a no-refund
debt cancellation contract, prohibited where the debt subject to the contract
is a residential mortgage loan.) "You have the option to purchase (product
name) that includes a refund of the unearned portion of the fee if you terminate
the contract or prepay the loan in full prior to the scheduled termination
date. Prices of refund and no-refund products may differ."
(F)
Refund of fee paid in lump sum (applicable where customer
pays the fee in a single payment and the fee is added to the amount borrowed,
prohibited where the debt subject to the contract is a residential mortgage
loan). Either:
(i)
"You may cancel (product name) at any time and receive
a refund;"
(ii)
"You may cancel (product name) within __________ days
and receive a full refund;" or
(iii)
"if you cancel (product name) you will not receive a
refund."
(G)
Use of card or credit line restricted (applicable if the
contract restricts the use of card or credit line when customer activates
protection). "If (product name) is activated, you will be unable to incur
additional charges on the credit card or use the credit line."
(H)
Termination of (product name). Either:
(i)
"You have no right to cancel (product name)"; or
(ii)
"You have the right to cancel (product name) in the following
circumstances ________________________:" and
(I)
"The bank has no right to cancel (product name);" or
(II)
"The bank has the right to cancel (product name) in the
following circumstances____________________________."
(I)
Eligibility requirements, conditions, and exclusions. "There
are eligibility requirements, conditions, and exclusions that could prevent
you from receiving benefits under (product name)." Either:
(i)
"The following is a summary of the eligibility requirements,
conditions, and exclusions (summary provided by bank);" or
(ii)
"You may find a complete explanation of the eligibility
requirements, conditions, and exclusions in paragraphs __________ of the (product
name) agreement."
(3)
Disclosure requirements; timing and method of disclosures.
(A)
Short form disclosures. The bank shall make the short form
disclosures orally at the time the bank first solicits the purchase of a contract.
(B)
Long form disclosures. The bank shall make the long form
disclosures in writing before the customer completes the purchase of the contract.
If the initial solicitation occurs in person, then the bank shall provide
the long form disclosures in writing at that time.
(C)
Special rule for transactions by telephone. If the contract
is solicited by telephone, the bank 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 3 business days, beginning on the first
business day after the telephone solicitation.
(D)
Special rule for solicitations using written mail inserts
or "take one" applications. If the contract is solicited through written materials
such as mail inserts or "take one" applications, the bank may provide only
the short form disclosures in the written materials if the bank mails the
long form disclosures to the customer within 3 business days, beginning on
the first business day after the customer contacts the bank to respond to
the solicitation, subject to the requirements of subsection (g)(3) of this
section.
(E)
Special rule for electronic transactions. The disclosure
described in this section may be provided electronically in a manner consistent
with the requirements of the Uniform Electronic Transactions Act, Texas Business &
Commerce Code Chapter 43, and the Electronic Signatures in Global and National
Commerce Act, 15 U.S.C. 7001 et seq.
(4)
Form of disclosures.
(A)
Disclosures must be understandable. The disclosures required
by this subsection must be in plain language, i.e., conspicuous, simple, direct,
readily understandable, and designed to call attention to the nature and significance
of the information provided.
(B)
Disclosures must be meaningful. The disclosures required
by this subsection must be in a meaningful form. Examples of methods that
could call attention to the nature and significance of the information provided
include:
(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.
(5)
Advertisements and other promotional material. The short
form disclosures are required in advertisements and promotional material for
contracts unless the advertisements and promotional materials are of a general
nature describing or listing the services or products offered by the bank.
(g)
Affirmative election to purchase and acknowledgment of
receipt of disclosures required.
(1)
Affirmative election and acknowledgment of receipt of disclosures.
Before entering into a contract the bank must obtain a customer's written
affirmative election to purchase a contract and written acknowledgment of
receipt of the disclosures required by subsection (f) of this section. The
election and acknowledgment information must be in plain language, i.e., conspicuous,
simple, direct, readily understandable, and designed to call attention to
their significance. The election and acknowledgment satisfy these standards
if they conform with the requirements in subsection (f)(2) of this section.
(2)
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:
(A)
maintains sufficient documentation to show that the customer
received the short form disclosures and then affirmatively elected to purchase
the contract;
(B)
mails the affirmative written election and written acknowledgment,
together with the long form disclosures required by subsection (f)(2) of this
section, to the customer within 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
(C)
permits the customer to cancel the purchase of the contract
without penalty not later than 30 days after the date the bank has mailed
the long form disclosures to the customer.
(3)
Special rule for solicitations using written mail inserts
or "take one" applications. If the contract is solicited through written materials
such as mail inserts or "take one" applications and the bank provides only
the short form disclosures in the written materials, then the bank shall mail
the acknowledgment of receipt of disclosures, together with the long form
disclosures required by subsection (f) of this section, to the customer within
3 business days, beginning on the first business day after the customer contacts
the bank or otherwise responds to the solicitation. The bank may not obligate
the customer to pay for the contract until after the bank has received the
customer's written acknowledgment of receipt of disclosures unless the bank:
(A)
maintains sufficient documentation to show that the bank
provided the acknowledgment of receipt of disclosures to the customer as required
by this section;
(B)
maintains sufficient documentation to show that the bank
made reasonable efforts to obtain from the customer a written acknowledgment
of receipt of long form disclosures; and
(C)
permits the customer to cancel the purchase of the contract
without penalty within 30 days after the bank has mailed the long form disclosures
to the customer.
(4)
Special rule for electronic election. The affirmative election
and acknowledgment may be made electronically in a manner consistent with
the requirements of the Uniform Electronic Transactions Act, Texas Business &
Commerce Code Chapter 43, and the Electronic Signatures in Global and National
Commerce Act, 15 U.S.C. 7001 et seq.
(h)
Safety and soundness. A state bank must manage the risks
associated with debt cancellation contracts and debt suspension agreements
in accordance with safe and sound banking principles. Accordingly, a state
bank must establish and maintain effective risk management and control processes
over its debt cancellation contracts and debt suspension agreements. These
processes include appropriate recognition and financial reporting of income,
expenses, assets and liabilities, and appropriate treatment of all expected
and unexpected losses associated with the products. A bank should also assess
the adequacy of its internal control and risk mitigation activities in view
of the nature and scope of its debt cancellation contract and debt suspension
agreement programs.
This agency hereby certifies that the proposal has been reviewed
by legal counsel and found to be within the agency's legal authority to adopt.
Filed with the Office of
the Secretary of State on February 14, 2003.
TRD-200301169
Everette D. Jobe
Certifying Official
Texas Department of Banking
Proposed date of adoption: Apirl 11, 2003
For further information, please call: (512) 475-1300