American Bankers Insurance Association
May 28, 2004
Jennifer J. Johnson, Secretary
Board of Governors of the
Federal Reserve System
20th Street and Constitution Ave., NW
Washington, DC 20551
Docket Number R-1188
Office of the Comptroller of the Currency
250 E Street, SW
Public Information Room, Mail Stop 1-5
Washington, DC 20219
Docket Number 04-09
Robert E. Feldman, Executive Secretary
Attention: Comments
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429
RIN 3064-AC81
Regulation Comments
Chief Counsel's Office
Office of Thrift Supervision
1700 G St., NW
Washington, DC 20552
Attention: No. 2004-16
Ms. Becky Baker
Secretary of the Board
National Credit Union Administration
1775 Duke Street
Alexandria, VA 22314-3428
Dear Sir or Madam:
On behalf of the American Bankers Insurance Association and an
informal coalition of depository institutions and insurers that either
offer or administer debt cancellation contracts (DCCs) and debt
suspension agreements (DSAs), we appreciate the opportunity to comment
on the proposed regulations implementing section 411 of the Fair and
Accurate Credit Transactions Act of 2003 (FACT Act).
This comment letter primarily addresses the treatment of DCCs and
DSAs under the proposed regulation. As explained in detail below, we
respectfully recommend that such contracts and agreements be subject to
a specific exception to the prohibition on the use of medical
information rather than an interpretation of what constitutes
“eligibility for credit.” Such an exception not only is consistent with
the FACT Act and the legislative history of the Act, but also eliminates
the operational and legal uncertainties associated with the proposed
regulation.
Treatment of DCCs and DSAs
Our Proposed Exception
The proposed regulation interprets the phrase “eligibility, or
continued eligibility, for credit” to exclude determinations of whether
provisions of a DCC or DSA are triggered. In effect, this permits
creditors to consider medical information when deciding whether or not a
borrower is eligible for the protection afforded by a DCC or DSA. Such
an exclusion is particularly important in the case of DCCs and DSAs that
have triggering events related to the health of a borrower. Many DCCs
and DSAs provide credit protection in the event that a borrower becomes
disabled or dies. Access to medical information in that context is
necessary and appropriate to the operation of the DCC and DSA. Without
such information, it would be impossible to determine whether or not a
borrower was entitled to receive the protection promised in the DCC or
DSA.
On the other hand, the proposed interpretation fails to address all
circumstances in which medical information may be considered in
connection with a DCC or DSA and creates some legal uncertainty
regarding the application of the regulation to these products.
Therefore, we respectfully recommend that proposed Section __.30(d) be
revised to include the following specific exception for DCCs and DSAs:
(d)(1)(viii) To determine the eligibility for, the triggering of, or
the reactivation of a debt cancellation contract or debt suspension
agreement.
The Interpretation in the Proposed Regulation is Too Narrow
Our proposed exception is broader than the interpretation contained
in the proposed regulation. The interpretation in the proposed
regulation relates only to the determination of whether a DCC or DSA has
been triggered by an event specified in the DCC or DSA. While, as noted
above, medical information is a necessary and appropriate consideration
in such circumstances, medical information also is necessary and
appropriate in determining whether an individual is eligible to purchase
a DCC or DSA and whether such a contract or agreement should be
reactivated.
Creditors that sell DCCs and DSAs that include triggering events
related to the death or disability of a borrower frequently ask simple
“health” questions as part of the application process. Depending upon a
borrower’s response to a question, the creditor may decide not to offer
the borrower the DCC or DSA. Such questions are a necessary and
appropriate part of the sale of a DCC or DSA because they give a
creditor some control over the amount of risk they assume under the DCC
or DSA. They also permit the creditor to lower the price of the DCC or
DSA. Absent the ability to ask medical questions in connection with
offering a DCC or DSA that includes death or disability protection, the
price of such protection would, in many cases, be higher for all
borrowers.
Additionally, most DCCs and DSAs provide for the temporary suspension
and reactivation of the protection provided by the products if a
borrower falls behind in the payments due on the extension of credit
associated with the DCC and DSA and then brings those payments current.
Just as medical information is necessary and appropriate in determining
the initial eligibility for a borrower, it is equally necessary and
appropriate in making a reactivation determination.
The Interpretation in the Proposed Regulation Creates Legal
Uncertainty
Our proposed exception avoids the legal uncertainty created by the
proposed interpretation. The proposed interpretation creates legal
uncertainty because the preamble to the proposed rule provides no
rationale for the interpretation. This permits others to question, and
even challenge, the basis for the interpretation. More importantly, the
proposed interpretation calls into question the prevailing legal
classification of DCCs and DSAs. The prevailing legal view of DCCs and
DSAs is that such contracts and agreements are nothing more than a term
of an extension of credit. This treatment of DCCs and DSAs is reflected
in a debt cancellation regulation issued by the Office of the
Comptroller of the Currency1, an interpretation issued by the Chief
Counsel of the Office of Thrift Supervision2, and a regulation issued by
the National Credit Union Administration3. An interpretation that a
borrower’s eligibility for credit does not include a determination of
whether the provisions of a DCC or DSA are triggered could be read by
state insurance regulators to suggest that DCCs and DSAs are somehow
separate and distinct from the credit transaction. While presumably
unintended, such an outcome would be contrary to the rationale upon
which the existing DCC and DSA regulations and interpretation, cited
above, are based.
The Terms and Legislative History of the FACT Act Support Our
Proposed Exception
Our proposed exception is consistent with the terms of Section 411 of
the FACT Act. New Section 604(g)(5)(A) of the Fair Credit Reporting Act
(as added by Section 411) expressly empowers the federal banking
agencies and the National Credit Union Administration to except from the
prohibition on the use of medical information transactions that are
“necessary and appropriate to protect the legitimate operational,
transactional, risk, consumer, and other needs.” An exception for
determining the eligibility for, the triggering of, and the reactivation
of DCCs and DSAs falls within the ambit of this authority. As noted
above, the consideration of medical information in such contexts is
necessary and appropriate to the ability to provide borrowers with
promised protection (triggering and reactivation), and control the risk
and price of DCCs and DSAs (eligibility).
Our proposed exception also is supported by the legislative history
accompanying the FACT Act. The House Report accompanying the Act (House
Report 108-263) specifically states that the use of medical information
in connection with “credit-related debt cancellation agreements” is
“necessary and appropriate use of medical information”:
The Committee recognizes that there are limited circumstances in
which a creditor may require medical information in determining a
consumer’s eligibility or continued eligibility for credit, for
example, to confirm the use of loan proceeds in connection with loans
to finance a specific medical procedure or device, or to verify a
consumer’s death or disability in connection with credit-related debt
cancellation agreements, and considers the limited use of medical
information in these circumstances and any similar circumstances the
financial regulators may identify, to be a necessary and appropriate
use of medical information for purposes of this section. (at page 53)
While the foregoing statement is limited to the verification of a
death or disability, a section-by-section analysis of the Act introduced
in the Congressional Record of December 8, 2003 by the Chairman
of the House Financial Services Committee and the Chairman of the
Financial Institutions and Consumer Credit Subcommittee (who was an
original sponsor of the House version of the Act) indicates that
Congress did not intend any part of a DCC or DSA transaction to be
subject to the prohibition on the use of medical information:
The Federal banking agencies and the NCUA are directed to prescribe
regulations that are necessary and appropriate to protect legitimate
business needs with respect to the use of medical information in the
credit granting process, including allowing appropriate sharing for
verifying certain transactions as well as for debt cancellation
contracts, debt suspension agreements, and credit insurance that are
not generally intended to be restricted by this provision. (at
page E2518) emphasis added
Treatment of Credit Insurance
The proposed interpretation of the phrase “eligibility, or continued
eligibility, for credit” applies not only to DCCs and DSAs, but also to
credit insurance. We respectfully recommend that the regulation be
revised to include a specific exception for credit insurance.
Technically, it is our opinion that Section 411(a) of the FACT Act
does not apply to credit insurance. Section 411(a) applies to credit
products, and, unlike DCCs and DSAs, credit insurance is not a credit
product; it is an insurance product. Nonetheless, the legislative
history cited above suggests that Section 411(a) may apply to credit
insurance. Therefore, we urge that the regulation remove any doubt
regarding the impact of Section 411(a) and specifically except credit
insurance from the scope of the regulation. The rationale for such an
exception is identical to the rationale for the exception for DCCs and
DSAs. Credit insurance frequently is associated with the death and
disability of a borrower, and consideration of the medical information
related to the borrower is necessary and appropriate to the operation of
credit insurance.
Conclusion
In conclusion, we urge the establishment of a specific exception for
all aspects of DCC and DSA transactions. Such an exception not only is
consistent with the FACT Act and the legislative history of the Act, but
also eliminates the operational and legal uncertainties associated with
the proposed regulation. We also urge that the regulation include a
specific exception for credit insurance. We appreciate the opportunity
to provide these comments.
Sincerely,
James C. Sivon
Barnett & Sivon, P.C.
James T. McIntyre
McIntyre Law Firm, PLLC
Beth L. Climo
Executive Director
American Bankers Insurance Association
1 12 CFR Part 37.
2 Letter from Carolyn Lieberman, Acting Chief Counsel dated September 15, 1993
3 12 CFR 721.3(g)
