What Is a Debt Cancellation Contract (DCC)?
A debt cancellation contract (DCC) is a contractual arrangement modifying loan terms. Under the debt cancellation contract, a bank agrees to cancel all or part of a customer’s obligation to repay a loan or credit. These contracts become effective upon the occurrence of a specified event as written into the contract, and most people connect them to credit card debts.
A product in which debt is suspended for a certain period of time due to extenuating circumstances is known as a debt suspension agreement (DSA). In DSAs, debt payment is not canceled and is resumed after the mitigating circumstances have passed. Both products fall under the control and oversight of the Office of the Comptroller of the Currency (OCC).
- A debt cancellation contract (DCC) cancels all or part of a loan due to a change in circumstances for the borrower.
- Banks and other financial institutions offer debt cancellation contracts in place of credit insurance plans.
- DCCs places the onus of risk on the issuing agency, which often benefits borrowers.
Understanding Debt Cancellation Contracts
A debt cancellation contract (DCC) provides for the cancellation of loan payments when it becomes difficult, or impossible, for the borrower to make payments. These events may include an accident or the loss of life, health, or loss of income. Other reasons for debt cancellation include military service, marriage, and divorce.
Banks and other financial institutions will offer debt cancellation contracts in place of a credit insurance plan. Credit insurance is a type of insurance policy purchased by a borrower that pays off one or more existing debts in the event of a death, disability, or in rare cases, unemployment. DCCs act like credit insurance but can also be written to cover events in the life of the borrower’s spouse or other household members. This product feature recognizes that in many households, various family members contribute to total household income.
DCCs provide a flexible way for borrowers to protect themselves from a variety of events that can affect their ability to make debt payments. They also permit borrowers to buy only the amount of protection they need based on their financial situation and the amount of debt they have outstanding. Consequently, debt cancellation contracts (DCCs) and debt suspension agreements (DSAs) are often a more suitable form of debt protection for borrowers than credit insurance.
Availability and Regulation of Debt Forgiveness Products
Debt cancellation contracts are available for consumer loans including installment loans, auto loans, mortgages, home equity lines of credit (HELOC), and leases. The borrower pays a fee to a creditor in receipt of the protection provided. Federal banking regulators, federal Courts, and most states recognize DCCs as banking products because they do not have the attributes of insurance. DCCs are available from federal- and state-chartered depository institutions as well as by non-depository creditors. DCCs are subject to comprehensive regulation by federal and state banking regulators. DCCs may originate either with the underlying credit transaction or after the closing or establishment of a loan or a line of credit.
The transfer of risk inherent in credit insurance requires regulation of the product as insurance. This regulation protects the bank in the case of insolvency. However, the same safeguard is not present with a debt cancellation product. With a DCC, the creditor retains all of the risks of payment cancellation or suspension. Additionally, DCCs do not sell through insurance agents, brokers, or other intermediaries. They are a feature of the extension of credit, provided by a lender that the customer may cancel at any time. Banks and auto agencies offer debt cancellation agreements, instead of insurance, in exchange for a fee and a deductible.
Example of Debt Cancellation Agreement
Debt cancellation agreements can differ based on state and jurisdiction. For example, the Texas State Office of Credit Commissioner (OCCC) specifies contract requirements for debt cancellation agreements provided by auto agencies to consumers. Among the more interesting requirements is the fact that the buyer maintains property insurance for the vehicle while it is under their ownership. Typically, DCAs are considered an alternative to insurance. However, the requirement for insurance is concerned with the depreciation in the value of the automobile.