Designing a successful Debt Protection program can be complicated unless you and your provider understand the concept, the regulatory environment and how you can design products that will be better accepted by your members. A Debt Cancellation Contract (DCC) or Debt Suspension Agreement (DSA) is a loan term or contractual arrangement modifying loan terms under which a credit union agrees to cancel or suspend, all or part of a member's obligation to repay an extension of credit upon the occurrence of a specified event. There are three primary cancellation or suspension methods used in Debt Protection: * Full Cancellation – the entire debt is waived * Partial Cancellation – a loan payment or payments are waived * Debt Suspension – a loan payment is not required during the suspension period; interest may or may not continue to accrue during this time Debt Protection products can be designed to provide cancellation or suspension benefits to members who experience various "protected events" which may impact the ability of a member to repay their loan obligations. While the types of protected events are virtually unlimited, the most common events include: * Death * Disability * Involuntary Unemployment * Hospitalization * Family Leave * Terminal Condition Debt protection products are not considered insurance products but are considered "incidental to the business of lending". As a result, they are not regulated by the state insurance departments but rather regulated by the credit union's state or federal regulator. The Office of the Comptroller of the Currency, the Office of Thrift Supervision and the National Credit Union Administration have determined that national banks, federal thrifts and federal credit unions can sell debt protection products without being subject to state insurance laws. State regulated credit unions may offer debt protection products in states with federal parity laws either by automatic application or, in accordance with the provisions of the state parity law, only upon specific approval granted by the state credit union regulator. There are many opportunities for a credit union to offer Debt Protection to their members. One of the primary opportunities is using the design flexibility to improve the overall success of a loan protection program. Improvements could result in increased revenue and/or decreased expense. Increasing loan protection participation Improving Product Design – debt protection allows a credit union to cover new (and more) events than a traditional credit life and disability program. Improving Loan Officer Acceptance – by designing a product that is more focused on member needs and concerns, a credit union will likely increase its loan officer's acceptance of the program. Improved Marketing Opportunities – debt protection allows a credit union to design products that will be better accepted through alternative marketing channels, beyond point of sale. Increasing loan protection program efficiency No State Licensing Requirements – debt protection is a lending product, thus no additional state licenses are required. One National Program – being regulated at the credit union level means individual state rates and forms are not needed. Ease of Training and Systems Implementation – a simple debt protection program is easy for loan officers to understand and minimal systems modifications necessary. Phasing Implementation of the Program A credit union may start by offering debt protection on credit cards, move to consumer loans, home equity loans, and finally first mortgages over 12-24 months. It is critical that the credit union protect itself against a variety of potential litigation risks which may arise as a result of its offer of a Debt Protection product. As the product provider, consumer or potential class action litigation is directed at the credit union rather than a vendor or insurance carrier. With loan staff under constant pressure to originate loans and cross sell products, errors can and no doubt will occur. These mistakes can lead to unexpected and potentially costly litigation due to: * Unintentional violations of unfair or deceptive trade practice acts * Breaches of contract or agreement with a customer * Extension of credit, refusals to extend credit, or agreements to extend credit to a customer Most Debt Protection programs do not include specific coverage for these risks. However, some programs may provide, through the vendor, indemnification for certain compliance or legal risks. This indemnification is typically limited to damages resulting from the negligent performance of administrative services by the vendor or failure of the program documents drafted by the vendor to comply with applicable laws and regulations addressing the offer of Debt Protection products. Credit unions entering into any Debt Protection program with any vendor should review their professional liability and bond coverage carefully to consider their potential risk exposure on claims. Where coverage gaps exist, consider installing a supplemental litigation policy from a reputable carrier. Implementing a program requires adjustments to a credit union's loan origination and loan servicing systems. The complexity of these adjustments depends on the systems ability to handle the additional requirements. Unfortunately, there is no "silver bullet" that solves all Debt Protection systems needs. Each origination and servicing system has unique architecture and each program is unique, so the implementation is customized for each system. System development will be one of the most critical and time consuming steps for implementation. While the authority to issue Debt Protection has been around since the 1960s, the widespread practice of offering debt protection on consumer loans started picking up in 2001 with release of the final OCC rules. We've identified the following keys to success with debt protection programs: * Use Debt Protection to increase overall loan protection participation A debt protection program should be designed to increase members' purchase of protection on their loans. * Do not overanalyze product design If not carefully managed, research within product design can lead to "analysis paralysis," with an unnecessary delay in finalizing product design and implementing the debt protection program. * Involve Systems team members early Product design and/or pricing may need to be adjusted based on system capabilities. It is best to find this out early in the process. * Keep it simple Be sure that a debt protection program is easy for loan staff to offer and members to understand. * Keep price points in mind According to consumer research and marketing experience, a cost of $20-25 per month seems to be best accepted by consumers. * Educate staff early and often The first way to accomplish this is to involve loan staff in the product design process. Initial employee training should then occur close to product rollout, with additional refresher sessions scheduled regularly after product introduction.