Sales of Credit Life Insurance

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 2

[Docket No. 95-23]

RIN 1557-AB49

Sales of Credit Life Insurance

AGENCY: Office of the Comptroller of the Currency, Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Office of the Comptroller of the Currency (OCC) is

proposing to revise its regulation governing credit life insurance and

the disposition of credit life insurance income. This proposal is

another component of the OCC's Regulation Review Program to update and

streamline OCC regulations and to reduce unnecessary regulatory costs

and other burdens.

The proposal eliminates unnecessarily detailed provisions,

reorganizes sections of the rule into a more helpful format, and

refocuses the regulation to address areas presenting the greatest

safety and soundness concerns.

DATES: Comments must be received by November 13, 1995.

ADDRESSES: Comments should be directed to: Docket 95-23, Communications

Division, 250 E Street, SW, Washington, DC 20219, Fax (202)874-5274.

Comments will be available for public inspection and photocopying at

the same location.

FOR FURTHER INFORMATION CONTACT: Stuart E. Feldstein, Senior Attorney,

Legislative and Regulatory Activities, (202) 874-5090.

SUPPLEMENTARY INFORMATION: The OCC is proposing to revise 12 CFR part 2

as part of its Regulation Review Program. The goal of the Program is to

eliminate provisions in the OCC's regulations that impose unnecessary

regulatory burdens and do not contribute significantly to maintaining

the safety and soundness of national banks or accomplishing the OCC's

other statutory responsibilities. By simplifying and clarifying the

regulation, the proposal is intended to better focus on the standards

and principles to which national banks should adhere when they furnish

credit life insurance to customers.

Background

The OCC issued a final rule to establish part 2 in 1977, 42 FR

48518 (September 23, 1977), to regulate the disposition of income from

the sale of credit life insurance by national banks to loan customers

of the bank. The regulation addressed the practice where employees,

officers, directors, and principal shareholders, or their related

interests, diverted income from the sale of credit life insurance to

their benefit rather than to the bank. The OCC noted at the time that

``[T]he proposal was premised on the judgment that income earned from

credit life insurance sales to bank customers by bank officers using

bank premises and good will in the creation of bank assets (loans)

should be credited to bank earnings rather than be paid directly to and

retained by officers, directors or selected stockholders.'' Id.

The regulation also addressed a number of related safety and

soundness concerns. For example, there is an inherent conflict of

interest when a loan officer's receipt of commissions from the sale of

credit life insurance is dependent on the volume of loans made. This

prospect of financial reward based solely upon loan volume may induce

loan officers to make financially unsound loans. See also, First

National Bank of La Marque v. Smith, 610 F.2d 1258 (5th Cir. 1980)

(``When loan officers are allowed to retain commissions, the prospect

of personal financial gain is interjected into the lending

decision.''). Additional safety and soundness concerns cited when the

rule was adopted included: (1) that arrangements permitting employees,

officers and directors to use bank premises and goodwill for personal

profit were inimical to the trust and

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confidence depositors place in financial institutions; (2) that the

acquisition of a bank by investors who rely on the credit life

insurance income to service their debt was inherently unsafe and

unsound because it decreases their interest in running a profitable

bank; and (3) that incentives to increase bank profits were diminished

if money was distributed other than through dividends. See, 41 FR 29846

(July 20, 1976); 42 FR 48518 (September 23, 1977).

In 1982, the OCC amended part 2 to incorporate certain

recommendations of the Federal Financial Institutions Examination

Council. Among other things, these amendments clarified that bank

officers and employees could participate in limited bonus and incentive

plans notwithstanding the prohibition on receiving income derived from

the sale of credit life insurance. The amendments also revised a

provision permitting income from the sale of credit life insurance to

be credited to a holding company affiliate of the bank by requiring the

affiliate to ``reasonably compensate'' the bank for the use of its

premises, personnel, and goodwill. 47 FR 31376 (July 20, 1982).

Proposal

The OCC is committed to safeguarding national banks from the

inappropriate practices that gave rise to the promulgation of part 2,

and is not proposing to diminish the fundamental standards reflected in

the current rule. Rather, the proposal reduces the overly detailed

format of the current rule, seeks comment on additional streamlining,

and reorganizes the rule into more readable and understandable

provisions that focus on the safety and soundness concerns and

fiduciary principles that are the objectives of the regulation.

Section 2.1--Authority, Purpose, and Scope

The proposal removes current Sec. 2.1 as unnecessary. The proposal

adds an ``Authority, purpose, and scope'' section that briefly

describes the objectives and scope of the regulation. The section also

restates language in current Sec. 2.6 relating to national bank

authority to furnish credit life insurance under 12 U.S.C. 24

(Seventh). These revisions do not expand or otherwise modify the

authority of national bank's to furnish credit life insurance under 12

U.S.C. 24 (Seventh).1

\1\ IBAA v. Heimann, 613 F.2d 1164, (D.C. Cir. 1979), cert.

denied, 449 U.S. 823 (1980) (upholding national bank authority to

sell credit life insurance). See also examples of other OCC

precedent on furnishing credit life insurance: Interpretive Letter

No. 277 (December 21, 1983) reprinted at [1983-1984 Transfer Binder]

Fed. Banking L. Rep. (CCH) P85,441 (credit life insurance

permissible as an incidental power under 12 U.S.C. 24(Seventh));

Interpretive Letter No. 283 (March 16, 1984) reprinted at [1983-1984

Transfer Binder] Fed. Banking L. Rep. (CCH) P85,447 (sales of credit

life and disability insurance as agent for the insurer or by other

arrangement as an incidental power); Letter from James G. Orie,

Attorney, OCC Law Department (January 28, 1987); Letter from Ford

Barrett, Assistant Director, Legislative and Regulatory Analysis

(December 13, 1984); Letter from Richard V. Fitzgerald, Director,

Legal Advisory Services Division (May 12, 1980); Letter from Robert

Bloom, First Deputy Comptroller for Policy (June 29, 1976); and

Letter from Joe H. Selby, First Deputy Comptroller for Operations

(June 30, 1976).

Section 2.2--Definitions

The definitions in current Sec. 2.3 are amended to reflect minor

wording changes. In addition, the OCC requests comment as to whether

the scope of the definition of ``credit life insurance'' is

appropriate.

Section 2.3--Distribution of Credit Life Insurance Income

The proposal also contains a simplified statement of the methods by

which credit life insurance may be sold by national banks. The current

regulation requires income derived from the sale of credit life

insurance by national bank insiders to loan customers of the bank to be

credited to the bank rather than to the bank insiders or entities in

which they have a material interest. In connection with the initial

Notice of Proposed Rulemaking in 1976, some commenters argued that

certain state laws prohibited the assignment of commissions to the bank

and, thus, contradicted the OCC's requirement to credit income from the

sale of the credit life insurance to the bank. In response to this

concern, current Sec. 2.6 contains a list of OCC approved methods of

distribution of credit life insurance income that are alternatives to

the assignment of commissions to the bank. Section 2.6 also states that

other methods satisfying the requirements of current Sec. 2.4 are

acceptable.

The current rule provides banks with some certainty about the types

of methods that are acceptable. However, these examples do not appear

to be needed as part of the regulation, and may, in practice, be unduly

restrictive and confusing. Therefore, the OCC is proposing to remove

the list of approved alternative methods and substitute a simple

statement that the means of distribution of credit life insurance

income must be consistent with the requirements and principles of

proposed Sec. 2.3.

These requirements include a provision that prohibits bank insiders

from retaining commissions or other income from the sale of credit life

insurance to loan customers of the bank, subject to certain exceptions

for bonus and incentive plans.

In addition, the proposal also clarifies that it is unsafe and

unsound for a director, officer, employee, or principal shareholder of

a national bank, (i.e. a shareholder that directly or indirectly owns

five percent or more of the bank's stock), or an entity in which any

such person has an interest of five percent or more, involved in the

sale of credit life insurance to bank loan customers to take advantage

of that business opportunity for personal profit. This provision

revises current Sec. 2.4(a) to reinforce the core principle that income

derived from the opportunity created by the bank should be credited to

the bank.

The OCC requests commenters to address whether the five percent

ownership test for a ``principal shareholder'' and for covered entities

in which insiders have an interest is an appropriate level to use in

these contexts, and, if not, what alternative percentages or more

flexible standards would be appropriate. For example, the OCC notes

that a ``principal shareholder'' for purposes of insider lending

standards is defined with a ten percent voting stock ownership test. 12

CFR 215.2(m)(1).

The OCC also requests commenters to address whether the prohibition

against the retention of income derived from the sale of credit life

insurance should apply to sales of credit life insurance to loan

customers of an affiliate bank.

Subject to various safeguards, the OCC permits national banks to

share space and employees with entities other than depository

institutions. See 42 FR 11924 (March 3, 1995) (Proposed revisions to

part 7, the OCC's interpretive rulings.) In some instances, the bank

and another entity that uses bank premises may share employees to sell

products, which may include credit life insurance, to the bank's

customers. To the extent these shared employees receive commissions

from the sale of the credit life insurance, the arrangement arguably

falls within the prohibitions contained in the current rule, as well as

this proposal.

Possible solutions to this issue include a prohibition on

commissions received from the sale of credit life insurance by bank

employees to the bank's customers, a requirement that the bank be

compensated in some fashion, and/or a standard excluding certain types

of dual employees from the scope of part 2. The OCC is mindful of not

placing impediments to multi-product arrangements that are beneficial

to banks and bank customers and have not been the source of problems or

abuses.

[[Page 47500]]

However, the OCC also must exercise effective oversight where

legitimate safety and soundness concerns may arise.

The OCC therefore requests comment on the treatment and

compensation of employees shared with a non-bank entity that sells

credit life insurance to the bank's customers.

Section 2.4(b) of the current regulation, originally adopted in

1977, permits income from the sale of credit life insurance to be

credited to a holding company affiliate of the bank or to a trust for

the benefit of all bank shareholders. A subsequent amendment to part 2

in 1982 required the holding company affiliate or trust to pay

``reasonable compensation'' to the bank for the use of its personnel

and premises. 47 FR 31376 (July 20, 1982).

The OCC requests comment on whether to retain these provisions in

the final rule or whether they are no longer necessary or used. If

commenters propose retaining these provisions, the OCC also requests

comment on whether comparable provisions should apply to affiliates not

in a holding company structure.

Section 2.4--Bonus and Incentive Plans

Current Sec. 2.4(a) permits limited bonus and incentive

arrangements for employees and officers, notwithstanding the general

prohibition against paying insiders income derived from the sale of

credit life insurance to loan customers. Under the current rule, bonus

or incentive payments based on credit life insurance sales may be made

not more frequently than quarterly, and may not exceed in any one year

five percent of the recipient's annual salary or five percent of the

average salary of all loan officers participating in the plan. The

proposal retains this condition with some minor wording changes to make

the provision simpler and more understandable.

The OCC is concerned, however, that these restrictions may be too

rigid. Therefore, commenters are specifically asked to address whether

this periodic payment standard and the two percentage limits are

appropriate safeguards for bonus and incentive programs, and, if not,

what alternative safeguards the OCC should adopt that would deter

inappropriate sales activities by insiders in connection with the sale

of credit life insurance.

The proposal also adds a new provision that requires the bank not

to structure its bonus or incentive plans in a manner that could create

incentives for persons selling credit life insurance to provide

inappropriate recommendations or sales of credit life insurance to

customers of the bank. This provision is intended to protect consumers

by requiring banks to address potential conflicts of interest that

arise when loan officers also sell credit life insurance.

Other Changes

The proposal removes current Sec. 2.5 which relates to director

responsibilities since that issue is already considered in another

section of the proposal. Current Sec. 2.5 only addresses directors, and

requires them to observe the requirements in Sec. 2.4 and to be mindful

of their duty under common law and 12 U.S.C. 73 to promote the interest

of the bank over their personal interests. This section merely restates

common law and statutory requirements. Moreover, the same basic

fiduciary principles apply to bank officers and other employees

involved in credit life insurance sales as well as to directors. The

proposal states these principles in Sec. 2.3(c), and applies them to

all categories of bank officials and employees engaged in credit life

insurance sales.

The proposal also removes current Sec. 2.7 where the Comptroller

reserves the authority to modify the applicability of any part of part

2 based on the particular circumstances of the bank. The OCC has rarely

used this section. The OCC will continue to consider requests for

interpretations of part 2 on a case-by-case basis.

The OCC welcomes comments on any aspect of the proposed regulation,

particularly those issues specifically noted in this preamble.

Derivation Table

[This table directs readers to the provision(s) of the current

regulation, if any, upon which the proposed revision is based.]

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Revised provision Original provision Comments

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Sec. 2.1........... Secs. 2.1, 2.2, 2.6............... Modified.

Sec. 2.2........... Sec. 2.3.......................... Modified.

Sec. 2.3........... Secs. 2.4(a), (b), 2.6............ Modified.

Sec. 2.4(a), (c)... Sec. 2.4(a), (c).................. Modified.

Sec. 2.4(b)........ ................................... Added.

Sec. 2.5.......................... Removed.

Sec. 2.7.......................... Removed.

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Regulatory Flexibility Act

It is hereby certified that this regulation will not have a

significant economic impact on a substantial number of small entities.

Accordingly, a regulatory flexibility analysis is not required. This

regulation will reduce the regulatory burden on national banks,

regardless of size, by simplifying and clarifying existing regulatory

requirements.

Executive Order 12866

The OCC has determined that this proposal is not a significant

regulatory action under Executive Order 12866.

Unfunded Mandates Reform Act of 1995

Section 202 of the Unfunded Mandates Reform Act of 1995 (``Unfunded

Mandates Act'') (signed into law on March 22, 1995) requires that an

agency prepare a budgetary impact statement before promulgating a rule

that includes a Federal mandate that may result in the expenditure by

State, local, and tribal governments, in the aggregate, or by the

private sector, of $100 million or more in any one year. If a budgetary

impact statement is required, Section 205 of the Unfunded Mandates Act

also requires an agency to identify and consider a reasonable number of

regulatory alternatives before promulgating a rule. Because the OCC has

determined that the proposed rule will not result in expenditures by

State, local, and tribal governments, or by the private sector, of more

than $100 million in any one year, the OCC has not prepared a budgetary

impact statement or specifically addressed the regulatory alternatives

considered. Nevertheless, as discussed in the preamble, the rule has

the effect of reducing burden and increasing the flexibility of

national banks, consistent with safe and sound banking practices.

List of Subjects in 12 CFR Part 2

Credit, Life insurance, National banks.

Authority and Issuance

For the reasons set out in the preamble, part 2 of chapter I of

title 12 of the Code of Federal Regulations is proposed to be revised

to read as follows:

PART 2--SALES OF CREDIT LIFE INSURANCE

Sec.

2.1 Authority, purpose, and scope.

2.2 Definitions.

2.3 Distribution of credit life insurance income.

2.4 Bonus and incentive plans.

Authority: 12 U.S.C. 24 (Seventh), 93a, and 1818(n).

Sec. 2.1 Authority, purpose, and scope.

(a) Authority. A national bank may furnish credit life insurance to

loan customers pursuant to 12 U.S.C. 24 (Seventh).

(b) Purpose. The purpose of this part is to set forth the

principles and

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standards that apply to a national bank's sale of credit life

insurance, and the limitations that apply to the receipt of income from

those sales by certain individuals and entities associated with the

bank.

(c) Scope. This part applies to sales of credit life insurance by

any national bank employee, officer, director, or principal

shareholder, and certain entities in which they have interests.

2.2 Definitions.

(a) Credit life insurance means credit life, health, and accident

insurance.

(b) Interest includes:

(1) Ownership through a spouse or minor child;

(2) Ownership through a broker, nominee, or other agent; or

(3) Ownership through any corporation, partnership, association,

joint venture, or proprietorship, that is controlled by a director,

officer, employee, or principal shareholder of the bank.

(c) Officer, director, employee, or principal shareholder includes

the spouse and minor children of an officer, director, employee, or

principal shareholder.

(d) Principal shareholder means any shareholder who directly or

indirectly owns or controls an interest of more than five percent of

the bank's outstanding shares.

Sec. 2.3 Distribution of credit life insurance income.

(a) The means of distribution of credit life insurance income

employed by a national bank must be consistent with the requirements

and principles of this section.

(b) Except as provided in Sec. 2.4, a director, officer, employee,

or principal shareholder of a national bank, or an entity in which such

person has a voting interest of five percent or more, may not retain

commissions or other income from the sale of credit life insurance in

connection with any loan made by that bank.

(c) It is an unsafe and unsound practice for any director, officer,

employee, or principal shareholder of a national bank, (including any

entity in which such a person has a voting interest of five percent or

more), who is involved in the sale of credit life insurance to loan

customers of a national bank, to take advantage of that business

opportunity for personal profit. Income derived from credit life

insurance sales to loan customers must be credited to the income

accounts of the bank and not to the bank's employee, director, officer,

or principal shareholder, or to an entity in which such a person has a

voting interest of five percent or more.

Sec. 2.4 Bonus and incentive plans.

(a) A bank employee or officer may participate in a bonus or

incentive plan based on the sale of credit life insurance if the

following conditions are satisfied:

(1) Payments based on credit life insurance sales are made not more

frequently than quarterly; and

(2) Payments to any individual in any one year do not exceed the

greater of:

(i) Five percent of the recipient's annual salary; or

(ii) Five percent of the average salary of all loan officers

participating in the plan.

(b) The bank may not structure its incentive or bonus program in a

manner that creates incentives for an individual to make inappropriate

recommendations or sales to customers of the bank.

(c) Nothing contained in this part prohibits a bank employee,

officer, director, or principal shareholder who holds an insurance

agent's license from agreeing to compensate the bank for the use of its

premises, employees, or goodwill. However, the employee, officer,

director, or principal shareholder shall turn over to the bank as

compensation all income received from the sale of the credit life

insurance to the bank's loan customers.

Dated: September 7, 1995.

Eugene A. Ludwig,

Comptroller of the Currency.

[FR Doc. 95-22699 Filed 9-12-95; 8:45 am]

BILLING CODE 4810-33-P