[Federal Register Volume 61, Number 194 (Friday, October 4, 1996)]
[Rules and Regulations]
[Pages 51777-51782]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-25158]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 2
[Docket No. 96-22]
RIN 1557-AB49
Sales of Credit Life Insurance
AGENCY: Office of the Comptroller of the Currency, Treasury.
ACTION: Final rule.
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SUMMARY: The Office of the Comptroller of the Currency (OCC) is
revising its
[[Page 51778]]
regulation governing national bank sales of credit life insurance and
the disposition of credit life insurance income. This final rule is
another component of the OCC's Regulation Review Program to update and
streamline OCC regulations, focus regulations on key safety and
soundness concerns and agency objectives, and eliminate requirements
that impose unnecessary regulatory burdens on national banks. The final
rule eliminates unnecessarily detailed provisions, reorganizes the rule
into a more helpful format, and refocuses the regulation to better
address areas presenting potential safety and soundness and conflict of
interest issues.
EFFECTIVE DATE: December 31, 1996.
FOR FURTHER INFORMATION CONTACT: Stuart E. Feldstein, Assistant
Director, Legislative and Regulatory Activities, (202) 874-5090; Karen
E. McSweeney, Attorney, Legislative and Regulatory Activities, (202)
874-5090. Office of the Comptroller of the Currency, 250 E Street, SW,
Washington, DC 20219.
SUPPLEMENTARY INFORMATION:
Background
On September 13, 1995, the OCC published a notice of proposed
rulemaking, 60 FR 47498 (September 13, 1995) (proposal), to revise 12
CFR part 2--the OCC's regulation governing credit life insurance and
the disposition of credit life insurance income. The proposal
reaffirmed the OCC's commitment to addressing the concerns that gave
rise to the former part 2 and did not contemplate altering the
fundamental standards reflected in the former rule.
As noted in the proposal, there are two principal concerns that
part 2 is intended to address. First, part 2 is ``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.'' See 42 FR 48518 (September 23, 1977). Second,
a conflict of interest may exist when a loan officer's receipt of
commissions for the sale of the credit life insurance is tied to the
number of loans he or she makes. This prospect of financial reward
based solely upon loan volume may induce loan officers to make unsound
loans or unsound insurance recommendations to the bank's customers. \1\
See generally First National Bank of La Marque v. Smith, 610 F.2d 1258
(5th Cir. 1980).
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\1\ Additional safety and soundness concerns cited when the rule
was adopted included that: (1) arrangements permitting employees,
officers and directors to use bank premises and good will for
personal profit were inimical to the trust and confidence depositors
place in financial institutions; (2) 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) 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).
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The courts have confirmed the authority of a national bank to sell
credit life insurance. See IBAA v. Heimann, 613 F.2d 1164 (D.C. Cir.
1979), cert. denied, 449 U.S. 823 (1980). In Heimann, the D.C. Circuit
stated that 12 U.S.C. 24 (Seventh) grants national banks all incidental
powers necessary to carry on the business of banking and found that the
sale of credit life insurance is within the incidental powers of
national banks. As the court noted, credit life insurance is both
commonplace and essential where ordinary loans on personal security are
involved. Id. at 1170. The court also found that the then-current part
2 regulations were well within the OCC's rulemaking authority. Id. at
1171.
Comments Received and Changes Made
The proposal revised part 2 by streamlining the overly detailed
format of the former part 2 and reorganizing the rule into more
readable and concise provisions. The OCC received 25 comments on the
proposal. The commenters included 17 banks and bank holding companies,
four trade associations, two law firms, one public interest
organization, and one insurance company.
The commenters generally supported the proposed changes to part 2,
and the final rule implements most of the initiatives contained in the
proposal, including the revised structure and format. However, many
commenters recommended changes to specific sections. The OCC carefully
considered each comment and has responded by making certain changes.
The section-by-section discussion of this preamble identifies and
discusses comments received and any changes made to the proposal.
Distribution and derivation tables summarizing sections of former part
2 as changed by the final rule are included at the end of this
preamble.
Section-by-Section Discussion
Section 2.1--Authority, Purpose, and Scope
The proposal added an ``Authority, purpose, and scope'' section
that briefly described the objectives and scope of the regulation. This
section also restated language from former Sec. 2.6 relating to
national bank authority to provide credit life insurance under 12
U.S.C. 24 (Seventh).
The OCC received no comments on this section. The final rule adopts
the section substantially as proposed.
Section 2.2--Definitions
The proposal defined ``credit life insurance'' to mean ``credit
life, health, and accident insurance.'' The OCC requested comment on
whether the scope of this definition was appropriate. The OCC received
11 comments on this issue. Most commenters recommended expanding the
definition to include, for example, all types of credit-related
insurance.
The OCC declines, at this time, to expand the regulatory definition
of ``credit life insurance,'' but notes that it has approved, on a
case-by-case basis, bank sales of other types of credit-related
insurance. The OCC recognizes that national banks are authorized to
offer credit-related insurance other than credit life insurance
pursuant to 12 U.S.C. 24(Seventh) and will continue to consider these
types of credit-related insurance on a case-by-case basis.
A number of commenters also noted that the OCC had removed language
from the definition of credit life insurance and questioned whether the
OCC intended to change the meaning of the definition. In addition to
stating that credit life insurance ``means credit life, health and
accident insurance,'' the former rule also noted that this is
``sometimes referred to as credit life and disability insurance, and
mortgage life and disability insurance.'' The proposal did not include
this latter language. However, the OCC did not intend to change the
definition of credit life insurance. Thus, to avoid any confusion, the
final rule retains the language contained in the former rule.
In addition, the final rule retains the definition of the term
``bank'' contained in the former rule and makes a technical change by
replacing the defined term ``interest'' with ``owning an interest.''
Section 2.3--Distribution of Credit Life Insurance Income
The proposal provided that the means of distributing credit life
insurance income must be consistent with certain requirements and
principles identified in proposed Sec. 2.3. These requirements included
prohibiting a director, officer, employee, or principal shareholder
(bank insider), or an entity in which a bank insider has a voting
interest of five percent or more, from retaining
[[Page 51779]]
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. Proposed Sec. 2.3 also provided that it is unsafe and
unsound for a bank insider, or an entity in which the insider has a
voting interest of five percent or more, to take advantage of that
business opportunity for personal profit.
The proposal defined the term ``principal shareholder'' as any
shareholder who directly or indirectly owns or controls an interest of
more than five percent of the bank's outstanding shares. The OCC asked
commenters to address whether the five percent ownership test for a
``principal shareholder'' and for covered entities in which bank
insiders have an interest is an appropriate ownership test to use in
these contexts, and, if not, what alternative percentages or more
flexible standards would be appropriate.
The OCC received seven comments on this issue. Six commenters
recommended increasing the ownership test to ten percent. One commenter
stated that the definition of principal shareholder is too broad and
should not include holding companies.
The final rule increases the ownership test from five percent to
ten percent. The ten percent ownership level is used to define a
``principal shareholder'' for purposes of other safety and soundness
regulations, and the OCC does not believe safety and soundness concerns
require a lower threshold in the context of the part 2 definition. For
example, a ``principal shareholder'' for purposes of insider lending
standards is defined using a ten percent voting securities ownership
test. 12 CFR 215.2(m)(1).
Thus, the final rule defines a ``principal shareholder'' as any
shareholder who directly or indirectly owns or controls an interest of
more than ten percent of the bank's outstanding voting securities. The
final rule also provides that it is an unsafe and unsound practice for
any bank director, officer, employee, or principal shareholder, or any
entity in which this person owns an interest of more than ten percent,
who is involved in the sale of credit life insurance to loan customers
of the national bank, to take advantage of that business opportunity
for personal profit. In this regard, the final rule states that
recommendations to customers to buy credit life insurance should be
based on the benefits of the policy, not the commissions to be received
from the sale. In addition, except as provided in Secs. 2.3(d), 2.4,
and 2.5(b), a bank insider, or an entity in which the bank insider owns
an interest of more than ten percent, may not retain commissions or
other income from the sale of credit life insurance in connection with
any loan made by that bank, and income from credit life insurance sales
must be credited to the income accounts of the bank.
The OCC also requested comment on situations where banks share
space and employees with other non-bank entities. In some instances,
the bank and another entity that uses bank premises may share employees
to sell products, potentially including credit life insurance, to the
bank's customers. To the extent these shared employees received
commissions from the sale of the credit life insurance, the arrangement
arguably fell within the prohibitions contained in the proposal.
The OCC received one comment on this issue. The commenter
recommended that the bank receive the profits from sales of credit life
insurance by shared employees.
The OCC agrees that in some cases this is the appropriate result.
However, there are situations where the concerns underlying part 2
would not, generally, be implicated. Accordingly, the final rule
focuses on the objectives underlying part 2 and does not apply the part
2 restrictions in certain cases to dual employees, provided that
specified conditions are met. Thus, under the final rule, a director,
officer, employee, or principal shareholder is not subject to the
specific limits of part 2 if he or she is: (1) Employed by a third
party that has contracted with the bank on an arm's-length basis to
sell financial products on bank premises; and (2) not involved in the
bank's credit decision process.
The first requirement ensures that the third party will compensate
the bank for the use of the bank's premises, thus addressing the
concern that the bank be properly reimbursed for the use of its
premises and good will. The second requirement addresses potential
conflicts of interest that may arise when the individual selling the
insurance is involved in the credit decision. The OCC believes that
these conditions effectively adapt the part 2 safeguards to the dual
employee situation.
The proposal also requested comment on whether to retain a
provision that permitted 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 shareholders, if the holding company affiliate
or trust paid reasonable compensation to the bank for the use of its
personnel, premises, and good will. Under the former rule, it was
suggested that reasonable compensation meant an amount equivalent to at
least 20 percent of the affiliate's net income attributable to the
bank's credit life insurance sales.
The OCC received only a few comments addressing this issue. After
considering these comments, the OCC has decided to retain the current
provision with a few modifications. Thus, under the final rule, income
derived from the sale of credit life insurance to loan customers may be
credited to an affiliate operating under the Bank Holding Company Act
of 1956, 12 U.S.C. 1841 et seq., or to a trust for the benefit of all
shareholders, if the holding company affiliate or trust pays reasonable
compensation to the bank for the use of the bank's personnel, premises,
and good will. The OCC does not believe, however, that it is
appropriate for it to suggest what constitutes reasonable compensation
in these arrangements. Thus, the final rule states that reasonable
compensation generally means an amount equivalent to at least 20
percent of the affiliate's net income attributable to the bank's credit
life insurance sales. This provision has been transferred a new section
2.5(b).
The proposal also requested comment on whether to apply the
prohibition against the retention of income derived from the sale of
credit life insurance to sales of credit life insurance to loan
customers of an affiliate bank. The OCC received several comments on
this issue, which raised issues warranting further study. Therefore,
this issue is not addressed in the final rule.
Section 2.4--Bonus and Incentive Plans
Both the proposal and the former regulation permitted 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. Bonuses and incentive payments based on
credit life insurance sales in any one year are limited to the greater
of five percent of the recipient's annual salary or five percent of the
average salary of all loan officers participating in the plan. The bank
may not pay bonuses more frequently than quarterly.
The OCC requested comment relating to both the frequency and amount
of the bonus and incentive payments. Specifically, the OCC asked
commenters to address whether the periodic payment standard and the
percentage limits are appropriate safeguards for bonus and incentive
programs, and, if not, what alternative safeguards would deter
inappropriate sales activities by insiders in connection with the sale
of credit life insurance.
The OCC received 22 comments addressing the permissible amount of
[[Page 51780]]
bonus and incentive plan payments. Nineteen commenters supported either
eliminating or increasing the five percent limit on the amount that a
bank may pay its employees under an incentive or bonus plan. Commenters
recommended alternatives including: (1) Permitting any compensation
plan approved by the bank's board of directors; (2) permitting up to
five percent of premiums sold; and (3) expanding the percentage from
five percent to up to ten percent. Other commenters suggested that the
sole limitation should be the requirement contained in the proposal
that the bank not structure its sales practices in a manner that could
create incentives for persons selling credit life insurance to make
inappropriate recommendations.
Those supporting the retention of the current standards asserted
that the five percent standard is reasonable and provides sufficient
safeguards against abuses. One commenter stated that the five percent
limit provides a necessary bright-line test to prevent banks from
coercing customers.
The OCC agrees with the reasons offered by the commenters for
retaining the five percent limit on bonus and incentive plan payments
based on credit life insurance sales. The OCC shares the concerns
expressed that the prospect of increased financial reward could create
an inappropriate incentive for salespersons to make financially unsound
loans or to recommend insurance based on the amount of commissions paid
rather than the benefits of the policy itself, thereby undermining the
purpose of the regulation. Thus, the final rule retains the five
percent limit on the amount of permissible bonus and incentive plan
payments based on credit life insurance sales.
The OCC also received 18 comments addressing the frequency of
permissible bonus payments. Several commenters suggested either
eliminating or changing to monthly the quarterly limitation on the
frequency with which a bank could make bonus payments.
The OCC is not aware that the frequency--as opposed to the amount--
of the bonus payments has any demonstrable relationship to the
potential for coercing customers to purchase credit life insurance.
Moreover, removing this requirement could reduce burden and increase
flexibility for national banks that have separate payment procedures
for employees selling credit life insurance. Therefore, the final rule
removes the limitation on the frequency of bonus payments.
The proposal also added a new provision requiring the bank to avoid
structuring its bonus or incentive plan in a manner that could create
incentives for persons selling credit life insurance to make
inappropriate recommendations or sales of credit life insurance to bank
customers. The OCC received four comments on this provision. Several
commenters expressed concern that the provision was too vague and could
thereby encourage litigation against banks by disaffected purchasers of
credit life insurance.
The OCC agrees that the proposed provision was potentially vague.
However, the OCC believes that the issue nevertheless needs to be
addressed. As noted in the discussion of Sec. 2.3, the OCC believes
that encouraging a customer to buy credit life insurance on the basis
of commissions to the seller rather than the benefits of the policy is
an example of taking inappropriate advantage of a business opportunity
for personal profit. This is a concern regardless of the percentage
limitations that apply to bank insiders' and principal shareholders'
receipt of incentive and bonus payments and, accordingly, is
specifically referenced in Sec. 2.3 of the final rule.
Section 2.5--Bank Compensation
The OCC has made one clarifying structural change to the final
rule. The final rule transfers to a new Sec. 2.5(a) a concept from the
former rule and the proposal relating to the permissibility of a bank
insider compensating the bank for the use of bank premises, employees,
or good will. Also, as noted earlier, Sec. 2.5(b) contains a provision
from the former rule which allows income derived from credit life
insurance sales to loan customers to be credited to a holding company
affiliate or a trust for the benefit of all shareholders, provided that
the bank receives reasonable compensation in recognition for the role
played by its personnel, premises, and good will in the sale of the
credit life insurance. Reasonable compensation generally means an
amount equivalent to at least 20 percent of the affiliate's net income
attributable to the bank's credit life insurance sales.
Other Changes
The proposal also made a number of additional changes to the
regulation. For example, the proposal removed former Sec. 2.5 which
relates to director responsibilities because that issue was addressed
in a different section of the regulation. The proposal also removed
language in former Sec. 2.6 that contained a list of OCC approved
methods of distributing credit life insurance income that identified
alternatives to the assignment of commissions to the bank. The proposal
substituted a simple statement that the means of distribution of credit
life insurance income must be consistent with the requirements and
principles of Sec. 2.3. The final rule adopts, substantially as
proposed, these changes.
The proposal also removed former Sec. 2.7, which reserved the
Comptroller's authority to modify the applicability of part 2 based on
the particular circumstances of the bank. The final rule removes this
provision. However, as stated in the proposal, the OCC will continue to
consider requests for waivers of part 2 on a case-by-case basis.
Distribution Table
The distribution table indicates where, if applicable, each section
of the former part 2 will appear in the final part 2.
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Original provision Revised provision Comment
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Sec. 2.1...................... Sec. 2.1(a)....... Modified.
Sec. 2.2(a)................... Sec. 2.1(c)....... Modified.
Sec. 2.2(b)................... Sec. 2.1(b)....... Modified.
Sec. 2.3...................... Sec. 2.2.......... Modified.
Sec. 2.4(a)................... Secs. 2.3, 2.4.... Modified.
Sec. 2.4(b)................... Secs. 2.3(c), Modified.
2.5(b).
Sec. 2.4(c)................... Sec. 2.5(a)....... Modified.
Sec. 2.5...................... Sec. 2.3(b)....... Modified.
Sec. 2.6...................... ................... Removed.
Sec. 2.7...................... ................... Removed.
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Derivation Table
This derivation table illustrates the former sections of part 2
upon which the final sections are based.
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Revised provision Original provision Comment
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Sec. 2.1(a)................... Sec. 2.1.......... Modified.
Sec. 2.1(b)................... Sec. 2.2(b)....... Modified.
Sec. 2.1(c)................... Sec. 2.2(a)....... Modified.
Sec. 2.2...................... Sec. 2.3.......... Modified.
Secs. 2.3(a), (b), and (c).... Secs. 2.4(a), (b). Modified.
Sec. 2.3(d)................... ................... Added.
Sec. 2.4...................... Sec. 2.4(a)....... Modified.
Sec. 2.5(a)................... Sec. 2.4(c)....... Modified.
Sec. 2.5(b)................... Sec. 2.4(b)....... Modified.
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Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act, 5
U.S.C. section 605(b), the Comptroller of the Currency certifies that
this rule will not have a significant economic impact on a substantial
number of small entities. This final rule eliminates unnecessary or
confusing language and restructures part 2 to clarify regulatory
requirements. This final rule reduces, somewhat, regulatory burden on
national banks,
[[Page 51781]]
regardless of size. This final rule has minimal impact. Accordingly, a
regulatory flexibility analysis is not required.
Executive Order 12866
The OCC has determined that this final rule 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), 2 U.S.C. 1532, 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, 2 U.S.C. 1535, also
requires an agency to identify and consider a reasonable number of
regulatory alternatives before promulgating a rule. Because the OCC has
determined that this final 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. As discussed in the preamble, the final 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 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.
2.5 Bank compensation.
Authority: 12 U.S.C. 24 (Seventh), 93a, and 1818(n).
Sec. 2.1 Authority, purpose, and scope.
(a) Authority. A national bank may provide 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 standards that apply to a national bank's provision 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 the provision of credit life
insurance by any national bank employee, officer, director, or
principal shareholder, and certain entities in which such persons own
an interest of more than ten percent.
Sec. 2.2 Definitions.
(a) Bank means a national banking association or a bank located in
the District of Columbia and subject to the supervision of the
Comptroller of the Currency.
(b) Credit life insurance means credit life, health, and accident
insurance, sometimes referred to as credit life and disability
insurance, and mortgage life and disability insurance.
(c) Owning an 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 the director,
officer, employee, or principal shareholder of the bank.
(d) Officer, director, employee, or principal shareholder includes
the spouse and minor children of an officer, director, employee, or
principal shareholder.
(e) Principal shareholder means any shareholder who directly or
indirectly owns or controls an interest of more than ten percent of the
bank's outstanding voting securities.
Sec. 2.3 Distribution of credit life insurance income.
(a) Distribution of credit life insurance income by a national bank
must be consistent with the requirements and principles of this
section.
(b) It is an unsafe and unsound practice for any director, officer,
employee, or principal shareholder of a national bank (including any
entity in which this person owns an interest of more than ten percent),
who is involved in the sale of credit life insurance to loan customers
of the national bank, to take advantage of that business opportunity
for personal profit. Recommendations to customers to buy insurance
should be based on the benefits of the policy, not the commissions
received from the sale.
(c) Except as provided in Secs. 2.4 and 2.5(b), and paragraph (d)
of this section, a director, officer, employee, or principal
shareholder of a national bank, or an entity in which such person owns
an interest of more than ten percent, may not retain commissions or
other income from the sale of credit life insurance in connection with
any loan made by that bank, and income from credit life insurance sales
to loan customers must be credited to the income accounts of the bank.
(d) The requirements of paragraph (c) of this section do not apply
to a director, officer, employee, or principal shareholder if:
(1) The person is employed by a third party that has contracted
with the bank on an arm's-length basis to sell financial products on
bank premises; and
(2) The person is not involved in the bank's credit decision
process.
Sec. 2.4 Bonus and incentive plans.
A bank employee or officer may participate in a bonus or incentive
plan based on the sale of credit life insurance if payments to the
employee or officer in any one year do not exceed the greater of:
(a) Five percent of the recipient's annual salary; or
(b) Five percent of the average salary of all loan officers
participating in the plan.
Sec. 2.5 Bank compensation.
(a) 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 good will. 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.
(b) Income derived from credit life insurance sales to loan
customers may be credited to an affiliate operating under the Bank
Holding Company Act of 1956, 12 U.S.C. 1841 et seq., or to a trust for
the benefit of all shareholders, provided that the bank receives
reasonable compensation in recognition of the role played by its
personnel, premises, and good will in credit life insurance sales.
Reasonable compensation generally means an amount equivalent to at
least 20 percent of the affiliate's net income attributable to the
bank's credit life insurance sales.
[[Page 51782]]
Dated: August 30, 1996.
Eugene A. Ludwig,
Comptroller of the Currency.
[FR Doc. 96-25158 Filed 10-3-96; 8:45 am]
BILLING CODE 4810-33-P
