[Federal Register Volume 60, Number 177 (Wednesday, September 13, 1995)]
[Proposed Rules]
[Pages 47498-47501]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-22699]



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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 

[[Page 47499]]
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 

[[Page 47501]]
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