[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