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Bulletin No. 2001-06-OFIS
Gramm-Leach-Bliley Act and the sale of insurance by lenders
Issued and entered June 25, 2001 by Frank M. Fitzgerald, Commissioner of Financial and Insurance Services
The Michigan Insurance Code ("Code") and lender laws were amended in 1995 to expressly allow lenders to be licensed as agents or to own insurance agencies. In 1999, the federal Gramm-Leach-Bliley Act ("Act") clarified and expanded the authority of depository institutions to sell insurance.
The Code and the Act share fundamental principles and standards. Nonetheless, there are differences between the laws and, of course, the agencies that enforce them.
Lenders, insurers, and producers are concerned with how the Act will be integrated into the regulatory framework in Michigan. The purpose of this bulletin is to briefly compare the Code and the Act, identify key issues, and enunciate how the Office of Financial and Insurance Services ("OFIS") will approach the resolution of those issues.
Continued State Enforcement
The Code and the Act share the fundamental philosophy that, so long as appropriate consumer protections are in place, insurers, lenders, and insurance purchasers may benefit from lenders selling insurance. Congress, in passing the Act, recognized that states had long been entrusted with consumer protection with regard to insurance sales and should continue in this role.
In the Act, states are specifically authorized to continue regulating the sale of insurance by depository institutions in what are commonly referred to as the "thirteen safe harbors." Beyond these harbors, states may continue to regulate the sale of insurance by depository institutions to the extent that the regulations do not "significantly interfere" with a depository institution selling insurance.
Additionally, the Act encourages state laws to be strengthened. State laws will be preempted to the extent that they are not as strong as consumer protection rules promulgated last December by four federal agencies that regulate depository institutions (the "four federal agencies"). These regulations take effect October 1, 2001. The four federal agencies are the Office of the Comptroller of the Currency, the Office of Thrift Supervision, the Federal Deposit Insurance Corporation, and the Federal Reserve Board.
The Thirteen Safe Harbors
Briefly summarized, under the thirteen safe harbors a state may impose the following restrictions and requirements on depository institution sales of insurance:
The sale of insurance in Michigan is generally governed by Chapter 12, which deals with agents, and Chapter 20, which deals with unfair trade practices. Section 1243 sets standards specifically for lenders selling insurance.
A careful review of Code sections that may bear upon depository institutions selling insurance, and a review of Section 1243 in particular, reveals that Michigan laws are essentially consonant with the Act.
However, some of the restrictions in the Code are outside the thirteen safe harbors. For example, Section 1243 precludes a loan representative participating in the loan application from acting as an agent for the sale of required insurance. These and other restrictions will need to be examined in light of the "significantly interfere" standard. If any violate the standard, they will need to be changed or eliminated.
Some of the restrictions in Section 1243 are within the categories of regulation set forth in the thirteen safe harbors, but may be more restrictive or burdensome than the restrictions specified in the safe harbors. For example, the Act allows for the payment of some compensation to depository institution employees for the referral of customers. Section 1243 prohibits any compensation.
As previously noted, the four federal agencies promulgated rules last December that establish certain customer protection regulations. They include rules regarding anti-tying and anti-coercion, disclosures, advertising, separation of bank and non-banking activities, and discrimination in sales to persons who are victims of domestic violence.
Unlike the thirteen safe harbors, which set a ceiling on state restrictions, the federal rules establish a floor. To the extent the federal rules provide greater protection to customers, state law will be superseded. It appears that Section 1243 will need to be amended to provide for the disclosure of investment risks and for the separation of insurance sales areas from deposit-taking areas.
By August, OFIS will complete its analysis of the need to amend the Code to accommodate the Act and the federal rules. Any proposed amendments will take into account changes being made in the model unfair trade practices act by the National Association of Insurance Commissioners. OFIS will also keep abreast of developments within the four federal agencies. In particular, the Office of the Comptroller of the Currency is reviewing with respect to preemption the laws of three states which, like Section 1243 in Michigan, regulate the sale of insurance by lenders.
In summary, while the Act and the Code are highly compatible, changes will be needed in the Code. OFIS will, in recommending amendments, promote uniformity among state laws, make it clear to regulated entities what law applies to a transaction, create a more level playing field among lenders selling insurance, and retain authority to regulate the business of insurance in Michigan so far as federal law allows.
The Commissioner is entering into information sharing agreements with the four federal agencies. These are designed to assist OFIS in the functional regulation of insurance and to assist the four federal agencies in the enforcement of laws governing financial institutions.
If OFIS becomes aware that a depository institution is in apparent violation of the federal rules respecting the sale of insurance, it will promptly report this information to the applicable federal agency. Among other things, this would include finding that a depository institution has failed to maintain an insurance sales area separate from its deposit area.
As discussed above, Michigan law with regard to the sale of insurance by lenders is essentially consonant with the Act. There is no section of Michigan law, and no part of Section 1243 in particular, that a depository institution should assume is not in effect due to the Act or the federal rules.
Some sections of the Code that are outside the thirteen safe harbors may cause some interference with the sale of insurance. However, as noted above, the test for preemption is whether the state law significantly interferes with such sales.
Lenders in Michigan have been selling insurance successfully for years. Apparently, the constraints in the Code have not posed a problem to them. In particular, lenders have not approached the Commissioner seeking modification of Section 1243 since it became law in 1995.
In light of these observations, it appears that the Code does not significantly interfere with insurance sales. OFIS will continue to enforce the Code and bring compliance actions where violations of the Code are found.
It is highly recommended that a depository institution review with OFIS prior to implementation any plan for selling insurance that would be in apparent violation of any section of the Code. This will minimize the chances of the depository institution spending time and resources on a plan that may be impermissible under the Code.
The review may be informal or formal. A depository institution may seek a declaratory ruling on a particular plan. Any ruling would be binding upon the depository institution and the Commissioner and would be subject to court review. Any declaratory ruling or other written opinion issued with respect to the Code and the Act will be promptly posted on the OFIS Website. The address is http:/www.michigan.gov/ofis.
One final matter concerns depository institutions selling debt cancellation contracts. Under these agreements, a lender cancels the debt upon the death of the borrower. The Act expressly provides that national banks may sell these products. OFIS has under review the extent to which it may regulate the sale of these products.
Any questions regarding this bulletin should be directed to:
John R. Schoonmaker