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Bulletin No. 2001-10-OFIS
The Gramm-Leach-Bliley Act and the sale of insurance by depository institutions governed by that Act
Issued and entered September 18, 2001 by Frank M. Fitzgerald, Commissioner of Financial and Insurance Services
In Bulletin No. 2001-06-OFIS, the Commissioner briefly compared the Michigan Insurance Code of 1956, as amended, MCL 500.100 et seq. ("Code") and the federal Gramm-Leach-Bliley Act, Act of November 12, 1999, Pub. L. 106-102, 113 Stat. 1338 ("Act"), identified key issues, and enunciated how the Office of Financial and Insurance Services ("OFIS") will approach the resolution of those issues. The focus of this bulletin is upon the conduct of depository institutions that are governed by the Act ("depository institutions").
As previously reported, a careful review of Code sections that bear upon depository institutions selling insurance, and a review of Section 1243 in particular, revealed that the Code is essentially consonant with the Act. Nonetheless, some areas of possible conflict were noted.
Depository institutions have sought clarification of their duties under the Code where conflicts exist. They should not be left in the quandary of complying with federal law only to be in apparent violation of state law.
It is thus incumbent upon the Commissioner to identify areas of conflict between the laws, determine where state law has been preempted, and assure the depository institutions governed by the Act that they will not be subjected to compliance actions by this agency under laws that have been preempted.
As discussed in the prior bulletin, under the thirteen safe harbors in the Act, states may impose certain limitations on depository institutions as specified in the harbors. State laws that are more restrictive or burdensome than the standards in the thirteen safe harbors are preempted by the Act. As discussed below, there are three areas where Code sections are more restrictive than the standards contained in the thirteen safe harbors.
Code sections 1207(3), 1216(3), and 1243(30) generally prohibit the payment of referral fees to unlicensed persons. However, Sections 104(d)(2)(iv) and (v) of the Act allow the payment of certain referral fees. Therefore, with respect to referral fees, the Act preempts sections 1207(3), 1216(3) and 1243(30) as they apply to depository institutions and their affiliates, except to the extent that those sections prohibit either of the following:
Transfer of Information
Code sections 1243(11) and (22)-(29) generally restrict information that may be transferred from a lender to an agent employee or affiliated agency. Section 104(d)(2)(B)(vi) of the Act generally allows the free transfer of information. Accordingly, the Code sections do not apply to the transfer of information by a depository institution to an officer, director, employee, agent, or affiliate of the depository institution and to that extent are preempted by the Act.
Code section 1243(14) generally prevents a lender from making an early disclosure about the availability of insurance products from the lender or an affiliated agency to a person inquiring about credit or to a person applying for a loan. Section 104(d)(2)(B)(viii) of the Act does not allow a prohibition that would prevent the depository institution or affiliate from informing a customer or prospective customer that insurance is available from the depository institution or an affiliate of the depository institution. Therefore, the Act preempts Code section 1243(14) to the extent it applies to depository institutions or their affiliates.
The consumer protection rules issued by the federal banking agencies under section 305 of the Act, effective October 1, 2001, require a depository institution to make certain disclosures when it receives a loan application in connection with which insurance is sold or solicited. 65 Federal Register 75822 (December 4, 2000). A question has been raised as to whether giving this disclosure would violate the prohibition of Code section 1243(14) against "knowingly initiating a discussion" with a loan applicant about the availability of insurance from the lender or its affiliated agency before the lender notifies the applicant as to whether the application has been approved. As indicated above, however, the Act preempts section 1243(14). Even if it did not, making a federally-mandated disclosure would not constitute "initiating a discussion."
Additionally, Code section 1243(21) provides that a lender may not use certain information as a basis for informing a customer or other person that insurance is available from the lender or another person. This conflicts with section 104(d)(2)(B)(viii), which provides that a state may not prevent a depository institution from informing a customer or prospective customer that insurance is available from the depository institution or an affiliate of the depository institution. Accordingly, Code section 1243(21) is preempted by the Act, to the extent it applies to depository institutions or their affiliates.
Certain Code sections are preempted by the Act with respect to the conduct of depository institutions governed by the Act. In conformity with the discussion above, to the extent those Code provisions are more restrictive than allowed under the thirteen safe harbors, this agency will not seek to enforce them against the depository institutions. The Commissioner will continue to review whether other provisions of Code section 1243 are preempted by the Act.
Any questions regarding this bulletin should be directed to:
John R. Schoonmaker