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F e d er a l R e ser ve Ba n k
DALLAS, TEXAS
of
Dallas
75222
Circular No. 80-11
January 23, 1980
FEDERAL FINANCIAL INSTITUTIONS EXAMINATION COUNCIL
Joint Notice of Proposed Policy Statement
On Disposition of Credit Life Insurance Income
TO ALL STATE MEMBER BANKS IN THE
ELEVENTH FEDERAL RESERVE DISTRICT:
Enclosed is a proposed policy statement of the Federal financial
institutions supervisory agencies concerning disposition of income from the
sale of credit life insurance related to loans made by supervised institutions.
Those desiring to comment on the policy should send such comments
to Interagency Credit Life Income Policy, c/o John J . McCarthy, Deputy Director,
Division of Bank Supervision, Federal Deposit Insurance Corporation, Room
5050-A, 550 Seventeenth Street, NW, Washington, D.C. 20429. Comments
must be received by March 31, 1980.
Sincerely yours,
Robert H. Boykin
First Vice President
Enclosure
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
FEDERAL FINANCIAL INSTITUTIONS EXAMINATION COUNCIL
ON BEHALF OF ITS MEMBER AGENCIES
Joint Notice of Proposed Policy Statement
On Disposition of Credit Life Insurance Income
AGENCIES: The Federal Deposit Insurance Corporation, the Board of
Governors of the Federal Reserve System, the Comptroller of the
Currency, the Federal Home Loan Bank Board and the National Credit
Union Administration.
ACTION: Proposed policy statement; request for comments.
SUMMARY:
The Federal financial institution supervisory agencies are
proposing to issue a policy statement which would prohibit financial
institution
insiders from benefiting personally from income derived
from the sale of credit life, health or accident insurance sold in
connection with loans made by their institutions.
The proposed policy
statement would require that such income be credited to an institution'
own income account or, in the case of a savings and loan association,
to its service corporation.
In States where insurance laws appear to
preclude a financial institution from receiving insurance commissions,
the proposed policy statement would require a financial institution
that wishes to sell credit life, health or accident insurance to use
any other procedure for making insurance available so long as insiders
do not personally profit.
EFFECTIVE DATE:
Comments must be received by March 31, 1980.
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ADDRESS:
Comments should be addressed to Interagency Credit Life
Income Policy, c/o John J. McCarthy, Deputy Director, Division of
Bank Supervision, Federal Deposit Insurance Corporation, Room 5050-A,
550 Seventeenth Street, NW, Washington, DC
FOR FURTHER INFORMATION CONTACT:
20429 (202/389-4283).
John McCarthy, Federal Deposit
Insurance Corporation, (202) 389-4283; Sandy Greene, Federal Reserve
Board, (202) 452-2742; Ford Barrett, Comptroller of the Currency,
(202) 447-1896; Larry Berkow, Federal Home Loan Bank Board, (202)
377-6430; and Barry Jolette, National Credit Union Administration,
(202) 254-8760.
SUPPLEMENTARY INFORMATION: The Federal financial institution super
visory agencies ("agencies") are aware that it has been a long-standing
financial practice in certain parts of the country for officers,
directors, principal shareholders (whether individual or corporate),
their interests or other affiliates ("insiders") of financial institu
tion to receive, either directly or indirectly, income derived from
the sale of credit life, health or accident insurance ("credit life
insurance") in connection with loans made by the institutions.
Insiders usually receive the income in one of two ways— either by the
payment of the insurance commissions directly to the insider or by
payment to the insider of additional salary or other form of compen
sation based upon the amount of insurance business generated.
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The agencies believe that the diversion of income from credit life
insurance sales to insiders rather than to their financial institutions
may constitute an unsafe or unsound financial practice.
The reasons
for the agencies' concern include the following:
(1)
Financial institution officers and directors owe a fiduciary
duty to the institution and all its shareholders not to profit
personally from an activity involving use of the institution's
facilities, personnel, goodwill, or other resources.
(2)
As an accounting and operations matter, it appears that income
derived from insurance sales would be properly accounted for by
crediting it to the financial institution’s income accounts, or
in the case of a savings and loan association, to its service
corporation, and not to insiders, their interests or affiliates.
Allowing such income to be diverted without entering the income
stream seems contrary to the orderly and systematic accounting
of funds that is expected of financial institutions.
(3)
Loan officers may be induced to make loans they might not other
wise have considered sound in order to receive the commission on
the accompanying insurance sale.
This could result in a conflict
of interest situation in which a loan officer’s credit judgment
might be influenced by his or her own desire for personal
financial gain.
(4)
A loan officer who stands to receive an insurance commission
might be induced to persuade a borrower to purchase unneeded
or unwanted insurance.
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(5)
Financialinstitutions operate largely
on public trust and con
fidence. Arrangements that permit bank insiders
to profit at
the expense of the institution, its shareholders, or its
depositors could undermine that trust and confidence and com
promise the integrity of the institutions.
Accordingly, in the interest of preserving the safety and soundness of
financial institutions, the agencies are proposing to adopt a policy
statement which would prohibit insiders of financial institutions
from personally profiting on the sale of credit life insurance and which
would require such income to be credited to the financial institutions'
income accounts or, in the case of savings and loan associations, to
their service corporations.
In the two known States where State insurance laws may preclude a finan
cial institution from receiving credit life insurance commissions (Texas
and Oklahoma),a financial institution that
wishes to provide credit
life insurance would be permitted to use any other procedure for
making credit life insurance available (e.g., the group policyexperience refund method or the credit union method) , so long as insiders
do not personally profit and any income is credited to the financial
institution.
The agencies recognize that the practice whereby income derived from
the sale of credit life insurance is diverted to insiders is one of
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long standing in some areas of the country.
Therefore, it is the
agencies' intention to give financial institutions sufficient time
to adjust their activities and arrangements to conform to the provisions
of the proposed policy statement.
If adopted, the policy statement
would provide that financial institutions not now subject to a rule,
regulation, or policy statement on credit life insurance income should
be in compliance with its provisions within one year following final
publication.
The proposed policy statement also provides that financial
institutions may be excepted from the general rule on a case-by-case
basis if a clear hardship exists and satisfactory assurance is provided
that compliance will be forthcoming within an appropriate period of
time.
Given the provision enabling a phase-in of the proposed policy
statement’s applicability on a case-by-case basis, each agency will
have flexibility to handle hardship cases in an appropriate manner.
While comments on all aspects of the proposed policy statement are
invited, those addressing the effect of the proposed policy statement
on small banks and their shareholders (including bank holding companies)
are particularly desired.
The text of the following Proposed Policy Statement is as follows:
PROPOSED POLICY STATEMENT
Disposition of Credit Life Insurance Income
For the purpose of helping to preserve the safety and soundness of
financial institutions, the Federal Deposit Insurance Corporation,
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the Federal Home Loan Bank Board, the Federal Reserve Board, the
National Credit Union Administration 1/ and the Office of the
Comptroller of the Currency are adopting the policies set forth below
regarding the disposition of income from the sale of credit life,
health, and accident insurance ("credit life insurance") related to
loans made by federally insured financial institutions.
(1)
Individual officers, directors and principal shareholders of a
financial institution should not personally profit from the sale
of credit life insurance to the institution's loan customers.
(2)
As an accounting and operations matter, income derived from
credit life insurance sales to loan customers should be credited
only to the income accounts of the financial institutions or,
in the case of a savings and loan association, to its service
corporation, and not to the financial institution's individual
officers, directors, principal shareholders, their interests,
or other affiliates.
(3)
Where State insurance laws or other legal considerations preclude
a financial institution from using a particular procedure for
selling credit life insurance or from disposing of the income
in a particular manner, a financial institution which wishes to
provide this service to its loan customers shall seek and utilize
an alternative method that complies with 1 and 2 above.
(4)
The proper method for the distribution to shareholders or to an
affiliated holding company of income derived from credit life
insurance or other income sources is through a declaration of
dividend in conformity with law, rule, regulation and prudent
financial practice.
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(5)
Financial institutions not now subject to a rule, regulation
or policy statement on the disposition of credit life insurance
income should be in compliance with 1 and 2 above within one year
following publication in the Federal Register of the final policy
statement.
Modifications beyond that time will be granted only
where a clear hardship exists and satisfactory assurance is
provided that compliance with 1 and 2 above will be achieved
within an appropriate time period.
1/
Federal credit unions are not permitted by law to sell
credit life insurance.
I > *■
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(SIGNED)
Theodore fe. Allison, Secretary
Board of Governors of the Federal
Reserve System
(SIGNED)
J. J. Finn, Secretary
Federal Home Loan Bank Board
(SIGNED)
tt. Joe Selby, Senior freputy
Comptroller, Office of the
Comptroller of the Currency
(SIGNED)
Hoyle L. Robinson, Executive
Secretary, Federal Deposit
Insurance Corporation
(SIGNED)
Rosemary Brady, Secretary to NCUA
Board, National Credit Union
Administration
BY: Beatrix Fields, Acting
Secretary to NCUA Board
@FedFRASER