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F ederal R ese r v e B ank
OF DALLAS
W ILLIAM H. W ALLACE
f i r s t v ic e p r e s i d e n t
n
.
.
n - j
1noc
October 27, 1986
DALLAS, TEXAS 75222
Circular 86-90
TO:
The Chief Executive Officer of all
member banks, bank holding companies
and others concerned in the
Eleventh Federal Reserve District
SUBJECT
R evision to Regulation Y r e la te d to p erm issib le insurance a c t i v i t i e s
fo r bank holding companies
DETAILS
The Board of Governors of the Federal Reserve System has adopted a
comprehensive revision to provisions of Regulation Y that deal with
permissible insurance activities for bank holding companies, effective
November 7, 1986.
As part of this revision, the Board eliminated a 1972 requirement
that bank holding companies engaging in credit life, accident and health
insurance underwriting provide rate reductions or increased policy benefits.
The Board determined that this requirement put bank holding companies
at a disadvantage with respect to other providers of this insurance
underwriting. The Board also determined that other adequate safeguards exist
to deal with the possibility of adverse effects on the public.
The general revision of the insurance provisions of Regulation Y was
originally proposed in March 1984 to reflect amendments to the Bank Holding
Company Act contained in the Garn-St Germain Depository Institutions Act of
1982.
In clarifying the scope of insurance activities that are closely
related to banking and permissible for bank holding companies under the
Garn-St Germain Act, the Board further defined seven specific categories of
insurance activities contained in the Act.
For additional copies of any circular please contact the Public Affairs Department at (214) 651-6289. Banks and others are
encouraged to use the following incoming WATS numbers in contacting this Bank (800) 442-7140 (intrastate) and (800)
527-9200 (interstate).
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
- 2 -
These provisions, under certain conditions, generally allow bank
holding companies to sell credit-related life, accident and health insurance,
and involuntary unemployment insurance; to sell property insurance on
collateral securing loans of $10,000 or less ($25,000 for manufactured homes)
through finance company subsidiaries; to act as general insurance agents in
towns under 5,000 population or where the bank holding company has less than
$50 million in assets; to continue to sell and expand insurance agency
activities authorized on or before May 1, 1982; and to act as a supervisor of
agents for insurance provided to the holding company, its subsidiaries, and
their employees.
ATTACHMENTS
The material as published in the Federal Register is attached.
MORE INFORMATION
For further information, please contact Basil Asaro at (214)
698-4345, Gayle Teague at (214) 651-6481, or David W. Dixon of the Legal
Department at (214) 651-6228.
Sincerely yours,
36201
Federal Register
Vol. 51, No. 196
Thursday. October 9, 1986
accident and health, and involuntary
unemployment insurance. The Board in
adopting the amended insurance
regulation has decided to eliminate this
rate reduction requirement.
EFFECTIVE DATE: November 7,1986,
FOR FURTHER INFORMATION CONTACT:
FEDERAL RESERVE SYSTEM
12 CFR Part 225
[Regulation Y; Docket Nos. R-0491 and R0511]
Bank Holding Companies and Change
in Bank Control; Permissible Insurance
Activities For Bank Holding
Companies
AGENCY: Board of Governors of the
Federal Reserve System.
ACTION: Final rulemaking.
The Board has adopted, with
some modifications, a proposed revision
of its Regulation Y dealing with
permissible insurance activities, 12 CFR
225.25(b)(8). The Board proposed this
revision (49 FR 9215, March 12,1984) in
order to reflect amendments to section
4(c)(8) of the Bank Holding Company
Act (12 U.S.C. 1843(c)(8)) (“the BHC
Act”) contained in Title VI of the GarnSt Germain Depository Institutions Act
of 1982 (Pub. L. 97-320 601; 96 Stat. 1469,
1536-38 (1982)) (“the Gam-St Germain
Act”). This regulation seeks to clarify
the scope of insurance activities the
Board finds to be closely related to
banking and permissible for bank
holding companies under the Gam-St
Germain Act. This revised regulation
will replace in a single revised
§ 225.25(b)(8) (12 CFR 225.25(b)(8)), the
current provisions of 225.25(b)(8) dealing
with permissible insurance agency
activities, and 225.25(b)(9) dealing with
insurance underwriting activities.
In addition, on November 18,1983 (48
FR 53125), the Board invited public
comment on a proposal to eliminate the
condition contained in note 7 to
§ 225.25(b)(9) of Regulation Y (12 CFR
225.25(b)(9), n. 7) requiring a showing of
positive public benefits, generally in the
form of rate reductions, by those bank
holding companies applying to engage in
the underwriting of credit life, credit
su m m a ry :
Sidney M. Sussan, Assistant Director,
Division of Banking Supervision and
Regulation (202/452-2638), James E.
Scott, Senior Counsel, Legal Division
(202/452-3513) or Michael J. O’Rourke,
Senior Attorney, Legal Division (202/
452-3288), or for users of
Telecommunications Device for the
Deaf, Eamestine Hill or Dorothea
Thompson, (202/452-3244), Board of
Governors of the Federal Reserve
System, Washington, DC 20551.
SUPPLEMENTARY INFORMATION: In the
Gam-St Germain Act amending section
4(c)(8) of the BHC Act (12 U.S.C,
1843(c)(8)(A)—(G)). Congress has
determined that insurance agency and
underwriting activities are not closely
related to banking and thus not
generally permissible for bank holding
companies under section 4(c)(8) of the
BHC Act, except as contained in
exemptions A through G of the statute.
Moreover, the language of section 4(c)(8)
lists the exemptions A through G as
exceptions to the “closely related to
banking” test, but not to the “proper
incident" or public benefits test. See, for
example, the Conference Report
accompanying the Gam Act, S. Rep. No.
641, 97th Cong.. 2d Sess. 91 (1982), which
states .. thus [the Gam-St Germain
Act] establishes that the sale of
insurance does not, except for the
activities subject to the exceptions, meet
the ‘closely related’ test of section
4(c)(8) of the Bank Holding Company
Act.” The Board must still decide the
public benefits issues, however, on a
case-by-case basis. The Board has
consistently interpreted the insurance
exemptions in section 4(c)(8) as defining
certain insurance activities for which
bank holding companies may apply and
which the Board may approve on a caseby-case basis. See, e.g., dissenting views
of Representative Patterson, H.R. Rep.
No. 84, 96th Cong., 2d Sess. 15-16 (1980).
The Board’s revised insurance
regulation, § 225.25(b)(8) of Regulation
Y, 12 CFR 225.25(b)(8), contains
subsections (i) through (vii) which
correspond to exemptions (A) through
(G) of section 4(c)(8). Since certain of
these exemptions deal with
underwriting as well as agency
activities, the Board has decided, for the
purpose of clarity, to define both types
of permissible activities in a single
insurance provision, 12 CFR 225.25(b)(8).
The present § § 225.25 (b)(8) and (b)(9)
will be deleted.
The following commentary is intended
to describe and clarify the insurance
activities permissible for bank holding
companies under each provision of the
amended regulation.
1. Activities Permissible Under
Exemption A of the Gam Act
In paragraph (b)(8)(i) of § 225.25, the
Board has determined that the following
activities are permissible for bank
holding companies:
(i)
Credit Insurance. A c tin g as p r in c ip a l
ag en t, or b ro k er for in s u r a n c e (in clu d in g
h o m e m o r tg a g e r ed e m p tio n in s u r a n c e ) th at ss
[A ) d ir e c tly r e la te d to an e x te n s io n o f cre d it
b y th e b a n k h o ld in g c o m p a n y or a n y of its
su b s id ia r ie s: a n d (B) lim ite d to a ssu r in g the
r ep a y m e n t o f th e o u tsta n d in g b a la n c e d u e on
the e x te n s io n o f c r e d i t 1 in th e e v e n t o f th e
death, disability, or involuntary
u n e m p lo y m e n t o f the debtor.
7 '‘Extension of credit" includes direct loans to
borrowers, loans purchased from other lenders, and
leases o f real or personal property so long as ‘.He
leases are nonoperating and full payout leases tha«
meet the requirements of paragraph (b)(5l of this
section.
Defining an Extension o f Credit
The Board has permitted insurance
activities by a bank holding company
only with respect to its own extensions
of credit and those of its subsidiaries,
rather than extensions of credit by
unaffiliated bank holding companies.
Although some commenters argued that
exemption A permits insurance
activities with respect to extensions of
credit by any bank holding company,
the Board believes Congress intended to
continue the Board’s practice of
permitting the sale and underwriting of
insurance by a particular bank holding
company only with respect to
extensions of credit by that company .
To decide otherwise would permit bank
holding companies to engage in
insurance activities in conjunction with
extensions of credit by unaffiliated
banks only if they are subsidiaries of a
holding company rather than
independent institutions.
Paragraph (i) of the revised regulation
defines an “extension of credit” to
36202
Federal Register / Vol. 51, No. 196 / Thursday, October 9, 1986 / Rules and Regulations
include direct loans to borrowers, the
purchase of loans from other lenders,
and the lease of real or personal
property so long as the leases meet all
the criteria contained in § 225.25(b)(5) of
Regulation Y (12 CFR 225.25(b)(5)),
which defines leases that are “the
functional equivalent of an extension of
credit.” This list is not intended to be
exhaustive and the Board will decide on
a case-by-case basis whether there are
additional instruments that may qualify
as extensions of credit for purposes of
the sale and underwriting of insurance.
D efining an ‘‘Outstanding Balance D ue”
Paragraph (i) limits the insurance
coverage to the “outstanding balance
due” on an extension of credit. As used
in the regulation, the term “outstanding
balance due” includes principal and
interest and reasonable administrative
fees outstanding on a loan as well as the
balance of payments due in a lease
transaction. It does not include the
residual value of the leased item since
the lessor owns the leased item and the
lessee is not obligated to purchase the
item by paying the residual value.
A bank holding company may sell or
underwrite various kinds of life,
disability, and unemployment insurance
related to an extension of credit,
provided the face amounts of such
policies do not exceed the “balance
due” on the underlying loans or leases.
The insurance may provide for total
repayment of the extension of credit
upon the death of the borrower or for
periodic payments on the extension of
credit when the borrower is temporarily
disabled or unemployed. Such single or
periodic payments may not exceed the
balance on the loan and thus provide for
additional general life or accident
coverage.
While ordinarily such credit-related
insurance coverage would be declining
term as payments reduce the balance
due on an extension of credit, a bank
holding company may write or sell a
level term policy on non-amortizing
loans. Policies written or sold pursuant
to this paragraph, moreover, may be
individual rather than group policies,
and the premiums on such policies may
be age-related. The language of
exemption A requires only that the
insurance guarantee repayment of the
outstanding balance due on an
extension of credit and not that it be
limited to traditional group credit life
insurance. While recognizing that the
types of insurance permitted under
exemption A are “generally
underwritten as group policies covering
certain classes of borrowers,” the
Senate Report on Title VI of the Garn
Act (S. Rep. No. 536, 97th Cong., 2d Sess.
38 (1982)) (hereinafter “the Senate
Report”) does not indicate that such a
requirement is mandatory.
The Board will continue to require
that insurance policies sold or written to
cover the “outstanding balance due”
insure only named borrowers or lessees
of a particular bank holding company.
Accordingly, such policies could cover
both spouses jointly only if both spouses
were actual borrowers or lessees under
the terms of the agreement with the
bank holding company. The Board
limited permissible insurance activities
to actual debtors even prior to passage
of the Gam-St Germain Act. Irwin
Union Corp., 60 Fed. Res. Bull. 138
(1974); First Bancorp, 39 FR 7493 (1974).
See also Federal R eserve Regulatory
Service, 4-337 and 4-590.
Paragraph (i) of the amended
regulation contains three significant
interpretations of the term "extension of
credit” in exemption A of Garn-St
Germain Act. It permits the sale and
underwriting of credit-related life,
accident and health, and involuntary
unemployment insurance: (1) With
respect to lease transactions where such
lease transactions are the equivalent of
loans, (2) in connection with loans
secured by residential first mortgages,
and (3) in connection with the servicing
of loans originated or purchased by the
applicant bank holding company and
subsequently sold.
Leases as an Extension o f Credit
The amended regulation explicitly
permits the sale of life, disability, and
involuntary unemployment insurance
with respect to a lease transaction,
provided the lease is the type of non
operating, full payout lease described as
permissible for bank holding companies
in § 225.25(b)(5) of Regulation Y (12 CFR
225.25(b)(5). Since the Board has
determined that such leases are the
“functional equivalent of an extension
of credit," it believes that this type of
lease is encompassed in the term
“extension of credit” a3 it is used in
exemption A of the Gam-St Germain
Act. The Board also notes that it has
previously authorized the sale of creditrelated life and accident and health
insurance in connection with leases, and
it finds no evidence that Congress
intended to overturn the Board’s ruling.
The Board’s conclusion is supported
by a number of commenters who suggest
that in practice a lease and a loan are
functionally and operationally
equivalent. The bank holding company
makes the same sort of credit analysis in
each case. The bank holding company
then uses this credit analysis, the
prevailing interest rates, the term of the
transaction, and consideration of
available financing alternatives in
preparing the lease or loan package. In
each case the bank holding company is
protected by an interest in particular
property. The lease and loan both place
the bank holding company’s funds at
risk, require a monthly payment, and
generally have a diminishing
outstanding balance to complete the
transaction. The loan has a down
payment and the lease a residual value
amount.
The customers of the bank holding
company often consider loans and
leases as alternative forms of financing.
Moreover, the lease and the loan
customers of the bank holding company
have similar interests they may choose
to insure. In both cases, the bank
holding company customer or his
beneficiary retains the use of a
particular piece of property under the
terms of a contract without need to
make additional payments under the
contract at the disability or death of the
customer.
The Board does not believe, as some
commenters urge, that a bank holding
company may engage in the sale of
property and casualty insurance on the
leased item. This provision of the
amended regulation permits only the
sale of credit related life, disability and
voluntary unemployment insurance on
the lease transaction.
Underwriting Credit-Related Home
Mortgage Insurance
The second interpretation in
paragraph (i) of the amended regulation
involving the definition of “extension of
credit" is the permissibility of
underwriting home mortgage insurance,
which insures the repayment of the
unpaid balance of a residential first
mortgage loan in the event of the death
or disability of the mortgagor. As noted
above, exemption A of the Garn-St
Germain Act permits the sale and
underwriting of any type of life,
disability, and involuntary
unemployment insurance related to an
extension of credit by a bank holding
company as long as the face value of the
insurance policy does not exceed the
“outstanding balance due” on the
extension of credit. The Garn-St
Germain Act does not impose any
additional restrictions or limits on the
type of life, disability, or involuntary
unemployment insurance that may be
underwritten or sold.
The Board had previously held that
the underwriting of home mortgage
insurance is not closely related to
banking, in part because it is more like
general life insurance than credit life
insurance and in part because banks
Federal Register / Vol. 51, No. 196 / Thursday, October 9, 1986 / Rules and Regulations
have not generally underwritten such
insurance. BankAm erica Corporation, 66
Fed. Res. Bull. 660 (1980); Seafirst
Corporation, 68 Fed. Res. Bull. 318
(1982). Recently, however, the Board has
permitted bank holding companies to
underwrite such insurance. Citicorp/
Fam ily Guardian, 72 Fed. Res. Bull. 339
(1986); Security P acific Corporation, 72
Fed. Res. Bull. 671 (1986). In permitting
this activity by order the Board made
detailed findings that the underwriting
of home mortgage redemption insurance
is permitted by exemption A of the
Garn-St Germain Act, is closely related
to banking, and does not present the
possibility of such significant adverse
effects that it should not be added to the
list of activities permissible for bank
holding companies. The Board relied on
comments that the differences between
home mortgage insurance and credit life
insurance have diminished because
traditional group credit life insurance
sold by bank holding companies on
second mortgages has become similar in
face amount and actual (rather than
contractual) term to home mortgage
insurance. In addition, the Board
determined that home mortgage
redemption insurance is closely related
to banking because it supports the
lending function. The Board believes, for
the reasons set forth more fully in its
Citicorp order, that the underwriting of
home mortgage redemption insurance is
permissible for bank holding companies.
In adopting this position, the Board
considered the comments of those that
opposed bank holding company
underwriting of home mortgage
insurance, particularly the argument that
Congress intended to codify in
exemption A the scope of credit life and
disability insurance activities permitted
by the Board prior to 1982, when the
Board declined to permit the
underwriting of home mortgage
insurance. The Board has determined
that the language of exemption A of the
Garn-St Germain Act, however, does not
by its terms seek to codify prior Board
practice, particularly a limited Board
practice articulated in two individual
orders.
Since home mortgage insurance
underwriting involves a new type of
insurance activity that may raise public
benefits issues, the Board will require an
application or notice from any bank
holding company seeking to engage in
the activity and will not presume that all
companies heretofore engaged in the
underwriting of credit life insurance
may automatically extend those
activities to include the underwriting of
home mortgage insurance.
The Board notes that in approving this
activity by order the Board has relied on
commitments by applicants to inform in
writing borrowers who are prospective
purchasers of such insurance that home
mortgage redemption insurance is not
required and that, if desired, it may be
purchased from other sources. The
Board has also relied on a commitment
for written notice to borrowers that the
insurance contract may be rescinded at
any time after the loan commitment is
made and prior to closing. In processing
applications to engage in the
underwriting of home mortgage
redemption insurance pursuant to this
amended regulation, the Board, and the
Reserve Banks acting pursuant to
delegated authority, will continue to
require such notices be provided to
borrowers. In addition, it will continue
to rely on the fact that premiums for
such insurance are payable periodically
during the term of the extension of
credit, so as to increase the borrowers*
ability to rescind the insurance and to
limit premium financing as an incentive
to sell and underwrite such insurance.
Insurance in Connection W ith Serviced
Loans
A third significant interpretation of
the term “extension of credit” found in
exemption A of the Garn-St Germain
Act involves the sale and underwriting
of insurance in connection with the
servicing of loans. As the Board noted in
its proposed rulemaking, the Garn-St
Germain Act limits the sale of insurance
by bank holding companies in general to
insurance related to an extension of
credit. The Board may no longer permit
the sale of insurance related to the
provision of the general financial
services offered by a bank, including, for
example, insurance on the contents of
safe deposit boxes or savings
completion insurance on certificates of
deposit, Christmas club accounts,
individual retirement accounts, or
tuition completion plans. Insurance with
respect to loan servicing by a bank
holding company w as the primary type
of such insurance previously permitted
by the Board as related to financial
services.
The Board believes that the term
“extension of credit” is used in
exemption A to describe transactions in
which the funds of the bank holding
company or its subsidiaries have been
placed at risk, including direct loans or
leases or loans that have been
purchased. Loans that are merely being
serviced by the bank holding company
generally would not be covered by this
definition. The Board has been
persuaded, however, by the comments
received to permit bank holding
36203
companies to sell credit-related life,
accident and health, and involuntary
unemployment insurance where a bank
holding company has previously placed
funds at risk by originating or
purchasing loans and thereafter has sold
the loans and retained the servicing
rights. Of course, the bank holding
company must continue to limit its
insurance coverage to the outstanding
balance due on the extension of credit
by the borrower.
The Board notes that to require a
bank holding company to cancel
insurance that it has sold or
underwritten on a loan origination or
purchase immediately upon sale of the
loan would cause substantial
inconvenience for the borrower, the
bank holding company, and the
purchasers of the loan. It may also result
in gaps in insurance coverage and
greater cost to the borrower. Such
cancellation requirement would also
restrict the ability of bank holding
companies to compete in the sale and
underwriting of any credit-related
insurance because the purchaser of the
policy would have no control of whether
and when it could be cancelled. The
Board believes that in conferring the
right to sell such insurance Congress
must have intended that bank holding
companies be able to compete
effectively. Therefore, a bank holding
company that offers credit insurance for
a fixed term should not be forced to
alter that contract by reason of the
subsequent sale of the loan, particularly
the sale in the secondary market where
the servicing entity has traditionally
been obligated to see that proper
insurance coverage is maintained.
The sale and underwriting of
insurance on loans being serviced is
necessary only where the term of the
insurance was originally shorter than
that of the loan. The bank holding
company selling and underwriting
insurance on the loan that it originated
and is servicing is, in effect, only
extending the term of its original
insurance policy to be coterminus with
the duration of the loan. It is providing
insurance that it could have provided
previously. The Board does not believe
that Congress intended to prevent a
bank holding company lender from
renewing insurance coverage on loans it
sells but continues to service.
Although a bank holding company
may not sell or underwrite insurance in
the case where it is merely servicing a
loan and it has never placed its funds at
risk either by originating or purchasing
the loan, the bank holding company is
permitted to collect and transmit
insurance premiums, act as intermediary
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Federal Register / Vol. 51, No. 196 / Thursday, October 9, 1986 / Rules and Regulations
in renewing existing policies or
adjusting coverages, and engage in other
activities which are incidental to the
servicing of loans. The bank holding
company may collect a fee for such
services, providing that the fee is based
upon the provision of the service and is
not a premium for insurance sold or
underwritten. In that case, the bank
holding company is engaging in loan
servicing rather than insurance
activities.
The Public B enefits Requirem ent o f
Credit Life Underwriting
The Board has decided to eliminate its
requirement that those bank holding
companies applying to engage in the
underwriting of traditional group credit
life, disability, and involuntary
unemployment insurance show a public
benefit in the form of a reduction in the
premium cost of such insurance below
the maximum or prima-facie rate
established by the state and/or charged
by credit insurance underwriters in the
state. The Board imposed the
requirement of demonstrating explicit
public benefits in 1972 when it added
credit life underwriting to the list of
nonbanking activities permissible for
bank holding companies. The Board
imposed this requirement because of its
concern that the underwriting of such
insurance by bank holding companies
presented the potential for certain
adverse effects. Moreover, the Board in
viewing the rate structure of credit life
insurance was not convinced that the
underwriting of such insurance on a de
novo basis by bank holding companies
would result in the same positive
competitive effects normally associated
with de novo entry.
During the past 14 years the
underwriting of credit life insurance has
remained the only permissible
nonbanking activity for which the Board
has imposed a requirement or condition
that effectively determines the fee
structure for the activity. This is a
matter of concern to the Board because,
under authorization of a federal statute,
credit insurance rate ceilings are set by
the individual states. Moreover, the rate
reduction requirement can give the
appearance that only lower rates than
those permitted by the states are in the
public interest or create a public benefit.
This may be inappropriate at a time
when the states have become
increasingly active in reviewing and
setting credit life insurance rate ceilings.
These policy considerations weigh in
favor of eliminating the required rate
reduction.
In addition, the requirement appears
to have been motivated in 1972 by
concerns that are now less significant.
With respect to the Board’s concern in
1972 about the price structure for credit
life insurance, the Board notes that since
1972 a substantial number of states have
lowered their rates and have provided
for more systematic review and
adjustment of such rates based on
premiums-to-payout ratios or similar
considerations. The Board also had a
concern in 1972 that bank holding
companies acting as credit life insurance
underwriters might unduly pressure
consumers to purchase such insurance.
Since pressure on the consumer to
purchase insurance is more likely to be
exerted by an agent at the point of sale
rather than by an underwriter, the Board
believes that this concern is more
properly addressed in connection with
the rules regarding agency activities
than in the underwriting rules. In this
regard, there are appropriate safeguards
in place to deal with adverse effects
arising out of the sale of insurance,
including the anti-tying provision of the
BHC Act, 12 U.S.C. 1972(b), and the
disclosure requirements of the Board’s
Regulation Z, 12 CFR 226.4(a)(b)(6) and
226.4(d).1 The rate reduction
requirement, in any case, does not
directly address the concerns that
motivated the Board in 1972, either by
making the price structure for credit life
insurance more competitive or by
alleviating any basis that might exist for
pressure on borrowers to purchase such
insurance.
Finally, the general rate reduction
requirement falls on all bank holding
companies, and only bank holding
companies, regardless of how low the
rate ceiling might be in the state where
the holding company operates. Although
there has been no showing that
transactions by bank holding company
lenders are more likely to result in
adverse effects than transactions
involving other lenders, bank holding
companies are the only lenders that
must comply with the rate reduction
requirement.
The Board believes that these
considerations are adequate to support
elimination of the rate reduction
requirement. Accordingly, as of the
effective date of this regulation, those
bank holding companies that currently
engage in the underwriting of credit life
insurance may charge premiums as
1 A 1985 consumer survey conducted by the Board
at the request o f the Board's Consumer Advisory
Council suggests that most borrowers w ho purchase
credit insurance would be willing to do so again in
the future and that the vast majority of borrowers
believed that their decision with respect to such
insurance had no effect on the creditor’s decision to
grant a loan. University of Michigan, Survey
Research Center, S u rvey o f C onsum er A ttitu d es
(December 1985).
permitted by the states without notice of
adjustment to the Board.
The Board has been requested to
impose a more stringent public benefits
requirement by requiring bank holding
companies that sell credit life insurance
through unaffiliated underwriters to
notify and reenroll all borrower/
policyholders when changing
underwriters. The Board believes that
the policyholder’s contract rights under
state law provide adequate protection
and that such a requirement is an
unnecessary burden on bank holding
companies not required under the
“proper incident’’ standard of section
4(c)(8) of the Act.
2. Activities Permissible Under
Exemption B of the Garn Act
In paragraph (b)(8)(ii), the Board has
determined that the following insurance
activities are permissible for bank
holding companies:
(ii) Finance com pany su bsidiary. Acting as
agent or broker for insurance directly related
to an extension of credit by a finance
company 8 that is a subsidiary of a bank
holding company, if:
(A) The insurance is limited to assuring
repayment of the outstanding balance, on
such extension of credit in the event of loss
or damage to any property used as collateral
for the extension of credit; and
(B) The extension of credit is not more than
$10,000, or $25,000 if it is to Finance the
purchase of, a residential manufactured
home 9 and the credit is secured by the home:
and
(C) The applicant commits to notify
borrowers in writing that: (1) they are not
required to purchase such insurance from the
applicant; (2) such insurance does not insure
any interest of the borrower in the collateral;
and (3) the applicant will accept more
comprehensive property insurance in place of
such single interest insurance.
8 “Finance company” includes all nondeposittaking financial institutions that engage in a
significant degree of consumer lending (excluding
lending secured by first mortgages) and all financial
institutions specifically defined by individual States
as finance companies and that engage in a
significant degree of consumer lending.
8 These limitations increase at the end of each
calendar year, beginning with 1982, by the
percentage increase in the Consumer Price Index for
Urban Wage Earners and Clerical Workers
published by the Bureau of Labor Statistics.
D efinition o f Finance Company
The Board’s amended regulation
differs from the proposed regulation in
that it specifically defines a "finance
company” to be an entity that does not
take deposits and that engages to a
significant degree in consumer lending,
other than lending secured by first
mortgages, as well as any financial
institution a state defines as a finance
company, provided such an entity
Federal Register / Vol. 51, No. 196 / Thursday, October 9, 1988 / Rules and Regulations
engages to a significant degree in
consumer lending. Under this provision,
therefore, finance companies would
include those entities that may be
authorized to accept limited types of
time or savings deposits under state law
but which a state has defined to be a
finance company. Since exemption B
appears to focus on consumer loans, the
regulation requires a qualifying
company be engaged in that type of
lending to a significant degree as
measured by either number of loans,
percentage of loans, percentage of loan
amounts outstanding or some similar
measure. The Board will evaluate the
amount of the consumer lending on a
case-by-case basis.
The Board has been persuaded by
those who commented that Congress in
using the term “finance company" was
referring to a specific type of entity
rather than to all financial institutions
that are not banks. The Board believes
that finance companies generally a ra
understood to be financial institutions
that engage primarily in consumer
lending and that ordinarily do not
accept deposits. As such, these entities
are distinguished from industrial banks,
mortgage companies, credit unions,
savings banks and other types of
financial institutions. If Congress had
intended to cover these other
institutions, it could have used a
broader term, such as “lending
subsidiary” or “financial institution.”
Furthermore, the limitations contained
in exemption B as to the size and types
of loans with respect to which insurance
may be sold is evidence of the intent of
Congress to limit the scope of the
exemption to traditional finance
companies where such loans constitute
the primary type of lending.
Type o f Insurance a Finance Company
M ay S ell Under Exem ption B
An issue under this provision that was
raised only by the five insurance agents
associations and the Association of
Bank Holding Companies involves the
type of property insurance a finance
company may sell. The Board’s
proposed regulation suggested that
finance companies be permitted under
exemption B to sell property and
casualty insurance on property that
serves as collateral for a loan. This
insurance, most commonly sold in
automobile or homeowner insurance
packages, w as authorized by the Board
as permissible for bank holding
companies and their lending
subsidiaries prior to the passage of the
Garn-St Germain Act in 1982. A closer
reading of exemption B reveals a much
more limited scope of permissible
insurance activity. Accordingly, this
provision of the amended regulation
permits finance company subsidiaries of
bank holding companies to engage in the
sale of single interest property insurance
that insures against damage or loss only
to the lender’s interest in the property
that serves as collateral for a loan.
The language of exemption B limits
the permissible insurance coverage to
"the outstanding balance due on an
extension of credit.” It does not
contemplate general property insurance
that covers the entire value of the
property, including the balance due the
lender and the equity interest of the
borrower/owner. The language parallels
the "outstanding balance” requirement
of exemption A which, as noted above,
requires that the insurance not exceed
the unpaid amount of the loan.
Generally such insurance is declining
balance and the only interest in the
collateral property that may be insured
is that of th e lender.
The failure of exemption B to mention
casualty insurance provides additional
support for this view. Traditional
property insurance, such as automobile
or homeowners, is virtually always sold
in a package with casualty or liability
insurance. The absence of any
authorization to sell such casualty
insurance in exemption B or in the
Senate Report (p. 38) is an indication
that Congress views the insurance to be
sold as limited to declining balance
property insurance that protects the
lender’s interest in the property. The
legislative history of exemption B also
lends support to the view that
exemption B w as intended to permit
insurance activity only where the
insurance was limited to protecting the
single interest of the lender.2
The Board has also considered
whether general public benefits factors
are consistent with the sale of single
interest insurance by bank holding
companies. While lending institutions
may require such insurance on loan
collateral as a condition of granting a
loan to marginal borrowers or to those
who are not otherwise insured, concern
has been expressed that lenders may
unnecessarily require such insurance of
otherwise qualified or insured
borrowers. Moreover, unsophisticated
2 F inancial Institution s R estructuring and
S e rvices A c t o f 1981: H earings on S. 1686, S. 1703, S.
1720, S. 1721 B efore the S en ate Comm, on Banking,
Housing, an d Urban A ffairs, 97th Cong., 1st Sess.
155 (1981) (statement of Robert B. Evans, Senior
Vice President, National Consumer Finance
Association). C om petition an d C onditions in the
F inancial S ystem , H earings B efore the Senate
Comm, on Banking, H ousing an d U rban Affairs,
97th Cong., 1st Sess., 461 (1961) (statement of The
Consumer Credit Insurance Association). S ee also
the statement of Robert Reynolds, President,
Independent Insurance Agents of America, id, 330.
36205
borrowers may purchase this limited
insurance believing it to be
comprehensive coverage of their interest
in the loan collateral, or they may
purchase this coverage despite the fact
that it is largely duplicative of
previously purchased property
insurance.3
Congress was aware of these
concerns, however, and was persuaded
to permit the sale of such insurance by
the finance company subsidiaries of
bank holding companies. There was
testimony before Congress that the sale
of such insurance, not generally sold by
independent agents, assists marginal
borrowers to obtain credit. Property
insurance is provided at standard group
rates to those living in areas where
insurance coverage is difficult to obtain
or where the cost on an individual
policy would be prohibitive. Such
insurance serves as an alternative
coverage for risks not covered by
“mainstream" insurance companies,
such as inventory and floor plan
insurance to small businesses in high
risk areas. The testimony indicated the
ability to offer such insurance is
necessary for bank holding company
subsidiaries to compete effectively with
independent finance companies on the
basis of convenience.4 Exclusion of the
sale of single interest insurance would
also render exemption B a nullity, since
no other insurance is permissible under
that exemption.
The amended regulation permits the
sale of such insurance, provided that the
bank holding company finance company
subsidiary does not require such
insurance of borrowers who have
adequate property insurance on the loan
collateral. In addition, the finance
company subsidiary would be required
to disclose in writing that such
insurance, if required, need not be
purchased from the lender 5 and that
3 See, for example. F inancial Institutions
R estructuring an d S ervices A ct o f 1981, H earings on
S. 1686, S. 1703, S. 1720 an d S. 1721 Before the
S enate Comm, on Banking, Housing, and Urban
A ffairs, 97th Cong. 1st Sess., 154(1981) (statement of
the National Consumer Finance Association).
* See, for example, the testimony of Frederick L.
Boehm, Senior Vice President, American Bankers
Insurance Company of Florida and James M.
Browne, Executive Committee, National Consumer
Finance Association, B ank H olding C om pany
Legislation an d R ela ted Issues, H earings on H.R.
2255, H R . 2747, H.R. 2856; H.R. 4004 Before the
Subcomm . on F inancial Institutions Supervision o f
the H ouse Comm, on Banking, F inance an d Urban
A ffairs, 96th Cong. 1st Sess,, 304-309 (1979)
5 The requirement is already imposed by
Regulation Z, § 226.4(d)(2) if the premium is
excluded from the finance charge.
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Federal Register / Vol. 51, No. 196 / Thursday, October 9, 1986 / Rules and Regulations
such insurance does not cover the
borrower’s interest in the property. With
these conditions, the public benefits
considerations on a general basis would
be consistent with approval.
Property Insurance Underwriting Under
Exem ption B
The final issue raised by some
commenters on this provision of the
regulation is whether underwriting of
single interest property insurance is
contemplated in exemption B.
Exemption B makes no distinction
between acting as agent or acting as
principal as is the case in exemptions C,
D and F and more obliquely in G. The
Board notes, however, that the Senate
Report states explicitly (at p. 38) that
“the exemption is not intended to permit
a finance company subsidiary to
underwrite such property insurance.”
The Board does not believe that the
language of exemption B demonstrates
clear intent by Congress to permit a
change from the Board’s past practice of
declining to permit bank holding
companies to underwrite property
insurance.
3. Activities Permissible Under
Exemption C of the Gam Act
In paragraph (b)(8){iii) the Board has
determined that the following insurance
activities are permissible for bank
holding companies:
(iii) Insurance in sm all towns. Engaging in
any insurance agency activity in a place
where the bank holding company or a
subsidiary of the bank holding company has
a lending office and that: (A) has a
population not exceeding 5,000 (as shown in
the preceding decennial census); or (B) has
inadequate insurance agency facilities, as
determined by the Board, after notice and
opportunity for hearing.
"Principal Place o f Banking B usiness”
Requirem ent
The primary issue addressed by the
parties commenting on this provision of
the regulation is whether the Board
should require a bank holding company
that seeks to engage in the sale of
insurance in a place with a population
not exceeding 5,000 to have its principal
place of banking business in such a
place. The terms of exemption C do not
impose such a condition. Indeed, by its
terms, exemption C gives the Board the
discretion to determine that any
insurance agency activity conducted in
a place with 5,000 or less in population
is permissible for a bank holding
company, even if die holding company
does not maintain any office in that
place. The Board, however, declines to
adopt under the closely related to
banking standard such a broad
authorization since it would be contrary
to the general purpose Congress had in
mind when enacting exemption C.
The Senate Report (p. 38) does
indicate, however, a general intention to
conform exemption C both to the
Board’s existing insurance regulation
and to the National Bank Act (12 U.S.C.
92), which permits a national bank to
conduct insurance activities in a town of
less than 5t000. The Board’s current
regulation (as interpreted and applied)
imposed three requirements on the sale
of insurance in a small town. First, the
insurance could be sold only in the
small town in order to avoid the
channeling of business from subsidiaries
located elsewhere. Second, the bank
holding company must have a
subsidiary serving the public operating
in the town in order to provide a nexus
to the town and to avoid remote
operation of an insurance agency. In
applying this requirement, the Board has
generally approved small town
insurance agency activities if the
holding company has a subsidiary bank
or nonbanking subsidiary engaged in
lending operations located in the small
town. Finally, the bank holding company
must have its banking headquarters or
“principal place of banking business” in
a small town to limit the size of the bank
holding company qualifying to engage in
such insurance. 12 CFR 225.25(b)(8) and
BHC Letter 201, July 14,1980.
The Board included this third or
"principal place of banking business”
requirement to the Board’s insurance
regulation6 in response to the decision
in Alabam a A ssociation o f Insurance
A gents v. Board o f Governors,'1 which
directed the Board, before implementing
its existing regulation with respect to
insurance sales in towns of 5,000 to
make findings “whether the present
wording of the regulation would permit
remote insurance agency activity . . . ”
558 F.2d at 729. The court was
concerned that the proposals under
review contemplated the sale of
insurance in small towns in Alabama
and Georgia from central locations in
Birmingham and A tlanta.8
The National Bank Act, however,
imposes slightly different requirements
on insurance activities in small towns.
While the national bank must have an
office in the small town, there is no
• 44 Fed. Reg. 6505 (Nov. 9,1979).
7 533 F.2d 224 (5th Cir. 1970), modified on
rehearing. 558 F.2d 729 (1977), cert denied, 435 U.S.
904 (1978).
8 The court w as also concerned that larger bank
holding companies might not need the benefit o f the
revenue from insurance sales in a small town and
the Board ought to consider som e limitation on the
size of the bank holding company eligible to sell
such insurance.
requirement in the National Bank Act
that the national bank be headquartered
in a town of 5,000. Thus, both the
Board's existing regulations and the
National Bank Act require that an
institution providing general insurance
agency activities in a small town have at
a minimum some office in that town,
although the office need not be the
institution’s head office.
Accordingly, the amended regulation
explicitly retains the requirement that in
order to provide insurance agency
activities in a town with a population
not exceeding 5,000 the bank holding
company must have an office that
serves the public in the small town. The
amended regulation specifically requires
that the office be a lending office in
order to provide the bank holding
company with a link to the town, to
avoid remote operation from a central
location of a network of small town
insurance agencies, and generally to
maintain insurance as a fee generating
activity to help sustain a small town
lending office as an independent, viable
profit center. This is consistent with the
purpose of the National Bank Act that
insurance agency activities serve as a
supplemental source of income for a
bank or branch of a bank located in a
small town.
The Board also notes that it has
traditionally required that a bank
holding company engaging in insurance
agency activities in a town not
exceeding 5,000 limit its solicitation or
sales of insurance to the small town and
to other areas of less than 5,000 adjacent
to the town, in part to preclude the
referral or channeling of business from
affiliates. See BHC 201, Federal R eserve
Regulatory Service 4-844 (July 14,1980).
This requirement would not preclude the
bank holding company insurance agency
from selling insurance to those residing
outside the community who initiate the
transaction at the agency’s place of
business in the town of less than 5,000,
nor would it prohibit advertising in the
community newspaper or a telephone '
book that may serve an area larger than
the community of 5,000.
The Board believes that under these
limitations, bank holding companies
may continue to conduct insurance
activities in small towns in a manner
consistent with prior Board
requirements and with the purposes of
the Garn-St Germain Act and the
National Bank Act.
The Board does not believe it is
necessary to continue to limit bank
holding company insurance agency
activities in small towns only to those
bank holding companies that are
headquartered in a small town. While
Federal Register / Vol. 51, No. 196 / Thursday, October 9, 1986 / Rules and Regulations
the Board's existing regulation has such
a requirement, nothing in the legislative
history expressly states that all of the
specific limitations in the Board's
regulation must be incorporated into
exemption C on a wholesale basis. This
is made clear by the fact that the
legislative history provides that
exemption C was also intended to
conform to the provisions of the
National Bank Act. As explained above,
the National Bank Act, as interpreted by
the Comptroller of the Currency, has no
similar requirement that a national bank
providing insurance agency services
through an office in a small town itself
be headquartered in a small town.
The Board believes the “principal
place of banking business" requirement
does not further the purposes of the
small town exemption in current law,
that is to provide insurance alternatives
in at small town and to provide an
additional income source for lending
operations serving the small town.
Moreover, the Board does not believe it
appropriate or consistent with the Act to
require a bank holding company located
in a small town to divest its insurance
agency business simply because it is
acquired by a bank holding company in
a slightly larger town. The ability to
provide an effective insurance
alternative may depend on having a
presence in and knowledge of a small
town, but it does not depend on being
headquartered there.
Exemption C is not, by its terms,
limited to those holding companies of a
limited size or those with a lead bank
located in a small town. This is in
contrast to exemption F in which
Congress explicitly provided for general
insurance agency powers (except for the
sale oflife insurance) for small bank
ho$&ng companies (those under $50
million in total assets), Focusing on the
size of the town rather than the size or
nature of the bank holding company
engaging in the insurance activity is
more in accord with the accepted
principle that public policy favors the
promotion of competition and not the
protection of particular competitors.
Since the restrictions imposed in the
amended regulation adequately preserve
the ignited scope of insurance agency
activities permitted under exemption C,
the Board has declined to impose the
“principal place of banking business
test," particularly in the absence of any
basis for such a requirement in statutory
language*
Definition of Place
The amended regulation parallels
exemption C in permitting general
insurance activities in a "place" with a
population not exceeding 5,000. The
36207
Board has not defined the term “place,"
preferring to permit bank holding
companies to demonstrate on a case-bycase basis that a particular location
qualifies. The reference to the decennial
census in exemption C implies that the
"place" must be a cognizable political
subdivision such as a village, town,
municipality, or township for which
population figures are available. A bank
holding company could engage in the
sale of insurance from a single office in
a small town and in surrounding larger
political subdivisions, provided the total
population of all such "places” served
by the lending office does not exceed
5,000.
A bank holding company must
cease its otherwise impermissible
insurance agency operations if the
“place" is found in a subsequent
decennial census to have grown to a
population exceeding 5,000.
company pursuant to a binding written cpntract
entered into on or before May 1,1982, of another
company engaged in such activities at the time of
the acquisition.
4. Activities Permissible Under
Exemption D of the Gam Act
Lim itations on Expansion o f
Grandfather Rights
In paragraph (b)(8)(iv) the Board has
determined that the following insurance
activities are permissible for bank
holding companies:
Exemption D also provides for limited
expansion of grandfathered insurance
agency activities in order to permit
qualifying bank holding companies to
remain effective insurance agent
competitors. As the Senate Report states
(at p. 39): “Without providing such
companies with a broadened ability to
expand and grow, they would not long
survive in a competitive environment.'
Exemption D suggests certain types of
geographic and product line expansion
that should be considered permissible
for grandfathered insurance agency
subsidiaries of qualifying bank holding
companies.
Several commenters mged the Board
to permit expansion of grandfathered
insurance agency activities without
restriction. They argued that the
language in exemption D that purports
to place limits on the expansion of
grandfathered activities is merely
advisory and not mandatory. They
based this view on the language of
exemption D and particularly upon the
use of the word “including" to introduce
the limitations or restrictions on the
expansion of grandfathered activities.
These commenters argued that the word
“including" means that the proposed
types of expansion listed in exemption
D are not exhaustive but merely suggest
possible forms of expansion that the
Board might include in its regulation.
The use of the w ord “including" to
introduce lengthy and detailed
limitations on grandfathered activities is
ambiguous. The legislative history,
however, makes it clear that thfe limits'
imposed on exemption D w ith respect to
grandfathered activities are to be
mandatory rather than advisory. The
(iv) Insurance agency a c tiv itie s conducted
on M ay 1,1982. Engaging in any specific
insurance agency activity 10 if the bank
holding company, or subsidiary conducting
the specific activity, conducted such activity
on May 1,1982, or received Board approval to
conduct such activity on or before May 1,
1982.ri A bank holding company or
subsidiary engaging in a specific insurance
agency activity under this clause may:
(A) Engage in such specific insurance
agency activity only at locations:
(I) In the State in which the bank holding
company has its principal place of business
(as defined in 12 U.S.C. 1042(d));
(II) In any State or States immediately
adjacent to such State; and
(III) In any State in which the specific
insurance agency activity w as conducted (or
w as approved to be conducted) by such bank
holding company or subsidiary thereof or by
any other subsidiary of such bank holding
company on May 1,1982; and
(B) Provide other insurance coverages that
may become available after May 1,1982, so
long as those coverages insure against the
types of risks as (or are otherwise
functionally equivalent to) coverages sold or
approved to be sold on May 1,1982 by such
bank holding company or subsidiary.
10 Nothing contained in this provision shall
preclude a bank holding company subsidiary that is
authorized to engage in a specific insurance agency
activity under this clause from continuing to engage
in the particular activity after merger with an
affiliate, if the merger is for legitimate business
purposes and prior notice has been provided to the
Board.
11 For purposes of thjftpatNagraphkiactivities
engaged fn on May 1,1982, include activities carried
on subsequently as the result of an application to
engage In such activities pending before the Board
on May 1,1982, and approved subsequently by die
Board or as the .result of the acquisition by sudi
This provision of the regulation
parallels exemption D of the Gam-St
Germain Act and grandfathers those
insurance agency activities in which
individual bank holding companies were
engaged on May 1,1982. Under this
provision, therefore, a bank holding
company or subsidiary thereof may
continue to engage in particular types of
insurance agency activities that were
permissible prior to the passage of the
Garn-St Germain Act but which are now
prohibited by that Act. A qualifying
bank holding company may engage, for
example, in the sale of property and
casualty insurance on property serving
as collateral for loans made by a lending
subsidiary of the holding company.
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Federal Register / Vol. 51, No. 196 / Thursday, October 9, 1986 / Rules and Regulations
legislative history of exemption D as
contained in the Senate Report (pp. 3941) is more detailed than that of any
other provision and describes at length
the types of expansion that the Board
may approve under the terms of the
exemption. The detail of the statutory
provision and the legislative history
indicates that the conditions are not
merely advisory, and the Board believes
that it may permit only those specific
types of expansion of grandfathered
activities listed in exemption D.
Expansion of grandfathered activities
pursuant to exemption D presents three
issues that the Board h as resolved in
paragraph (iv) of this regulation. Those
issues include (1) defining which
subsidiaries of a bank holding company
may engage in otherwise impermissible
insurance agency activities under
exemption D, (2) the scope of
permissible geographic expansion, and
(3) the scope of product line expansion.
Specific Subsidiaries That M ay
Engage in G randfathered A ctivities.
Exemption D specifically states that a
bank holding company may continue to
engage in the sale of specific types of
insurance sold on May 1,1982, at
existing or new locations only through
“the same bank holding company or the
same subsidiary or subsidiaries with
respect to which insurance was sold on
May 1,1982-----’’ Thus, grandfather
rights do not inure to the benefit of the
entire holding company system by virtue
of the fact that a particular subsidiary
was engaged in insurance agency
activities prior to May 1,1982. Only the
subsidiary of the bank holding company
that was engaged in insurance activities
on May 1,1982, or received Board
approval to engage in insurance
activities prior to May 1,1982, has
grandfather status. The legislative
history supports this reading of
exemption D. The Senate Report states:
"The authority to engage in activities under
the grandfather amendment only extends to
the entity, be that the holding company itself
or a subsidiary or subsidiaries thereof, which
qualifies for grandfathered activity status.
This limitation is intended to prevent a bank
holding company from transferring any
grandfather rights among the companies
within the holding company system . . . . ’*
Senate Report, p. 40.
Some commenters suggested that a
"grandfathered subsidiary'’ is limited
solely to the types of insurance (or
equivalent types) which it sold prior to
May 1,1982. Other commenters argued
that the language of the statute should
be read to permit a subsidiary that was
engaged in -<my insurance agency
activity p rierto M a y 1,1982 to be
grandfathered with respect to all
insurance Agency activities engaged in
by any company in the holding company
system prior to th at date.
The Board believes that the emphasis
in the legislative history on the transfer
of grandfather rights shows the intent of
Congress to prohibit not only the
transfer of such rights from
“grandfathered” subsidiaries to those
affiliates wholly without grandfather
rights, but also to prohibit the transfer of
grandfather rights with respect to
particular kinds of insurance from one
“grandfathered” subsidiary to another.
Thus, a subsidiary that sold only credit
life insurance prior to the grandfather
date should not acquire grandfather
rights to sell property and casualty
insurance solely because an affiliate
sold property and casualty insurance
prior to the grandfather date. The
grandfather rights of a particular
subsidiary are limited to the precise
activities (or their functional equivalent)
engaged in prior to May 1,1982. As
discussed in more detail below, this
requirement does not preclude the
transfer of grandfather rights in the case
of a bona fide merger. Citicorp, 69 Fed.
Res. Bull. 554, 555 (1983).
A question has been raised whether a
subsidiary bank of a bank holding
company, or a nonbank subsidiary of
such a subsidiary bank, that was
engaged in insurance activities on May
1,1982, pursuant to the provisions of
state law may take advantage of the
grandfather provisions of exemption D
and, if so, whether such an entity must
terminate its grandfathered insurance
agency activities if it is acquired by a
bank holding company without
grandfather rights under section 4(c)(8).
The Board notes that resolution of this
issue depends in the first instance on the
fundamental question of the scope of
coverage of the nonbanking prohibitions
of section 4 of the Act to subsidiary
banks of bank holding companies, an
issue which the Board has under review
in a separate rulemaking proceeding
regarding § 225.22(d) of Regulation Y, (12
CFR 225.22(d) [See 48 FR 23520 (May 25,
1983) and 49 FR 794 (January 5,1984)),
and also in connection with the Board’s
request for comment on w h a t if any,
action it should take in the case of real
estate investment and development
powers of holding company banks
authorized pursuant to state law. (50 FR
4519 (January 31,1985)). The Board did
not seek comment on this issue or those
raised by a commenterin the course of
this rulemaking.
This rulemaking is limited in scope
and is intended only to clarify fhe extent
to which insurance activity is permitted
under exemptions A through G of Tide
V I^ fth e G a n a 'S tG e n a m n A c tin other
woods, tMsrogvkrtrea & intended only
to specify What insurance activities are
permissible for entities subject to the
nonbanking provisions of section 4 of
the Act. ft is n o t intended to specify
which entities are subject to these
provisions, an issue that, as noted, is the
subject of separate rulemaking
proceedings. Accordingly, the Board has
reserved judgment on die issues raised
by this comment for consideration in
connection with the Board’s rulemaking
proceedings on § 225.22(d) of Regulation
Y and the proceeding on real estate
development powers of holding
company banks. The issue of whether
an entity with grandfather rights under
exemption D must terminate those
activities if it is acquired by another
bank holding company is currently
under consideration in the context of a
pending application. See Sovran
Financial Corp./Suburan Bancorp, 72
Federal Reserve Bulletin 276 (1986).
Finally, the Board notes that this
rulemaking, which is only intended to
clarify the exemptions in Title VI of the
Gam-St Germain Act, does not
authorize any bank holding company to
commence any insurance activity, or to
acquire a company with insurance
activities, without compliance with the
notice and application requirements of
section 4(c)(8) of the Act.
Geographic Expansion b y a
G randfathered Subsidiary o f a Bank
Holding Company. A variety of
alternatives for geographic expansion
were suggested by those commenting on
this paragraph of the proposed
regulation. Some commenters suggested
that the Board should permit a
grandfathered subsidiary of a bank
holding company (or the holding
company itself if it engaged in die
insurance activities directly) to expand
its grandfathered insurance activities
into any new state without restriction.
Such a position treats the specific
limitations on geographic expansion in
exemption D as nonbinding, a position
the Board has considered and rejected.
All other commenters agreed that the
explicit language of exemption D
permits the grandfathered subsidiary of
a bank holding company to engage in
the sale of insurance in the bank holding
company's home state and states
adjacent thereto. There w as substantial
disagreement, however, concerning die
scope of additional expansion.
Some commenters argued a
grandfathered subsidiary of a bank
holding company could expand the
specific insurance agency activities in
which it engaged prior to M ay 1, 1982,
into any state where any affiliate w as
engaged in any type o f insurance
activity prior to fhe grandfather date.
Federal Register / Vol. 51, No. 196 / Thursday, October 9, 1986 / Rules and Regulations
Under this view, a bank holding
company subsidiary engaged in the sale
of property and casualty insurance on
the grandfather date could sell such
insurance in any state where an affiliate
sold credit life insurance prior to the
grandfather date.
Other commenters suggested
expansion be permitted only into those
states where the grandfathered
subsidiary or an affiliate sold the
specific type of insurance on the
grandfather date. Thus, for example, a
subsidiary engaged in the sale of
property insurance on the grandfather
date would expand its activities into
any state where an affiliate also sold
property insurance on the grandfather
date.
Finally, some commenters argued for
no geographic expansion, restricting the
grandfathered subsidiary to those states
where it sold insurance on the
grandfather date. The amended
regulation adopts the middle position of
permitting a grandfathered subsidiary to
expand into those states where an
affiliate sold the same type of insurance
on the grandfather date.
The Board believes unlimited
expansion into any state where any
insurance was sold on the grandfather
date is not supported by the language or
legislative history of exemption D or by
the limited nature of the grandfather
provision. The language and legislative
history of exemption D emphasize that it
is the specific subsidiary that is
grandfathered with respect to the
insurance activities it conducted prior to
May 1,1982, and not the entire holding
company system. Exemption D allows
the sale of insurance at new locations of
“the sam e bank holding company or the
sam e subsidiary . . . ” (emphasis added).
As noted above, the Senate Report is
clear in limiting grandfather status to the
specific subsidiary that engaged in the
activity on the grandfather date (p. 40).
If the focus of exemption D is the
individual subsidiary and the specific
types of insurance sold by that
subsidiary on the grandfather date, it is
inconsistent to read exemption D as
permitting the transfer of the right to
engage in insurance activities in a given
state to an affiliate that sells only a
completely different kind of insurance.
The Senate Report describes
exemption D as permitting expansion of
a bank holding company’s insurance
business “within reasonable limits.” The
exemption “does restrict the locations
and scope of grandfathered insurance
activities” without restricting the
volume of insurance sales. (Senate
Report, p. 39). The Board believes it is
not consistent with the limited nature of
this grandfather provision to permit, for
example, a bank holding company
subsidiary engaged in the sale of
property insurance in one state to
expand into the 49 other states where an
affiliate may sell credit life insurance. In
fact, the legislative history appears to
presume that only companies engaged in
the sale of property and casualty
insurance need be grandfathered, since
the sale of credit life insurance is still
permitted under exemption A. There
appears to be no intention to permit a
grandfathered property and casualty
insurance subsidiary to expand its
locations on the basis of the location of
credit life agency subsidiaries.
Accordingly, the Board’s final
regulation provides that a bank holding
company may sell a particular kind of
insurance from new or expanded
locations only in its home state, states
adjacent thereto, and states in which it,
or an affiliate, sold that kind of
insurance (or insurance that is
functionally equivalent) prior to May 1,
1982. The language of exemption D.
while limiting the grandfathered
activities to those agency activities
conducted by the specific grandfathered
subsidiary, does allow expansion into
states where such specific types of
agency activities "were conducted by
the bank holding company or any of its
subsidiaries on May 1,1982 . . If a
bank holding company subsidiary is
selling a particular type of insurance in
a given state, the Board does not believe
there is any regulatory or business
purpose served by restricting another
grandfathered subsidiary from engaging
in the same activity in the same
location.
Product Line Expansion. The Board’s
amended regulation also provides for
product line expansion. A grandfathered
subsidiary of a bank holding company
may seek approval from the Board to
engage in the sale of new types of
insurance that protect against the same
types of risks as, or are otherwise
functionally equivalent to, insurance
sold on the grandfather date. Although
the Board's proposed regulation
requested comment upon the issue of
whether property and casualty
insurance on leased items is the
functional equivalent of property and
casualty insurance on collateral for a
loan, the Board believes that this issue
and the other issues of "functionally
equivalent” coverage would be more
properly addressed on a case-by-case
basis in the course of individual
applications.
Transfer o f G randfather Rights Am ong
Subsidiaries
The amended regulation specifically
provides that a grandfathered subsidiary
36209
of a bank holding company (or its
successor) may retain its grandfather
rights after merger with an affiliate, if
such merger is based on legitimate
business concerns, e.g., centralized
management or increased efficiency,
rather than as a means of extending
insurance powers. The Senate Report
contains language that indicates an
intent on the part of Congress to limit
the possibility of expansion of
grandfather rights simply by means of
transferring those rights from one
grandfathered subsidiary to the entire
holding company system, but the
subsequent Conference Report (S. Rep.
No. 641, 97th Cong., 2d Sess. 91 (1982))
provides a limited exception to that
general rule when it states that "nothing
in this title is intended to prevent the
transferring of grandfathered insurance
activities of the bank holding company
to the parent company or to any of its
subsidiaries if the transferral is brought
about for management or efficiency
purposes." The regulation provides that
bank holding companies must advise the
Board prior to any such merger for
legitimate business purposes in order to
confirm the transfer of grandfather
rights.
R etention o f Grandfather Rights Upon
A cquisition B y A nother Bank Holding
Company. Prior to adoption of this
regulation, the Board had, in limited
circumstances, allowed a bank holding
company qualifying for certain
grandfather rights under exemption D
(specifically related to the sale of creditrelated property and casualty insurance
that w as directly linked and limited to
extensions of credit by the
grandfathered bank holding company
and its subsidiaries) to retain those
rights and continue to engage in the
grandfathered activities after its
acquisition by another bank holding
company that did not have grandfather
rights. The acquiring bank holding
company did not, however, gain any
grandfather rights with respect to its
own subsidiaries. See BankAm erica
Corporation, 69 Fed. Res. Bull. 568
(1983); Fuji Bank, 70 Fed. Res. Bull. 50
(1984).
5. Activities Permissible Under
Exemption E of the Gam Act
In paragraph (8)(b)(v) the Board has
determined that the following insurance
activities are permissible for bank
holding companies:
(v) Supervision o f re ta il insurance agents.
Supervising on behalf of insurance
underwriters the activities of retail insurance
agents who sell: (A) fidelity insurance and
property and casualty insurance on the real
and personal property used in the operations
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Federal Register / Vol. 51, No. 196 / Thursday, October 9, 1986 / Rules and Regulations
of the bank holding company or its
subsidiaries; and (B) group insurance that
protects the employees of the bank holding
company or its subsidiaries.
This provision, which merely restates
exemption E of the Gam Act, is of
limited applicability. The legislative
histo'y indicates an intent on the part of
Congress to avoid preempting certain
practices permissible under Texas law.
Senate Report, at p. 41. The Board
received no substantive comments on
this provision.
6. Activities Permissible Under
Exemption F of the Garn Act
In paragraph (b)(8)(vi) the Board has
determined that the following insurance
activities are permissible for bank
holding companies:
(vi)
Sm all bank holding com panies.
Engaging in any insurance agency activity if
the bank holding company has total
consolidated assets of $50 million or less. A
bank holding company performing insurance
agency activities under this paragraph may
not engage in the sale of life insurance or
annuities except as provided in paragraphs (i)
and (iii) of this section, and it may not
continue to engage in insurance agency
activities pursuant to this provision more
than 90 days after the end of the quarterly
reporting period in which total assets of the
holding company and its subsidiaries exceed
$50 million.
This provision permits bank holding
companies with total consolidated
assets not exceeding $50 million to
engage in general insurance agency
activities, except that they may not
engage in the sale of life insurance or
annuities unless otherwise authorized to
do so under subsections (i) and (iii) of
this regulation. (These subsections
generally permit the sale of credit life
insurance or any type of insurance in a
town with a population not exceeding
5,000.) The Senate Report (at p. 42)
makes it clear that exemption F ceases
to apply “if the value of a bank holding
company’s system assets exceed $50
million." The assets of the entire holding
company system rather than those of its
bank subsidiaries or its insurance
agency subsidiary are determinative for
meeting the $50 million limit of this
provision.
The regulation requires a bank
holding company to cease general
insurance agency activities pursuant to
this provision within 90 days after the
end of the quarterly reporting period in
which the bank holding company’s total
assets exceed $50 million. Since a small
bank holding company may not have
complete and accurate financial figures
until it prepares its quarterly report and
since quarterly reports are generally
completed several weeks after the end
exemption G, therefore, would render it
superfluous for purposes of
grandfathering permissible types of
insurance agency activity.
Prior to 1971 the Board did not
examine individual types of insurance to
determine whether the sale of such
insurance would be "closely related to
banking.” Section 4(c)(6) of the Bank
7. Activities Permissible Under
Holding Company Act of 1956, the
Exemption G of the Gam Act
operative nonbanking provision, used
In paragraph (b)(8)(vii) the Board has
the standard of “closely related to the
determined that the following insurance
business of banking.” See Pub. L 84-511,
activities are permissible for bank
section 4(c)(6); 70 Stat. 137 (1956). Under
holding companies consistent with
this “business of banking” standard, the
exemption G of the Gam-St Germain
Board considered only whether the
Act:
entire insurance agency business of a
(vii) Insurance agency a c tiv ities conducted particular bank holding company was
conducted in such a manner that it was
before 1971. Engaging in any insurance
agency activity performed at any location in
closely related to the banking business
the United States directly or indirectly by a
of the applicant bank holding company.
bank holding company that w as engaged in
As a consequence, the Board did not
insurance agency activities prior to January 1,
scrutinize each type of insurance an
1971, as a consequence of approval by the
applicant proposed to sell, and in
Board prior to January 1,1971.
several cases prior to 1971 the Board
A gency A ctivities
approved general insurance agency
activities for bank holding companies.
In this provision the Board has
See First B ankstock Corp., 45 Fed. Res.
adopted a position, already articulated
Bull. 917 (1959); N orthw est
in several orders on individual
Bancorporation, 45 Fed. Res. Bull. 963
applications, permitting any qualifying
(1959).
bank holding company to engage in
For the reasons set out in its previous
general insurance agency activities
order, the Board’s regulation permits the
without restriction as to location or to
limited number of qualifying companies
type of insurance sold. See First
to engage in general insurance agency
W isconsin Corporation, 71 Fed. Res.
Bull. 171 (1985); N orw est Corporation, 70 activities pursuant to exemption G
regardless of their precise insurance
Fed. Res. Bull. 235 and 470 (1984). A
agency activities prior to 1971. First
company qualifies under this provision
W isconsin Corporation, 71 Fed. Res.
if it was engaged in insurance agency
Bull. 171 (1985); N onvest Corporation, 70
activities as a consequence of Board
Fed. Res. Bull. 470 (1984).
approval prior to January 1,1971. A very
limited number of active bank holding
Underwriting A ctivities
companies received such Board
Several commenting bank holding
approval in the period from passage of
companies argued that exemption G
the BHC Act in 1956 until January 1,
also permits qualifying companies to
1971.
engage in general insurance
The regulation does not limit the
underwriting activities without
insurance agency activities of a
qualifying company by requiring that the restriction. These companies argued that
the language of the statute merely
company engage only in the sale of such
speaks of insurance activities rather
types of insurance as it sold prior to
than insurance agency activities as in
1971 from such locations as it conducted
insurance agency activities prior to 1971. exemption C, D, and F. The Board has
not proposed nor has it adopted a
As the Board has already stated in the
regulation that would permit qualifying
above-cited orders, it does not find any
exemption G companies to engage in
indication in the language of exemption
general underwriting activities.
G that Congress intended to limit the
The language of exemption G provides
insurance agency activities of qualifying
that a company qualifies for grandfather
companies in any fashion.
rights only by reason of receiving Board
To limit the sale of insurance to the
approval to engage in agency activities
types sold prior to 1971 would render
prior to January 1,1971. The Board
exemption G more restrictive than
believes, therefore, that exemption G is
exemption D, which grandfathers those
intended to deal only with agency
insurance agency activities engaged in
activities. The Board also believes that
prior to 1982. By definition, any pre-1971
Congress intended to permit bank
insurance agency activities would also
holding companies to engage in only the
qualify under exemption D as pre-1982
general kinds of activities the Board
activities. Such a limited reading of
of a quarterly reporting period, the
Board believes this 90-day requirement
provides a reasonable, minimum time to
alter the structure of the bank holding
company’s insurance activities.
Thereafter, the bank holding company
may continue to engage in the sale of
insurance pursuant to other exemptions.
Federal Register / Vol. 51, No. 196 / Thursday, October 9, 1986 / Rules and Regulations
permitted prior to 1971. While the Board
did permit general insurance agency
activities prior to 1971, it permitted only
very limited credit-related underwriting
activities.
The Board does not believe that
Congress intended in a limited
grandfather provision to confer on a few
qualifying companies broad new powers
never before permitted to any bank
holding company. The Board had
declined prior to 1971 to permit bank
holding companies to engage in life
insurance underwriting activities
[Transamerica Corp., 43 Fed. Res. Bull.
1014 (1957)). In the Board’s view, a
limited grandfather provision such as
exemption G should not be read to
permit bank holding companies, which
qualify for grandfather rights because
they received Board approval prior to
1971 to engage in insurance agency
activities, to expand those activities to
include general insurance
underwriting—an activity the Board has
consistently refused to permit under
section 4(c)(8).
In any event, even assuming arguendo
that general insurance underwriting
would be exempt from the general
insurance prohibition of the Garn-St
Germain Act, this does not mean that
such an activity would be "so closely
related to banking as to be a proper
incident thereto” under section 4(c)(8) of
the Act, and, as noted, the Board has
previously determined that such general
insurance underwriting does not qualify
under this standard. NCNB Corporation,
64 Fed. Res. Bull. 506 (1978).
Applications Required
Several bank holding companies have
also suggested that qualifying exemption
G companies need not make specific
applications to engage in any insurance
agency activities. These commenters
claim that exemption G removes any
qualifying company from the
requirement of meeting either the
“closely related” or “public benefits”
tests of section 4(c)(8) of the BHC Act.
As the Board has previously stated, the
exemptions contained in section 4(c)(8)
are not intended to be dispositive of the
public benefits issues raised in
particular applications. For the reasons
set forth in these orders, the Board will
continue to require applications from
exemption G companies.
Regulatory F lexibility A nalysis—
Paperwork Reduction Act. The Board
has certified that adoption of this
amended regulation dealing with
permissible insurance activities for bank
holding companies is not expected to
have a significant economic impact on
small business entities within the
meaning of the Regulatory Flexibility
Act (5 U.S.C. 601 et seq.). The Board is
required by section 4(c)(8) of the BHC
Act, 12 U.S.C. 1843(c)(8), to determine
whether nonbanking activities are
closely related to banking and thus are
permissible for bank holding companies.
The Board is clarifying the scope of
insurance activities it considers to be
closely related to banking and
permissible for bank holding companies,
with Board approval. The amended
regulation does not impose different or
more burdensome requirements than the
prior regulation for applications to the
Board to engage in such activities, nor
does it restrict permissible activities for
bank holding companies except in
conformance with the requirements
established by Congress in the Garn-St
Germain Depository Institutions Act of
1982, codified at 12 U.S.C. 1843(c)(8)(A)(G). To the extent that it eliminates the
mandatory rate reduction requirement
for bank holding companies applying to
engage in credit life underwriting
activities, the amended regulation
provides for additional flexibility.
Similarly, by clarifying the scope of
permissible activities, the amended
regulation will permit certain additional
applications to qualify for more
expeditious processing in the regional
Federal Reserve Banks under authority
delegated by the Board, 12 CFR 225.23.
The amended insurance regulation
imposes no additional information
collection requirements and imposes no
substantial change in the requirements
for applications to engage in insurance
activities.
List of Subjects in 12 CFR Part 225
Banks, banking, Federal Reserve
System, Holding companies, Reporting
and recordkeeping requirements.
For reasons set out in this notice, the
Board is consolidating §§ 225.25 (b)(8)
and (b)(9) of the Board’s Regulation Y
(12 CFR 225.25 (b)(8) and (b)(9)), dealing
with permissible insurance agency and
underwriting activities for bank holding
companies, into a single! 225.25(b)(8).
Accordingly, the Board revises
§§ 225.1(a) and 225.25(b)(8); and
removes §§ 225.25(b)(9) and 225.128 as
set forth below:
PART 225—BANK HOLDING
COMPANIES AND CHANGE IN BANK
CONTROL
1. The authority citation for Part 225 is
revised to read as follows:
Authority: 12 U.S.C. 1817(j)(13), 1818,
1843(c)(8), 1844(b), 3108, 3108, 3907 and 3909.
2. Section 225.25(b)(8) is revised to
read as follows:
36211
§ 225.25 List of permissible nonbanking
activities.
*
*
*
*
*
(b) * * *
(8) Insurance agency and
underwriting, (i) Credit Insurance.
Acting as principal, agent, or broker for
insurance (including home mortgage
redemption insurance) that is:
(A) Directly related to an extension of
credit by the bank holding company or
any of its subsidiaries; and
(B) Limited to assuring the repayment
of the outstanding balance due on the
extension of c re d it7 in the event of the
death, disability, or involuntary
unemployment of the debtor.
(ii) Finance com pany subsidiary.
Acting as agent or broker for insurance
directly related to an extension of credit
by a finance company 8 that is a
subsidiary of a bank holding company,
if:
(A) The insurance is limited to
assuring repayment of the outstanding
balance on such extension of credit in
the event of loss or damage to any
property used as collateral for the
extension of credit; and
(B) The extension of credit is not more
than $10,000, or $25,000 if it is to finance
the purchase of a residential
manufactured home 9 and the credit is
secured by the home; and
(C) The applicant commits to notify
borrowers in writing that: (7) they are
not required to purchase such insurance
from the applicant; (2) such insurance
does not insure any interest of the
borrower in the collateral; and [3] the
applicant will accept more
comprehensive property insurance in
place of such single interest insurance.
(iii) Insurance in sm all towns.
Engaging in any insurance agency
activity in a place where the bank
holding company or a subsidiary of the
bank holding company has a lending
office and that: (A) has a population not
exceeding 5,000 (as shown in the
preceding decennial census); or (B) has
inadequate insurance agency facilities,
7 "Extension of credit" includes direct loans to
borrowers, loans purchased from other lenders, and
leases of real or personal property so long as the
leases are nonoperating and full payout leases that
meet the requirements of paragraph (b)(5) of this
section.
8 "Finance company" includes all nondeposittaking financial institutions that engage in a
significant degree o f consumer lending (excluding
lending secured by first mortgages) and all financial
institutions specifically defined by individual States
as finance companies and that engage in a
significant degree of consumer lending.
8 These limitations increase at the end of each
calendar year, beginning with 1982, by the
percentage increase in the Consumer Price Index for
Urban W age Earners and Clerical Workers
published by the Bureau of Labor Statistics.
36212
Federal Register / Vol. 51, No. 196 / Thursday, October 9, 1986 / Rules and Regulations
as determined by the Board, after notice
and opportunity for hearing.
(iv) Insurance agency a ctivities
conducted on M ay 1, 1982. Engaging in
any specific insurance agency activity 10
if the bank holding company, or
subsidiary conducting the specific
activity, conducted such activity on May
1,1982, or received Board approval to
conduct such activity on or before May
1 ,1982.11 A bank holding company or
subsidiary engaging in a specific
insurance agency activity under this
clause may:
(A) Engage in such specific insurance
agency activity only at locations:
(1) In the State in which the bank
holding company has its principal place
of business (as defined in 12 U.S.C.
1842(d));
(2) In any State or States immediately
adjacent to such State; and
(3) In any State in which the specific
insurance agency activity was
conducted (or was approved to be
conducted) by such bank holding
company or subsidiary thereof or by any
other subsidiary of such bank holding
company on May 1,1982; and
(B) Provide other insurance coverages
that may become available after May 1,
1982, so long as those coverages insure
against the types of risks as (or are
otherwise functionally equivalent to)
coverages sold or approved to be sold
on May 1,1982 by such bank holding
company or subsidiary.
(v) Supervision o f retail insurance
agents. Supervising on behalf of
insurance underwriters the activities of
retail insurance agents who sell: (A)
Fidelity insurance and property and
casualty insurance on the real and
personal property used in the operations
of the bank holding company or its
subsidiaries; and (B) group insurance
that protects the employees of the bank
holding company or its subsidiaries.
(vi) Sm all bank holding companies.
Engaging in any insurance agency
activity if the bank holding company has
total consolidated assets of $50 million
or less. A bank holding company
10 Nothing contained in this provision shall
preclude a bank holding company subsidiary that is
authorized to engage in a specific insurance agency
activity under this clause from continuing to engage
in the particular activity after merger with an
affiliate, if the merger is for legitimate business
purposes and prior notice has been provided to the
Board.
11 For purposes of this paragraph, activities
engaged in on May 1,1982, include activities carried
on subsequently as the result of an application to
engage in such activities pending before the Board
on May 1,1982, and approved subsequently by the
Board or as the result of the acquisition by such
company pursuant to a binding written contract
entered into on or before May 1,1982, of another
company engaged in such activities at the time of
the acquisition.
performing insurance agency activities
under this paragraph may not engage in
the sale of life insurance or annuities
except as provided in paragraphs (b)(8)
(i) and (iii) of this section, and it may not
continue to engage in insurance agency
activities pursuant to this provision
more than 90 days after the end of the
quarterly reporting period in which total
assets of the holding company and its
subsidiaries exceed $50 million.
(vii) Insurance agency activities
conducted before 1971. Engaging in any
insurance agency activity performed at
any location in the United States
directly or indirectly by a bank holding
company that was engaged in insurance
agency activities prior to January 1.
1971, as a consequence of approval by
the Board prior to January 1.1971,
§225.25 [Amended]
3. Section 225.25(b)(9) is removed and
reserved.
4. Section 225.25 (b)(10) and (b)(ll)
footnotes numbered 8, 9 and 10 are
redesignated 12,13 and 14, respectively.
§225.128 [Removed)
5. Section 225.128 is removed.
§225.135 [Removed]
6. Section 225.135 is removed.
Board o f Governors o f the Federal Reserve
System, October 3,1980.
William W. Wiles,
Secretary of the Board.
[FR Doc. 86-22867 Filed 10-0-80; 0:45 am]
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