Full text of Federal Reserve Bank of New York Circulars : 8729. Comment Invited on Proposed Joint Policy Statement Regarding Credit Life Insurance Income

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FEDERAL RESERVE BANK
OF NEW YORK

Circular No. 8 7 2 9
January 4, 1980

COMMENT INVITED ON PROPOSED JOINT POLICY STATEMENT
REGARDING CREDIT LIFE INSURANCE INCOME

To A ll State Member Banks, and Others Concerned,
in the Second Federal Reserve District:

The Federal Financial Institutions Examination Council has invited comment, by
March 31, 1980, on a proposed policy statement that would prohibit insiders in State
member banks from profiting personally from life insurance sales made in connection
with credit transactions.
Enclosed—for State member banks—is a copy of the text of the proposed
statement, together with the notice submitted by the Examination Council for
publication in the Federal Register. Copies will be made available to others upon request
directed to the Circulars Division of this Bank.
Comments on the proposed statement should be submitted by March 31, and may
be sent to our Consumer Affairs and Bank Regulations Department.




T h o m a s M. T i m l e n .

First Vice President

FEDERAL FINANCIAL INSTITUTIONS EXAMINATION COUNCIL
ON BEHALF OF ITS M BER AGENCIES
EM
J o in t N o tic e o f P rop osed P o lic y S ta tem en t
On D is p o s it io n o f .C r e d it L if e In su ra n ce Income
AGENCIES:

The F e d e r a l D e p o sit In su ra n ce C orp oration , th e Board o f

G overnors o f th e F e d e r a l R eserv e S ystem , th e C o m p tro ller o f th e
C urrency, th e F e d e r a l Home Loan Bank Board and th e N a tio n a l C re d it
Union A d m in is tr a tio n .

ACTION:

P rop osed p o l i c y s ta te m e n t; r e q u e s t f o r comments.

SUMMARY:

The F e d e r a l f i n a n c i a l i n s t i t u t i o n s u p e r v is o r y a g e n c ie s are

p r o p o sin g to i s s u e a p o l i c y sta te m e n t w hich w ould p r o h ib it f i n a n c i a l
in s titu tio n

in s i d e r s from b e n e f i t i n g p e r s o n a lly from incom e d e r iv e d

from th e s a l e o f c r e d it l i f e , h e a lt h or a c c id e n t in su r a n c e s o ld in
c o n n e c tio n w ith lo a n s made by t h e i r i n s t i t u t i o n s .

The p ro p o sed p o l i c y

sta te m e n t w ould r e q u ir e t h a t such incom e be c r e d it e d to an i n s t i t u t i o n ’ s
own incom e acco u n t o r , in th e c a s e o f a s a v in g s and lo a n a s s o c i a t i o n ,
to i t s

s e r v i c e c o r p o r a tio n .

In S t a t e s w here in s u r a n c e law s appear to

p r e c lu d e a f i n a n c i a l i n s t i t u t i o n from r e c e iv in g in s u r a n c e co m m ission s,
th e p ro p o sed p o l i c y sta te m e n t w ould r e q u ir e a f i n a n c i a l i n s t i t u t i o n
t h a t w is h e s to s e l l c r e d it l i f e , h e a lt h o r a c c id e n t in su r a n c e to u se
any o th e r p ro ced u re f o r making in su r a n c e a v a i l a b l e so lo n g as in s i d e r s
do n o t p e r s o n a lly p r o f i t .

EFFECTIVE DATE:

[Ref. Cir. No. 8729]




Comments must be r e c e iv e d by March 3 1 , 1980.

2

ADDRESS:

Comments sh o u ld b e a d d r e sse d to In te r a g e n c y C r e d it L if e

Income P o l i c y , c / o John J . M cCarthy, Deputy D ir e c t o r , D iv is io n o f
Bank S u p e r v is io n , F e d e r a l D e p o s it In su ra n ce C o r p o r a tio n , Room 5050-A ,
550 S e v e n te e n th S t r e e t , NW, W ash in gton , DC

FOR FURTHER INFORMATION CONTACT:
In su r a n c e C o r p o r a tio n ,
B oard,

20429 ( 2 0 2 /3 8 9 - 4 2 8 3 ) .

John M cCarthy, F e d e r a l D e p o sit

(2 0 2 ) 3 8 9 -4 2 8 3 ; Sandy G reen e, F e d e r a l R eserve

(202) 4 5 2 -2 7 4 2 ; Ford B a r r e t t , C o m p tro lle r o f th e C urrency,

(2 0 2 ) 4 4 7 -1 8 9 6 ; L arry Berkow, F e d e r a l Home Loan Bank B oard,

(202)

3 7 7 -6 4 3 0 ; and B arry J o l e t t e , N a tio n a l C r e d it Union A d m in is tr a tio n ,
(2 0 2 ) 2 5 4 -8 7 6 0 .

SUPPLEMENTARY INFORMATTON:
v i s o r y a g e n c ie s

The F e d e r a l f i n a n c i a l i n s t i t u t i o n su p e r ­

( ’’a g e n c i e s ”) a re aware t h a t i t h as b een a lo n g -s ta n d in g

f i n a n c i a l p r a c t i c e in c e r t a in p a r ts o f th e co u n tr y f o r o f f i c e r s ,
d i r e c t o r s , p r in c ip a l s h a r e h o ld e r s (w h eth er in d i v id u a l or c o r p o r a t e ) ,
t h e i r i n t e r e s t s or o t h e r a f f i l i a t e s

( ’’i n s i d e r s ”) o f f i n a n c i a l i n s t i t u - ,

t i o n to r e c e i v e , e i t h e r d i r e c t l y or i n d i r e c t l y ,

incom e d e r iv e d from

th e s a l e o f c r e d i t l i f e , h e a lt h or a c c id e n t in s u r a n c e ( ’’c r e d i t l i f e
in s u r a n c e ”) in c o n n e c tio n w it h lo a n s made by th e i n s t i t u t i o n s .
I n s id e r s u s u a l ly r e c e i v e th e incom e in one o f two w a y s - - e i t h e r by th e
payment o f th e in s u r a n c e com m ission s d i r e c t l y to th e i n s i d e r o r by
payment to th e i n s i d e r o f a d d it io n a l s a la r y or o th e r form o f compen­
s a t i o n b ased upon th e amount o f in s u r a n c e b u s in e s s g e n e r a te d .




3

he a g e n c ie s b e l i e v e t h a t th e d iv e r s io n o f incom e from c r e d i t l i f e
in s u r a n c e s a l e s to i n s id e r s r a th e r than to t h e i r f i n a n c i a l i n s t i t u t i o n s
may c o n s t i t u t e an u n s a fe o r unsound f i n a n c i a l p r a c t i c e .
f o r t h e a g e n c ie s*
(1)

The r e a so n s

co n cern in c lu d e th e f o llo w in g :

F in a n c ia l i n s t i t u t i o n o f f i c e r s and d ir e c t o r s owe a f id u c ia r y
d u ty to th e i n s t i t u t i o n and a l l i t s s h a r e h o ld e r s n o t t o p r o f i t
*
p e r s o n a lly from an a c t i v i t y in v o lv in g u se o f th e i n s t i t u t i o n ' s
f a c i l i t i e s , p e r s o n n e l, g o o d w ill, or o th e r r e s o u r c e s .

(2)

As an a c c o u n tin g and o p e r a tio n s m a tte r , i t ap pears t h a t income
d e r iv e d from in su r a n c e s a l e s w ould b e p r o p e r ly a cc o u n ted fo r by
c r e d i t i n g i t to th e f i n a n c i a l i n s t i t u t i o n ' s incom e a c c o u n t s , or
in th e c a s e o f a s a v in g s and lo a n a s s o c i a t i o n , to i t s

s e r v ic e

c o r p o r a tio n , and n o t to i n s i d e r s , t h e i r i n t e r e s t s or a f f i l i a t e s .
A llo w in g such incom e to be d iv e r t e d w ith o u t e n t e r in g th e income
strea m seem s c o n tr a r y to th e o r d e r ly and s y s t e m a t ic a c c o u n tin g
o f funds t h a t i s e x p e c te d o f f i n a n c i a l i n s t i t u t i o n s .
(3 )

Loan o f f i c e r s may b e in d u ced to make lo a n s th e y m ight n o t o t h e r ­
w is e h ave c o n s id e r e d sound in o rd er to r e c e iv e th e com m ission on
th e accom panying in s u r a n c e s a l e .

T h is c o u ld r e s u l t i n a c o n f l i c t

o f i n t e r e s t s i t u a t i o n in w hich a lo a n o f f i c e r ' s c r e d i t judgm ent
m ight be in f lu e n c e d by h i s or h er own d e s ir e f o r p e r s o n a l
f i n a n c i a l g a in .
(4)

A lo a n o f f i c e r who sta n d s to r e c e iv e an in s u r a n c e com m ission
m igh t be in d u ced to p e r su a d e a borrow er to p u rch a se unneeded
o r unwanted in s u r a n c e .




A

(5 )

F in a n c ia l i n s t i t u t i o n s o p e r a te la r g e l y on p u b lic t r u s t and con­
f id e n c e .

A rrangem ents t h a t p erm it bank i n s i d e r s to p r o f i t a t

th e ex p en se o f th e i n s t i t u t i o n , i t s s h a r e h o ld e r s , o r i t s
d e p o s it o r s c o u ld underm ine t h a t t r u s t and c o n fid e n c e and com­
p rom ise th e i n t e g r i t y o f th e i n s t i t u t i o n s .

A c c o r d in g ly , in th e i n t e r e s t o f p r e s e r v in g th e s a f e t y and sou nd n ess o f
f i n a n c i a l i n s t i t u t i o n s , th e a g e n c ie s a re p r o p o sin g to ad opt a p o lic y

*

s ta te m e n t w hich w ould p r o h ib i t in s i d e r s o f f i n a n c i a l i n s t i t u t i o n s
from p e r s o n a lly p r o f i t i n g on th e s a l e o f c r e d it l i f e

in s u r a n c e and w hich

w ould r e q u ir e such incom e to be c r e d it e d to th e f i n a n c i a l i n s t i t u t i o n s '
incom e a c c o u n ts o r , in th e c a s e o f s a v in g s and lo a n a s s o c i a t i o n s , to
t h e i r s e r v i c e c o r p o r a tio n s .

In th e two known S t a t e s w here S t a t e in su r a n c e law s may p r e c lu d e a f in a n ­
c i a l i n s t i t u t i o n from r e c e i v i n g c r e d it l i f e

in su r a n c e com m issions (Texas

and O klahom a), a f i n a n c i a l i n s t i t u t i o n t h a t w ish e s to p r o v id e c r e d it
life

in s u r a n c e w ould be p e r m itte d to u se any o th e r p ro ced u re fo r

making c r e d i t l i f e

in s u r a n c e a v a ila b le ( e . g . , th e group p o l i c y -

e x p e r ie n c e re fu n d m ethod o r th e c r e d it u n io n m e th o d ), so lo n g as in s id e r
do n o t p e r s o n a lly p r o f i t and any incom e i s c r e d it e d to th e f i n a n c i a l
in s titu tio n .

The a g e n c ie s r e c o g n iz e t h a t th e p r a c t ic e whereby incom e d e r iv e d from
th e s a l e o f c r e d i t l i f e




in s u r a n c e i s d iv e r t e d t o i n s i d e r s i s one o f

ong s ta n d in g in some a re a s o f th e c o u n tr y .

T h e r e fo r e , i t i s th e

a g e n c i e s 1 i n t e n t i o n to g iv e f i n a n c i a l i n s t i t u t i o n s s u f f i c i e n t tim e
to a d ju s t t h e i r a c t i v i t i e s and arrangem ents to conform t o th e p r o v is io n s
o f th e p ro p o sed p o l i c y s ta te m e n t.

I f a d o p ted , th e p o l i c y s ta te m e n t

w ould p r o v id e t h a t f i n a n c i a l i n s t i t u t i o n s n o t now s u b j e c t to a r u l e ,
r e g u l a t i o n , o r p o l i c y sta te m e n t on c r e d i t l i f e

in su r a n c e incom e sh o u ld

b e in co m p lia n ce w ith i t s p r o v is io n s w it h in one y e a r f o llo w in g f i n a l
p u b lic a t io n .

The p ro p o sed p o l i c y s ta te m e n t a ls o p r o v id e s t h a t f i n a n c i a l

i n s t i t u t i o n s may be e x c e p te d from th e g e n e r a l r u le on a c a s e - b y - c a s e
b a s is i f a c l e a r h a rd sh ip e x i s t s and s a t i s f a c t o r y a ssu r a n c e i s p r o v id e d
t h a t co m p lia n ce w i l l b e fo rth c o m in g w it h in an a p p r o p r ia te p e r io d o f
tim e .

G iven th e p r o v is io n e n a b lin g a p h a s e -in o f th e p ro p o sed p o l i c y

t a t e m e n t 's a p p l i c a b i l i t y on a c a s e - b y - c a s e b a s i s , each a gen cy w i l l
have f l e x i b i l i t y to h a n d le h a rd sh ip c a s e s in an a p p r o p r ia te manner.

W hile comments on a l l a s p e c ts o f th e p rop osed p o lic y s ta te m e n t are
i n v i t e d , t h o s e a d d r e s s in g th e e f f e c t o f th e p rop osed p o l i c y sta te m e n t
on sm a ll banks and t h e i r s h a r e h o ld e r s

( in c lu d in g bank h o ld in g com panies)

a re p a r t i c u l a r l y d e s ir e d .
7.3 J

The t e x t o f th e f o llo w in g P rop osed P o lic y S ta tem en t i s as f o llo w s :
PROPOSED POLICY STATEMENT
D is p o s it io n o f C r e d it L i f e In su ra n ce Income
For th e p u rp ose o f h e lp in g to p r e s e r v e th e s a f e t y and so u n d n ess o f
f i n a n c i a l i n s t i t u t i o n s , th e F e d e r a l D e p o s it In su ra n ce C o r p o r a tio n ,




6

th e F e d e r a l Home Loan Bank B oard, th e F e d e r a l R eserve B oard, th e
N a tio n a l C r e d it Union A d m in is tr a tio n 1 / and th e O f f ic e o f th e
C o m p tro lle r o f th e Currency a r e a d o p tin g th e p o l i c i e s s e t f o r t h b elow
r e g a r d in g t h e d i s p o s i t i o n o f incom e from th e s a l e o f c r e d i t l i f e ,
h e a lt h , and a c c id e n t in su r a n c e ( " c r e d it l i f e

in su ra n ce" ) r e l a t e d to

lo a n s made by f e d e r a l l y in s u r e d f i n a n c i a l i n s t i t u t i o n s .
(1)

I n d iv id u a l o f f i c e r s ,

d ir e c t o r s and p r in c ip a l sh a r e h o ld e r s o f a

f i n a n c i a l i n s t i t u t i o n sh o u ld n o t p e r s o n a lly p r o f i t from th e s a l e
o f c r e d it l i f e
(2)

in s u r a n c e to th e i n s t i t u t i o n ’ s lo a n cu sto m e rs.

As an a c c o u n tin g and o p e r a tio n s m a tte r , incom e d e r iv e d from
c r e d it l i f e

in s u r a n c e s a l e s to lo a n cu stom ers sh o u ld be c r e d it e d

o n ly to th e incom e a c c o u n ts o f th e f i n a n c i a l i n s t i t u t i o n s o r ,
in th e c a s e o f a s a v in g s and lo a n a s s o c i a t i o n , to i t s

s e r v ic e

c o r p o r a tio n , and n o t to th e f i n a n c i a l i n s t i t u t i o n ’s in d iv id u a l
o ffic e r s ,

d i r e c t o r s , p r in c ip a l s h a r e h o ld e r s , t h e i r i n t e r e s t s ,

o r o th e r a f f i l i a t e s .
(3)

Where S t a t e in s u r a n c e law s or o th e r l e g a l c o n s id e r a t io n s p r e c lu d e
a f i n a n c i a l i n s t i t u t i o n from u s in g a p a r t ic u la r p ro ced u re fo r
s e llin g c r e d it l i f e

in su r a n c e or from d is p o s in g o f th e income

in a p a r t i c u l a r m anner, a f i n a n c i a l i n s t i t u t i o n w hich w ish e s to
p r o v id e t h i s s e r v i c e to i t s

lo a n cu stom ers s h a l l se e k and u t i l i z e

an a l t e r n a t i v e method t h a t c o m p lie s w ith 1 and 2 ab ove.
(4)

The p ro p er m ethod f o r th e d i s t r i b u t i o n to s h a r e h o ld e r s or to an
a f f i l i a t e d h o ld in g company o f incom e d e r iv e d from c r e d i t l i f e
in s u r a n c e or o t h e r incom e s o u r c e s i s through a d e c la r a t io n o f
d iv id e n d in c o n fo r m ity w ith la w , r u l e , r e g u la t io n and prudent
f in a n c ia l p r a c tic e .




(5 )

F in a n c ia l i n s t i t u t i o n s n o t now s u b j e c t to a r u l e , r e g u la t io n
or p o l i c y s ta te m e n t on th e d i s p o s i t i o n o f c r e d it l i f e

in su r a n c e

incom e sh o u ld be in co m p lia n ce w ith 1 and 2 above w it h in one y e a r
f o llo w in g p u b lic a t io n in th e F e d e r a l R e g is t e r o f th e f i n a l p o l i c y
s ta te m e n t.

M o d if ic a t io n s beyond th a t tim e w i l l b e g ra n ted o n ly

w here a c l e a r h a rd sh ip e x i s t s and s a t i s f a c t o r y a ssu r a n c e i s
p r o v id e d t h a t co m p lia n ce w ith 1 and 2 above w i l l be a c h ie v e d
w it h in an a p p r o p r ia te tim e p e r io d .

1/

F e d e r a l c r e d i t u n io n s are n o t p e r m itte d by law to s e l l
c r e d i t l i f e in s u r a n c e .




8

(SIGNED)

Theodore E. A l l i s o n , S e c r e ta r y
Board o f G overnors o f th e F e d e r a l
R eserv e System

(SIGNED)

J . J . F in n , S e c r e t a r y
F e d e r a l Home Loan Bank Board

(SIGNED)

H. J o e S e lb y , S e n io r Deputy
C o m p tr o lle r , O f f i c e o f th e
C o m p tro ller o f th e C urrency

(SIGNED)

H oyle L~ R ob in son , E x e c u tiv e
S e c r e t a r y , F e d e r a l D e p o s it
In su ra n ce C o rp o ra tio n

(SIGNED)

Rosemary Brady, S e c r e t a r y to NCUA
Board, N a tio n a l C r e d it Union
A d m in is tr a tio n
BY: B e a t r ix F i e l d s , A c tin g
S e c r e ta r y to NCUA 3oard