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Regulations Pertaining to Insurance Activities
By: John E. Burrus, Esq.

On April 1, 2001, regulations became effective which apply to financial institutions’ consumer insurance activities. This article will outline the principal areas of coverage but should not be used as a substitute for the regulations themselves. The regulations can be found at 12 C.F.R. Part 14 (OCC); 12 C.F.R. Part 208 (Federal Reserve); 12 C.F.R. Part 343 (FDIC); and 12 C.F.R. Part 536 (OTS).

What Do the Regulations Generally Apply To?

• The sale, solicitation, advertisement or offer of an insurance product or annuity by a “covered person” to a “consumer”.
• “Insurance product or annuity” is not defined.
• A “consumer” means an individual who purchases, applies to purchase, or is solicited to purchase an insurance product or annuity primarily for personal, family or household purposes.

Who is affected by the regulations?

• A “covered person” is defined as:
  • Any financial institution; or
  • Any other person who sells, solicits, advertises or offers an insurance product or annuity to a consumer at an office of a financial institution or on behalf of a financial institution.
• An activity is done “on behalf of” a financial institution if:
  • A representation is made to a consumer that the activity is by or on behalf of a financial institution; or
  • A financial institution refers a consumer to another person under a contractual arrangement to receive commissions or fees from the sale of an insurance product or annuity; or
  • Documents evidencing the activity identify or refer to a financial institution.

What is Prohibited?

• Any practice which would lead a consumer to believe that an extension of credit is conditioned upon either (i) the purchase of an insurance product or annuity from a financial institution or its affiliates, or (ii) an agreement not to obtain or a prohibition on obtaining an insurance product or annuity from an unaffiliated entity.
• Any activity which could mislead a person with respect to:
  • The fact that an insurance product or annuity is not “backed by” the federal government or the bank and is not insured by the FDIC; or
  • For products involving investment risk, the fact that there is a risk, including the potential that principal may be lost and the product may decline in value.
  • The fact that an extension of credit to a consumer may not be conditioned on the purchase of an insurance product or annuity from the financial institution or its subsidiary and that the consumer is free to purchase the product from another source.
• The sale or offer for sale (as principal, agent or broker) of any life or health insurance product with regard to which underwriting, pricing, renewal or scope of coverage is affected by the insured’s status as a victim of domestic violence or as a provider of services to victims of domestic violence.
• The failure to keep segregated the area where the financial institution conducts transactions involving insurance products or annuities from areas where retail deposits are routinely accepted, or to identify and clearly delineate insurance product or annuity sales areas from retail deposit-taking areas.
• A financial institution’s permitting any person to sell or offer for sale any insurance product or annuity in any part of its office or on its behalf unless the person conducting such activity is appropriately qualified and licensed.

What must be disclosed?

• In connection with the initial purchase of an insurance product or annuity, the following must be disclosed:
  • That the product is not a deposit or other obligation of or guaranteed by the financial institution or its affiliate.
  • That the product is not insured by the FDIC or any other federal agency or by the financial institution or its affiliate.
  • For products involving investment risk, that there is investment risk associated with the product, including the possible loss of value.
• In connection with a credit application which includes the solicitation, offer or sale of an insurance product or annuity, disclosure must be made that the financial institution may not condition an extension of credit on either (i) the consumer’s purchase of an insurance product or annuity from the financial institution or its affiliate, or (ii) the consumer’s agreement not to obtain, or a prohibition on the consumer from obtaining, an insurance product or annuity from an unaffiliated entity.
  • The required disclosures must be made both orally and in writing before completion of the initial sale of the product or at the time the consumer applies for an extension of credit associated with the solicitation, offer or sale of an insurance product or annuity.
  • Oral disclosures are not required if the product is sold by mail or the application for credit is taken by mail.

• Special rules apply to sales conducted and applications taken by telephone or by electronic transmission.
• Disclosures must be “readily understandable” and “meaningful”. These terms are defined in greater detail by the regulations.
• Written acknowledgement of receipt of the disclosures must be received from the consumer. Acknowledgements may be received “electronically or in paper form.”
• For telephone transactions, acknowledgement of receipt may be received orally provided that the financial institution maintains “sufficient documentation” to show receipt of acknowledgment and makes “reasonable efforts” to obtain written acknowledgement from the consumer.
• The required disclosures must be included in advertisements and promotional material except those of a general nature describing or listing the services or products offered by the institution.

Contact John E. Burrus at jeb@bsblawyers.com

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