nycirc_1980_08729.pdf

FEDERAL RESERVE BANKOF NEW YORK

Circular No. 8729 January 4, 1980

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

To All 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 as M. T im l e n .First Vice President

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

FEDERAL FINANCIAL INSTITUTIONS EXAMINATION COUNCIL ON BEHALF OF ITS MEMBER AGENCIES

J o in t N o tic e o f Proposed P o lic y Statem ent On D is p o s it io n o f .C r e d it L ife Insurance Income

AGENCIES: The F ed era l D ep o sit In su ran ce C orporation, th e Board o f

Governors o f th e F ed era l R eserve System , th e C om ptroller o f the

Currency, th e F ed era l Home Loan Bank Board and th e N a tio n a l C red it

Union A d m in istra tio n .

ACTION: Proposed p o l ic y sta tem en t; req u est fo r comments.

SUMMARY: The F ed era l f in a n c ia l i n s t i t u t i o n su p e rv iso ry a g en c ie s are

p rop osin g to i s s u e a p o l ic y sta tem en t w hich would p r o h ib it f in a n c ia l

i n s t i t u t i o n in s id e r s from b e n e f i t in g p e r s o n a lly from income d er iv ed

from th e s a le o f c r e d it l i f e , h e a lth or a c c id e n t in su ra n ce s o ld in

co n n ectio n w ith loan s made by t h e ir i n s t i t u t i o n s . The proposed p o l ic y

sta tem en t would req u ire th a t such income be c r e d ite d to an i n s t i t u t i o n ’ s

own income account o r , in the ca se o f a sa v in g s and loan a s s o c ia t io n ,

to i t s s e r v ic e c o r p o r a tio n . In S ta te s where in su ra n ce laws appear to

p rec lu d e a f in a n c ia l i n s t i t u t i o n from r e c e iv in g in su ra n ce com m issions,

th e proposed p o l ic y sta tem en t would req u ire a f in a n c ia l i n s t i t u t i o n

th a t w ish es to s e l l c r e d it l i f e , h e a lth or a c c id e n t in su ra n ce to use

any o th er procedure fo r making in su ra n ce a v a i la b le so lon g as in s id e r s

do n o t p e r s o n a lly p r o f i t .

EFFECTIVE DATE: Comments must be r e c e iv e d by March 31 , 1980.

[Ref. Cir. No. 8729]


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ADDRESS: Comments sh ou ld be ad d ressed to In tera g en cy C red it L ife

Income P o l ic y , c /o John J . McCarthy, Deputy D ir e c to r , D iv is io n o f

Bank S u p e r v is io n , F ed era l D ep o sit In su ran ce C orp oration , Room 5050-A,

550 S ev en teen th S t r e e t , NW, W ashington, DC 20429 (2 0 2 /3 8 9 -4 2 8 3 ) .

FOR FURTHER INFORMATION CONTACT: John McCarthy, F ed era l D ep o sit

In su ran ce C orp oration , (202) 389-4283; Sandy G reene, F ed era l R eserve

Board, (202) 452-2742; Ford B a r r e t t , C om ptroller o f th e Currency,

(202) 447-1896; Larry Berkow, F ed era l Home Loan Bank Board, (202)

377-6430; and Barry J o l e t t e , N a tio n a l C red it Union A d m in is tra tio n ,

(202) 254-8760 .

SUPPLEMENTARY INFORMATTON: The F ed era l f in a n c ia l i n s t i t u t i o n su p er

v is o r y a g en c ie s ( ’’a g e n c ie s ”) are aware th a t i t has been a lo n g -s ta n d in g

f in a n c ia l p r a c t ic e in c e r ta in p a r ts o f th e cou n try fo r o f f i c e r s ,

d ir e c t o r s , p r in c ip a l sh a reh o ld ers (w hether in d iv id u a l or c o r p o r a te ) ,

t h e ir in t e r e s t s or o th e r a f f i l i a t e s ( ’’in s id e r s ”) o f f in a n c ia l in s t i tu - ,

t io n to r e c e iv e , e i t h e r d i r e c t ly or in d i r e c t l y , income d er iv ed from

th e s a le o f c r e d it l i f e , h e a lth or a c c id e n t in su ra n ce ( ’’c r e d it l i f e

in su ra n ce”) in co n n ec tio n w ith 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 iv e th e income in one o f two w a y s - - e i th e r by the

payment o f th e in su ra n ce com m issions d ir e c t ly to th e in s id e r or by

payment to th e in s id 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 io n based upon th e amount o f in su ra n ce b u s in e s s g en era ted .


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he a g e n c ie s b e l ie v e th a t th e d iv e r s io n o f income from c r e d it l i f e

in su ra n ce s a le s to in s id e r s ra th er than to t h e ir f in a n c ia l in s t i t u t io n s

may c o n s t i t u t e an u n sa fe or unsound f in a n c ia l p r a c t ic e . The reason s

fo r th e agen cies* concern in c lu d e th e fo llo w in g :

(1) 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 to r s owe a f id u c ia r y

duty to th e i n s t i t u t i o n and a l l i t s sh a reh o ld ers n o t to 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 so 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 cco u n tin g and o p era tio n s m a tter , i t appears th a t income

d er iv ed from in su ra n ce s a le s would be p ro p er ly accoun ted fo r by

c r e d it in g i t to th e f in a n c ia l i n s t i t u t i o n ' s income a c c o u n ts , or

in th e ca se o f a sa v in g s and loan a s s o c ia t io 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 in s id e r s , t h e ir in t e r e s t s or a f f i l i a t e s .

A llow in g such income to be d iv e r te d w ith o u t e n te r in g th e income

stream seems co n tra ry to th e o rd er ly and sy s te m a t ic accou n tin g

o f funds th a t i s ex p ec ted o f f in a n c ia l i n s t i t u t i o n s .

(3) Loan o f f i c e r s may be induced to make loan s th ey m ight n o t o th e r

w ise have co n s id er ed sound in order to r e c e iv e th e com m ission on

th e accompanying in su ra n ce s a le . This cou ld r e s u l t in a c o n f l i c t

o f in t e r e s t s i t u a t io n in which a loan o f f i c e r ' s c r e d it judgment

m ight be in f lu e n c e d by h is or her own d e s ir e fo r p erso n a l

f in a n c ia l g a in .

(4) A lo a n o f f i c e r who stan d s to r e c e iv e an in su ra n ce com m ission

m ight be induced to p ersuad e a borrower to purchase unneeded

or unwanted in su ra n ce .

A


(5) F in a n c ia l i n s t i t u t i o n s o p era te la r g e ly on p u b lic t r u s t and con

f id e n c e . Arrangements th a t perm it bank in s id e r s to p r o f i t a t

th e expense o f th e i n s t i t u t i o n , i t s sh a r e h o ld e r s , or i t s

d e p o s ito r s co u ld undermine th a t t r u s t and c o n fid e n c e and com

prom ise th e in t e g r i t y o f th e i n s t i t u t i o n s .

A cc o rd in g ly , in th e i n t e r e s t o f p r e se r v in g th e s a f e t y and soundness o f

f in a n c ia l i n s t i t u t i o n s , th e a g e n c ie s are p rop osin g to adopt a p o l ic y *

sta tem en t w hich would p r o h ib it in s id e r s o f f in a n c ia l i n s t i t u t io n s

from p e r s o n a lly p r o f i t in g on th e s a le o f c r e d it l i f e in su ra n ce and w hich

would r e q u ir e such income to be c r e d ite d to th e f in a n c ia l i n s t i t u t i o n s '

income accoun ts o r , in th e ca se o f sa v in g s and loan a s s o c ia t io n s , to

t h e ir s e r v ic e c o r p o r a tio n s .

In th e two known S ta te s where S ta te in su ra n ce laws may p rec 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 iv in g c r e d it l i f e in su ra n ce com m issions (Texas

and Oklahoma), a f in a n c ia l i n s t i t u t i o n th a t w ish es to p rov id e c r e d it

l i f e in su ra n ce would be p erm itted to u se any o th er procedure fo r

making c r e d it l i f e in su ra n ce a v a i la b le ( e . g . , the group p o l ic y -

e x p e r ie n c e refund method or th e c r e d it union m eth o d ), so lon 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 income i s c r e d ite d to th e f in a n c ia l

i n s t i t u t i o n .

The a g e n c ie s r e c o g n iz e th a t th e p r a c t ic e whereby income d er iv ed from

th e s a le o f c r e d it l i f e in su ra n ce i s d iv e r te d to in s id e r s i s one o f


ong sta n d in g in some areas o f th e co u n try . T h ere fo re , i t i s th e

a g e n c ie s 1 in t e n t io n to g iv e f in a n c ia l i n s t i t u t io n s s u f f i c i e n t tim e

to a d ju st t h e ir a c t i v i t i e s and arrangem ents to conform to th e p r o v is io n s

o f th e p roposed p o l ic y s ta te m e n t. I f adopted , th e p o l ic y sta tem en t

would p ro v id e th a t 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 je c t to a r u le ,

r e g u la t io n , or p o l ic y sta tem en t on c r e d it l i f e in su ra n ce incom e sh ou ld

be in com pliance w ith i t s p r o v is io n s w ith in one y ea r fo llo w in g f in a l

p u b lic a t io n . The proposed p o l ic y sta tem en t a ls o p ro v id es th a t f in a n c ia l

i n s t i t u t i o n s may be ex cep ted from th e g en era l r u le on a c a s e -b y -c a s e

b a s is i f a c le a r hard sh ip e x i s t s and s a t i s f a c t o r y a ssu ran ce i s p rov id ed

th a t com pliance w i l l be forthcom ing w ith in an a p p ro p ria te p er io d o f

tim e . G iven th e p r o v is io n en a b lin g a p h a se -in o f th e proposed p o l ic y

ta te 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 agency w i l l

have f l e x i b i l i t y to h and le hard sh ip c a se s in an a p p ro p r ia te manner.

W hile comments on a l l a sp e c ts o f th e proposed p o l ic y sta tem en t are

in v i t e d , th o se a d d ress in g th e e f f e c t o f th e proposed p o l ic y sta tem en t

on sm all banks and t h e ir sh a reh o ld ers ( in c lu d in g bank h o ld in g com panies)

are p a r t ic u la r ly d e s ir e d .

7.3 J

The t e x t o f th e fo llo w in g Proposed P o lic y Statem ent i s as fo llo w s :

PROPOSED POLICY STATEMENT

D is p o s it io n o f C red it L if e Insurance Income

For th e purpose o f h e lp in g to p r e se r v e th e s a f e t y and soundness o f

f in a n c ia l i n s t i t u t i o n s , th e F ed era l D ep o sit Insurance C orp oration ,


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th e F ed era l Home Loan Bank Board, th e F ed era l R eserve Board, the

N a tio n a l C red it Union A d m in istra tio n 1 / and th e O ff ic e o f th e

C om ptroller o f th e Currency are ad op tin g th e p o l i c i e s s e t fo r th below

reg a rd in g th e d is p o s i t io n o f incom e from th e s a le o f c r e d it l i f e ,

h e a lth , and a c c id e n t in su ra n ce (" c r e d it l i f e in su ran ce" ) r e la t e d to

lo a n s made by f e d e r a l ly in su red f in a n c ia l i n s t i t u t i o n s .

(1) In d iv id u a l o f f i c e r s , d ir e c to r s and p r in c ip a l sh a reh o ld ers o f a

f in a n c ia l i n s t i t u t i o n sh ou ld n o t p e r s o n a lly p r o f i t from th e s a le

o f c r e d it l i f e in su ra n ce to th e i n s t i t u t i o n ’ s loan custom ers.

(2) As an a cco u n tin g and o p e r a tio n s m a tter , income d er iv ed from

c r e d it l i f e in su ra n ce s a le s to loan custom ers sh ou ld be c r e d ite d

o n ly to th e income accou n ts o f th e f in a n c ia l i n s t i t u t io n s o r ,

in th e ca se o f a sa v in g s and lo a n a s s o c ia t io 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 in a n c ia l i n s t i t u t i o n ’s in d iv id u a l

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

or o th e r a f f i l i a t e s .

(3) Where S ta te in su ra n ce laws or o th e r l e g a l c o n s id e r a t io n s p rec lu d e

a f in a n c ia 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 procedure fo r

s e l l i n g c r e d it l i f e in su ra n ce or from d isp o s in g o f th e income

in a p a r t ic u la r manner, a f in a n c ia l i n s t i t u t i o n w hich w ish es to

p ro v id e t h i s s e r v ic e to i t s loan custom ers s h a l l seek and u t i l i z e

an a l t e r n a t iv e method th a t com p lies w ith 1 and 2 above.

(4) The proper method fo r th e d is t r ib u t io n to sh a reh o ld ers or to an

a f f i l i a t e d h o ld in g company o f income d er iv ed from c r e d it l i f e

in su ra n ce or o th e r income so u rces i s through a d e c la r a t io n o f

d iv id en d in con form ity w ith law , r u le , r e g u la t io n and prudent

f in a n c i a l p r a c t ic e .Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

(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 je c t to a r u le , r e g u la t io n

or p o l ic y sta tem en t on th e d is p o s i t io n o f c r e d it l i f e in su ran ce

income sh ou ld be in com pliance w ith 1 and 2 above w ith in one year

fo llo w in g p u b lic a t io n in th e F ed era l R e g is te r o f th e f in a l p o l ic y

sta 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 be gran ted on ly

where a c le a r hard sh ip e x i s t s and s a t i s f a c t o r y assu ran ce i s

p rov id ed th a t com pliance w ith 1 and 2 above w i l l be a ch iev ed

w ith in an a p p ro p r ia te tim e p e r io d .

1 / F ed era l c r e d i t u n ion s are n ot p erm itted by law to s e l l c r e d it l i f e in su ra n ce .


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(SIGNED)

Theodore E. A l l i s o n , S ecr e ta ry Board o f Governors o f th e F ed era l

R eserve System

(SIGNED)

J . J . F inn , S e c r e ta r y F ed era l Home Loan Bank Board

(SIGNED)H. Joe S e lb y , S en io r Deputy

C om p tro ller , O f f ic e o f th e C om ptroller o f th e Currency

(SIGNED)

H oyle L~ R obinson, E x ecu tiv e S e c r e ta r y , F ed era l D ep o sit In su ran ce C orporation

(SIGNED)

Rosemary Brady, S e c r e ta r y to NCUA Board, N a tio n a l C red it Union A d m in istra tio n

BY: B e a tr ix F ie ld s , A ctin g S ecr e ta ry to NCUA 3oard


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