National banks may finally find out from regulators this week how they may sell insurance from small towns.

The Office of the Comptroller of the Currency is expected to use an application filed by First Union Corp. to spell out where, how, and under what circumstances insurance may be sold.

The industry's insurance powers were confirmed in March when the Supreme Court ruled that national banks may sell insurance from towns with fewer than 5,000 people.

But while the court decision was a big win for banks, the justices did not detail how national banks may reach customers living outside small towns. That's where the OCC comes in.

First Union filed a request with the comptroller's office April 26 to sell insurance through its subsidiary banks in seven states: North and South Carolina, Georgia, Florida, Tennessee, Virginia, and Maryland.

The OCC and First Union refused to release any further details about the application, but a source close to the situation said the company purposely kept its request general, leaving it to the agency to define specifics.

"Basically, First Union is suggesting they be able to operate exactly as an insurance agent who is not affiliated with a bank can operate," the source said. "First Union has taken a conceptual approach, rather than ask, 'Can we have a guy with a desk or office here or there?'"

Thirteen other national banks have applications pending at the OCC , including Mellon Bank Corp., Banc One Corp., and Bank of Boston Corp.

Industry representatives are disappointed that the agency will interpret the Barnett decision through an application approval, rather than through guidelines or an interpretive letter.

"From the industry's perspective, doing this in the form of an application is less informative because it deals with a narrow set of facts unique to a specific bank," said James D. McLaughlin, director of regulatory and trust affairs for the American Bankers Association.

"Of course, from the OCC's perspective, it is probably easier and safer for them to make a judgment call on a specific set of facts," he added.

The OCC, according to sources, hasn't yet decided how far it will go when it signs off on First Union's application. Clearly, allowing First Union to set up branches of its small town agencies in cities would be the most controversial move.

To gauge the impact of permitting bank insurance sales outside small towns, the OCC has polled its examiners on the risks and benefits, according to a source familiar with the survey.

The examiners were asked to rate roughly 20 different sales methods, ranging from telemarketing and direct-mail insurance solicitations to opening an insurance sales office outside the small town.

Each method was rated in five different categories: benefit to consumers, benefit to banks, risk of controversy, risk of litigation, and risk to the institution.

If the polling is any guide, First Union may be stuck selling in small towns.

"When you start getting into face-to-face marketing and locating agents outside of the small town, the litigation and controversy risk ratings go up drastically," the source said.

State insurance commissioners also are predicting that the comptroller's office will take a conservative approach on insurance sales from small towns.

"Comptroller (Eugene A.) Ludwig and Chief Counsel Julie Williams have gone more than halfway on this - they're extending the working hand of friendship and we're taking it," said Louisiana Insurance Commissioner Jim Brown.

The OCC spent much of the summer squabbling with state insurance commissioners over separate guidelines on bank insurance sales. Those instructions, issued in final form this month, were watered down to appease the commissioners and the OCC is not expected to pick a new fight with the states.

Mr. Brown did issue a warning: the OCC will be sued if it gives banks too much freedom.

"I think the comptroller is really struggling with how far he can go under Barnett," Mr. Brown said. "We're going to have to agree on this, and if we can't, it will go straight to the courts."

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