OCC Clears Way for Banks To Offer Debt Insurance
WASHINGTON - The Office of the Comptroller of the Currency issued a rule Tuesday that could give banks a large share of the $6 billion a year credit life insurance business.
The long-awaited rule sounded the all clear for banks that had hesitated to sell debt cancellation products to borrowers because of legal uncertainties. It includes several consumer protections, but industry officials said the rule asserts more vividly than ever that federal law would shield banks from challenges by state insurance commissioners.
"Some bank representatives have indicated to me that they have been awaiting the OCC rules before making the decision," said William F. Burfeind, executive vice president of the Consumer Credit Insurance Association, a Chicago-based group representing about 130 traditional insurance companies.
Debt cancellation contracts and a related product, debt suspension agreements, are arrangements under which a bank agrees, in exchange for a fee, to either cancel or suspend a borrower's obligations if certain triggering events occur - typically the death of the borrower. Both compete directly with credit life insurance.
Banks have been allowed to offer debt cancellation contracts since the 1960s, but relatively few have done so. A recent survey by the American Bankers Insurance Association found that only 4.3% of 400 banks asked offered debt cancellation as of yearend 2001.
Part of the problem has been a lack of regulatory guidance and protection, experts said.
"While the OCC said they could do it, there was no body of regulatory structure that preempted state insurance laws, and banks always ran the risk that they could be challenged by a state insurance commissioner," said Gilbert T. Schwartz, a partner with the law firm Schwartz & Ballen in Washington.
"The rule certainly provides an advantage to banks in that they can offer a product that competes directly with credit insurance companies without requiring that they be regulated as an insurance company," Mr. Schwartz said.
Others echoed that appraisal.
"The key to this regulation is that it clearly articulates and resolves the fact that debt cancellation and suspension contracts are banking products," said Beth L. Climo, the American Bankers Insurance Association's executive director. "This should be a real positive for the product. It gives banks a standard that can be used across the country as opposed to credit insurance that is regulated on a state-by-state basis."
Banks' interest in the products - and in the fee income they generate - has been on the rise for some time, regulators said.
"These products are becoming more attractive to banks recently, and we have over the course of the last couple of years had more inquiries and indications of interest from banks that wanted to get into the business of offering these products," said Julie Williams, the OCC's chief counsel.
The rule requires banks offering such contracts to establish risk management and control processes that address income recognition and other accounting issues that arise from offering the products.
The Comptroller's Office was also sensitive to the fact that some credit insurance products have been associated with predatory lending - particularly among mortgage lenders. It wrote several consumer protection elements into the rule.
"The rule we have approved today prohibits or restricts bank practices that have the greatest potential for abuse," said Comptroller of the Currency John D. Hawke Jr. "The rule also requires banks to provide disclosures on issues that are likely to be most important to customers in deciding whether to purchase DCCs or DSAs."
The disclosures are modeled on Gramm-Leach-Bliley Act provisions governing bank insurance sales. The rule will take effect nine months after it is published.
The impact it will have on existing credit insurance providers is unclear, but it does not bode well.
Banks offering credit protection generally do so by acting as agents for insurance companies. The American Bankers Insurance Association survey found that in 2001, banks wrote about $2.8 billion worth of the total $6 billion market for credit insurance.
"Banks are already doing debt cancellation contracts on a significant enough basis to have reflected some impact in our marketplace," Mr. Burfeind said. He added that growth in the industry has been flat over the past several years, partly because of market-share loss to lending institutions.