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Consumer Protection Insurance Rules: What You Need to Know

by Mary Beth Guard

New consumer protections take effect for depository institution sales of insurance on October 1, 2001. (They were originally slated to take effect April 1, 2001, but the deadline was extended after intense lobbying by ABA and others.) Some bankers have mistakenly assumed that these rules are simply a repetition of the interagency guidance on sales of nondeposit retail investment products. That is not the case. These rules establish consumer protections in connection with retail sales of all insurance products and annuities by any depository institution or by any person that is engaged in these activities at an office of the institution or on behalf of the institution -- including credit insurance and flood insurance! [Force-placed insurance, however, is not covered by these rules.]

The insurance activities will be deemed to be "on behalf of" an institution, whether they are at an office of the bank or at another location, if:

  • The person represents to a consumer that the sale, solicitation, advertisement, or offer of any insurance product or annuity is by or on behalf of the institution;
  • The depository institution refers a consumer to a seller of insurance products or annuities and the bank has a contractual arrangement to receive commissions or fees derived from a sale of an insurance product or annuity resulting from that referral;
  • Documents evidencing the sale, solicitation, advertising, or offer of an insurance product or annuity identify or refer to the institution or use its corporate logo or corporate name; or

There are three important prohibitions in the new rules. The first is a prohibition against a covered person engaging in any practice that would lead a consumer to believe that an extension of credit, in violation of the anti-tying provisions of the Bank Holding Company Act, is conditional upon either the purchase of an insurance product or annuity from the institution or one of its affiliates, or an agreement by the consumer not to obtain, or a prohibition on the consumer from obtaining an insurance product or annuity from an unaffiliated entity. The second is a general prohibition against misrepresentations. The third prohibits a covered person from considering the applicant's or insured's status as a domestic violence victim in the insurance underwriting. There are two sets of disclosures that must be made. One disclosure is applicable only when a consumer is applying for an extension of credit in connection with which an insurance product or annuity is either solicited, offered, or sold. That credit-related disclosure:

  • Must be made at the time of application both orally and in writing;
  • Must disclose that the institution may not condition an extension of credit on either
    • The consumer's purchase of an insurance product or annuity from the institution or any of its affiliates; or
    • The consumer's agreement not to obtain, or a prohibition on the consumer from obtaining, an insurance product or annuity from an unaffiliated entity.
  • Must be conspicuous, simple, direct, readily understandable, and provided in a meaningful form.

A written acknowledgement must be received from the consumer acknowledging that the consumer has received the disclosures.

There are some special rules for transactions by mail or by telephone, and the written disclosure requirement may be satisfied electronically, so long as the provisions of the federal E-Sign Act (Electronic Signatures in Global and National Commerce) are complied with.

The second set of disclosures applies in connection with the initial purchase of any insurance product or annuity by a consumer from a covered person (including credit and property insurance.) This disclosure:

  • Must be provided both orally and in writing before the completion of the initial sale of an insurance product or annuity to a consumer. [As with the other disclosure, there are special provisions relating to mail or telephone transactions, as well as electronic communications.]
  • Must include the following, except to the extent the disclosure would not be accurate:
    • The insurance product or annuity is not a deposit or other obligation of, or guaranteed by, the bank or an affiliate of the bank;
    • The insurance product or annuity is not insured by the FDIC or any other agency of the U.S., the bank or (if applicable) an affiliate of the bank; and
    • In the case of an insurance product or annuity that involves an investment risk, there is investment risk associated with the product, including the possible loss of value.
  • Must be conspicuous, simple, direct, readily understandable, and provided in a meaningful form.

A written acknowledgement must be received from the consumer acknowledging that the consumer has received the disclosures.

When they say the disclosure must be made except to the extent it would not be accurate, they give as examples instances where the pertinent insurance is crop insurance or federal flood insurance. In those cases, the statement that a product is not insured by an agency of the U.S. would not be accurate, so the disclosure can be modified to eliminate the inaccuracy.

Although some commenters urged the regulators to remove certain types of insurance, such as property and casualty insurance and credit-related insurance, from the requirement to disclose that the product is not FDIC-insured, the regulators declined to do so. Therefore, both sets of disclosures - each with different timing requirements, will need to be made in credit transaction situations! In non-credit related transactions only the second set of disclosures (Not FDIC-insured, etc.) must be made.

The rules provide sample language that could be used for this set of disclosures in visual media, such as TV, billboards, and the like:
NOT A DEPOSIT
NOT FDIC-INSURED
NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
NOT GUARANTEED BY THE BANK [OR SAVINGS ASSOCIATION]
MAY GO DOWN IN VALUE

Compliance with these new rules will require not only new forms (for both the disclosures and the acknowledgements), but also training of covered personnel to ensure the disclosures are given at the proper time and that they are given both orally and in writing and that the customer's acknowledgment is obtained.

Originally appeared in the Oklahoma Bankers Association Compliance Informer.

First published on BankersOnline.com 5/21/01

First published on 05/21/2001

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