Disclosures Relating to Insurance
by Mary Beth Guard
As the new requirements for consumer protection insurance disclosures take effect on October 1, 2001, we're hearing from bankers who had previously believed they would not be affected and would not need to comply. Many have now realized their activities are covered.
These new requirements establish consumer protections in connection with
- retail sales practices,
- advertising, or
of any insurance product to a consumer
- by any depository institution
- or any other person that is engaged in such activities at an office of a depository institution or on behalf of a depository institution.
Take a look at what is being solicited, offered, or sold by, at, or on behalf of your institution. If it includes any of the following, you need to be in compliance with this new rule:
Accidental death or dismemberment
Auto rental insurance
Purchase Security and Extended Protection
CAP (credit account protection) insurance
VSI, if you are excluding it from the finance charge on a Reg Z-covered loan and giving the customer the option to purchase it from you or through you (although we're hoping for a clarification that would exclude it)
PMI, but only if you are giving the customer the option to purchase it from you or through someone offering it at your office or on your behalf
Any other type of insurance being solicited, offered, or sold, by your institution or through someone offering it at your office or on your behalf
The basic requirements for the new rules were summarized earlier. Since that time, additional questions have arisen, some of which have been answered directly by the regulators. There are still a number of unresolved issues, and we've attempted to address some of them below, as well as summarize the regulators' responses.
- There are two disclosures required by the rule. One is required to be given prior to the time of the purchase of an insurance product that is solicited, offered, or sold, by, through, or at an office of the depository institution. The second is a disclosure given at the time of application for credit in connection with which insurance is offered, solicited, or sold by, through, or at an office of the institution. The customer must be given these disclosures both orally and in writing and must give a written acknowledgment of receipt of both the oral and written disclosures!
- That means you must have the necessary forms, train your employees about when and how to provide them, and train them on how to provide the oral disclosures and seek the customer's acknowledgment.
- The disclosure requirements don't apply to renewals of insurance if the consumer has previously received the disclosures and the renewal is issued by the same carrier, or if the renewal involves the same type of insurance and the new carrier is a legal successor of the original.
- An upgrade in coverage at the time of renewal would be treated as part of the renewal and would not require a disclosure if one was previously given, but if the upgrade involves a different type of insurance, a disclosure would be required. When the rule applies
- If the insurance transaction occurs on the premises of the depository institution, or if another prong of the "on behalf of" test is met, the rule would apply.
- The regulation sets forth examples of activities that would trigger coverage, but the regulators caution that they were only intended to be examples, rather than an exhaustive list of all activities that would be deemed to be an insurance sale or solicitation "on behalf of" an institution.
- The requirements don't apply to crop insurance if it is sold for commercial or business purposes;
- the requirements may or may not apply to PMI, depending upon whether the lender is the purchaser. If the consumer has the option of purchasing the PMI and either the lender or some other entity offers the PMI to a consumer at an office of the depository institution, PMI would be covered.
- If a customer picked up an application for credit prior to October 1, 2001, but does not return it until after that date, it's permissible to simply provide the necessary disclosures orally and in writing prior to the initial sale. On "take one" applications or direct mail solicitations that are actually sent out after October 1, 2001, you must include the new disclosures.
- If you have a situation where an individual applies for credit and you don't offer, solicit, or sell insurance at that time, you still must give the anti-coercion disclosure if the offer, solicitation or sale is going to take place while the application is pending, and they consider it "pending" until your approval has been communicated to the consumer.
Transactions involving both mail and telephone
- If an insurance sale involves a consumer's use of both telephone and mail, no exception applies. They say "the regulation does not provide any exceptions when multiple methods are employed." You must still provide oral and written disclosures. Telephone sales
- If you are making a telephone sale of insurance, you must give the disclosure orally and make "reasonable efforts" to obtain a written acknowledgment. Examples of reasonable efforts include sending a return-addressed envelope or something similar to facilitate the return of the acknowledgment, making a follow-up call or contact, sending a second mailing.
Letting someone else do it
- An insurance company may provide the disclosures and obtain the acknowledgment on behalf of a depository institution, so long as it complies with the content and timing requirements. The insurance company can then be responsible for retaining the acknowledgments, so long as the depository institution has access to the records and the institution's examiners can review them.
Form of written notice Unlike some of the other compliance regulations, such as Regs E, CC, and DD, the insurance disclosure rule does not specifically state that the disclosures must be given in a form the customer can keep. On the other hand, there is a significant difference between the Reg E, CC, and DD disclosures and these insurance disclosures: you must obtain the customer's written acknowledgment of receipt of the insurance disclosures. There is some uncertainty over whether the customer must be given a copy, but best practices would appear to favor giving one.
The anti-coercion disclosure, since it always involves a credit application, can be incorporated into the application form, but that might complicate the process of providing a copy of the disclosure to the customer. Of course, you could certainly provide the customer a copy of the entire application form, and it would not appear necessary for it to be the completed copy.
- The consumer's written acknowledgment of receipt of the disclosures may be obtained either at the time the consumer receives the disclosures or at the time of the initial purchase of an insurance product.
- In the rare instance where you are permitted to give the disclosure orally, you must obtain an oral acknowledgment. (Can you imagine?) They say you may do so by asking a follow up question, such as "Do you acknowledge you received this disclosure?" and receiving an affirmative reply from the consumer. You can document that you've made the disclosure and received the acknowledgment by recording the conversation (with the permission of the consumer, of course) , or by completing a checklist at the time the disclosure is made to document the oral disclosure was given and the acknowledgment was received. Another alternative is to simply note the compliance in the consumer's file. Again, this should be done at the time the disclosure was made - not after the fact.
- You "must" obtain a written acknowledgment that the consumer has received the disclosures in the case of a mail solicitation. The "reasonable efforts" test does not apply in any transaction except a telephone transaction.
- There are no tangible guidelines for the appropriate form or format for a written acknowledgment that is provided electronically, but you should follow the guidelines set forth in the federal ESIGN Act. If you are taking loan applications via your Web site, but not soliciting or offering insurance to the applicant until after you have made your loan decision and communicated the approval to the customer, you don't have to make the anti-coercion disclosure.
Restrictions on where you sell insurance products
- The regulation requires a depository institution to identify the area in which insurance products are sold and clearly delineate and distinguish those areas from areas where retail deposit-taking activities occur. To do so, you could use signage or other means. Remove any "Member FDIC" signs from the insurance sales area!
Originally appeared in the Oklahoma Bankers Association Compliance Informer.
First published on BankersOnline.com 1/14/02
First published on 01/14/2002