New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

The Office of General Counsel issued the following informal opinion on April 2, 2002, representing the position of the New York State Insurance Department.

RE: Bank Issuance of Debt Suspension and Debt Cancellation Contracts in connection with its Customers’ Credit Card Account at the Bank

Questions Presented:

1. Do debt cancellation contracts or debt suspension contracts issued by a national bank in connection with credit card loans made by the bank to its cardholders constitute insurance contracts under New York State law?

2. Are debt cancellation contracts or debt suspension contracts issued by a national bank in connection with credit card loans made by the bank to its cardholders subject to regulation by the New York State Insurance Department?

Conclusion:

1. Yes, the underwriting and sale of debt cancellation contracts or debt suspension contracts by a national bank in connection with credit card loans made by the bank to its cardholders constitutes insurance contracts under N.Y. Ins. Law § 1101(a)(1) (McKinney 2000).

2. State regulation of the underwriting of debt cancellation contracts or debt suspension contracts issued by a national bank in connection with credit card loans made by the bank to its cardholders is preempted by the provisions of § 104(d)(1) and (e)(3) of the Gramm-Leach-Bliley Act (15 U.S.C. § 6701(d)(1) and (e)(3)(2000)) in that application of New York State insurance law would prevent or restrict a national bank from carrying out the underwriting activity associated with such insurance contracts.

The sale of debt cancellation contracts or debt suspension contracts issued by a national bank in connection with credit card loans to its cardholders may be subject to state regulation. The application of New York State insurance statutes and regulations needs to be addressed on a case-by-case basis. Any statutes or regulation will not apply to the extent that such statute or regulation "prevents or significantly interfere[s] with the ability" of the national bank "to engage, directly or indirectly, either by itself or in conjunction with an affiliate or any other person, in any insurance sales, solicitation, or cross-marketing activity." 15 U.S.C. § 6701(d)(2)(A)(2000).

Facts:

A national bank ("the Bank"), provides credit card loans to its customers. In connection with such loans the Bank intends to offer, as principal and for a fee, a credit protection option. The option will permit the customer to temporarily suspend making required monthly loan payments because of unemployment or disability. In the event of the customer’s death the Bank will cancel the underlying debt.

Analysis:

The credit protection option is commonly known as a debt suspension contract ("DSC") or debt cancellation contract ("DCC"). Both the DSC and DCC are insurance products under N.Y. Ins. Law § 1101(a)(1)(McKinney 2000), which provides:

"Insurance contract" means any agreement or other transaction whereby one party, the "insurer" is obligated to confer benefit of pecuniary value upon another party, the "insured" or "beneficiary", dependent upon the happening of a fortuitous event in which the insured or beneficiary has, or is expected to have at the time of such happening, a material interest which will be adversely affected by the happening of such event.

In 1964, the Attorney General of New York ruled that a DCC is an insurance contract. In considering the question of a national bank entering into a DCC with a borrower providing for the cancellation of the debt in the event of the borrower’s death, the Attorney General wrote: "In my opinion a debt cancellation contract of the kind in question is an insurance contract and the bank’s status thereunder is that of an insurer." The Attorney General concluded that a national bank entering into a DCC in New York must comply with the licensing and other relevant provisions of the Insurance Law. 1964 Op. Atty. Gen. 30.

Passage of the Gramm-Leach-Bliley Act (Pub. No. 106-102, 113 Stat. 1338, 1999)("GLBA") affirmed a national bank’s ability to underwrite, as a principal, DCCs and DSCs. Section 302 of the GLBA (15 U.S.C. § 6712 (2000)) delineates the limits on a national bank’s ability to underwrite insurance. Section 302(c)(1)(15 U.S.C. § 6712(c)(1)(2000)) defines insurance for the purposes of Section 302 of GLBA in part as "any product regulated as insurance as of January 1, 1999, in accordance with the relevant State insurance law, in the State in which the product is provided." Pursuant to Section 302(a) of the GLBA (15 U.S.C. § 6712(a)(2000)), a national bank and its subsidiaries may not provide insurance in a State as a principal, unless it is an authorized product. Section 302(b) (15 U.S.C. § 6712(b)(2000)) defines a product as authorized if, as of January 1, 1999, the OCC had determined in writing that national banks may provide such a product as principal, or national banks were in fact lawfully providing such product as principal, and no court of relevant jurisdiction had, by final judgment, overturned a determination of the OCC that national banks may provide such a product as a principal and the product is not title insurance, or an annuity contract the income of which is subject to tax treatment under § 72 of the Internal Revenue Code of 1986.

Beginning in 1963, the OCC had concluded that offering DCCs was incidental to the express authority of a national bank to make loans, and was therefore a permissible activity pursuant to 12 U. S. C. § 24 (Seventh)(2000). The OCC’s 1963 interpretation was promulgated as a regulation in 1971 and then amended in 1996. Currently 12 CFR pt. 37.7 provides:

Debt cancellation contracts. A national bank may enter into a contract to provide for loss arising from cancellation of an outstanding loan upon the death or disability of a borrower. The imposition of an additional charge and the establishment of necessary reserves in order to enable the bank to enter into such debt cancellation contracts are a lawful exercise of the powers of a national bank.

In 1998, in response to an inquiry by a national bank concerning DSCs, the OCC reaffirmed its view that national banks can underwrite DSCs as part of the bank’s expressly authorized lending function. (OCC Interpretive Letter # 827, April 3, 1998). Accordingly, national banks and their subsidiaries are permitted to underwrite both DCCs and DSCs because they are authorized products under Section 302 of the GLBA.

Section 104(a) of GLBA reaffirms the role of the states as functional regulators of insurance. 15 U.S.C. § 6701(a)(2000). This role is also reaffirmed in the GLBA’s explicit recognition of the continuing role of the states as the primary regulator of insurers in the context of the newly created financial holding company. 12 U.S.C. § 1844(c)(4)(B)(2000). New York State Insurance law sets forth a comprehensive statutory and regulatory scheme governing the underwriting and sale of insurance in New York State. See, e.g., Ins. Law Articles 21, 41 and 42 (McKinney 2000) and N.Y. Comp. Codes R & Regs. tit.11. As insurance products, debt cancellation contracts are subject to this regulatory scheme.

Sections 104(d)(1) and (e)(3) of the GLBA (15 U.S.C. § 6701(d)(1) and (e)(3)(2000), however, set forth general limits which would affect the state regulation of insurance underwriting by a depository institution (as defined in 15 U.S.C. § 6701(g)(3)) such as a national bank. In particular, § 104(d)(1) provides in part that:

"…no State may, by statute, regulation order, interpretation, or other action, prevent or restrict a depository institution or an affiliate thereof from engaging directly or indirectly … in any activity authorized or permitted under this Act and the amendments made by this Act."

Section 104(e)(3) provides in part that:

"Except or provided in any restrictions described in subsection (d)(2)(B), no State may, by statute, regulation, order, interpretation, or other action regulate the insurance activities authorized or permitted under this act or any other provision of Federal law of a depository institution or an affiliate thereof, to the extent that such statute, regulation, order, interpretation, or other action - …(3) effectively prevents a depository institution, or an affiliate thereof, from engaging in insurance activities authorized or permitted by this Act or another provision of Federal law; …"

A reading of the insurance laws and regulations otherwise applicable to the national bank in this instance yields differing results on the question of preemption of state law pursuant to § 104(d)(2)(A) of GLBA (15 U.S.C. § 6701(d)(2)(A)(2000). The application of existing laws and regulations relating to the underwriting of insurance (see, e.g., Insurance Law sections 4103, 4107, 4202, 4204, 4208 (minimum financial and capital requirements); section 1322 (risk-based capital); sections 309-313 (examinations) to a national bank underwriting debt cancellation contracts or debt suspension contracts issued by the national bank in connection with credit card loans made by the bank to its cardholders would prevent or restrict a national bank from carrying out such activity. However, an application of existing laws and regulations, relating to the sale of insurance, to a national bank engaged in the sale of debt cancellation contracts or debt suspension contracts issued by the national bank in connection with credit card loans made by the bank may or may not violate the proscription "prevent or significantly interfere" set forth in § 104(d)(2)(A). Such a determination will need to be made on a case-by-case basis.

For further information you may contact Deputy Superintendent and General Counsel Audrey Samers at the New York City Office.