The Office of General Counsel issued the following opinion on April 4, 2003, representing the position of the New York State Insurance Department.
Re: Bank sales of Debt Suspension Agreements and Debt Cancellation Contracts.
Are debt cancellation contracts or debt suspension agreements sold by a national bank in connection with an extension of credit to a customer of the bank subject to regulation by the New York State Insurance Department?
As stated previously, the state regulation of the underwriting of debt cancellation contracts or debt suspension agreements issued by a national bank 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 Insurance Law would prevent or restrict a national bank from carrying out the underwriting activity associated with such insurance contracts.
After review of the recently promulgated OCC regulation concerning debt cancellation agreements, the Department has determined that it will not regulate debt cancellation contracts or debt suspension agreements sold by a national bank in connection with an extension of credit to a customer of the bank.
No facts were provided.
As stated in the Office of General Counsel opinion dated April 2, 2002, it is the Departments position that such debt cancellation contracts are considered insurance under New York Insurance Law. 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 borrowers death, the Attorney General wrote: "In my opinion a debt cancellation contract of the kind in question is an insurance contract and the banks 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 banks 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 banks 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.
In 1963, the OCC 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 OCCs 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 affirmed its view that national banks can underwrite DSCs as part of the banks expressly authorized lending function. OCC Interpretive Letter # 827, April 3, 1998. Accordingly, national banks are permitted to underwrite both DCCs and DSCs because they are authorized products under Section 302 of the GLBA.
Section 104(a) of GLBA recognizes the role of the states as functional regulators of insurance. 15 U.S.C. § 6701(a)(2000). This role is also reaffirmed in the GLBAs explicit recognition of the continuing role of the states as the primary regulator of insurers in the financial holding company. 12 U.S.C. § 1844(c)(4)(B)(2000). New York 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 as 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; "
As stated in the April 2, 2002 opinion, the application of existing laws and regulations relating to the underwriting of insurance to a national bank underwriting debt cancellation contracts or debt suspension agreements issued by the national bank would prevent or restrict a national bank from carrying out such activity. However, the Department did state that the 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 agreements issued by the national bank may or may not violate the proscription "prevent or significantly interfere" set forth in § 104(d)(2)(A). Accordingly, the Department stated that such a determination would need to be made on a case-by-case basis.
Subsequent to issuance of the April 2, 2002 opinion, the Office of the Comptroller of the Currency issued a final regulation, 12 C.F.R. Part 37; 67 Fed. Reg. 58976 et seq. (Sept. 19, 2002), governing the issuance of debt cancellation contracts and debt suspension agreements by national banks. Subpart 37.1(c) of those rules states that "National banks debt cancellation contracts and debt suspension agreements are governed by this part and applicable Federal law and regulations, and not by part 14 of this chapter or by State law."
In light of the OCC regulation, the Department has determined that it will not regulate the sale of debt cancellation contracts or debt suspension agreements sold by a national bank in connection with an extension of credit to a customer of the bank.
For further information you may contact Deputy Superintendent and General Counsel Audrey Samers at the New York City office.