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Previously Published in the National Law Journal

As debate over financial institution modernization legislation continues in Congress, banks continue to make some progress on reducing restrictions on their insurance activities through regulatory and judicial channels. Since we last reported on this subject in the NLJ,1 the authority of banks and their affiliates to engage in insurance activities has continued to expand.

Two Supreme Court decisions are the foundation for the entry of national banks into insurance sales. NationsBank v. Variable Annuity Life Insurance Co., or VALIC,2 authorized national banks to sell annuities pursuant to Section 24(Seventh) of the National Bank Act 3. A year later, Barnett Bank of Marion County, N.A. v. Nelson 4 upheld banks' right to sell all types of insurance from places of 5,000 people or fewer under Section 92 of that act. Standing on the pillars of VALIC and Barnett, the Comptroller of the Currency ("OCC") continues to pave the way for banks to engage in more insurance activities.

Chipping away at geographic limitations, the OCC confirmed that sales of insurance by national banks from places of 5,000 are not limited to such places. The OCC then further expanded the range of permissible bank sales by issuing a liberal definition of "place of 5,000." Expanding the range of permissible products, the OCC approved sales of mortgage guaranty reinsurance but its prior authorization of crop insurance suffered a legal set-back.

In other highlights, the OCC continues to be open to insurance underwriting activities by national banks. Although the OCC has not yet authorized a national bank to conduct underwriting directly, it has authorized more underwriting activities by national bank subsidiaries.

Finally, bank holding companies forged into insurance underwriting when Citicorp merged with Travelers Group Inc. ("Travelers"), to form Citigroup, Inc. ("Citigroup") and persuaded the Federal Reserve Board ("Fed") to allow Citigroup to continue Travelers' insurance underwriting activities for at least two more years.

What is a Place?


New guidance issued by the OCC has opened the door to national banks selling insurance in major metropolitan areas . Section 92 authorizes national banks to sell insurance from a "place" of 5000 or fewer in population, but does not conclusively define the geographical limits of that "place." In February 1998, the OCC issued an interpretive letter confirming that a "place" for Section 92 purposes includes any area designated a "place" by the United States Bureau of the Census ("Census Bureau")5. The Census Bureau defines a "place" to include an incorporated place and a "census designated place" ("CDP"), which may be unincorporated.

An incorporated place is a city, borough, town or village recognized by its state as a legal entity and reported as such to the Census Bureau. A CDP, on the other hand, is merely a densely settled concentration of people, identifiable by name, but not legally incorporated. An unincorporated rural area may qualify as a CDP if it consists of 1,000 or more persons. The Census Bureau does not limit its definition of CDPs to rural areas, however. It also recognizes unincorporated places located within urbanized areas and consisting of 2,500 or more persons. The OCC's embrace of the notion that an urban CDP is a "place" under Section 92 may give national banks incentive to apply to sell insurance from places such as Soho, New York, Lincoln Park, Chicago or North Beach, San Francisco.

Where is that Place Located?


The OCC not only clarified the definition of the place from which a national bank may sell insurance, but it confirmed that sales of insurance by national banks from places of 5,000 are not limited to such places. Based upon a Louisiana law permitting any insurance agency to conduct business at "satellite offices," the OCC authorized a national bank insurance agency subsidiary, located in a place of 5,000 where the bank also has a branch, to establish "satellite office" locations in places of more than 5,000 6. The OCC's decision was predicated on a letter it issued to First Union in October 1996 7. The First Union letter provided that, so long as a bank insurance agency is bona fide, and it uses the same market range and marketing tools as other licensed insurance agents, its sale and solicitation of insurance is authorized under Section 92.

The Developing Impact of Barnett and VALIC On State Insurance Laws and Regulations


Debate has arisen as to the extent state laws are preempted by Section 92, stemming from the Supreme Court's landmark ruling in Barnett. Barnett clearly held that state laws prohibiting national banks in places of 5,000 or less from selling insurance were preempted by Section 92 of the National Bank Act, but what of laws less encompassing? In two recent decisions, courts have sought to define the reach of the Supreme Court's holding.

In March of 1998, a New York federal district court ruled that Section 92 preempted a New York law that did not allow banks to sell insurance covering property that was security for the bank's loans 8. Later last year, a Mississippi federal district court held that a state law that did not allow lending institutions located in a municipality of 7000 or more to be licensed to sell insurance was preempted because the law significantly interfered with a bank's ability to sell insurance from branches located in places of 5000 or less 9. The court specifically limited the ruling to the direct conflict with federal law, however, so similarly situated state lending institutions still cannot be licensed.

Going Beyond Sections 92 and 24(Seventh)


Another recent federal court decision supported OCC's efforts to expand the rights of banks to sell insurance outside the limitations set by Sections 92 and 24(Seventh) of the National Bank Act. In American Council of Life Insurance v. Ludwig 10, the court upheld the conversion of Magna Bank of Missouri, a state bank, to a national bank despite Magna's failure to comply with federal laws restricting insurance activities of banks. Relying on Section 35 of the National Bank Act, which gives the OCC discretion to permit a bank to retain nonconforming assets in such a conversion, the OCC permitted Magna to retain indefinitely the bank's insurance brokerage subsidiaries that were selling insurance from places of more than 5,000. The decision was a departure from OCC's decisions over the prior 60 years that allowed converting institutions to retain non-conforming assets only for the short period needed to divest the asset without damage to the banks 11.

The district court stated that the agency had adequately articulated in testimony to Congress that OCC's policy had changed to one of allowing banks to participate in providing financial services to the fullest extent possible 12.

The Business of Banking: What Kinds of Insurance Can Banks Sell?

Last year, for the first time ever, the OCC allowed a bank subsidiary to engage in a joint venture to sell title insurance nationwide to both bank affiliates and unaffiliated companies 13. Mellon Bank, N.A. sought to establish an operating subsidiary to acquire a 50% general partnership interest in a limited liability general partnership. The agency approved the joint venture, which engages in the sale of title insurance, real estate appraisal, loan closing and other activities in connection with loans made by Mellon or its lending affiliates.

On the other hand, OCC was not able to defeat a challenge to its decision permitting national banks to sell multiple peril crop insurance in connection with loans to farmers 14. In a decision issued March 23, 1999, the federal district court for the District of Columbia rejected OCC's view, finding that crop insurance was not credit insurance and that general sales of forms of insurance other than credit insurance could not be considered part of the business of banking in light of the Section 92 restriction of bank insurance agency activities to places of 5000.

Overriding Underwriting Limitations


The OCC has permitted a number of operating subsidiaries of national banks to reinsure mortgage guaranty insurance on loans originated or purchased by the parent bank or the parent bank's lending affiliates. The agency has stated that such underwriting both constitutes and is incidental to the business of banking under the National Bank Act 18.

The agency has also authorized a national bank to establish an operating subsidiary to serve as a captive insurance agency for the purpose of providing insurance coverage on the business risks of the parent and bank affiliates 19. The OCC noted, however, that compliance and safety and soundness remain critical factors that will be reviewed in this context.

Bank holding companies regulated by the Fed are likewise interested in the insurance underwriting business. In one of the most significant developments of last year, the Fed approved the application by Travelers to acquire Citicorp and all of its subsidiary banks 20. The newly formed Citigroup became one of the largest commercial banking organization in the world, and insurance underwriting currently represents approximately 20% of its business 21.

Citigroup convinced the Fed to allow Citigroup to retain its insurance underwriting subsidiaries for a period of at least two years, as permitted by the Bank Holding Company Act ("BHCA"). Upon a finding by the Fed that an extension "would not be detrimental to the public interest," that period could be extended an additional three years. Citigroup's best hope for avoiding the divestiture of those subsidiaries is the passage of legislation that would permit such holdings, such as proposed under H.R. 10.

There is no guarantee that the legislation will pass. While all three financial services industry groups – banks, insurers and securities firms – want legislation, their competing interests have managed to stymie its passage for over a decade. In the interim, the Fed has placed no limitations on Travelers' insurance underwriting activities, although Travelers is required to conform future investments by its insurance companies to those authorized by the BHCA.

While domestic bank holding company subsidiaries must wrangle with Congress to increase their insurance underwriting authority, subsidiaries operating offshore may obtain faster results through the Fed. If approved, a regulation proposed by the Fed may authorize a foreign underwriting subsidiary of a bank holding company to reinsure the risk of policies sold in the U.S. by U.S. affiliates of the bank holding company or unrelated parties. The Fed carefully points out that it does not believe that such a subsidiary may sell policies directly into the United States. As of this date, the Fed has received comments and the regulation is still pending.

Parity for State Banks


As of August 1998, 32 states authorize state-chartered banks to exercise general insurance agency powers. As state legislatures broadened insurance powers of state banks and repealed anti-affiliation laws in 1997 and 1998, they also enacted consumer protection provisions regarding bank conduct in the sale of insurance. One of the areas targeted by a number of states for regulation was the ability of a bank to share confidential customer information with affiliates or with third parties seeking to sell investment products.

Riding the wave of concerns about privacy, insurance trade groups and consumer advocates aggressively championed the inclusion of customer privacy provisions in connection with information sharing. Some states approached this issue by requiring banks to use information only of customers who "opt-in" to the sharing of information for the purpose of product marketing. Other states only required banking organizations to permit the customer to "opt-out" of information sharing. Opt-in states include Louisiana and Pennsylvania, opt-out states include Arkansas, Connecticut, Illinois and New Hampshire.

Unitary Thrifts as the Current Option

While banks and bank holding companies are lobbying Congress and banking agencies to allow more insurance activities, insurance companies continue to expand their banking activities through acquisitions of thrift charters. The Office of Thrift Supervision ("OTS") recently approved applications by Allstate Corporation 23, State Farm Mutual Automobile Insurance Company 24, and Guardian Life Insurance Company of America. Allstate limited its application to trust and cash management services (including ACH processing). In contrast, State Farm will employ its 16,000 insurance agents to sell banking products. Guardian limited its application to trust services, but intends to offer those services through Guardian's agents and employees nationwide. Other notable insurance companies have joined the trend. Since January 1, 1997, Aetna, New York Life, Massachusetts Mutual Life Insurance Company, Kaiser Permanente, and approximately 35 other insurers have all applied for thrift charters.

Under current law, any company can apply for a thrift charter, not just insurance companies. Thrift applications have been filed by companies from retailer Nordstrom Inc. to manufacturer General Motors Corporation. Banking trade groups are attempting to persuade Congress to eliminate the ability of nonbank companies to enter the thrift business. As it stands now, however, a company that files its application before the grandfather date in the proposed legislation will be permitted to continue to operate as a unitary thrift holding company after the bill becomes law. The Senate bill contains a grandfather date of February 28, 1999, while the House deadline is March 4, 1999. This disparity, as well as past experience, suggests that the date, like the world of banking, will probably change again.

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    1 See Ronald R. Glancz, John Beaty, and Juliana Schulte O'Reilly, "Bank Insurance Sales Spark Regulatory Rumblings." NLJ, Sept. 8, 1997, at C2; see also Ronald R. Glancz and Juliana Schulte O'Reilly, "Insurance? It's in the Bank," NLJ, Aug. 26, 1996, at C1.
    2 115 S. Ct. 810 (1995).
    3 12 U.S.C. 1 et seq.
    4 116 S. Ct. 1103 (1996).
    5 OCC Interpretive Ltr. No. 823 (Feb. 27, 1998).
    6 OCC Interpretive Ltr. No. 844 (Oct. 20, 1998).
    7 OCC Interpretive Ltr. No. 754 (Nov. 4, 1996).
    8 New York Bankers Ass'n v. Leven, 999 F. Supp. 716 (W.D.N.Y. 1998)
    9 Deposit Guaranty National Bank v. Dale, 28 F. Supp.2d 395 (S.D. Miss. 1998)
    10 American Council of Life Ins. V. Ludwig. 1 F. Supp. 2d 24 (D.D.C. 1998), dismissed as moot, 1999 U.S. App. Lexis 3974 (D.C. Cir. Feb. 5, 1999).
    11 Magna Group, Inc./Magna Bank of Mo. N.A., Corp. Dec. 95-55 (OCC Nov. 15, 1995).
    12 During the appeal, Magna became involved in another merger, pursuant to which nonconforming subsidiaries were to be divested. The circuit court ordered the district court to vacate the OCC letter ruling as moot to the extent that it permitted nonconforming subsidiaries to be retained indefinitely. Even vacated, the Magna letter likely still reflects the OCC's views and its intent to enable banks to provide the widest array of financial services.
    13 OCC Conditional Approval No. 276 (May 8, 1998).
    14 OCC Interpretive Ltr. No. 812 (Dec. 29, 1997).
    15 No. 98-cv-0562, 1999 U.S. Dist. Lexis 3549 (D.D.C. March 23, 1999).
    16 No. 96-3021, 1999 U.S. App. Lexis 6069 (11th Cir. April 5, 1999).
    17 The 11th Circuit found also that, even if retirement CDs could be underwritten as part of the business of banking, their annuity portion satisfied the tests of Union Labor Life Ins. Co. v. Pireno, 458 U.S. 119, 129 (1982), for being "insurance" (risk spreading, integral to relationship between insurer and insured, and generally issued by insurance companies). On that basis, the 11th Circuit joined the 7th Circuit, American Deposit Corp. v. Schach, 84 F.3d 834 (7th Cir. 1996), in holding that retirement CDs are subject to state insurance regulation.
    18 See e.g., OCC Corporate Decisions Nos. 99-05 (Dec. 28, 1998) (NationsBank); 99-04 (Dec. 23, 1998) (Hibernia); 97-97 (Nov. 10, 1997) (First Tennessee); 97-93 (Oct. 20, 1997) (Sun Trust); 97-89 (Sept. 26, 1997) (Norwest); 97-27 (May 2, 1997) (Bank One).
    19 OCC Interpretive Ltr. No. 845 (Oct. 20, 1998).
    20 Federal Reserve Board, Order Approving Formation of a Bank Holding Company and Notice to Engage in Nonbanking Activities (Sept. 23, 1998).
    21 Federal Reserve Press Release (Sept. 23, 1998).
    22 62 Fed. Reg. 68424 (Dec. 31, 1997).
    23 OTS Order No. 98-71 (July 21, 1998).
    24 OTS Order No. 98-115 (Nov. 12, 1998).
    25 OTS Order NO. 99-18 (April 20, 1999).