FINANCIAL SERVICES

GLBA: New Consumer Disclosures for Credit Transactions and Insurance Sales

June 2001

By Susan B. Hollinger*
for Business New Hampshire Magazine

On December 4, 2000, four federal bank and thrift regulatory agencies adopted final rules as required by section 305 of the Gramm-Leach-Bliley Act. Among other things, these rules require certain consumer disclosures in connection with retail sales of insurance products and annuities when insurance products are advertised, sold or solicited at an office of a bank or on behalf of a bank. The seemingly simple rules become effective on October 1, 2001.

These rules, however, are confusing many banks as they are ramping up to comply with their requirements. Banks are finding that questions remain as to whether and how they apply to banking activities.

Disclosure Scenarios

There are essentially two scenarios when the disclosures must be made, and their requirements on their face are not complicated. A series of disclosures must be made (A) in connection with the initial purchase of an insurance product or annuity; and (B) in the case of an application for credit in connection with which an insurance product or annuity is solicited, offered, or sold.

Under the first scenario, the disclosure must include, to the extent accurate, that:

• The insurance product or annuity is not a deposit or other obligation of, or guaranteed by the bank or its affiliates;
   
• The insurance product or annuity is not insured by the FDIC or any other agency of the U.S., the bank or its affiliate; 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.

Under the second scenario, the disclosure must provide that the bank may not condition an extension of credit on either:

• The consumer's purchase of an insurance product or annuity from the bank or 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.

Timing and Method of Disclosures

Under both scenarios, the bank must provide the disclosures both orally and in writing, and obtain a written acknowledgment of receipt from the consumer, and in most cases, an oral acknowledgment as well. Further, under the first scenario, the bank must provide the disclosures prior to the completion of the initial sale of insurance; and in the second scenario, at the time the consumer applies for credit.

The rules expressly accommodate transactions conducted by mail, telephone or electronically. When the transaction is made by mail, there is no requirement to make an oral disclosure. When the transaction is made by telephone, the oral disclosures must be made, but the written disclosures may be provided by mail within 3 business days from the date of the transaction. If the transaction is conducted electronically, i.e., over a bank's web site, no oral disclosures are required, but the written disclosure may be provided only if the consumer consents to electronic receipt and if the consumer may retain or obtain such receipt later, such as by printing or storing electronically.

The rules provide for simplified disclosures to be used in visual media, such a television broadcasting, ATM screens, and promotional materials.

Confusion Over Coverage

Many banks who are gearing up for the October compliance deadline by putting together sample disclosure forms and employee training, have voiced confusion over applying the disclosure requirements. Much of the confusion centers around what types of insurance products are covered by the rules. Under the rules, the term "insurance product" is not defined. The federal agencies note in the preamble accompanying the rules that certain types of insurance, such as property and casualty insurance, and credit-related insurance, were purposely not removed from coverage under the rules, and that they favor requiring the disclosures in connection with the sale of any insurance product (other than forced placed insurance, because such insurance is purchased by the bank, and not a consumer).

This agency view means that bankers need to consider the practical ramifications of the need for disclosures in the credit transaction in which title insurance is part of the loan, or vendor single interest insurance, and PMI. Often, the reality is that the consumer does not have a choice of vendors because no one else in the market area offers it. The only cost-effective choice is to purchase through the bank making the loan. This is especially true in the case of vendor single insurance coverage and PMI. And, with title insurance, once the consumer has already paid for the cost of the title insurance protecting the lender's interest, does it want to pay another party for a duplicate search when it purchases title insurance on the owner's interest?

More confusion results when applying the "on behalf of" test. The rules provide that any depository institution or any other person selling, soliciting, advertising or offering insurance products or annuities to a consumer at an office of the institution or on behalf of the institution is required to make the disclosures. The rules provide that a person's activities are "on behalf of" a bank if, among other things, the documents evidencing the sale, solicitation, advertising or offer of an insurance product or annuity identify or refer to the bank.

The question then becomes what to do in the indirect auto loan transaction when credit accident or life insurance is solicited on the face of the loan document. If a document merely references a bank's name in the lower corner as assignee, does that rise to a level of "on behalf of" thus requiring a disclosure provided by the auto lender? What if the bank, as assignee, gets no referral fee from the insurance sale. Is that determinative of whether the disclosure must be made? Or, if an auto lender shops a loan to multiple bank lenders, which bank is responsible for seeing that the disclosures were timely made? These and other questions may be part of the reason the effective date of the rules was moved back. Until the federal agencies clarify these questions, it may be advisable for a bank to be prepared to have systems in place for disclosures to be issued for all types of consumer loans in which any type of insurance is offered, and such offer is by or on behalf of, the bank.

Other Provisions

The other, non-disclosure provisions of the rules regulate the location within a bank for conducting insurance sales, qualification and licensing requirements for those who sell insurance and payment of referral fees. To the extent practicable, a bank must keep insurance and annuity sales activities physically segregated from routine, retail deposit areas, and referral fees may be no more than a one-time, nominal fee that does not depend on whether the referral results in a transaction. The rules also provide that persons who offer for sale any insurance product or annuity in any part of a bank office, or on its behalf, must be licensed under applicable state insurance licensing standards.

Consumer Redress

Although the rules do not provide for a private right of action by a consumer who has not received the required disclosures, they do provide for a consumer grievance process. Any consumer who believes that any bank or other person selling, soliciting, advertising, or offering insurance products or annuities has violated the requirements of these rules, is urged to contact the federal agencies at a specified address and telephone number. Because the rules are so new, it is not clear what consequences a bank may face for violations.

*Susan B. Hollinger is admitted in New Hampshire and Massachusetts.

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