RS C.S.H.B. 3391 75(R) BILL ANALYSIS INSURANCE C.S.H.B. 3391 By: Smithee 4-22-97 Committee Report (Substituted) BACKGROUND On March 26, 1996, the U.S. Supreme Court ruled in Barnett Bank of Marion County, N.A. v. Bill Nelson, Florida Insurance Commissioner, that Section 92 of the National Bank Act preempts any state law that prevents banks from exercising the insurance powers granted under that law. Section 92 permits a national banking association located in a place with a population not exceeding 5,000 according to the last preceding U.S. decennial census the authority to act as agent for any insurance company authorized to do business in the state where the bank is located. Under the Court's analysis, "prevents" means "significantly impairs" or "significantly interferes with" a bank's federal law authority. The Texas Insurance Code licensing provisions effectively prevent banks from being licensed as agents by requiring that corporations be organized under Texas law and that each officer, director, and shareholder be individually licensed. On June 20, 1996, the Commissioner of Insurance issued Bulletin No. B-0043-96, establishing interim guidelines for banks selling insurance. This bill, with a few exceptions, incorporates essentially the same guidelines set out in the Commissioner's bulletin. PURPOSE To provide a licensing mechanism for national banks, state banks, and savings banks to become licensed as insurance agents in order to comply with the U.S. Supreme Court's decision in Barnett Bank v. Nelson, and to provide certain consumer protections. RULEMAKING AUTHORITY The existing rule-making authority in SECTION 5 of bill (Sec. 13, Article 21.07, Insurance Code), SECTION 14 of bill (Sec. 15, Article 21.07-1, Insurance Code) is expanded to provide that the Commissioner may promulgate reasonable rules and regulations to comply with federal law applicable to the sale of insurance. SECTION 21 of bill (Sec. 27, Article 21.14, Insurance Code), and SECTION 22 (Sec. 7, Article 21.21-9, Insurance Code) provide new rulemaking authority to this article for the commissioner to comply with federal law applicable to the sale of insurance. SECTION BY SECTION ANALYSIS SECTION 1. - Amends Section 1(a) and (b) of article 21.07, Insurance Code, by adding bank to those entities that may be licensed as agents; changes "State Board of Insurance" to "department." Changes "he" to "that individual" and "it" to "entity." SECTION 2. - Amends article 21.07 by adding Section 1C as follows: (a)Adds definition of "bank." "Bank" means a national banking association, a state banking association, a state savings bank, a bank branch, or a bank operating subsidiary, located in a place with a population of 5,000 or less. (b) A bank operating subsidiary as defined in federal or state law located in a place with a population of 5,000 or less may own a licensed corporate agent which is also located and doing business in a place with a population of 5,000 or less. SECTION 3. - Amends Secs. 2 and 3, article 21.07, Insurance Code, as follows: Adds bank to those persons and entities that may obtain a license; provides that the application by a bank must bear a signed endorsement by the responsible officer and employee of the bank; substitutes "department" for "State Board of Insurance;" and provides that the department may issue a license to a corporation organized and existing under the Texas Professional Corporation Act (Article 1528e, Vernon's Texas Civil Statutes). Adds subsection (e) to section 2 of Article 21.07 to provide requirements for banks seeking to obtain a license. At least one officer of the bank and each individual who will perform the acts of an agent for the bank must be individually licensed. Each bank must have financial ability to pay any sums up to $25,000 for negligent acts or omissions. Adds definition of "customer." Limits additional offices from which the business of insurance is conducted to places with a population of 5,000 or less. Requires banks to maintain their insurance files separate and apart from their bank files. Adds provision making banks notify the Department of Insurance of any change in officers, directors, or agents to sell insurance. Contains same provisions as those contained in the existing statute relating to corporations. SECTION 4. - Amends Sec. 4(a), Article 21.07, Insurance Code, as follows: Adds bank to the list of entities that are not required to pass a written examination; substitutes "department" for "State Board of Insurance." SECTION 5. - Amends Section 12, 13, and 16 of article 21.07, Insurance Code, to add bank to the list of persons and entities that may be fined no more than $500.00 or imprisoned not more than 6 months, or both, for certain violations. Adds to the Commissioner's rule-making authority the power to adopt rules to comply with federal law applicable to the sale of insurance. Contains the present requirement that a license have the words HEALTH AND ACCIDENT INSURANCE, but eliminates the requirement that the words be stamped on the license. Substitutes "Commissioner" for "State Board of Insurance" in the rule-making section, and "department" for "State Board of Insurance" in other sections. SECTION 6. - Adds subsection (c) to Section 18, article 21.07, Insurance Code, to provide that a bank located in a place with a population of 5,000 or less, which owns a licensed bank operating subsidiary, in accordance with federal or state law, which is also located and doing business in a place with a population of 5,000 or less, may receive profits from the licensed bank operating subsidiary. Provides that if a bank wishes to advertise under the bank name or to participate in the insurance operation other than by receiving profits for the insurance business, it must hold a license. Provides that a bank or any affiliate may not pay commissions or other valuable consideration to any nonlicensed employees, nor may a bank pay, credit, or otherwise reward particular nonlicensed units or geographic locations of the bank or any of its affiliates with a portion of the commission. SECTION 7. - Amends Sec. 1(b) of article 21.07-1, Insurance Code, to add bank to those persons and entities authorized to obtain a license. Adds "bank" to definition of "life insurance agent." SECTION 8. - Amends article 21.07-1, Insurance Code, by adding Sec. 1C adding definition of "bank." (Same as SECTION 2, above.) SECTION 9. - Amends Sec. 2(a), article 21.07-1, Insurance Code, to add bank to list of persons and entities that shall not solicit, procure, receive, or forward applications for life insurance or annuities to, or perform other acts of an agent on behalf of, any life insurance company not authorized to do business in Texas. SECTION 10. - Amends Sec. 3(a) and (b), article 21.07-1, Insurance Code, to add bank to the list of persons or entities that shall procure a license before acting as a life insurance agent. Adds a provision that allows a bank located in a place with a population of 5,000 or less which owns a licensed bank operating subsidiary, in accordance with federal or state law, which is also located in and doing business in a place with a population of 5,000 or less from receiving profits from the licensed bank operating subsidiary. Prohibits banks or any affiliate from paying commissions or other valuable consideration to any nonlicensed employees or from paying, crediting, or otherwise rewarding particular nonlicensed units or geographic locations of the bank or any of its affiliates with a portion of the commission. SECTION 11. - Amends article 21.07-1, Insurance Code, by amending Subsections (e) and (f) and adding subsection (g) to section 4 to provide requirements for banks seeking to obtain a license. Requirements are described in SECTION 3 above. Substitutes "department" for "Board," and "commissioner," and "comptroller" for "State Treasurer." SECTION 12. - Amends Secs. 5(a) and (d), article 21.07-1, Insurance Code, to add bank to the list of entities that are not required to pass a written examination; substitutes "department" for "State Board of Insurance." Contains present requirement that a license include COMBINATION OR INDUSTRIAL LICENSE on its face, but eliminates the requirement that the words be stamped on the license. SECTION 13. - Substitutes "Commissioner" for "Life Insurance Commissioner" in Sec. 7(b), article 21.07-1, Insurance Code. SECTION 14. - Amends Secs. 14 and 15, article 21.07-1, Insurance Code, to add bank to the list of persons and entities that may be fined no more than $500.00 or imprisoned not more than 6 months, or both, for certain violations. Adds to the Commissioner's rule-making authority the power to adopt rules to comply with federal law applicable to the sale of insurance. SECTION 15. - Amends Sec. 16(a) - (d), article 21.07 - 1, Insurance Code, by adding bank to the definition of "accident and health insurance agent." Substitutes "department" for "State Board of Insurance." Adds bank to those exempt from a written examination. SECTION 16. - Amends Section 3, article 21.14, Insurance Code, by adding bank to those persons and entities that may be licensed as agents; adds subsection (d) to section 3 to provide requirement for banks seeking to obtain a license. Requirements are described in SECTION 3 above. Defines "bank" as described in SECTION 2 above. SECTION 17. - Amends Section 3(a), article 21.14, Insurance Code, as indicated in SECTION 6 above. SECTION 18. - Amends Sections 4(a) - (c), article 21.14, Insurance Code, to add bank and any officer, director, or employee of a bank to those who are prohibited from acting as a local recording agent without a license. SECTION 19. - Amends Section 5, article 21.14, Insurance Code, to add bank to those agents that must be or intend to be actively engaged in the soliciting or writing of insurance to obtain a license. Substitutes "department" for "State Board of Insurance." SECTION 20. - Amends Section 24, article 21.14, Insurance Code, by adding bank to the persons that are subject to penalties for violation of the article, Sections 4, 15, and 22. SECTION 21. - Adds rule-making authority to article 21.14, Insurance Code, by adding Section 27. SECTION 22. - Amends Chapter 21, Subchapter B, Insurance Code, by adding article 21.21-9 entitled "UNFAIR METHODS OF COMPETITION AND UNFAIR PRACTICES BY FINANCIAL INSTITUTIONS." Section 1 defines "affiliate" and "bank" is defined as indicated in SECTION 2 above, except that the 5,000 limitation applies only to bank operating subsidiaries and not to banks, bank branches, and state savings banks. Section 2 provides that tying and failing to make necessary disclosures are unfair methods of competition and unfair practices. Also provides that a person who lends money or extends credit is not prevented from placing insurance on real or personal property in the event the mortgagor, borrower, or purchaser has failed to provide required insurance in accordance with the terms of the loan or credit document. Section 3 provides that the disclosure to customers must be in substantially the same form as the one set out in the bill, and provides that the Commissioner may amend the disclosure form as necessary to comply with federal or state law. Section 4 provides that if insurance is offered or sold to a bank customer in connection with a loan transaction by a bank, the insurance sales person involved in that transaction must be independent of that lending transaction and may not also be the person of persons making that loan. An exception is made for banks which have $40 million or less in total assets and for transactions in which the insurance sold is a credit life, credit disability, credit property, or involuntary unemployment product sold in conjunction with a credit transaction. Section 5 provides for privacy of customer records. It defines "nonpublic customer information" as information regarding a person that has been derived from a record of a bank, and prohibits a person from using any nonpublic information for the purpose of selling or soliciting the purchase of insurance unless it is clearly and conspicuously disclosed that the information has been so used and the customer has been provided an opportunity to object prior to the use. Section 6 requires that the place of solicitation or sale of insurance by a bank or on the premises of a bank shall be clearly and conspicuously signed so as to be readily distinguishable by the public as separate and distinct from the lending and deposit-taking activities of the bank. Provides that the commissioner may grant a written waiver upon request by a person if such person demonstrates that due to its small physical facilities, compliance is not possible, provided that such person also identifies other steps which will be taken to minimize customer confusion. Section 7 adds rule making authority. SECTION 23. - Act takes effect on September 1, 1997. SECTION 24. - Emergency clause. COMPARISON OF ORIGINAL TO SUBSTITUTE The following changes were made throughout the substitute. Definition of "bank". The original bill defined bank as "a national banking association, a state banking association, a state savings bank, a bank branch, or a bank operating subsidiary, located in a municipality or county with a population of 5,000 or less." Committee substitute changes definition of "bank" by striking the words "municipality or county" and inserting the words "place with a population of 5,000 or less." This change brings the bill in conformance with Section 92 of the National Bank Act. "Bank operating subsidiary." The provisions throughout the bill that require that a bank located and doing business in a place with a population of 5,000 or less may own "at least 51%" of a licensed corporate agent which is also located and doing business in a place with a population of 5,000 or less, are changed to provide that a bank operating subsidiary, "as defined in federal or state law," located and doing business in a place with a population of 5,000 or less may own a licensed corporate agent which is also located and doing business in a place with a population of 5,000 or less. The requirements for the percentage of ownership a bank must have in a bank operating subsidiary are defined in federal law for national banks (currently 51% ownership is required) and in state law for state banks (currently 50% ownership is required). This change will alleviate the need for changing this statute whenever the federal or state law ownership percentages are changed. Unfair methods of competition and unfair practices. New Article 21.21-9 , which defines unfair methods of competition and unfair practices in the sale of insurance by banks is changed from applying to an agent that is "a bank, affiliated with a bank for the purpose of the sale of insurance products through common ownership, management, or control, or offers or sells insurance from a bank's premises" to apply "when a bank is soliciting the purchase of or selling insurance, and when any person is soliciting the purchase of or selling insurance recommended or sponsored by , on the premises of, in connection with a product offering of, or using a name identifiable with, a bank." A definition of "affiliate" is also added for purposes of Article 21.21-9. "Affiliate" means a person that directly or indirectly or through one or more intermediaries, controls or is controlled by another or is under common control with another." Required disclosure. New Article 21.21-9 requires that disclosure is to be made by agents which are banks or "which are soliciting the purchase of or selling insurance recommended or sponsored by, on the premises of, in connection with a product offering of, or using a name identifiable with a bank." The bill, as filed, applied to agents which are banks, or "which offer or sell insurance from a bank's premises." The committee substitute also adds a disclosure requirement where the insurance product "where appropriate, involves investment risk, including loss of principal." The committee substitute changes the reference from "Texas Credit Code" to "Texas Finance Code." SECTION 22 - Customer Disclosure form: The bill, as filed, contains the following : Sec. 3 (c) "An agent that is affiliated with a bank for the purpose of the sale of insurance products through common ownership, management, or control may not complete a sale of insurance covering the collateral securing or proposed to secure a loan with the same bank prior to the bank making a commitment on such loan transaction." The committee substitute changes paragraph (c) as follows: " (1) No individual who is an employee or agent of a bank, or a subsidiary or affiliate thereof, may, directly or indirectly, make an insurance-related referral related to, or solicit the purchase of any insurance from, a customer knowing that such customer has applied for a loan or extension of credit from a financial institution before such time as the customer has received a written commitment with respect to such loan or extension of credit, or, in the event that no written commitment has or will be issued in connection with the loan or extension of credit, before such time as the customer receives notification of approval of the loan or extension of credit by the person and that person creates a written record of the loan or extension of credit approval. (2) This provision shall not prohibit a bank from: (A) informing a customer that insurance is required in connection with a loan, or (B) contacting persons in the course of direct or mass mailing to a group of persons in a manner that bears no relation to the person's loan application or credit decision. (C) selling credit life, credit disability, credit property, involuntary unemployment insurance specifically authorized in the Code and approved for sale in this State, which is sold in connection with a credit transaction." Other new sections are added in SECTION 22 involving the following: Customer privacy. Adds new Sec. 5 regarding customer privacy. Section 5 provides for privacy of customer records. It defines "nonpublic customer information" as information regarding a person that has been derived from a record of a bank, and prohibits a person from using any nonpublic information for the purpose of selling or soliciting the purchase of insurance unless it is clearly and conspicuously disclosed that the information has been so used and the customer has been provided an opportunity to object prior to the use. Physical location of insurance activities. Adds new Sec. 6 regarding physical location of insurance activities. Section 6 requires that the place of solicitation or sale of insurance by a bank or on the premises of a bank shall be clearly and conspicuously signed so as to be readily distinguishable by the public as separate and distinct from the lending and deposit-taking activities of the bank. Provides that the commissioner may grant a written waiver upon request by a person if such person demonstrates that due to its small physical facilities, compliance is not possible, provided that such person also identifies other steps which will be taken to minimize customer confusion.