A community bank in Arkansas has proven that with determination and the right resources, you can fight City Hall. In a closely watched case settled in late 1990, the First National Bank of Eastern Arkansas, in Forrest City, won the right to sell debt cancellation contracts, an alternative to credit life insurance. But the case involved more than just permission to market the new product.
The $120 million-assets bank had to defend its right to sell the product granted by its chief regulator, the Office of the Comptroller of the Currency (OCC). By doing so, the bank set an important precedent for other banks. What's more, by offering the debt cancellation agreement, the bank has created an additional source of noninterest revenue.
OCC's ruling. W.D. Glover, the bank's chairman and chief executive officer, who is also a lawyer, had discovered an OCC ruling, 12 C.F.R. 7.7495, which permitted banks to provide for losses arising from cancellation of outstanding loans upon the death of borrowers. The ruling further said that it was lawful for banks to impose an additional charge to do so and to establish necessary reserves in order to enable the bank to enter into the debt cancellation contracts.
"The brevity and simplicity of the ruling caught my attention," says Glover. "After certain calculations and study, we decided to get into the debt cancellation business."
The Commissioner of Arkansas' Insurance Department first agreed with the ruling, allowing the bank to proceed with a debt cancellation contract program. On second thought, however, the commissioner reversed his position, saying the contract was, in fact, an insurance product and that further marketing of the product would result in sanctions by his department.
Glover complied with the commissioner's request and then filed suit in federal district court seeking a declaration that the commissioner's action was preempted by the National Bank Act, which sanctioned the contracts.
"When [the commissioner] acquiesced to pressure from the credit life industry in Arkansas and changed his position," says Glover, "we decided we would ask the federal court system to determine if we could or could not follow a ruling of our regulator."
In court, the insurance commissioner and the Arkansas Credit Insurance Association argued that the Comptroller had exceeded his authority in issuing the regulation permitting the activity. They further argued that the regulation violated the McCarran-Ferguson Act, which preserves state regulation of the "business of insurance."
The court ruled in the bank's favor, but the decision was appealed to the Eight Circuit Court of Appeals, at which point various national insurance organizations stepped in to support the insurance commissioner, as did the Comptroller of the Currency on the bank's behalf.
The appeals court affirmed the district court's decision, placing greater emphasis on the National Bank Act's interpretation of the debt cancellation contract than on state law. The court did, however, acknowledge that some state appellate courts had found debt cancellation contracts to fall within their states' definitions of insurance. But state law is not controlling on the issue of whether an activity falls within the business of insurance as the term is used in the McCarran-Ferguson Act, noted the court. …