The Comptroller of the Currency yesterday prohibited officers of directors of national banks from keeping any income from sales of credit life insurance to borrowers at their banks.
The comptroller ruled that when bank insiders sell credit life insurance and keep the agent's income for themselves - rather than assigning it over to the bank - it is an unsafe and unsound banking practice.
Comptroller of the Currency John G. Heimann said the rules address only part of the problem and do not solve other "serious" problems associated with credit life insurance, such as the "excessive rates paid by borrowers in relation to the low amount of claims paid by the insurance companies."
A borrower takes out a credit life insurance policy to guarantee that if he or she should die before paying off the loan it will be paid off by the insurance company.
Often at small banks - especially in the south and midwest - officers or directors also are agents for the life insurance company and take agent's commissions on all sales of credit like policies at the bank.
The agent's income can often be substantial.
Ford Barrett assistant chief counsel in the office of the comptroller of the currency, said that in 1975 at one bank with $17 million in assets $83,000 in income was paid to the bank by the insurance company selling credit life at the bank. That was equivalent to 30 per cent of the bank's pre-tax income.
The president of the bank was the insurance agent. He received $78,000 of the $33,000 in agent's commissions. His salary as president of the bank was only $25,000 - a salary which is in line with what president's of comparable-sized banks received.
Barrett said that the practice of insiders - including major stockholders - becoming credit life insurance agents is so common that individuals are now dorming "small empires of eight to ten banks using credit life insurance income to finance bank stock loans."
Barrett said when an indivudual buys a bank, he should pay off the loan on dividends from the stock and salary he may earn if he is an officer of the bank.
When an individual can use the incentive to run a sound, profitable bank may be reduced, Barrett said. Using credit life income to finance bank stock loans "strikes us as an unsafe and unsound banking practice."
The Comptroller's ruling will be published in today's Federal Register. It applies only to nationally chartered banks. State-chartered banks are not affected by the ruling.
Neither the Federal Reserve Board nor the Federal Deposit Insurance Corp., the other two federal bank regulatory agencies, prohibit insiders from acting as insurance agents and keeping agents' fees for themselves.
The Comptroller's ruling said that banks may use whatever method they prefer to supply credit life coverage to their customers "so long as the method selected does not benefit employees, officers, directors or selected stockholders personally."
The agent can assign his commissions to the bank or the bank can buy group credit life coverage where refunds of excess premiums (similar to dividends on regular life insurance policies) are paid to the bank.
The regulation permits banks to pass through to the borrowers "all commissions, experience refunds or other life insurance income where state insurance laws permit," according to a statement from the comptroller's office. However, the ruling, which takes effect Jan. 1, 1978, does not require a bank to do so. CAPTION: Picture, Clive Singlair, of Sinclair Radionics, a New York-based firm, displays the Microvision television recently. The tiny TV, about the size of a paperback book, is made in England and sells in the United States for about $395. AP