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Interpretive Letter #835 August 1998 12 U.S.C. 24(7)

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Interpretive Letter #835 August 1998 12 U.S.C. 24(7) Comptroller of the Currency Administrator of National Banks Washington, DC 20219 Interpretive Letter #835 July 31, 1998 August 1998 Joseph T. Green, Esquire 12 U.S.C. 24(7) General Counsel TCF Financial Corporation 801 Marquette Avenue Minneapolis, Minnesota 55402-3475 Re: Proposed Mortgage Life Reinsurance Activities Dear Mr. Green: On February 24, 1997, the OCC approved the application of TCF Financial Corporation, Minneapolis, Minnesota (“TCF”), to convert its federal savings bank to a national bank, Great Lakes National Bank (“Bank”). Pursuant to the OCC’s approval, the OCC permitted Lakeland Group Insurance Agency, Inc. (“Lakeland”), a subsidiary of the Bank, to retain its non- controlling minority interest in MIMLIC Life Insurance Company (“MIMLIC”) for up to two years pending the OCC’s determination of the permissibility of MIMLIC’s credit-related reinsurance activities under the National Bank Act. See OCC Corporate Decision No. 97-13 (February 24, 1997) at 32. MIMLIC is an Arizona insurance company that reinsures mortgage life, mortgage accidental death, and mortgage disability insurance1 (collectively, “credit life insurance”)2 on loans originated by lenders with an ownership interest in MIMLIC. For the reasons set forth below, we conclude that Lakeland is legally permitted to retain its non-controlling minority interest in MIMLIC, subject to certain conditions. 1 Although MIMLIC is authorized under its Articles of Incorporation to reinsure mortgage disability insurance, MIMLIC does not presently engage in this activity. 2 See generally 12 C.F.R. § 2.2(b) (Credit life insurance includes credit health, accident, disability and mortgage life insurance.) - 2 - I. BACKGROUND A. Credit-related Insurance Generally National banks may sell, underwrite and reinsure credit-related insurance products, including credit life insurance, that assist bank customers in meeting loan obligations when unfortunate circumstances, such as death, disability or unemployment, occur. These credit-related products may be purchased by customers to mitigate risks arising from credit obligations, and thus constitute an important component of outstanding credit relationships. B. Parties MIMLIC is an Arizona insurance company that reinsures mortgage life, mortgage accidental death, and mortgage disability insurance issued by Minnesota Mutual Life Insurance Company (“Minnesota Mutual”) on loans originated by lenders with an ownership interest in MIMLIC. The lenders with an ownership interest in MIMLIC include the Bank (which holds its ownership through its subsidiary, Lakeland) and service corporations of federal savings associations (collectively, “other depository institutions”). C. Each Lender’s Interest in MIMLIC The Bank’s subsidiary, Lakeland, holds approximately a 2.9% interest in MIMLIC. Minnesota Mutual holds approximately a 79% interest in MIMLIC, and the remaining shares are owned by other depository institutions. There are three classes of MIMLIC stock outstanding: Class A stock, which is entirely owned by Minnesota Mutual; Class B stock, which is held by Lakeland and other depository institutions that participate in Minnesota Mutual’s mortgage life insurance plan; and Class C stock, which is held by Lakeland and other depository institutions that participate in Minnesota Mutual’s mortgage accidental death insurance plan. The number of shares of Class B and Class C stock and the value of shares held by Lakeland and the other investors reflect the relative amounts of mortgage life and mortgage accidental death insurance, respectively, in force with Minnesota Mutual on the mortgage borrowers of each lending institution. In order to maintain this relative distribution, MIMLIC may adjust the amount of stock each investor holds in MIMLIC, and has made such adjustments in April or May of each year based on the insurance in force with Minnesota Mutual on the mortgage borrowers of each lending institution as of December 31 of the prior year. The annual reallocation of shares produces share ownership among investors in each class of MIMLIC’s stock in direct proportion to the total insurance written on the borrowers of the lending institution for each type of insurance during the prior calendar year. - 3 - D. MIMLIC’s Reinsurance Activities MIMLIC is authorized under Arizona law to reinsure life, accidental death, health, and disability insurance. Pursuant to MIMLIC’s Articles of Incorporation, as amended, MIMLIC’s reinsurance activities are limited to the reinsurance of risks ceded to it from Minnesota Mutual, which assumes such risks under group life, accidental death and disability insurance policies related to borrowers of mortgage loans from the Bank and the other depository institutions that have an interest in MIMLIC.3 Under MIMLIC’s Articles of Incorporation, Lakeland and each of the other depository institutions with an interest in MIMLIC assume their pro-rata share of MIMLIC’s total reinsurance risk. Net income received by MIMLIC from its credit life reinsurance operations is distributed pro-rata, and losses are assessed on a pro-rata basis. E. Reserve Requirements and Capitalization MIMLIC will comply with all capital and reserve requirements under Arizona law applicable to reinsurers of mortgage life, mortgage accidental death and mortgage disability insurance. F. Limitations on the Liability of Each Lender Neither Lakeland, the other depository institutions, nor the Bank, will be liable for any of the activities of MIMLIC. MIMLIC is a corporation incorporated under the laws of the state of Arizona. Arizona law provides that a shareholder of a corporation is not personally liable for the acts or debts of the corporation. A.R.S. § 10-622 (1996). Therefore, Lakeland and the other depository institutions are not liable for MIMLIC’s obligations. Lakeland’s potential loss exposure would be limited to the amount of Lakeland’s investment, i.e., its 2.9% ownership interest in MIMLIC.4 The potential collective loss exposure of the other depository institutions would also be limited to the amount of their collective investment in MIMLIC. Additionally, the Bank and the other depository institutions hold their interest in MIMLIC through their subsidiaries, which provides the lending institutions further insulation from MIMLIC’s obligations. Provided that each lending institution’s respective subsidiary is operated with appropriate corporate separateness, the Bank and the other depository institutions should have no direct loss exposures for MIMLIC’s obligations. With respect to the Bank, its indirect exposure will be limited to losses suffered by Lakeland, which are limited to its 2.9% ownership interest in MIMLIC. Thus, the Bank’s loss exposure for the liabilities of MIMLIC will be limited from a legal standpoint. 3 As noted under footnote 1, supra., MIMLIC does not presently reinsure mortgage disability insurance. 4 As of June 30, 1998, Lakeland’s 2.9% ownership interest in MIMLIC represented approximately .05% of the Bank’s total equity capital. - 4 - G. Consumer Provisions The Bank does not require borrowers to obtain credit life insurance in order to obtain a mortgage.5 If, however, a borrower chooses to obtain credit life insurance sold by the Bank, the Bank complies with, and makes the disclosures required under, 12 C.F.R. §§ 226.4(d) and 226.18(n). Specifically, the Bank (i) discloses in writing to the borrower that the credit life insurance coverage is not required by the Bank; (ii) discloses the premium for the term of the insurance coverage; (iii) discloses that the credit life insurance may be obtained from a person of the borrower’s choice; and (iv) requires the borrower to sign or initial an affirmative written request for the insurance. H. Safety and Soundness Considerations As noted above, neither Lakeland, the other depository institutions, nor the Bank, will be liable for any of the activities of MIMLIC. The authorized activities of MIMLIC consist solely of reinsuring mortgage life, mortgage accidental death insurance, and mortgage disability insurance on the mortgage loans of borrowers from the Bank and the other depository institutions that have an interest in MIMLIC.6 MIMLIC does not reinsure the life, accident, or disability insurance for other mortgage loans. All reinsured mortgages have to meet Minnesota Mutual’s insurance criteria, which will provide minimal, uniform requirements. Moreover, as a licensed reinsurer in the state of Arizona, MIMLIC is subject to ongoing supervision and regulation by the Arizona Commissioner. In return for accepting the risk associated with its reinsurance activities, MIMLIC receives insurance premiums, as well as investment income from its cash flow, providing a potentially important source of revenue for lenders that have an ownership interest in MIMLIC. II. ANALYSIS The Bank’s 2.9% interest (which is held by the Bank’s subsidiary Lakeland) in MIMLIC raises the issue of the authority of a national bank to make a non-controlling investment in an enterprise.7 A number of recent OCC Interpretive Letters have analyzed the authority of 5 The Bank generally does require that borrowers obtain mortgage insurance from third-party mortgage insurers on a loan with a down payment of less than 20 percent of the property’s value, or a loan with a loan-to-value ratio in excess of 80 percent. Mortgage insurance protects an investor holding a mortgage loan against default by the mortgagor. 6 See footnote 1, supra. 7 The OCC recently amended its operating subsidiary rule, 12 C.F.R. § 5.34, as part of
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