Don's Discussion

Are you a member with a question? Contact IA&B Legal & Corporate Affairs Director Don Bankus at 717-918-9204 or DonB@IABforME.com.

QUESTION:

A bank extending a loan to one of my commercial accounts strong-armed the customer into also switching his insurance to them. Is this permissible?

ANSWER:

This is an interesting question. While the answer is relatively straightforward, enforcement of applicable laws can often be hard to achieve. The situation described is generally referred to as tying. While some types of tying may be permissible, what you describe is seen as coercion and is prohibited. The prohibition is derived from federal law, as well as state statutes in Pennsylvania, Maryland, and Delaware. A brief summary of the prohibitions and the statutory references follow:

FEDERAL LAW

The U.S. Code addresses this issue at 12 U.S. Code Section 1972, which provides in part that:

12 U.S. Code § 1972 - Certain tying arrangements prohibited; correspondent accounts.

(1) A bank shall not in any manner extend credit, lease or sell property of any kind, or furnish any service, or fix or vary the consideration for any of the foregoing, on the condition or requirement -

(A) that the customer shall obtain some additional credit, property, or service from such bank other than a loan, discount, deposit, or trust service; or

(B) that the customer shall obtain some additional credit, property, or service from a bank holding company of such bank, or from any other subsidiary of such bank holding company.

PENNSYLVANIA LAW

In Pennsylvania, the issue is primarily addressed at 7 Pa.C.S.A. Section 6123(5), which provides as follows:

§ 6123. Mortgage loan business prohibitions.

(a) Mortgage loan business prohibitions.--A licensee [a mortgage broker/lender/servicer/ originator] engaging in the mortgage loan business shall not:

(5) Make any mortgage loan on the condition, agreement or understanding that the consumer contract with any specific person or organization for insurance services as agent, broker or underwriter.

In addition, a provision in the Pennsylvania Producer Licensing statute also prohibits “tying” by a financial institution at 40 P.S. Section 310.76, as well as requiring financial institutions adhere to the following requirements:

40 P.S. Section 310.76. Required purchases of insurance

(a) Disclosures.--If a financial institution requires a person to obtain insurance in connection with a loan and the insurance is available through the financial institution, a licensee employed by or affiliated with the financial institution shall inform the person at or prior to the time of application that the purchase of the insurance from the financial institution is not a condition of the loan and will not affect current or future credit decisions. The licensee may inform the person that insurance is available from the financial institution.

(b) Acknowledgment.--If the person purchases the insurance through the financial institution, the licensee shall obtain a written statement or acknowledgment from the person prior to the purchase of the insurance stating that the person has been advised that the purchase of the insurance from the financial institution is not a condition of receiving the loan and will not affect current or future credit decisions.

MARYLAND LAW

In Maryland, the Maryland Code addresses coerced or tie-in sales in Chapter 27 of the Insurance Code, which governs Unfair Trade Practices (MD Code, Insurance, Section 27214(a)(1) and (2)), which provides, in part, that:

§27–214.(a)

(1) A person may not require another person to buy insurance through a particular insurance producer or insurer as a condition, agreement, or understanding with respect to selling or providing a loan, credit, sale, goods, property, contract, lease, or service to the other person.

(2) An insurance producer or insurer may not participate in a combination plan or transaction prohibited by paragraph (1) of this subsection.

The above prohibition is supported in the Maryland Code, Commercial Law, at Section 12-124 (MD Code, Sections 12-124(a)(2) and (5)), which provides:

§12–124.(a)

(2) A lender may not require a borrower, as a condition to receiving or maintaining a loan secured by a first mortgage or first deed of trust, to provide or purchase property insurance coverage against risks to any improvements on any real property in an amount exceeding the replacement cost of the improvements on the real property.

(5) A lender may not require that the insurance be purchased through a particular insurance producer or insurance company.

DELAWARE LAW

Delaware statutes address tying arrangements in the Banking Code at 5 Del.Code Section 929(a)(1) and (2), which provides, in part, that:

§ 929. Tying arrangements prohibited.

(a) No bank or trust company shall, either directly or indirectly through any subsidiary, division or 3rd person, in any manner extend credit, sell any product or furnish any service to any person, or fix or vary the consideration for any of the foregoing, on the condition or requirement that:

(1) The person shall obtain some additional credit, product or service from such bank or trust company or its affiliate other than a loan, discount, deposit or trust service; or

(2) The person provide some additional credit, product or service to such bank or trust company or its affiliate other than those related to and usually provided in connection with a loan, discount, deposit or trust services; or […]

The above prohibition is reinforced in the Insurance Code at 18 Del. Code Section 2304(23)(a)(1), which provides that:

Section 2304. Unfair methods of competition and unfair or deceptive acts or practices defined.

(23) Tying arrangements; cancellation; disclosure.

a. No person who has received the name of any actual or potential borrower from any bank or trust company which engages, directly or indirectly, in any activity authorized by § 761(a)(14) of Title 5 shall, with respect to such borrower:

1. Engage in any of the activities prohibited to such bank or trust company by § 929 of Title 5.

AND NOW, THE HARD PART

Notwithstanding what can certainly be argued to be ample federal and state prohibitions, enforcement of the prohibitions can be elusive, primarily because:

▲ Absent a customer complaint, it’s unlikely you’d independently have sufficient, verifiable evidence between the affected customer and the lender to establish and support a violation; and

▲ As a third party, you may not have standing to file a complaint. As a rule, the affected customer is the one who would be required to do so, and, more often than not, consumers may lack the will to file an action against their bank and challenge a financial transaction they have just negotiated, and from which they have likely derived a benefit.

This document is not a legal opinion and should not be relied upon as such. The intent of this document is to provide a general background regarding the topic or topics discussed, not to provide legal advice. Producers and agencies should consult an attorney regarding specific situations and specific questions with respect to the topic or topics covered in this document. Neither the Insurance Agents & Brokers nor any of its employees shall be responsible for any errors or omissions regarding any statements made in this document, nor any errors or omissions regarding any statutes, regulations, court rules, and/or any other government documents cited in this document.