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Tuesday, June 17, 2014

The CFPB Cannot Regulate Optional Insurance Sales by Banks Despite Recent Enforcement Action

By: ABIA Outside Counsel Chrys D. Lemon and Adam D. Maarec, McIntyre & Lemon, PLLC
The Dodd-Frank Wall Street Reform and Consumer Protection Act places explicit limitations on the Consumer Financial Protection Bureau’s authority over insurance activities. Both the “business of insurance” and entities “regulated by a state insurance regulator” are generally exempt from the CFPB’s rules and enforcement actions. However, a few exceptions allow the CFPB to exercise some authority over insurance activities. For example, the Truth in Lending Act authorizes the CFPB to issue and enforce credit insurance disclosures, and the Real Estate Settlement Procedures Act authorizes the CFPB to issue and enforce rules on lender-placed insurance. The agency can also request information from insurance companies and exercise its jurisdiction over insurance companies as “service providers,” to the extent they are providing a material service to a bank or other supervised entity in connection with a financial product or service (as opposed to an insurance product or service).

Some may believe that the CFPB has authority over insurance marketing and sales if the sale occurs “in connection with” a financial product or service. In fact, in a recent enforcement action against US Bank and its service provider, the CFPB appears to have concluded that its UDAAP powers reach the marketing and sale of GAP insurance offered in connection with vehicle loans by a service provider to a bank.

But a close analysis of the CFPB’s powers indicates that, aside from the exceptions referenced above, the CFPB lacks authority over the marketing and sale of optional insurance products by anyone, including an insurance company, for three reasons. First, the definition of the “business of insurance” in the Dodd-Frank Act and federal court cases includes insurance marketing and sales activities, and therefore places those activities outside the jurisdiction of the CFPB. Second, federal court cases and Federal Reserve Board interpretations require more than an incidental connection between the sale of optional insurance and the provision of a financial product or service for a sale to trigger the “in connection with” requirement associated with CFPB’s powers. And finally, the McCarran-Ferguson Act’s preservation of state supremacy in the regulation of insurance activities prevents the Dodd-Frank Act from overriding state regulation of insurance activities.