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The following opinion is presented on-line for informational use only and does not replace the official version. (Mich Dept of Attorney General Web Site - www.ag.state.mi.us) STATE OF MICHIGAN FRANK J. KELLEY, ATTORNEY GENERAL Opinion No. 5975 September 10, 1981 INSURANCE: Licensing of subsidiary of a mortgage company as an insurance agency The Commissioner of Insurance may issue a license to a subsidiary, otherwise qualified as a mortgagee, to sell property and casualty insurance, but the subsidiary may not intimidate the borrower to purchase insurance from the lender or to use any information which is unavailable to competitors in order to secure an unfair advantage in the marketing of insurance. William S. Ballenger Director Department of Licensing and Regulation 320 N. Washington Lansing, Michigan My opinion has been requested as to whether a subsidiary of a mortgage corporation may be licensed as an insurance agency for the purpose of offering property and casualty insurance to the mortgagors issued mortgages by the parent mortgage corporation. The Commissioner of Insurance, pursuant to 1956 PA 218, as amended; MCLA 500.100 et seq; MSA 24.1100 et seq, has plenary authority over the licensing of insurance agents and solicitors. A perusal of 1956 PA 218, supra, fails to reveal any prohibition against licensing a lender as an insurance agent. In fact, OAG 1967-1968, No 4614, p 225 (April 4, 1968), recognized that the Insurance Commissioner may license a bank as an insurance agent but MAC 1979, R 501.6 prohibited the payment of commissions. Various provisions of 1965 PA 218, supra, which regulate the marketing practices of agents, also recognize that a lender may also be an agent. 1956 PA 218, ch 12, supra, sets forth certain limitations on the activities of licensed insurance agents and solicitors who lend money. 1956 PA 218, Sec. 1207(5); MCLA 500.1207(5); MSA 24.11207(5), provides: 'A person may not sell or attempt to sell insurance by means of intimidation or threats, whether express or implied. Except as provided in subsection (4) of section 2077 a person may not induce the purchase of insurance through a particular agent or from a particular insurer by means of a promise to sell goods, to lend money, to provide services, or by a threat to refuse to lend money or to refuse to provide services.' Whether there is implied intimidation or improper inducement involved in the sale of property insurance to a mortgagor by the subsidiary agent of a mortgage company must be determined from the facts of each case. However, in order to avoid even the appearance of coercion, a lender who is selling insurance should avoid discussing the borrower's purchase of insurance until after the application for the loan has been approved. The borrower should at all times be advised that the purchase of insurance from the lender is optional, will not affect the approval of the loan, and should the insurance be purchased from the lender, the borrower is free to substitute the policy with a comparable one from another company. Furthermore, a lender who is also licensed as an insurance agent must comply with 1956 PA 218, Sec. 2077; MCLA 500.2077; MSA 24.12077, which specifically relates to the lending of money and the sale of insurance: '(1) No person shall require, as a condition precedent to the lending of money or extension of credit, or any rental thereof, that the person, to whom such money or credit is extended or whose obligation the creditor is to acquire or finance, negotiate any policy or contract of insurance through a particular insurance agent or with a particular insurer. No person engaged in the business of financing real or personal property other than motor vehicles or of lending money or extending credit, shall directly or indirectly require that the borrower pay a consideration of any kind to substitute the insurance policy of 1 insurer for that of another. '(2) If an instrument requires that a purchaser, mortgagor or borrower furnish insurance of any kind on real property being conveyed on which is collateral security to a loan, the vendor, mortgagee or lender shall refrain from using or disclosing any such information to his own advantage or to the deteriment of the purchaser, mortgagor, borrower, insurance company or agency complying with such requirement. '(3) This section shall not be construed as forbidding the vendor or creditor from exercising a reasonable right to approve or disapprove the insurance selected by the debtor for the protection of the property securing the credit or lien, but the vendor or creditor shall not disapprove a policy which contains coverages in excess of the basic coverage required by the vendor of creditor. '(4) Nothing in this section shall forbid any insurer from requiring as a condition precedent for the lending of its own funds that the debtor insure his own life for a reasonable amount with such insurer. '(5) Each violation of this section shall be a misdemeanor, punishable by a fine of not more than $100.00.' (Emphasis added.) 1956 PA 218, Sec. 2077, supra, clearly provides that it is an unfair trade practice if a creditor requires that a policy of insurance be negotiated through a particular insurance agent or company. Furthermore, the lender is required to refrain from using or disclosing any inside information for its own advantage. The reason for this prohibition is twofold. First, a lender who is also an insurance agent has an obvious and distinct marketing advantage over other insurance agents. By knowing who is purchasing a car, a mobile home, or real estate, the lender may immediately solicit the borrower to purchase insurance. If the loan requires that the borrower continuously maintain insurance, which is the case in most secured loans, the borrower is likely to be persuaded by the convenience afforded by having the lender make the insurance arrangements, particularly if the lender is willing to finance the insurance or allow the borrower to include the insurance premiums in monthly loan payments. A second reason for prohibiting lenders from using 'inside information' to secure the purchase of insurance is that it may ultimately lead to a lack of competition or even 'reverse competition.' Reverse competition is most prevalent in the credit life insurance industry where a lender purchases a group contract and in turn enrolls borrowers into the group. The lender is often motivated to sell a policy which provides the highest commission rather than one which provides the lowest premiums or highest benefits to the insured. This phenomenon of reverse competition was described in Alinco Life Insurance Co v United States, 373 F2d 336, 338 (footnote 3) (Court of Claims, 1967), as follows: '[Since] the premium for credit life insurance is generally paid by the borrower, and since the lender's remuneration is generally a percentage thereof, the higher the gross premium, the greater will be the profit to the lender who procures the policy. Therefore, some lenders (or sellers) in seeking to increase their remuneration for the procurement of such insurance tend to place their business with the insurance company that charges the highest gross premium. An experienced lender (or seller) can generally foresee that, since the borrower's (or purchaser's) interest lies in the consummation of the primary transaction of loan (or installment sale), he is not likely to go out 'shopping' elsewhere for a lower premium rate assuming he is interested in acquiring any credit life insurance at all. Thus, it is reasonable to anticipate that, in most instances, a borrower desiring to cover his loan with credit life insurance will consummate the entire transaction with his creditor in preference to making any independent analysis or comparison of credit life premiums available elsewhere. This situation is sometimes referred to as 'reverse competition' and is one of the factors leading to the contention by some persons that premium overcharging is a common abuse in the selling of credit life insurance.' By permitting a lender to use inside information in the process of selling property and casualty insurance, the bureau is sanctioning the unfair advantage enjoyed by the licensed agent/lender over insurance agents who either do not have access to lists of persons in need of insurance or the ability to solicit them at the most propitious moment. As a result, the existing structure of insurance marketing could be changed with serious deleterious results to the consumer. Accordingly it is my opinion that the Commissioner of Insurance may issue a license to a subsidiary, otherwise qualified as a mortgagee, to sell property and casualty insurance, but the subsidiary may not intimidate the borrower to purchase insurance from the lender or to use any information which is unavailable to competitors in order to secure an unfair advantage in the marketing of insurance. Frank J. Kelley Attorney General
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