Do national banks have to comply with Oregon insurance laws when offering debt-cancellation contracts on their loans?

Plain-English summary

A debt-cancellation contract is what it sounds like: a bank charges the borrower an extra fee on a loan; if the borrower dies (or becomes disabled, depending on the contract), the debt is canceled. The Insurance Division asked whether national banks have to comply with Oregon's insurance laws when offering these contracts. A 1964 AG opinion had said yes; this 1999 opinion reverses that.

Attorney General Hardy Myers concluded that under post-1964 federal banking and preemption law, debt-cancellation contracts are not "insurance" subject to state regulation. The National Bank Act gives national banks "incidental powers" necessary to carry on banking, and the Comptroller of the Currency interprets debt cancellation as falling within those powers (12 CFR § 7.1013). Federal courts (notably the Eighth Circuit in Taylor) have agreed. The McCarran-Ferguson Act preserves state insurance regulation but only if the activity is the "business of insurance" under federal law. Applying the three-part Pireno test (risk transfer, integral to insurer-insured relationship, limited to insurance industry), debt cancellation falls short, especially because the risk profile differs from traditional insurance and the bank doesn't face investment risk or pay claims to an estate. So state insurance regulation is preempted.

Currency note

This opinion was issued in 1999. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

Q: What's the difference between a debt-cancellation contract and credit life insurance?
A: Functionally, they look very similar. Both cancel a debt when the borrower dies. Legally, the structure differs. Credit life insurance involves an insurance company paying out a death benefit to the lender. Debt cancellation is a contract directly between bank and borrower that extinguishes the debt; no insurance company is involved, no investment risk is taken, no estate gets a check.

Q: Why does the Pireno test matter?
A: McCarran-Ferguson Act § 2(b) only protects state insurance laws against federal preemption if the activity is "the business of insurance." The Pireno test (transfer/spread of risk, integral to insurer-insured relationship, limited to insurance industry) is how courts decide. Debt cancellation by banks fails at least the third prong and arguably the first.

Q: Doesn't McCarran-Ferguson generally protect state insurance regulation from federal banking statutes?
A: Yes, when the federal statute targets insurance. McCarran-Ferguson § 2(b) applies if the federal statute "specifically relates to the business of insurance." The National Bank Act doesn't; it's a banking statute. The Taylor court read McCarran-Ferguson's purpose narrowly: preserving traditional state regulation of insurance companies, not expanding state authority over banking activities the federal government already regulated before 1944.

Q: What about Oregon's older 1964 opinion?
A: The 1964 opinion treated bank debt-cancellation contracts as credit life insurance and declined to give weight to the Comptroller's view that they were a lawful banking power. It predated the federal appellate decisions interpreting the National Bank Act's "incidental powers" (such as Taylor in 1990) and the modern McCarran-Ferguson and Pireno framework. The 1999 opinion explicitly reverses the 1964 conclusion in light of those developments.

Q: How far does this opinion reach?
A: It is limited to national banks offering debt-cancellation contracts in conformance with the National Bank Act and the Comptroller's regulations. For that activity, Oregon's insurance laws are preempted and a certificate of authority is not required. The opinion did not address any other product or any other type of institution.

Background and statutory framework

National banks are chartered under the National Bank Act (12 USC). The Act gives the Comptroller of the Currency authority to interpret national-bank powers (12 USC § 1). Section 24 (Seventh) gives national banks "all such incidental powers as shall be necessary to carry on the business of banking." The Comptroller has long interpreted that phrase to include offering debt-cancellation contracts (12 CFR § 7.1013).

The Eighth Circuit in First National Bank of Eastern Arkansas v. Taylor (1990) held that the National Bank Act preempts state insurance laws as applied to bank debt-cancellation contracts. The court relied on (1) the Comptroller's interpretation receiving great deference under Clarke v. Securities Indus. Assn, and (2) the distinction between bank debt cancellation and traditional insurance (no risk transfer to a third-party insurer, no investment risk for the bank, no payments to estates).

The Ninth Circuit's test in M&M Leasing Corp. defines "incidental powers" as activities "convenient or useful" in connection with established banking activities. Debt cancellation easily fits because it's directly connected to lending.

The McCarran-Ferguson Act analysis in Merchants Home Delivery Service v. Hall (9th Cir 1995) applies a four-part inquiry. The dispositive prong here is whether debt cancellation is "the business of insurance." Under Pireno, it isn't.

Citations and references

Statutes and regulations:
- ORS 731.102(1), insurance contract definition
- ORS 731.354, certificate of authority requirement
- ORS 743.371(1), credit life insurance definition
- 12 USC § 1, § 24 (Seventh), Comptroller of the Currency and incidental powers
- 12 CFR § 7.1013, debt cancellation as incidental power
- 15 USC § 1012(b), McCarran-Ferguson Act preservation of state insurance regulation

Cases:
- First National Bank of Eastern Arkansas v. Taylor, 907 F2d 775 (8th Cir 1990), debt cancellation not insurance
- Clarke v. Securities Indus. Assn, 479 US 388 (1987), deference to Comptroller
- M&M Leasing Corp. v. Seattle First National Bank, 563 F2d 1377 (9th Cir 1977), incidental powers test
- Merchants Home Delivery Service v. Hall, 50 F3d 1486 (9th Cir 1995), four-part preemption inquiry
- Union Labor Life Ins. Co. v. Pireno, 458 US 119 (1982), business of insurance test
- United States v. South-Eastern Underwriters Assn, 322 US 533 (1944), Commerce Clause and insurance
- SEC v. Variable Annuity Life Ins. Co., 359 US 65 (1959), federal-question characterization

Source

• Landing page: https://www.doj.state.or.us/oregon-department-of-justice/office-of-the-attorney-general/attorney-general-opinions/
• Original PDF: https://www.doj.state.or.us/wp-content/uploads/1999/11/op8269.pdf

Original opinion text

November 3, 1999

No. 8269

This opinion is issued in response to a question from Nancy Ellison, Deputy Commissioner of the Insurance Division of
the Department of Consumer and Business Services.
QUESTION PRESENTED
Must national banks comply with Oregon insurance laws when offering debt cancellation programs?
ANSWER GIVEN
Debt cancellation programs offered by national banks in accordance with applicable federal law do not constitute
insurance subject to regulation under Oregon's insurance laws.
DISCUSSION
Under Oregon law, no person may be an insurer without first obtaining a certificate of authority. ORS 731.354. Only an
insurer in possession of such a certificate may enter into policies (contracts) of insurance. Id. An insurance contract occurs
where "one undertakes to indemnify another or pay or allow a specified or ascertainable amount or benefit upon
determinable risk contingencies." ORS 731.102(1). The question concerns debt cancellation programs, which have been
described as follows:
The essence of the debt cancellation contract is the imposition of an additional charge by the bank when a loan is
made. Such a charge is subsequently used for the establishment of reserves to cover the bank's interest in the loan
should it be canceled by the contract before being paid. * * * The primary purpose of a debt cancellation contract is
to protect the bank from the risk of a loan loss when a contingency occurs that is covered by the contract. Because
of this function, the debt cancellation contract has been called the equivalent of underwriting credit life insurance.
Moore & Smith, Debt Cancellation Contracts: A Neglected Asset, 112 Banking LJ 918, 920 (1995). "Credit life insurance"
is statutorily defined as "insurance on the life of a debtor pursuant to or in connection with a specific loan or other credit
transaction." ORS 743.371(1). In Oregon, a national bank may not enter into policies of insurance, including credit life
insurance, if it does not have the required certificate of authority.
In 1964, we opined that national banks that engaged in writing debt cancellation contracts in Oregon were engaging in the
business of insurance subject to state regulation. 32 Op Atty Gen 59 (1964). Specifically, our opinion concluded that debt
cancellation contracts fell within the statutory definition of credit life insurance. Id. at 60. In 1964, state law expressly
prohibited anyone other than an authorized insurance company from writing credit life insurance. Id. (citing former ORS
739.603). Former ORS 739.603 was renumbered as ORS 743.585 and, again in 1989, as ORS 743.379. The current statute
no longer contains this specific prohibition. The prohibition in ORS 731.354 against a person transacting insurance without
first obtaining a certificate of authority, however, remains applicable to credit life insurance.
To determine whether national banks may offer debt cancellation contracts without regard to state insurance laws, we must
answer two questions under federal case law developed since 1964. First, does a national bank have the authority to offer
debt cancellation contracts, and, second, if a national bank does have this authority, do debt cancellation programs offered
by such a bank constitute "insurance" that is subject to regulation under state insurance laws?
I. A National Bank's Authority to Offer Debt Cancellation Programs
The United States Comptroller of the Currency (comptroller) is responsible for enforcing national banking laws. 12 USC §
1. The National Bank Act, in addition to enumerating specific powers, grants national banks the power to exercise "all
such incidental powers as shall be necessary to carry on the business of banking." 12 USC § 24 (Seventh). Since 1964, the
comptroller has interpreted "incidental powers" to include the offering of debt cancellation contracts. Moore & Smith, 112
Banking LJ at 919-920. The comptroller's current Interpretative Ruling states:
A national bank may enter into a contract to provide for loss arising from cancellation of an outstanding loan upon
the death or disability of a borrower. The imposition of an additional charge and the establishment of necessary
reserves in order to enable the bank to enter into such debt cancellation contracts are a lawful exercise of the
powers of a national bank.
12 CFR § 7.1013.
In our 1964 opinion, we quoted from an earlier comptroller statement, which concluded that national banks had the
authority to enter into debt cancellation contracts, stating:
"The use of debt cancellation contracts * * * is a lawful exercise of the powers of a National Bank. The exercise of
such powers is necessary to and is a part of the business of banking. Such activities may not therefore, properly be
considered as engaging in the life insurance business."
32 Op Atty Gen at 60 (quoting March 10, 1964 letter addressed to the presidents of national banks from the Comptroller of
the Currency, James J. Saxon). Our opinion, however, gave no authoritative weight to the comptroller's decision. Instead,
the opinion focused upon federal statutes and case law, finding no authority in the National Bank Act for national banks to
offer debt cancellation contracts, and no federal case law holding that debt cancellation contracts were "incidental" and
"necessary" to banking. In light of this absence of federal statutory and common law authority, we concluded that national
banks that wrote debt cancellation contracts in Oregon would be engaged in the business of insurance. 32 Op Atty Gen at
61.
Several federal appellate courts have interpreted the National Bank Act's "incidental powers" provision since 1964. In
1990, the Eighth Circuit Court of Appeals analyzed the particular question that you have raised in deciding whether the
Arkansas Insurance Commissioner had acted lawfully in directing First National Bank of Eastern Arkansas (FNB) to cease
offering debt cancellation contracts. First National Bank of Eastern Arkansas v. Taylor, 907 F2d 775, 777 (8th Cir 1990),
cert den 498 US 972 (1990). The court concluded that the National Bank Act authorizes national banks to enter into debt
cancellation contracts. Id. at 778-79. The court specifically cited the comptroller's interpretation of "incidental powers" as
including debt cancellation contracts and noted that the comptroller's interpretation of the National Bank Act is entitled to
"great weight." Id. at 777 (quoting Clarke v. Securities Indus. Assn, 479 US 388, 403-04, 107 S Ct 750, 93 L Ed2d 757
(1987) ("[C]ourts should give great weight to any reasonable construction of a regulatory statute [regarding enforcement of
banking laws] adopted by the [comptroller].").
In construing the National Bank Act, the Taylor court reasoned that the "incidental powers" of national banks are not
limited to activities deemed essential to the exercise of express powers. 907 F2d at 778. Rather, "incidental powers"
include activities closely related to an express power that are useful in carrying out the business of banking. Id. The court
supported its conclusion that the act of making debt cancellation contracts was directly related to FNB's expressly
authorized lending power with the following rationale. First, debt cancellation contracts were sold only in connection with
loans to FNB borrowers. Id. Second, debt cancellation contracts "provide borrowers with a convenient method of
extinguishing debt in case of death, and enable FNB to avoid the time, expense, and risk associated with attempting to
collect the balance of the loan from a borrower's estate." Id.
The Ninth Circuit Court of Appeals has adopted the following test to determine whether an activity falls within the
purview of a national bank's "incidental powers":
[F]or an activity to be pursuant to an incidental power "necessary to carry on the business of banking" it must be
"convenient or useful in connection with the performance of one of the bank's established activities pursuant to its
express powers under the National Bank Act."
M&M Leasing Corp. v. Seattle First National Bank, 563 F2d 1377, 1382 (9th Cir 1977), cert den 436 US 956 (1978)
(quoting Arnold Tours, Inc. v. Camp, 472 F2d 427, 431-32 (1st Cir 1972)). In determining the scope of incidental powers,
the Ninth Circuit stated its belief that "the powers of national banks must be construed so as to permit the use of new ways
of conducting the very old business of banking." Id. at 1382.
The rationale provided by the Taylor court for concluding that offering debt cancellation contracts is within the
"incidental" powers of national banks and therefore authorized by the National Bank Act fits well into the test established
by the Ninth Circuit in M&M Leasing Corp. It cannot be seriously questioned that lending money constitutes an
established activity carried out pursuant to a national bank's express powers under the National Bank Act./ The Ninth
Circuit requires that an activity be either "convenient" or "useful" in connection with the performance of an established
activity, such as lending money, to be pursuant to an "incidental power." As noted above, the Taylor court found that debt
cancellation contracts were offered only in relation to the bank's lending of money and that they offered a "convenient
method" for a borrower to extinguish a debt in case of death and allowed the bank to "avoid the time, expense and risk" of
trying to collect from a deceased borrower's estate. Taylor, 907 F2d at 778. These qualities establish debt cancellation
contracts as both convenient and useful to a national bank's established function of lending money. Consequently, we
believe that the Ninth Circuit would conclude that issuing debt cancellation contracts is within the "incidental" powers of
national banks and is therefore authorized by the National Bank Act.
II. Debt Cancellation Programs and State Insurance Laws
Normally, concluding that the National Bank Act authorizes debt cancellation contracts would end our inquiry. "Because
national banks are considered federal instrumentalities * * * states may neither prohibit nor unduly restrict their activities."
Taylor, 907 F2d at 778 (citations omitted). One would expect, in other words, that the National Bank Act would preempt a
state's requirement that a national bank obtain a certificate of authority from state insurance regulators before offering debt
cancellation contracts./ However, a second federal statute, the McCarran-Ferguson Act, protects a state's regulation of
insurance against conflicting federal law./ Section 2(b) of the McCarran-Ferguson Act states:
No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for
the purpose of regulating the business of insurance * * * unless such Act specifically relates to the business
of insurance * * *.
15 USC § 1012(b).
The National Bank Act specifically relates to the business of banking, not insurance. The court in Taylor, however, found
that the McCarran-Ferguson Act did not prevent the National Bank Act's preemption of state insurance laws because, the
court concluded, the offering of debt cancellation contracts by banks falls within the incidental powers granted by the
National Bank Act and therefore does not constitute "the business of insurance." Taylor, 907 F2d at 779. The court offered
two reasons in support of this conclusion. The first (and primary) reason was that "the McCarran-Ferguson Act was not
directed at the activities of national banks." Id. The Taylor court explained that Congress passed the McCarran-Ferguson
Act in response to the Supreme Court's decision in United States v. South-Eastern Underwriters Assn, 322 US 533, 64 S
Ct 1162, 88 L Ed 1440 (1944).
[The Court] held that the insurance industry was subject to regulation by Congress under the Commerce Clause,
and that insurance company activities were subject to federal antitrust laws. * * * The McCarran-Ferguson Act was
designed to preserve traditional state regulation and taxation of insurance companies, and to provide insurance
companies with a partial exemption from federal antitrust laws.
Taylor, 907 F2d at 779 (citations omitted). Concluding that the McCarran-Ferguson Act was not designed to provide states
with authority broader than that which they enjoyed prior to the decision in South-Eastern Underwriters, the Taylor court
found the fact that national banks were exclusively regulated by the federal government before South-Eastern
Underwriters to be a strong indication "that Congress did not intend the 'business of insurance' to encompass lawful
activities of national banks." Id. at 780. (citations omitted).
The second reason the Taylor court concluded debt cancellation contracts did not constitute "the business of insurance"
focused on the difference between such contracts and traditional insurance with regard to transferring or spreading risk.
The court found that debt cancellation contracts issued by banks in connection with loans differ significantly from
traditional insurance contracts with respect to risk, stating:
Although debt cancellation contracts may * * * transfer some risk from the borrower to the bank, the contracts do
not require the bank to take an investment risk or to make payment to the borrower's estate. The debt is simply
extinguished when the borrower dies. Thus, the primary and traditional concern behind state insurance regulation
— the prevention of insolvency — is not of concern to a borrower who opts for a debt cancellation contract.
Id. (footnote omitted).
We believe that the Ninth Circuit, like the Taylor court, would find that debt cancellation contracts are not subject to state
insurance regulation pursuant to section 2(b) of the McCarran-Ferguson Act. The Ninth Circuit has adopted a four-part
inquiry to determine, under section 2(b) of the McCarran-Ferguson Act, whether a federal law will give way to a state's
insurance requirements. Merchants Home Delivery Service v. Hall, 50 F3d 1486, 1489 (9th Cir) (1995). Under the Ninth
Circuit test, whether an activity, such as offering debt cancellation contracts, constitutes "the business of insurance" is one
of the four factors to be considered. The Ninth Circuit will preclude the application of a federal statute only if:
1. the federal statute does not "specifically relate to the business of insurance,"
2. the challenged acts "constitute the business of insurance,"
3. "the state has enacted a law or laws regulating the challenged acts," and
4. "the state law would be superseded, impaired or invalidated by the application of the federal statute."
Id. Unless all four factors of the test are satisfied, the Ninth Circuit will permit the federal statute to preempt the state
insurance law.
With respect to debt cancellation contracts, the first factor of the Ninth Circuit test is satisfied because the provisions of the
National Bank Act addressing a national bank's "incidental powers," which authorize the banks to offer such contracts, do
not "specifically relate" to the business of insurance. The third factor may also be met; to the extent that our 1964 opinion
concluded that debt cancellation contracts fall within the statutory definition of credit life insurance, one could argue that
Oregon has enacted laws regulating the writing of debt cancellation contracts, although there are no state statutes that
specifically regulate this activity by name. If a court concluded that Oregon's insurance laws regulate debt cancellation
contracts, those laws would be superseded by the National Bank Act to the extent that the latter authorizes national banks
to write debt cancellation contracts, thus satisfying the fourth factor of the test.
All four prongs of the Ninth Circuit's test must be met; however, to prevent the National Bank Act from preempting
Oregon's insurance laws. Unless the offering of debt cancellation contracts constitutes "the business of insurance," the
second factor of the test is not satisfied and the National Bank Act preempts state insurance laws with respect to this
activity.
A debt cancellation contract may be viewed as very similar to credit life insurance under Oregon law, where the latter is
defined as "insurance on the life of a debtor pursuant to or in connection with a specific loan or other credit transaction."
ORS 743.371(1). United States Supreme Court precedent, however, indicates that the federal judiciary will not look to
state insurance laws to determine whether a practice actually constitutes "the business of insurance" when applying the
McCarran-Ferguson Act. In determining whether federal securities laws applied to the offering of annuity contracts, the
Supreme Court stated that conflicting state treatment of annuities was not of consequence to the case because "the meaning
of 'insurance' or 'annuity' under these Federal Acts [Securities Act of 1933 and McCarran-Ferguson Act] is a federal
question." SEC v. Variable Annuity Life Ins. Co., 359 US 65, 69, 79 S Ct 618, 3 L Ed2d 640 (1959). The Taylor court
cited to the Supreme Court's decision in Variable Annuity Life when discounting the relevance of state law to determining
whether offering debt cancellation contracts constituted "the business of insurance."
We acknowledge that in addition to the Commissioner [in Arkansas] a few state appellate courts have found
debt cancellation contracts to fall within their states' definitions of "insurance." However, state law defining
insurance is not controlling on the issue of whether an activity falls within the "business of insurance" as
that term is used in the McCarran-Ferguson Act.
Taylor, 907 F2d at 780 n 8 (citations omitted).
The Ninth Circuit applies the following test to determine whether an activity constitutes "the business of insurance":
1. whether the practice has the effect of transferring or spreading the policyholders' risks,
2. whether the practice is an integral part of the policy relationship between the insurer and the insured, and
3. whether the practice is limited to entities within the insurance industry.
Merchants Home Delivery, 50 F3d at 1490 (citing Union Labor Life Ins. Co. v. Pireno, 458 US 119, 129, 102 S Ct 3002,
73 L Ed2d 647 (1982)). The Ninth Circuit observed that "[t]he U.S. Supreme Court has made it clear that the transfer or
spreading of the risk is the primary or even 'indispensable' characteristic of the business of insurance." Merchants Home
Delivery, 50 F3d at 1490 (citing Pireno, 458 US at 127). With regard to the transferring or spreading of risk, Taylor
concluded that, while some risk may be transferred to the bank under a debt cancellation contract, the risk taken on by the
bank is much different (and less) than that taken on by an insurance company. Taylor, 907 F2d at 780. Because offering a
debt cancellation contract does not necessitate the bank taking an investment risk or making payment to the borrower's
estate, the court explained, "the primary and traditional concern behind state insurance regulation — the prevention of
insolvency — is not of concern to a borrower who opts for a debt cancellation contract." With regard to the second
component of the Pireno test, so long as the contracts are optional, rather than a term or condition of taking a loan, it
would be difficult to construe the practice of offering debt cancellation contracts as an "integral part" of the relationship
between the bank and the borrower. For example, the debt cancellation contracts offered by the bank in Taylor were
"additional-cost options to customers borrowing $10,000 or less." Id. at 776. As to the third component of the Pireno test,
the fact that national banks offer debt cancellation contracts shows that the practice is not limited to entities within the
insurance industry.
We conclude that the offering of debt cancellation contracts does not constitute "the business of insurance" under the
Pireno test used by the Ninth Circuit. This conclusion means that, under the Ninth Circuit's interpretation of section 2(b)
of the McCarran-Ferguson Act, the National Bank Act preempts Oregon insurance laws with respect to debt cancellation
contracts.
In our 1964 opinion, we stated that, in the absence of applicable federal court decisions, if a national bank engaged in
writing debt cancellation contracts in Oregon it would be engaged in the business of insurance in violation of state law. 32
Op Atty Gen 59. Since that opinion, federal law has developed in the Ninth Circuit and other jurisdictions which leads us
to reverse our 1964 opinion and conclude that a national bank issuing debt cancellation contracts in Oregon, in
conformance with requirements of the National Bank Act and regulations issued by the comptroller, is not engaging in the
business of insurance by conducting such activities. A national bank's offering of debt cancellation contracts, therefore, is
not subject to regulation under Oregon's insurance laws.

HARDY MYERS
Attorney General