1.7 Federal Regulations Flashcards
Fair Credit Reporting Act (15 USC 1681–1681d)
The Fair Credit Reporting Act protects consumer privacy and protects the public from overly intrusive information collection practices. It ensures data collected is confidential, accurate, relevant, and used for a proper and specific purpose.
When an application is taken, it must inform the applicant a credit report (from a consumer reporting agency) can be obtained. The purpose of this is to determine the financial and moral status of an applicant (for variety of purposes such as employment screening, insurance underwriting or loan approvals). An applicant has the right to review the report.
Applicant Challenge - (Fair Credit Reporting Act)
Credit reporting agency must reinvestigate within 6 months, if applicant challenges accuracy.
Inaccuracies - (Fair Credit Reporting Act)
Agency must forward to applicant inaccurate information given out within previous 2 years.
Disallowed Information - (Fair Credit Reporting Act)
Report must not include lawsuits over 7 years old or bankruptcies more than 10 years old.
Disclosure upon Request - (Fair Credit Reporting Act)
Consumer reporting agencies must provide the information on file if requested.
Limited Access to Information - (Fair Credit Reporting Act)
A consumer reporting agency may not provide a credit report to any party that lacks a permissible purpose, such as the evaluation of an application for a loan, credit, service, or employment. Permissible purposes also include several business and legal uses.
Investigation of Disputed Information - (Fair Credit Reporting Act)
If a consumer’s file contains inaccurate information, the agency must promptly investigate the matter with the source that provided the information. If the investigation fails to resolve the dispute, a statement may be added to the credit file explaining the matter.
Correct or Delete Inaccurate Information - (Fair Credit Reporting Act)
A consumer reporting agency must correct or, if necessary, delete from a credit file the information that is found to be inaccurate or can no longer be verified. The consumer reporting agency is not required to remove accurate data from a file unless it is outdated. Adverse information that is more than 7 years old (10 years for bankruptcies) must be removed from the file.
USA PATRIOT Act and Anti-Money Laundering (AML)
With the increase of drug trafficking and acts of terrorism, the desire and demand for laundered money has also increased. As of May 2006, insurance companies have been required to provide anti-money laundering training to their producers. Brokers and agents are required to undergo training as insurance products are now being used to give a legitimate appearance to money financed by and for illegal activities.
These new requirements and standards were necessitated by the USA PATRIOT Act. This act specified which financial institutions would be required to institute AML training programs, including insurance companies. The act specified which insurance products require anti-money laundering training and how to respond to suspected laundering activity. It also helped expand the definition of money laundering to include the money’s ultimate purpose, not just its origin. The insurance products being used are mostly single premium permanent life insurance and annuity products, as they generate cash value.
There are several “red flags” agents are trained to recognize, one in particular is a client buying a policy simply to hide or move illegal money. Practices that are outside the norm for life insurance transactions include:
Paying for an entire policy up front with cash
Early cancellation of the policy, regardless of cancellation fees or surrender charges
The heavy use of third parties for policy transactions
Strong reliance on wire or electronic fund transfers to foreign accounts
Agents/brokers are required to report any activity they believe, or even have reason to suspect, is an effort to launder money. Depending upon a producer’s involvement in the transaction, failure to comply can result in dismissal and civil, or possibly even criminal, prosecution.
Fraud and False Statements (Fraudulent Insurance Act)
Federal laws prohibit the commissions of fraud, which always involves a false statement and deceit; it can be either a criminal or civil crime. In 2001, the NAIC adopted model legislation for the prevention and enforcement of insurance fraud. Subsequently, each of the states enacted its own Fraudulent Insurance Act.
A fraudulent act involves a misstatement of material fact by a person who knows or believes that statement to be false. The statement is made to another person who relies on its accuracy to act or make a decision and is subsequently harmed by relying on the deliberately false statement. State fraudulent insurance acts do not modify the privacy of any individual; they protect producers, brokers, and insurers in the event fraudulent information is provided by consumers.
Insurance applications and claim forms must contain a disclosure about how false statements and fraud will be treated by the insurer. A sample warning is, “Any person who knowingly presents false or fraudulent information on an insurance application or claim for the payment of a loss is guilty of a crime and may be subject to fines and confinement in state prison.”
If a person engaged in the business of insurance, whose activities affect interstate commerce, willfully embezzles, misappropriates funds or property knowingly, and with the intent to deceive, makes a false material statement, or purposely overstates the security of an insurer, the following penalties will apply:
A fine of no more than $50,000, imprisonment for up to 10 years, or both
If the violation jeopardized the safety and soundness of an insurer, and was a significant cause of the insurer being placed in conservation, rehabilitation, or liquidation by an appropriate court, imprisonment can be for up to 15 years
If the amount embezzled or misappropriated does not exceed $5,000, violators will be fined up to $50,000, imprisoned for up to 1 year, or both
If a person uses threats, force, or attempts to impede/obstruct the administration of the law during any proceeding involving the business of insurance before any insurance regulatory official, they will be fined up to $50,000, imprisoned up to 10 years, or both.
Any individual who has been convicted of a felony involving dishonesty or a breach of trust, who then willfully engages or permits an individual to engage in the business of insurance, and whose activities affect interstate commerce, will be fined up to $50,000, imprisoned up to 5 years, or both.
Gramm-Leach-Bliley Act (the Financial Services Modernization Act of 1999)
This act repealed parts of the Glass-Steagall Act of 1933 and allowed the merger of banks, securities companies, and insurance companies. It also established the Financial Privacy Rule and Safeguards Rule for the protection of consumers’ privacy.
The Financial Privacy rule requires “financial institutions,” which include insurers, to provide each consumer with a privacy notice at the time the consumer relationship is established, and annually thereafter. In insurance, the consumer relationship is created when the policy is issued to the client. Application information remains confidential and cannot be used for other purposes without prior notice to the consumer.
The privacy notice must explain: The information collected about the consumer Where that information is shared How that information is used How that information is protected
The notice must also identify the consumer’s right to opt out of the information being shared with unaffiliated parties as part of the provisions of the Fair Credit Reporting Act.
Should the financial institutions privacy policy change at any point in time, the consumer must be notified again for acceptance. Each time the privacy notice is re-established, the consumer has the right to opt out again.
Violent Crime Control and Law Enforcement Act of 1994 (18 USC 1033, 1034)
The largest crime bill in U.S. history expands funding to federal agencies such as the FBI, DEA, and INS and includes provisions that address, among other topics, domestic abuse and firearms, gang crimes, immigration, registration of sexually violent offenders, victims of crime, and fraud.
The Act made it a felony for a person to engage in the business of insurance after being convicted of a state or federal felony crime involving dishonesty or breach of trust. Violations include willfully embezzling money, knowingly making false entries in any book, report or statement of the business, and threatening or impeding proper administration of the law in any proceeding involving the business of insurance.
Dishonesty - (Violent Crime Control and Law Enforcement Act of 1994)
refers to misrepresentation, untruthfulness, falsification.
Breach of Trust - (Violent Crime Control and Law Enforcement Act of 1994)
is based on fiduciary relationship of parties and the wrongful acts violating the relationship.
Penalties - (Violent Crime Control and Law Enforcement Act of 1994)
Fines and possible prison time.
Applicants who have been convicted of a felony must apply for Consent to Work (1033 Waiver) in the business of insurance—prior to applying for an insurance license. Producer must apply for this consent in their state of residence. Officers and employees must apply for the consent in the state where their home office is located. Convicted felons must apply for consent in order to discover if they are permitted in, or prohibited from, the insurance business.
