We are a state-chartered savings bank, and our Guaranteed Asset Protection (GAP) insurance company is running a promotion offering loan officers a $25 gift card for selling GAP insurance on auto loans. Is this legal? Our loan officer will not sell the GAP insurance unless it is required by our banking guidelines.

Any bank employee who receives any incentive for referring GAP insurance customers would need to obtain an insurance producer’s license from the Illinois Department of Insurance. While the Illinois Insurance Code permits bank employees to enroll consumers in lines of insurance protecting personal property without obtaining an insurance producer’s license, they may do so only if they are not paid any commission, service fee, or other valuable consideration. Consequently, we believe that your loan officers should decline the gift cards unless they hold an insurance producer’s license.

As an aside, while your question relates to selling GAP insurance offered by a third-party insurance provider, we should note that some lenders offer a GAP-like product that is a contractual agreement whereby a borrower pays a fee to a lender when financing a car purchase in exchange for not being held liable for any remaining deficiency if the car is lost, stolen, or destroyed, and the borrower’s auto insurance does not cover the full amount of the debt. The IDFPR, the OCC, and Regulation Z all recognize that such agreements – referred to alternatively as guaranteed asset protection plans (GAPPs), GAP Addendums, and debt cancellation contracts (DCCs) – are not insurance policies and are subject to other rules.

For resources related to our guidance, please see:

Illinois Insurance Code, 215 ILCS 5/500-80 (“Commissions.

(a) An insurer or insurance producer may not pay a commission, service fee, brokerage, or other valuable consideration to a person for selling, soliciting, or negotiating insurance in this State if that person is required to be licensed under this Article and is not so licensed at the time of selling, soliciting, or negotiating the insurance.

(b) A person may not accept a commission, service fee, brokerage, or other valuable consideration for selling, soliciting, or negotiating insurance in this State if that person is required to be licensed under this Article and is not so licensed.”)

Illinois Insurance Code, 215 ILCS 5/500-35(a) (“Unless denied a license pursuant to Section 500-70, persons who have met the requirements of Sections 500-25 and 500-30 shall be issued a 2-year insurance producer license. An insurance producer may receive qualification for a license in one or more of the following lines of authority:

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(4) Property: insurance coverage for the direct or consequential loss or damage to property of every kind.

(5) Casualty: insurance coverage against legal liability, including that for death, injury, or disability or damage to real or personal property.

(6) Personal lines: property and casualty insurance coverage sold to individuals and families for primarily noncommercial purposes.

(7) Any other line of insurance permitted under State laws or rules.”)

IDFPR Interpretive Letter 94-013 (July 27, 1994) (“A Borrower can enroll in GAPP [Guaranteed Asset Protection Plan] by paying the required fee to the lending bank at the time the car purchase is originally financed and executing a ‘Special Loss Protection Notice’ that explains the terms and conditions of GAPP coverage. GAPP is not an automobile insurance policy nor is it a credit life or credit accident and health insurance policy. The Borrower does not receive an insurance policy pursuant to GAPP and does not deal with an insurance agent or company. Rather, GAPP is a contractual agreement between a Borrower and the lending bank relating to a car loan and redistributing the risk of loss that is otherwise involved if the car is lost, stolen or destroyed.”)

OCC Interpretive Letter 1032 (June 16, 2005) (“For the reasons discussed below, and based on the specific facts, we conclude that GAP Addendums that a national bank sells in connection with the proposed GAP program are DCCs [debt cancellation contracts], and are subject to the OCC’s rule governing DCCs.”)

Regulation Z, 12 CFR 1026.4(d)(3) (“Voluntary debt cancellation or debt suspension fees. Charges or premiums paid for debt cancellation coverage for amounts exceeding the value of the collateral securing the obligation or for debt cancellation or debt suspension coverage in the event of the loss of life, health, or income or in case of accident may be excluded from the finance charge, whether or not the coverage is insurance, if the following conditions are met . . .”)