By Shields                                            H.B. No. 3714
         Line and page numbers may not match official copy.
         Bill not drafted by TLC or Senate E&E.
                                A BILL TO BE ENTITLED
 1-1                                   AN ACT
 1-2     relating to collateral protection insurance for lenders.
 1-3           BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
 1-4           SECTION 1.  The Insurance Code is amended by adding Chapter
 1-5     27 as follows:
 1-6           Sec. 1.  Short Title.  This Act may be cited as the
 1-7     Collateral Protection Insurance Act.  An Act concerning the
 1-8     protection of collateral pledged to ensure payment or performance
 1-9     under a credit agreement.
1-10           Sec. 5.  Definitions.  In this Act, the following words and
1-11     phrases shall have the following meanings:
1-12           "Collateral" means any or all property pledged or otherwise
1-13     used to secure payment, repayment, or performance under a credit or
1-14     lease agreement, whether personal property, real property,
1-15     fixtures, inventory, receivables, rights, privileges, or otherwise.
1-16           "Collateral protection insurance" means:
1-17           Insurance coverage that:  (1) is purchased by a creditor
1-18     subsequent to the date of a credit agreement; (2) provides monetary
1-19     protection against loss of or damage to the collateral or against
1-20     liability arising out of the ownership or use of the collateral;
1-21     and (3)  is purchased according to the terms of a credit agreement
 2-1     as a result of a debtor's failure to provide evidence of insurance
 2-2     or failure to maintain adequate insurance covering the collateral,
 2-3     with the costs of the collateral protection insurance, including
 2-4     interest and any other charges imposed by the creditor in
 2-5     connection with the placement of the collateral protection
 2-6     insurance, payable by the debtor.  Collateral protection insurance
 2-7     includes insurance coverage that is purchased to protect only the
 2-8     interest of the creditor and insurance coverage that is purchased
 2-9     to protect both the interest of the creditor and some or all of the
2-10     interest of the debtor.  The term of a collateral protection
2-11     insurance policy may, but need not, extend to the full term of the
2-12     credit transaction.
2-13           Collateral protection insurance does not include insurance
2-14     coverage that is:  (1) purchased by the creditor for which the
2-15     debtor is not charged; (2) purchased at the inception of a credit
2-16     transaction to which the debtor is a party or agrees, whether or
2-17     not the costs are included in any payment plan under the credit
2-18     transaction; (3) purchased by the creditor following foreclosure,
2-19     repossession, or a similar event wherein the creditor gains
2-20     possession or control over the collateral; (4) maintained by the
2-21     creditor for the protection of any or all collateral which may come
2-22     into the possession or control of the creditor through foreclosure,
2-23     repossession, or a similar event; (5) credit insurance, mortgage
2-24     protection insurance, insurance issued to cover the life or health
2-25     of the debtor, or any other insurance maintained to cover the
 3-1     inability or failure of the debtor to make payment under the credit
 3-2     agreement; (6) title insurance; or (7) flood insurance required to
 3-3     be placed by creditors by 42 U.S.C.  4012(a), as amended, pursuant
 3-4     to the National Flood Insurance Reform Act of 1994.
 3-5           "Credit agreement" means the written document or documents
 3-6     that set forth the terms of the credit transaction.
 3-7           "Credit transaction" means any transaction the terms of which
 3-8     require the payment or repayment of money, goods, services,
 3-9     property, rights, or privileges, which is to be made on one or more
3-10     future dates, where such obligation is secured by collateral.
3-11           "Creditor" means any person, corporation, partnership,
3-12     association, or other venture, which is a lender of money or the
3-13     vendor or lessor of goods, services, property, rights, or
3-14     privileges, for which repayment is arranged through a credit
3-15     transaction, and includes any successor to the rights, title,
3-16     interest, or liens of such lender, vendor, or lessor.
3-17           "Debtor" means a borrower of money or a purchaser or lessee
3-18     of goods, services, property, rights, or privileges, for which
3-19     payment or repayment is arranged through a credit agreement.
3-20     Debtor does not include any person who is not the primary obligor
3-21     under a credit transaction and who is not jointly liable or jointly
3-22     and severally liable with the debtor for the obligation.
3-23           Sec. 10.  Placement of Collateral Protection Insurance.  A
3-24     creditor may place collateral protection insurance provided the
3-25     following conditions are met:
 4-1                 (1)  the debtor has entered into a credit transaction
 4-2     with the creditor; and
 4-3                 (2)  the credit transaction has been reduced to a
 4-4     credit agreement, and the credit agreement requires the debtor to
 4-5     maintain insurance on the collateral; and
 4-6                 (3)  a notice substantially similar to the following
 4-7     has been included in the credit agreement or on a separate document
 4-8     provided to the debtor, at the time the credit agreement is
 4-9     entered:
4-10           Unless you provide us with evidence of the insurance coverage
4-11     required by your agreement with us, we may purchase insurance at
4-12     your expense to protect our interest in your collateral.  This
4-13     insurance may, but need not, protect your interest.  The coverage
4-14     that we purchase may not pay any claim that you make or any claim
4-15     that is made against you in connection with the collateral.  If we
4-16     purchase insurance for the collateral, you will be responsible for
4-17     the costs of that insurance, including interest and any other
4-18     charges we may impose in connection with the placement of the
4-19     insurance, until the effective date of the cancellation or
4-20     expiration of the insurance.  If after we purchase the insurance
4-21     you provide us with proof that you had adequate insurance as
4-22     required by our credit agreement on your collateral as of the date
4-23     the collateral became uninsured and that you continue to have the
4-24     insurance that you purchased yourself, we will cancel the insurance
4-25     purchased by us without charging you any costs, interest, or other
 5-1     charges in connection with the insurance that we purchased.  The
 5-2     costs of the insurance that we purchase may be added to your total
 5-3     outstanding balance or obligation.  The costs of the insurance may
 5-4     be significantly greater  than the cost of insurance that you may
 5-5     be able to obtain on your own.
 5-6           Sec. 15.  Notice of Purchase of Collateral Protection
 5-7     Insurance; Repayment Terms.  (a)  Within 30 calendar days following
 5-8     the purchase date of collateral protection insurance, the creditor
 5-9     shall mail or have mailed to the debtor at the last known address
5-10     on file with the creditor, a notice entitled "Notice of Placement
5-11     of Insurance" in a form substantially similar to the following:
5-12           NOTICE OF PLACEMENT OF INSURANCE.  Your credit agreement with
5-13     us requires you to maintain adequate insurance on your collateral
5-14     until you pay off your loan.  You have not given us proof that you
5-15     have adequate insurance on your collateral.  Under the terms of
5-16     your credit agreement, we have purchased insurance at your expense
5-17     to protect our interest in your collateral.
5-18           The insurance we purchased will pay claims made by us as the
5-19     creditor.  The insurance we purchased may not pay any claims made
5-20     by you or against you in connection with your collateral.
5-21           You are responsible for the costs of this insurance,
5-22     including any interest and other charges that we may impose in
5-23     connection with the purchase of this insurance.  The initial
5-24     premium payment for this insurance is ($amount), which may or may
5-25     not include any interest or other charges that we may impose.  The
 6-1     costs of this insurance will be added to your payment obligations
 6-2     and may be significantly greater  than the cost of insurance that
 6-3     you can buy on your own.
 6-4           You still may obtain insurance of your own choosing on the
 6-5     collateral.  If you provide us with proof that you have obtained
 6-6     adequate insurance on your collateral, we will cancel the insurance
 6-7     that we purchased and refund or credit any unearned premiums to
 6-8     you.
 6-9           If, after the date this notice was sent to you, you provide
6-10     us with proof that you had adequate insurance on your collateral as
6-11     of the date the collateral became uninsured and that you continue
6-12     to have the insurance that you purchased yourself, we will cancel
6-13     the insurance that we purchased without charging you any costs,
6-14     interest, or other charges in connection with the insurance that we
6-15     purchased.
6-16           (b)  The terms for repayment of the costs of the collateral
6-17     protection insurance, which shall include interest and any other
6-18     charges imposed by the creditor in connection with the placement of
6-19     the collateral protection insurance, shall include one or more of
6-20     the following:
6-21                 (1)  full payment within 30 days after the date of the
6-22     Notice of Placement of Insurance;
6-23                 (2)  a final balloon payment within 30 days after the
6-24     last scheduled payment required by the credit agreement; or
6-25                 (3)  full amortization over the term of the credit
 7-1     transaction, the term of the collateral protection insurance
 7-2     coverage, or the term for which amortization is used by the
 7-3     creditor.
 7-4           Sec. 20.  Notice of Amortization.  If any form of
 7-5     amortization is used by the creditor, the creditor shall send to
 7-6     the debtor notice of the terms of the amortization and change in
 7-7     the debtor's periodic payment.
 7-8           Sec. 25.  Cancellation of Collateral Protection Insurance.  A
 7-9     debtor may at any time cause the cancellation of collateral
7-10     protection insurance by providing proper evidence to the creditor
7-11     that the debtor has obtained insurance as required by the credit
7-12     agreement.  If a debtor provides the creditor with proper evidence
7-13     that the debtor had insurance on the collateral as required by the
7-14     credit agreement on  or before the date the collateral protection
7-15     insurance is effective and that the debtor continues to have
7-16     insurance on the collateral as required by the credit agreement,
7-17     the creditor shall cancel the insurance that it purchased and may
7-18     not charge the debtor any costs, interest, or other charges in
7-19     connection with the insurance.
7-20           Sec. 30.  Unearned Premiums.  Upon cancellation or expiration
7-21     of collateral protection insurance, the amount of unearned
7-22     premiums, if any, as calculated in accordance with the Texas
7-23     Automobile Manual and/or the policy filed by the insurer with the
7-24     Texas Department of Insurance, shall be refunded to the creditor.
7-25     A refund of unearned premiums may be credited, by the creditor, to
 8-1     the debtor's obligation under the credit agreement or distributed
 8-2     directly to the debtor by check or other means.
 8-3           Sec. 35.  Selection of Insurance Carrier.  Collateral
 8-4     protection insurance may be placed with any insurance carrier
 8-5     selected by the creditor that is authorized to underwrite
 8-6     collateral protection insurance by the Department of Insurance.
 8-7     The insurance shall be evidenced by an individual policy or a
 8-8     certificate of insurance.
 8-9           Sec. 40.  Substantial Compliance.  A creditor, its insurer or
8-10     the insurer's agent that places collateral protection insurance in
8-11     substantial compliance with the terms of this Act shall not be
8-12     directly or indirectly liable in any manner to a debtor, co-signor,
8-13     guarantor, or any other person, in connection with the placement of
8-14     the collateral protection insurance.  Notices required to be mailed
8-15     under this Act shall be mailed by United States Mail, first class,
8-16     postage prepaid.
8-17           Sec. 45.  No Fiduciary Relationship.  This Act does not
8-18     impose a fiduciary relationship between the creditor and the
8-19     debtor.  Placement of collateral protection insurance is for the
8-20     sole purpose of protecting the interest of the creditor when the
8-21     debtor fails to insure collateral as required by the credit
8-22     agreement.
8-23           Sec. 50.  No Cause of Action Created.  A creditor is not, by
8-24     virtue of this Act, required to purchase collateral protection
8-25     insurance or to otherwise insure collateral.  A creditor shall not,
 9-1     by virtue of this Act, be liable to a debtor or to any other person
 9-2     for not purchasing collateral protection insurance, as a result of
 9-3     the amount or level of coverage of collateral protection insurance
 9-4     purchased by the creditor, or because the creditor purchased
 9-5     collateral protection insurance that protects only the interests of
 9-6     the creditor or less than all of the interest of the debtor.  This
 9-7     Act shall not be deemed to create a cause of action for damages on
 9-8     behalf of the debtor or any other person in connection with the
 9-9     placement of collateral protection insurance.
9-10           Sec. 55.  Uniform Commercial Code.  The obligations and
9-11     rights of the creditor and the debtor with respect to the
9-12     collateral as provided by the Texas Uniform Commercial Code are not
9-13     affected by this Act.
9-14           Sec. 60.  Severability; No Impairment of Creditor's Rights.
9-15     This Act shall not impair any other remedies, rights, or options
9-16     available to a creditor pursuant to any law, regulation, ruling,
9-17     court order, contract, or agreement.
9-18           Sec. 65.  Coverage of Act.  Substantial compliance with the
9-19     provisions of this Act shall be mandatory for the placement of
9-20     collateral protection insurance in this State by a creditor
9-21     pursuant to a credit agreement entered into on or after September
9-22     30, 1999.  No provision of this Act shall be held or applied
9-23     against a creditor in connection with collateral protection
9-24     insurance placed prior to September 30, 1999.  A creditor that
9-25     places collateral protection insurance pursuant to a credit
 10-1    agreement entered into prior to September 30, 1999 shall have
 10-2    available to it all of the rights provided by this Act if the
 10-3    creditor is in substantial compliance with the provisions of this
 10-4    Act other than item (3) of Section 10.
 10-5          SECTION 2.  This Act takes effect September 31, 1999.
 10-6          SECTION 3.  The importance of this legislation and the
 10-7    crowded condition of the calendars in both houses create an
 10-8    emergency and an imperative public necessity that the
 10-9    constitutional rule requiring bills to be read on three several
10-10    days in each house be suspended, and this rule is hereby suspended.