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.