1-1 AN ACT
1-2 relating to collateral protection insurance.
1-3 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
1-4 SECTION 1. Subtitle A, Title 4, Finance Code, is amended by
1-5 adding Chapter 307 to read as follows:
1-6 CHAPTER 307. COLLATERAL PROTECTION INSURANCE
1-7 SUBCHAPTER A. GENERAL PROVISIONS
1-8 Sec. 307.001. DEFINITIONS. In this chapter:
1-9 (1) "Collateral" means property pledged or used to
1-10 secure payment, repayment, or performance under a credit or lease
1-11 agreement, including personal property, real property, fixtures,
1-12 inventory, receivables, rights, or privileges.
1-13 (2) "Collateral protection insurance" means insurance
1-14 coverage described by Section 307.051.
1-15 (3) "Credit agreement" means a written document that
1-16 sets forth the terms of a credit transaction.
1-17 (4) "Credit transaction" means a transaction with
1-18 terms that require the payment of money, goods, services, property,
1-19 rights, or privileges on a future date and in which the obligation
1-20 for payment is secured by collateral.
1-21 (5) "Creditor" means a person who is a lender of money
1-22 or a vendor or lessor of goods, services, property, rights, or
1-23 privileges for which a payment is arranged through a credit
1-24 transaction and includes any successor to the rights, title,
1-25 interest, or liens of the lender, vendor, or lessor.
2-1 (6) "Debtor" means a borrower of money or a purchaser
2-2 or lessee of goods, services, property, rights, or privileges for
2-3 which payment is arranged through a credit agreement. The term
2-4 does not include a person who is not a primary obligor under a
2-5 credit transaction or who is not jointly and severally liable with
2-6 the debtor for the obligation.
2-7 (7) "Title insurance" means insurance that may be
2-8 issued only by persons regulated under Chapter 9, Insurance Code,
2-9 and that insures:
2-10 (A) a lender or owner against loss caused by:
2-11 (i) defective title held by the mortgagor
2-12 or owner or insured;
2-13 (ii) unknown mortgages or defective
2-14 recording of mortgages or liens on real property;
2-15 (iii) failure of any person to pay ad
2-16 valorem taxes resulting in a lien; or
2-17 (iv) failure to research properly title,
2-18 taxes, liens, or other matters relative to the validity of loans or
2-19 liens secured by real property or insurance; or
2-20 (B) the validity, enforceability, or priority of
2-21 any lien or title on real property.
2-22 (Sections 307.002-307.050 reserved for expansion)
2-23 SUBCHAPTER B. REQUIREMENTS FOR COLLATERAL PROTECTION INSURANCE
2-24 Sec. 307.051. COLLATERAL PROTECTION INSURANCE. (a)
2-25 Collateral protection insurance is insurance coverage that:
2-26 (1) is purchased by a creditor after the date of a
3-1 credit agreement;
3-2 (2) provides monetary protection against loss of or
3-3 damage to the collateral or against liability arising out of the
3-4 ownership or use of the collateral; and
3-5 (3) is purchased according to the terms of a credit
3-6 agreement as a result of a debtor's failure to provide evidence of
3-7 insurance or failure to obtain or maintain insurance covering the
3-8 collateral, with the costs of the collateral protection insurance,
3-9 including interest and any other charges incurred by the creditor
3-10 in connection with the placement of collateral protection
3-11 insurance, payable by a debtor.
3-12 (b) Collateral protection insurance includes insurance
3-13 coverage that is purchased to protect:
3-14 (1) only the interest of the creditor; or
3-15 (2) both the interest of the creditor and some or all
3-16 of the interest of a debtor.
3-17 (c) The term of a collateral protection insurance policy may
3-18 be:
3-19 (1) not greater than 12 months; or
3-20 (2) the remaining term of the credit transaction if
3-21 the remaining term is less than or equal to 24 months.
3-22 (d) The effective date of coverage for collateral protection
3-23 insurance may be earlier than the date of issuance of the policy.
3-24 The effective date may not be earlier than the date the collateral
3-25 became uninsured.
3-26 (e) A premium for collateral protection insurance may not be
4-1 based on an amount that exceeds the actual amount of unpaid
4-2 indebtedness of the debtor as of the effective date of the policy.
4-3 This condition applies without regard to whether the coverage under
4-4 the policy limits the insurer's liability to:
4-5 (1) the amount of unpaid debt;
4-6 (2) the cash value of the collateral; or
4-7 (3) the cost of repair of the collateral.
4-8 (f) Collateral protection insurance does not include
4-9 insurance coverage that:
4-10 (1) is purchased by the creditor for which the debtor
4-11 is not charged;
4-12 (2) is purchased at the inception of a credit
4-13 transaction in which the debtor is a party or to which the debtor
4-14 agrees, whether or not costs are included in a payment plan under
4-15 the credit transaction;
4-16 (3) is maintained by the creditor for the protection
4-17 of collateral that comes into the possession or control of the
4-18 creditor through foreclosure, repossession, or a similar event;
4-19 (4) is credit insurance, mortgage protection
4-20 insurance, insurance issued to cover the life or health of the
4-21 debtor, or any other insurance maintained to cover the inability or
4-22 failure of the debtor to make payment under the credit agreement;
4-23 (5) is title insurance; or
4-24 (6) is flood insurance required to be placed by
4-25 creditors under Section 102, National Flood Insurance Act of 1968
4-26 (42 U.S.C. Section 4012a).
5-1 Sec. 307.052. CREDITOR DUTIES. (a) A creditor who requires
5-2 collateral protection insurance that is paid for directly or
5-3 indirectly by a debtor may place collateral protection insurance
5-4 if:
5-5 (1) the debtor has entered into a credit transaction
5-6 with the creditor for which a credit agreement exists;
5-7 (2) the credit agreement requires the debtor to
5-8 maintain insurance on the collateral; and
5-9 (3) a notice has been included in the credit agreement
5-10 or a separate document provided to the debtor at the time the
5-11 credit agreement is executed that states that:
5-12 (A) the debtor is required to:
5-13 (i) keep the collateral insured against
5-14 damage in the amount equal to the debtor's indebtedness to the
5-15 creditor;
5-16 (ii) purchase the insurance from an
5-17 insurer that is authorized to do business in this state or an
5-18 eligible surplus lines insurer; and
5-19 (iii) name the creditor as the person to
5-20 be paid under the policy in the event of a loss;
5-21 (B) the debtor must, if required by the
5-22 creditor, deliver to the creditor a copy of the policy and proof of
5-23 the payment of premiums; and
5-24 (C) if the debtor fails to meet any requirement
5-25 listed in Paragraph (A) or (B), the creditor may obtain collateral
5-26 protection insurance on behalf of the debtor at the debtor's
6-1 expense.
6-2 (b) Not later than the 31st day after the date the
6-3 collateral protection insurance is charged to the debtor, the
6-4 creditor, by prepaid, first class mail, shall mail to each debtor
6-5 at the last known address on file with the creditor a notice that
6-6 states:
6-7 (1) that the creditor has purchased or will purchase
6-8 collateral protection insurance on behalf of the debtor and at the
6-9 debtor's expense as provided by the credit agreement;
6-10 (2) the type of insurance that the creditor has
6-11 obtained or will obtain, the extent of the coverage, and whose
6-12 interest the policy protects;
6-13 (3) the beginning and ending dates of the policy
6-14 period;
6-15 (4) the total cost of the policy to the debtor;
6-16 (5) the annual interest rate charged on the cost of
6-17 insurance if that rate is different from the rate charged in the
6-18 related credit transaction;
6-19 (6) the manner in which the debtor may pay the cost of
6-20 insurance, interest, or finance charge relating to the purchase of
6-21 the collateral protection insurance; and
6-22 (7) at the option of the creditor, other repayment
6-23 options to which the debtor has agreed in the original credit
6-24 transaction.
6-25 (c) The creditor shall mail the notice required under
6-26 Subsection (b) to each person who is a cosigner or guarantor to the
7-1 debt, if the last known address of that person differs from the
7-2 last known address of the debtor.
7-3 (d) The creditor may delegate the notice requirements under
7-4 Subsections (b) and (c) to the insurer or the insurer's agent.
7-5 (e) The notice required by Subsection (b) must be printed in
7-6 type that is:
7-7 (1) underlined;
7-8 (2) in all capital letters;
7-9 (3) in all bold letters; or
7-10 (4) otherwise conspicuous.
7-11 (f) If the required notice to any debtor, cosigner, or
7-12 guarantor is returned to the creditor undelivered, the creditor
7-13 shall:
7-14 (1) locate the person by using the procedures the
7-15 creditor regularly uses for locating debtors; and
7-16 (2) mail a second notice at the time the person is
7-17 located.
7-18 (g) The terms for payment of the costs of the collateral
7-19 protection insurance, including interest and any other charges
7-20 actually incurred that the creditor may impose in connection with
7-21 the placement of the collateral protection insurance, must include
7-22 one or more of the following:
7-23 (1) a final balloon payment on or before the 30th day
7-24 after the date of the last scheduled payment required by the credit
7-25 agreement;
7-26 (2) full amortization over the term of the credit
8-1 transaction, the term of the collateral protection insurance
8-2 coverage, or the term for which the amortization is used by the
8-3 creditor; or
8-4 (3) any other repayment terms agreed to by a debtor in
8-5 the original credit transaction.
8-6 Sec. 307.053. AMORTIZATION OF DEBT. If any form of
8-7 amortization is used by the creditor, the creditor shall send to
8-8 each debtor notice of the terms of the amortization and any change
8-9 in the debtor's periodic payment.
8-10 Sec. 307.054. CANCELLATION OF COLLATERAL PROTECTION
8-11 INSURANCE. A debtor may at any time cause the cancellation of
8-12 collateral protection insurance by providing proper evidence to the
8-13 creditor that the debtor has obtained insurance as required by the
8-14 credit agreement. If a debtor provides the creditor with proper
8-15 evidence that the debtor had insurance on the collateral as
8-16 required by the credit agreement on or before the date the
8-17 collateral protection insurance is effective and that the debtor
8-18 continues to have insurance on the collateral as required by the
8-19 credit agreement, the creditor shall cancel the insurance that it
8-20 purchased and may not charge the debtor any costs, interest, or
8-21 other charges in connection with the insurance.
8-22 Sec. 307.055. REFUND OF UNEARNED PREMIUMS. (a) On the date
8-23 the collateral protection insurance is canceled or expires, the
8-24 amount of unearned premiums, as computed by the Texas Automobile
8-25 Rules and Rating Manual for collateral to which that manual applies
8-26 and pro rata for all other types of collateral, shall be refunded
9-1 to the creditor. Except as otherwise provided in Subsection (b),
9-2 not later than the 14th day after the date the creditor receives
9-3 the refund, the creditor shall distribute a refund of unearned
9-4 premiums by any method selected by the creditor, including:
9-5 (1) payment to the debtor by check; or
9-6 (2) an adjustment to a credit transaction of the
9-7 debtor.
9-8 (b) If not later than the 28th day after the date the
9-9 creditor receives the refund the creditor distributes the refund of
9-10 the unearned premiums by an adjustment to a credit transaction of
9-11 the debtor that is made effective not later than the 14th day after
9-12 the date the creditor receives the refund, the creditor shall be in
9-13 compliance with this section.
9-14 Sec. 307.056. CHOICE OF CARRIER. Collateral protection
9-15 insurance may be placed with an insurer that is authorized to write
9-16 insurance in this state or an eligible surplus lines insurer
9-17 selected by the creditor. The insurance shall be evidenced by an
9-18 individual policy or a certificate of insurance.
9-19 Sec. 307.057. CREDITOR LIABILITY. (a) A creditor, its
9-20 insurer, or the insurer's agent that places collateral protection
9-21 insurance in substantial compliance with the terms of this chapter
9-22 is not directly or indirectly liable to a debtor, cosigner, or
9-23 guarantor or any other person in connection with the placement of
9-24 the collateral protection insurance.
9-25 (b) This chapter does not impose a fiduciary relationship
9-26 between the creditor and debtor. Placement of collateral
10-1 protection insurance is for the principal purpose of protecting the
10-2 interest of the creditor if the debtor fails to insure collateral
10-3 as required by the credit agreement.
10-4 (c) A creditor is not required under this chapter to
10-5 purchase collateral protection insurance or to otherwise insure
10-6 collateral. A creditor is not liable to a debtor or any other
10-7 person for failing to purchase collateral protection insurance,
10-8 failing to purchase a certain amount or level of coverage of
10-9 collateral protection insurance, or purchasing collateral
10-10 protection insurance that protects only the interests of the
10-11 creditor or less than all the interest of a debtor. This chapter
10-12 does not create a cause of action for damages on behalf of a debtor
10-13 or any other person in connection with the placement of collateral
10-14 protection insurance.
10-15 Sec. 307.058. RIGHTS OF CREDITOR AND DEBTOR. (a) The
10-16 obligations and rights of the creditor and debtor with respect to
10-17 the collateral under Chapters 1 through 9, Business & Commerce
10-18 Code, are not affected by this chapter.
10-19 (b) This chapter does not impair other remedies, rights, or
10-20 options available to a creditor under any law, rule, regulation,
10-21 ruling, court order, or agreement.
10-22 (c) This chapter does not impair or alter other requirements
10-23 of this code or other law that may apply to a credit transaction.
10-24 SECTION 2. The heading to Subchapter D, Chapter 341, Finance
10-25 Code, is amended to read as follows:
11-1 SUBCHAPTER D. ADVERTISING [AND INSURANCE] REQUIREMENTS
11-2 SECTION 3. Section 341.302, Finance Code, is repealed.
11-3 SECTION 4. This Act takes effect September 1, 2001, and
11-4 applies only to the placement of collateral protection insurance by
11-5 a creditor under a credit agreement entered into on or after the
11-6 effective date. A creditor that places collateral protection
11-7 insurance under a credit agreement entered into before the
11-8 effective date of this Act is governed by the applicable law in
11-9 effect before that date, and that law is continued in effect for
11-10 that purpose.
_______________________________ _______________________________
President of the Senate Speaker of the House
I hereby certify that S.B. No. 707 passed the Senate on
March 21, 2001, by a viva-voce vote; and that the Senate concurred
in House amendment on May 17, 2001, by a viva-voce vote.
_______________________________
Secretary of the Senate
I hereby certify that S.B. No. 707 passed the House, with
amendment, on May 11, 2001, by a non-record vote.
_______________________________
Chief Clerk of the House
Approved:
_______________________________
Date
_______________________________
Governor