By Carona S.B. No. 707
77R6202 MXM-F
A BILL TO BE ENTITLED
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,
2-1 interest, or liens of the lender, vendor, or lessor.
2-2 (6) "Debtor" means a borrower of money or a purchaser
2-3 or lessee of goods, services, property, rights, or privileges for
2-4 which payment is arranged through a credit agreement. The term
2-5 does not include a person who is not a primary obligor under a
2-6 credit transaction or who is not jointly and severally liable with
2-7 the debtor for the obligation.
2-8 (7) "Title insurance" means insurance that may be
2-9 issued only by persons regulated under Chapter 9, Insurance Code,
2-10 and that insures:
2-11 (A) a lender or owner against loss caused by:
2-12 (i) defective title held by the mortgagor
2-13 or owner or insured;
2-14 (ii) unknown mortgages or defective
2-15 recording of mortgages or liens on real property;
2-16 (iii) failure of any person to pay ad
2-17 valorem taxes resulting in a lien; or
2-18 (iv) failure to research properly title,
2-19 taxes, liens, or other matters relative to the validity of loans or
2-20 liens secured by real property or insurance; or
2-21 (B) the validity, enforceability, or priority of
2-22 any lien or title on real property.
2-23 (Sections 307.002-307.050 reserved for expansion)
2-24 SUBCHAPTER B. REQUIREMENTS FOR COLLATERAL PROTECTION INSURANCE
2-25 Sec. 307.051. COLLATERAL PROTECTION INSURANCE.
2-26 (a) Collateral protection insurance is insurance coverage that:
2-27 (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 maintain adequate 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) 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
3-27 based on an amount that exceeds the actual amount of unpaid
4-1 indebtedness of the debtor as of the effective date of the policy.
4-2 This condition applies without regard to whether the coverage under
4-3 the policy limits the insurer's liability to:
4-4 (1) the amount of unpaid debt;
4-5 (2) the cash value of the collateral; or
4-6 (3) the cost of repair of the collateral.
4-7 (f) Collateral protection insurance does not include
4-8 insurance coverage that:
4-9 (1) is purchased by the creditor for which the debtor
4-10 is not charged;
4-11 (2) is purchased at the inception of a credit
4-12 transaction in which the debtor is a party or to which the debtor
4-13 agrees, whether or not costs are included in a payment plan under
4-14 the credit transaction;
4-15 (3) is maintained by the creditor for the protection
4-16 of collateral that comes into the possession or control of the
4-17 creditor through foreclosure, repossession, or a similar event;
4-18 (4) is credit insurance, mortgage protection
4-19 insurance, insurance issued to cover the life or health of the
4-20 debtor, or any other insurance maintained to cover the inability or
4-21 failure of the debtor to make payment under the credit agreement;
4-22 (5) is title insurance; or
4-23 (6) is flood insurance required to be placed by
4-24 creditors under Section 102, National Flood Insurance Act of 1968
4-25 (42 U.S.C. Section 4012a).
4-26 Sec. 307.052. CREDITOR DUTIES. (a) A creditor who requires
4-27 collateral protection insurance that is paid for directly or
5-1 indirectly by a debtor may place collateral protection insurance
5-2 if:
5-3 (1) the debtor has entered into a credit transaction
5-4 with the creditor for which a credit agreement exists;
5-5 (2) the credit agreement requires the debtor to
5-6 maintain insurance on the collateral; and
5-7 (3) a notice has been included in the credit agreement
5-8 or a separate document provided to the debtor at the time the
5-9 credit agreement is executed that states that:
5-10 (A) the debtor is required to:
5-11 (i) keep the collateral insured against
5-12 damage in the amount equal to the debtor's indebtedness to the
5-13 creditor;
5-14 (ii) purchase the insurance from an
5-15 insurer that is authorized to do business in this state or an
5-16 eligible surplus lines insurer that is approved by the creditor;
5-17 (iii) name the creditor as the person to
5-18 be paid under the policy in the event of a loss; and
5-19 (iv) deliver to the creditor a copy of the
5-20 policy and, if required by the creditor, proof of the payment of
5-21 premiums; and
5-22 (B) if the debtor fails to meet any requirement
5-23 listed in Paragraph (A), the creditor may obtain collateral
5-24 protection insurance on behalf of the debtor at the debtor's
5-25 expense.
5-26 (b) Not later than the 31st day after the date the
5-27 collateral protection insurance is charged to the debtor, the
6-1 creditor, by prepaid, first class mail, shall mail to each debtor
6-2 at the last known address on file with the creditor a notice that
6-3 states:
6-4 (1) that the creditor has purchased or will purchase
6-5 collateral protection insurance on behalf of the debtor and at the
6-6 debtor's expense as provided by the credit agreement;
6-7 (2) the type of insurance that the creditor has
6-8 obtained or will obtain, the extent of the coverage, and whose
6-9 interest the policy protects;
6-10 (3) the beginning and ending dates of the policy
6-11 period;
6-12 (4) the total cost of the policy to the debtor;
6-13 (5) the annual interest rate charged on the cost of
6-14 insurance if that rate is different from the rate charged in the
6-15 related credit transaction;
6-16 (6) the manner in which the debtor may pay the cost of
6-17 insurance, interest, or finance charge relating to the purchase of
6-18 the collateral protection insurance; and
6-19 (7) at the option of the creditor, other repayment
6-20 options to which the debtor has agreed in the original credit
6-21 transaction.
6-22 (c) The creditor shall mail the notice required under
6-23 Subsection (b) to each person who is a cosigner or guarantor to the
6-24 debt, if the last known address of that person differs from the
6-25 last known address of the debtor.
6-26 (d) The creditor may delegate the notice requirements under
6-27 Subsections (b) and (c) to the insurer or the insurer's agent.
7-1 (e) The notice required by Subsection (b) must be printed in
7-2 type that is:
7-3 (1) underlined;
7-4 (2) in all capital letters;
7-5 (3) in all bold letters; or
7-6 (4) otherwise conspicuous.
7-7 (f) If the required notice to any debtor, cosigner, or
7-8 guarantor is returned to the creditor undelivered, the creditor
7-9 shall:
7-10 (1) locate the person by using the procedures the
7-11 creditor regularly uses for locating debtors; and
7-12 (2) mail a second notice at the time the person is
7-13 located.
7-14 (g) The terms for payment of the costs of the collateral
7-15 protection insurance, including interest and any other charges
7-16 actually incurred that the creditor may impose in connection with
7-17 the placement of the collateral protection insurance, must include
7-18 one or more of the following:
7-19 (1) a final balloon payment on or before the 30th day
7-20 after the date of the last scheduled payment required by the credit
7-21 agreement;
7-22 (2) full amortization over the term of the credit
7-23 transaction, the term of the collateral protection insurance
7-24 coverage, or the term for which the amortization is used by the
7-25 creditor; or
7-26 (3) any other repayment terms agreed to by a debtor in
7-27 the original credit transaction.
8-1 Sec. 307.053. AMORTIZATION OF DEBT. If any form of
8-2 amortization is used by the creditor, the creditor shall send to
8-3 each debtor notice of the terms of the amortization and any change
8-4 in the debtor's periodic payment.
8-5 Sec. 307.054. CANCELLATION OF COLLATERAL PROTECTION
8-6 INSURANCE. A debtor may at any time cause the cancellation of
8-7 collateral protection insurance by providing proper evidence to the
8-8 creditor that the debtor has obtained insurance as required by the
8-9 credit agreement. If a debtor provides the creditor with proper
8-10 evidence that the debtor had insurance on the collateral as
8-11 required by the credit agreement on or before the date the
8-12 collateral protection insurance is effective and that the debtor
8-13 continues to have insurance on the collateral as required by the
8-14 credit agreement, the creditor shall cancel the insurance that it
8-15 purchased and may not charge the debtor any costs, interest, or
8-16 other charges in connection with the insurance.
8-17 Sec. 307.055. REFUND OF UNEARNED PREMIUMS. On the date the
8-18 collateral protection insurance is canceled or expires, the amount
8-19 of unearned premiums, as computed by the Texas Automobile Rules and
8-20 Rating Manual or the policy filed by the insurer with the
8-21 department, shall be refunded to the creditor. Not later than the
8-22 14th day after the date the creditor receives the refund, the
8-23 creditor shall distribute a refund of unearned premiums by any
8-24 method selected by the creditor, including:
8-25 (1) payment to the debtor by check; or
8-26 (2) an adjustment to a credit transaction of the
8-27 debtor.
9-1 Sec. 307.056. CHOICE OF CARRIER. Collateral protection
9-2 insurance may be placed with an insurer that is authorized to write
9-3 insurance in this state or an eligible surplus lines insurer
9-4 selected by the creditor. The insurance shall be evidenced by an
9-5 individual policy or a certificate of insurance.
9-6 Sec. 307.057. CREDITOR LIABILITY. (a) A creditor, its
9-7 insurer, or the insurer's agent that places collateral protection
9-8 insurance in substantial compliance with the terms of this chapter
9-9 is not directly or indirectly liable to a debtor, cosigner,
9-10 guarantor, or any other person in connection with the placement of
9-11 the collateral protection insurance.
9-12 (b) This chapter does not impose a fiduciary relationship
9-13 between the creditor and debtor. Placement of collateral
9-14 protection insurance is for the principal purpose of protecting the
9-15 interest of the creditor if the debtor fails to insure collateral
9-16 as required by the credit agreement.
9-17 (c) A creditor is not required under this chapter to
9-18 purchase collateral protection insurance or to otherwise insure
9-19 collateral. A creditor is not liable to a debtor or any other
9-20 person for failing to purchase collateral protection insurance,
9-21 failing to purchase a certain amount or level of coverage of
9-22 collateral protection insurance, or purchasing collateral
9-23 protection insurance that protects only the interests of the
9-24 creditor or less than all the interest of a debtor. This chapter
9-25 does not create a cause of action for damages on behalf of a debtor
9-26 or any other person in connection with the placement of collateral
9-27 protection insurance.
10-1 Sec. 307.058. RIGHTS OF CREDITOR AND DEBTOR. (a) The
10-2 obligations and rights of the creditor and debtor with respect to
10-3 the collateral under Chapters 1 through 9, Business & Commerce
10-4 Code, are not affected by this chapter.
10-5 (b) This chapter does not impair other remedies, rights, or
10-6 options available to a creditor under any law, rule, regulation,
10-7 ruling, court order, or agreement.
10-8 (c) This chapter does not impair or alter other requirements
10-9 of this code or other law that may apply to a credit transaction.
10-10 SECTION 2. The heading to Subchapter D, Chapter 341, Finance
10-11 Code, is amended to read as follows:
10-12 SUBCHAPTER D. ADVERTISING [AND INSURANCE] REQUIREMENTS
10-13 SECTION 3. Section 341.302, Finance Code, is repealed.
10-14 SECTION 4. This Act takes effect September 1, 2001, and
10-15 applies only to the placement of collateral protection insurance by
10-16 a creditor under a credit agreement entered into on or after the
10-17 effective date. A creditor that places collateral protection
10-18 insurance under a credit agreement entered into before the
10-19 effective date of this Act is governed by the applicable law in
10-20 effect before that date, and that law is continued in effect for
10-21 that purpose.