1-1 By: Carona S.B. No. 707
1-2 (In the Senate - Filed February 14, 2001; February 15, 2001,
1-3 read first time and referred to Committee on Business and Commerce;
1-4 March 15, 2001, reported adversely, with favorable Committee
1-5 Substitute by the following vote: Yeas 7, Nays 0; March 15, 2001,
1-6 sent to printer.)
1-7 COMMITTEE SUBSTITUTE FOR S.B. No. 707 By: Carona
1-8 A BILL TO BE ENTITLED
1-9 AN ACT
1-10 relating to collateral protection insurance.
1-11 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
1-12 SECTION 1. Subtitle A, Title 4, Finance Code, is amended by
1-13 adding Chapter 307 to read as follows:
1-14 CHAPTER 307. COLLATERAL PROTECTION INSURANCE
1-15 SUBCHAPTER A. GENERAL PROVISIONS
1-16 Sec. 307.001. DEFINITIONS. In this chapter:
1-17 (1) "Collateral" means property pledged or used to
1-18 secure payment, repayment, or performance under a credit or lease
1-19 agreement, including personal property, real property, fixtures,
1-20 inventory, receivables, rights, or privileges.
1-21 (2) "Collateral protection insurance" means insurance
1-22 coverage described by Section 307.051.
1-23 (3) "Credit agreement" means a written document that
1-24 sets forth the terms of a credit transaction.
1-25 (4) "Credit transaction" means a transaction with
1-26 terms that require the payment of money, goods, services, property,
1-27 rights, or privileges on a future date and in which the obligation
1-28 for payment is secured by collateral.
1-29 (5) "Creditor" means a person who is a lender of money
1-30 or a vendor or lessor of goods, services, property, rights, or
1-31 privileges for which a payment is arranged through a credit
1-32 transaction and includes any successor to the rights, title,
1-33 interest, or liens of the lender, vendor, or lessor.
1-34 (6) "Debtor" means a borrower of money or a purchaser
1-35 or lessee of goods, services, property, rights, or privileges for
1-36 which payment is arranged through a credit agreement. The term
1-37 does not include a person who is not a primary obligor under a
1-38 credit transaction or who is not jointly and severally liable with
1-39 the debtor for the obligation.
1-40 (7) "Title insurance" means insurance that may be
1-41 issued only by persons regulated under Chapter 9, Insurance Code,
1-42 and that insures:
1-43 (A) a lender or owner against loss caused by:
1-44 (i) defective title held by the mortgagor
1-45 or owner or insured;
1-46 (ii) unknown mortgages or defective
1-47 recording of mortgages or liens on real property;
1-48 (iii) failure of any person to pay ad
1-49 valorem taxes resulting in a lien; or
1-50 (iv) failure to research properly title,
1-51 taxes, liens, or other matters relative to the validity of loans or
1-52 liens secured by real property or insurance; or
1-53 (B) the validity, enforceability, or priority of
1-54 any lien or title on real property.
1-55 (Sections 307.002-307.050 reserved for expansion)
1-56 SUBCHAPTER B. REQUIREMENTS FOR COLLATERAL PROTECTION INSURANCE
1-57 Sec. 307.051. COLLATERAL PROTECTION INSURANCE.
1-58 (a) Collateral protection insurance is insurance coverage that:
1-59 (1) is purchased by a creditor after the date of a
1-60 credit agreement;
1-61 (2) provides monetary protection against loss of or
1-62 damage to the collateral or against liability arising out of the
1-63 ownership or use of the collateral; and
1-64 (3) is purchased according to the terms of a credit
2-1 agreement as a result of a debtor's failure to provide evidence of
2-2 insurance or failure to obtain or maintain insurance covering the
2-3 collateral, with the costs of the collateral protection insurance,
2-4 including interest and any other charges incurred by the creditor
2-5 in connection with the placement of collateral protection
2-6 insurance, payable by a debtor.
2-7 (b) Collateral protection insurance includes insurance
2-8 coverage that is purchased to protect:
2-9 (1) only the interest of the creditor; or
2-10 (2) both the interest of the creditor and some or all
2-11 of the interest of a debtor.
2-12 (c) The term of a collateral protection insurance policy may
2-13 be:
2-14 (1) not greater than 12 months; or
2-15 (2) the remaining term of the credit transaction if
2-16 the remaining term is less than or equal to 24 months.
2-17 (d) The effective date of coverage for collateral protection
2-18 insurance may be earlier than the date of issuance of the policy.
2-19 The effective date may not be earlier than the date the collateral
2-20 became uninsured.
2-21 (e) A premium for collateral protection insurance may not be
2-22 based on an amount that exceeds the actual amount of unpaid
2-23 indebtedness of the debtor as of the effective date of the policy.
2-24 This condition applies without regard to whether the coverage under
2-25 the policy limits the insurer's liability to:
2-26 (1) the amount of unpaid debt;
2-27 (2) the cash value of the collateral; or
2-28 (3) the cost of repair of the collateral.
2-29 (f) Collateral protection insurance does not include
2-30 insurance coverage that:
2-31 (1) is purchased by the creditor for which the debtor
2-32 is not charged;
2-33 (2) is purchased at the inception of a credit
2-34 transaction in which the debtor is a party or to which the debtor
2-35 agrees, whether or not costs are included in a payment plan under
2-36 the credit transaction;
2-37 (3) is maintained by the creditor for the protection
2-38 of collateral that comes into the possession or control of the
2-39 creditor through foreclosure, repossession, or a similar event;
2-40 (4) is credit insurance, mortgage protection
2-41 insurance, insurance issued to cover the life or health of the
2-42 debtor, or any other insurance maintained to cover the inability or
2-43 failure of the debtor to make payment under the credit agreement;
2-44 (5) is title insurance; or
2-45 (6) is flood insurance required to be placed by
2-46 creditors under Section 102, National Flood Insurance Act of 1968
2-47 (42 U.S.C. Section 4012a).
2-48 Sec. 307.052. CREDITOR DUTIES. (a) A creditor who requires
2-49 collateral protection insurance that is paid for directly or
2-50 indirectly by a debtor may place collateral protection insurance
2-51 if:
2-52 (1) the debtor has entered into a credit transaction
2-53 with the creditor for which a credit agreement exists;
2-54 (2) the credit agreement requires the debtor to
2-55 maintain insurance on the collateral; and
2-56 (3) a notice has been included in the credit agreement
2-57 or a separate document provided to the debtor at the time the
2-58 credit agreement is executed that states that:
2-59 (A) the debtor is required to:
2-60 (i) keep the collateral insured against
2-61 damage in the amount equal to the debtor's indebtedness to the
2-62 creditor;
2-63 (ii) purchase the insurance from an
2-64 insurer that is authorized to do business in this state or an
2-65 eligible surplus lines insurer; and
2-66 (iii) name the creditor as the person to
2-67 be paid under the policy in the event of a loss;
2-68 (B) the debtor must, if required by the
2-69 creditor, deliver to the creditor a copy of the policy and proof of
3-1 the payment of premiums; and
3-2 (C) if the debtor fails to meet any requirement
3-3 listed in Paragraph (A) or (B), the creditor may obtain collateral
3-4 protection insurance on behalf of the debtor at the debtor's
3-5 expense.
3-6 (b) Not later than the 31st day after the date the
3-7 collateral protection insurance is charged to the debtor, the
3-8 creditor, by prepaid, first class mail, shall mail to each debtor
3-9 at the last known address on file with the creditor a notice that
3-10 states:
3-11 (1) that the creditor has purchased or will purchase
3-12 collateral protection insurance on behalf of the debtor and at the
3-13 debtor's expense as provided by the credit agreement;
3-14 (2) the type of insurance that the creditor has
3-15 obtained or will obtain, the extent of the coverage, and whose
3-16 interest the policy protects;
3-17 (3) the beginning and ending dates of the policy
3-18 period;
3-19 (4) the total cost of the policy to the debtor;
3-20 (5) the annual interest rate charged on the cost of
3-21 insurance if that rate is different from the rate charged in the
3-22 related credit transaction;
3-23 (6) the manner in which the debtor may pay the cost of
3-24 insurance, interest, or finance charge relating to the purchase of
3-25 the collateral protection insurance; and
3-26 (7) at the option of the creditor, other repayment
3-27 options to which the debtor has agreed in the original credit
3-28 transaction.
3-29 (c) The creditor shall mail the notice required under
3-30 Subsection (b) to each person who is a cosigner or guarantor to the
3-31 debt, if the last known address of that person differs from the
3-32 last known address of the debtor.
3-33 (d) The creditor may delegate the notice requirements under
3-34 Subsections (b) and (c) to the insurer or the insurer's agent.
3-35 (e) The notice required by Subsection (b) must be printed in
3-36 type that is:
3-37 (1) underlined;
3-38 (2) in all capital letters;
3-39 (3) in all bold letters; or
3-40 (4) otherwise conspicuous.
3-41 (f) If the required notice to any debtor, cosigner, or
3-42 guarantor is returned to the creditor undelivered, the creditor
3-43 shall:
3-44 (1) locate the person by using the procedures the
3-45 creditor regularly uses for locating debtors; and
3-46 (2) mail a second notice at the time the person is
3-47 located.
3-48 (g) The terms for payment of the costs of the collateral
3-49 protection insurance, including interest and any other charges
3-50 actually incurred that the creditor may impose in connection with
3-51 the placement of the collateral protection insurance, must include
3-52 one or more of the following:
3-53 (1) a final balloon payment on or before the 30th day
3-54 after the date of the last scheduled payment required by the credit
3-55 agreement;
3-56 (2) full amortization over the term of the credit
3-57 transaction, the term of the collateral protection insurance
3-58 coverage, or the term for which the amortization is used by the
3-59 creditor; or
3-60 (3) any other repayment terms agreed to by a debtor in
3-61 the original credit transaction.
3-62 Sec. 307.053. AMORTIZATION OF DEBT. If any form of
3-63 amortization is used by the creditor, the creditor shall send to
3-64 each debtor notice of the terms of the amortization and any change
3-65 in the debtor's periodic payment.
3-66 Sec. 307.054. CANCELLATION OF COLLATERAL PROTECTION
3-67 INSURANCE. A debtor may at any time cause the cancellation of
3-68 collateral protection insurance by providing proper evidence to the
3-69 creditor that the debtor has obtained insurance as required by the
4-1 credit agreement. If a debtor provides the creditor with proper
4-2 evidence that the debtor had insurance on the collateral as
4-3 required by the credit agreement on or before the date the
4-4 collateral protection insurance is effective and that the debtor
4-5 continues to have insurance on the collateral as required by the
4-6 credit agreement, the creditor shall cancel the insurance that it
4-7 purchased and may not charge the debtor any costs, interest, or
4-8 other charges in connection with the insurance.
4-9 Sec. 307.055. REFUND OF UNEARNED PREMIUMS. On the date the
4-10 collateral protection insurance is canceled or expires, the amount
4-11 of unearned premiums, as computed by the Texas Automobile Rules and
4-12 Rating Manual for collateral to which that manual applies and pro
4-13 rata for all other types of collateral, shall be refunded to the
4-14 creditor. Not later than the 14th day after the date the creditor
4-15 receives the refund, the creditor shall distribute a refund of
4-16 unearned premiums by any method selected by the creditor,
4-17 including:
4-18 (1) payment to the debtor by check; or
4-19 (2) an adjustment to a credit transaction of the
4-20 debtor.
4-21 Sec. 307.056. CHOICE OF CARRIER. Collateral protection
4-22 insurance may be placed with an insurer that is authorized to write
4-23 insurance in this state or an eligible surplus lines insurer
4-24 selected by the creditor. The insurance shall be evidenced by an
4-25 individual policy or a certificate of insurance.
4-26 Sec. 307.057. CREDITOR LIABILITY. (a) A creditor, its
4-27 insurer, or the insurer's agent that places collateral protection
4-28 insurance in substantial compliance with the terms of this chapter
4-29 is not directly or indirectly liable to a debtor, cosigner, or
4-30 guarantor or any other person in connection with the placement of
4-31 the collateral protection insurance.
4-32 (b) This chapter does not impose a fiduciary relationship
4-33 between the creditor and debtor. Placement of collateral
4-34 protection insurance is for the principal purpose of protecting the
4-35 interest of the creditor if the debtor fails to insure collateral
4-36 as required by the credit agreement.
4-37 (c) A creditor is not required under this chapter to
4-38 purchase collateral protection insurance or to otherwise insure
4-39 collateral. A creditor is not liable to a debtor or any other
4-40 person for failing to purchase collateral protection insurance,
4-41 failing to purchase a certain amount or level of coverage of
4-42 collateral protection insurance, or purchasing collateral
4-43 protection insurance that protects only the interests of the
4-44 creditor or less than all the interest of a debtor. This chapter
4-45 does not create a cause of action for damages on behalf of a debtor
4-46 or any other person in connection with the placement of collateral
4-47 protection insurance.
4-48 Sec. 307.058. RIGHTS OF CREDITOR AND DEBTOR. (a) The
4-49 obligations and rights of the creditor and debtor with respect to
4-50 the collateral under Chapters 1 through 9, Business & Commerce
4-51 Code, are not affected by this chapter.
4-52 (b) This chapter does not impair other remedies, rights, or
4-53 options available to a creditor under any law, rule, regulation,
4-54 ruling, court order, or agreement.
4-55 (c) This chapter does not impair or alter other requirements
4-56 of this code or other law that may apply to a credit transaction.
4-57 SECTION 2. The heading to Subchapter D, Chapter 341, Finance
4-58 Code, is amended to read as follows:
4-59 SUBCHAPTER D. ADVERTISING [AND INSURANCE] REQUIREMENTS
4-60 SECTION 3. Section 341.302, Finance Code, is repealed.
4-61 SECTION 4. This Act takes effect September 1, 2001, and
4-62 applies only to the placement of collateral protection insurance by
4-63 a creditor under a credit agreement entered into on or after the
4-64 effective date. A creditor that places collateral protection
4-65 insurance under a credit agreement entered into before the
4-66 effective date of this Act is governed by the applicable law in
4-67 effect before that date, and that law is continued in effect for
4-68 that purpose.
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