HBA-TYH H.B. 3714 76(R) BILL ANALYSIS Office of House Bill AnalysisH.B. 3714 By: Shields Financial Institutions 4/15/1999 Introduced BACKGROUND AND PURPOSE Lenders who secure their loans by a lien on personal property (collateral) depend on the value of the property to ensure the principal of the loan will be paid if the borrower defaults on the loan. However, if the property is stolen or destroyed, the lender no longer has any means of ensuring repayment of the principal. Some lenders require borrowers to obtain insurance on the collateral and list the lender as the beneficiary of the insurance. There are currently no rules regulating collateral protection insurance. H.B. 3714 establishes rules for lenders to ensure collateral is insured against loss at the most reasonable rate to the consumer. RULEMAKING AUTHORITY It is the opinion of the Office of House Bill Analysis that this bill does not expressly delegate any additional rulemaking authority to a state officer, department, agency, or institution. SECTION BY SECTION ANALYSIS SECTION 1. Amends the Insurance Code by adding Chapter 27, as follows: Sec. 1. SHORT TITLE. Authorizes this act to be cited as the Collateral Protection Insurance Act, concerning the protection of collateral pledged to ensure payment or performance under a credit agreement. Sec. 5. DEFINITIONS. Defines "collateral," "collateral protection insurance," "credit agreement," "credit transaction," "creditor," and "debtor." Sec. 10. PLACEMENT OF COLLATERAL PROTECTION INSURANCE. Authorizes a creditor to place collateral protection insurance provided that the debtor has entered into a credit transaction with the creditor, the credit transaction has been reduced to a credit agreement which requires the debtor to maintain insurance, and a notice containing specified language has been provided to the debtor. Sec. 15. NOTICE OF PURCHASE OF COLLATERAL PROTECTION INSURANCE; REPAYMENT TERMS. Requires the creditor, within 30 calendar days following the purchase date of collateral protection insurance, to mail or have mailed to the debtor at the last known address on file with the creditor, a notice entitled "Notice of Placement of Insurance" in a form substantially similar to the specified format. Requires the terms for repayment of the costs of the collateral protection insurance, which is required to include interest and any other charges imposed by the creditor in connection with the placement of the collateral protection insurance, to include one or more of the enumerated payment methods. Sec. 20. NOTICE OF AMORTIZATION. Requires the creditor, if any form of amortization is used by the creditor, to send to the debtor notice of the terms of the amortization and change in the debtor's periodic payment. Sec. 25. CANCELLATION OF COLLATERAL PROTECTION INSURANCE. Authorizes a debtor at any time to cause the cancellation of collateral protection insurance by providing proper evidence to the creditor that the debtor has obtained insurance as required by the credit agreement. Provides that if a debtor provides the creditor with proper evidence that the debtor had insurance on the collateral as required by the credit agreement on or before the date the collateral protection insurance is effective and that the debtor continues to have insurance on the collateral as required by the credit agreement, the creditor is required to cancel the insurance that it purchased and may not charge the debtor any costs, interest, or other charges in connection with the insurance. Sec. 30. UNEARNED PREMIUMS. Provides that upon cancellation or expiration of collateral protection insurance, the amount of unearned premiums, if any, as calculated in accordance with the Texas Automobile Manual and/or the policy filed by the insurer with the Texas Department of Insurance (department), is required to be refunded to the creditor. Authorizes a refund of unearned premiums to be credited, by the creditor, to the debtor's obligation under the credit agreement or distributed directly to the debtor by check or other means. Sec. 35. SELECTION OF INSURANCE CARRIER. Authorizes collateral protection insurance to be placed with any insurance carrier selected by the creditor that is authorized to underwrite collateral protection insurance by the department. Requires the insurance to be evidenced by an individual policy or a certificate of insurance. Sec. 40. SUBSTANTIAL COMPLIANCE. Prohibits a creditor, its insurer or the insurer's agent that places collateral protection insurance in substantial compliance with the terms of this Act from being directly or indirectly liable in any manner to a debtor, co-signor, guarantor, or any other person, in connection with the placement of the collateral protection insurance. Requires notices required to be mailed under this Act to be mailed by United States Mail, first class, postage prepaid. Sec. 45. NO FIDUCIARY RELATIONSHIP. Provides that this Act does not impose a fiduciary relationship between the creditor and the debtor. Provides that placement of collateral protection insurance is for the sole purpose of protecting the interest of the creditor when the debtor fails to insure collateral as required by the credit agreement. Sec. 50. NO CAUSE OF ACTION CREATED. Provides that a creditor is not, by virtue of this Act, required to purchase collateral protection insurance or to otherwise insure collateral. Prohibits a creditor, by virtue of this Act, from being liable to a debtor or to any other person for not purchasing collateral protection insurance, as a result of the amount or level of coverage of collateral protection insurance purchased by the creditor, or because the creditor purchased collateral protection insurance that protects only the interests of the creditor or less than all of the interest of the debtor. Prohibits this Act from being deemed to create a cause of action for damages on behalf of the debtor or any other person in connection with the placement of collateral protection insurance. Sec. 55. UNIFORM COMMERCIAL CODE. Provides that the obligations and rights of the creditor and the debtor with respect to the collateral as provided by the Texas Uniform Commercial Code are not affected by this Act. Sec. 60. SEVERABILITY; NO IMPAIRMENT OF CREDITOR'S RIGHTS. Prohibits this Act from impairing any other remedies, rights, or options available to a creditor pursuant to any law, regulation, ruling, court order, contract, or agreement. Sec. 65. COVERAGE OF ACT. Requires substantial compliance with the provisions of this Act to be mandatory for the placement of collateral protection insurance in this state by a creditor pursuant to a credit agreement entered into on or after September 30, 1999. Prohibits any provision of this Act from being held or applied against a creditor in connection with collateral protection insurance placed prior to September 30, 1999. Requires a creditor that places collateral protection insurance pursuant to a credit agreement entered into prior to September 30, 1999 to have available to it all of the rights provided by this Act if the creditor is in substantial compliance with the provisions of this Act other than the notice provision of Section 10. SECTION 2. Effective date: September 1, 1999. SECTION 3. Emergency clause. Chapter 27 (Health Benefit Plans for Children), Insurance Code, currently exists.