HBA-LJP C.S.H.B. 540 77(R) BILL ANALYSIS Office of House Bill AnalysisC.S.H.B. 540 By: Shields Financial Institutions 3/23/2001 Committee Report (Substituted) BACKGROUND AND PURPOSE Some creditors require debtors to obtain insurance on collateral and list the creditor as the beneficiary of the insurance to ensure the repayment of the principal of a loan. Current law regulates the notice and payment procedures of collateral protection insurance, but there are no laws regulating liability, cancellation, and other aspects of collateral protection insurance. C.S.H.B. 540 establishes additional regulations for collateral protection insurance. 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. ANALYSIS C.S.H.B. 540 amends the Finance Code to regulate the coverage, term of policy, and conditions of purchase of collateral protection insurance (insurance) (Sec. 307.051). The insurance is for the principal purpose of protecting the interest of the creditor if the debtor fails to insure collateral as required by a credit agreement and the decision by the creditor to require the insurance is optional (Sec. 307.057). When a creditor requires insurance that is paid for directly or indirectly by the debtor, the bill authorizes the creditor to place insurance, under stipulated conditions, with an authorized insurer or eligible surplus lines insurer (Secs. 307.052 and 307.056). In a situation in which the creditor requires the debtor to obtain insurance or if the debtor fails to do so and the creditor obtains the insurance on behalf of the debtor at the debtor's expense, the bill requires the creditor to notify the debtor and any person who is a cosigner or guarantor to the debt by mail not later than the 31st day after the date the insurance is charged the debtor. The bill authorizes the creditor to delegate these notice requirements to the insurer or the insurer's agent. If this notice is returned to the creditor undelivered, the creditor is required to locate the person using regular locating procedures and to mail a second notice once the person is located. The terms for repayment to the creditor of the costs of the insurance must include a balloon payment, full amortization, or any other repayment terms agreed to by a debtor in the original credit transaction (Sec. 307.052). If amortization is used by the creditor, the bill requires the creditor to send the debtor a notice of its terms and any change in the debtor's periodic payment (Sec. 307.053). A debtor may at any time cause the cancellation of the insurance obtained by the creditor if the debtor has obtained insurance. If a debtor provides the creditor with proper evidence that the debtor has obtained insurance on or before the date the insurance is effective, then the bill requires the creditor to cancel the insurance it obtained and prohibits the creditor from billing certain charges (Sec. 307.054). The bill provides that according to stipulated calculations, the amount of unearned premiums that is required to be refunded to the creditor on the date the insurance is canceled or expires. The bill requires the creditor to distribute this refund directly to the debtor by any method selected by the creditor, including by check or other means, within 14 days after the creditor receives the refund (Sec. 307.055). A creditor, its insurer, or the insurer's agents that place insurance in compliance with this bill are not directly or indirectly liable to a debtor, cosigner, guarantor, or any other person in connection with the placement of the insurance. The bill does not impose a fiduciary relationship between the creditor and the debtor. The bill does not create a cause of action for damages on behalf of the debtor or any other person in connection with the placement of insurance (Sec. 307.057). EFFECTIVE DATE September 1, 2001. COMPARISON OF ORIGINAL TO SUBSTITUTE C.S.H.B. 540 differs from the original by setting forth provisions for the effective date and premiums of collateral protection insurance (insurance) and by placing restrictions on the length of an insurance policy, rather than allowing it to extend to the full term of the transaction. The substitute removes the prohibition of a creditor from obtaining insurance following foreclosure, repossession, or a similar event in which the creditor gains possession or control over the collateral (Sec. 307.051). C.S.H.B. 540 replaces the time period, not earlier than the 60th day before and not later than the 10th day after the insurance is purchased, with not later than the 31st day after the date the collateral insurance is charged to the debtor, during which a creditor is required to notify the debtor and any other person that insurance has been obtained on the behalf of the debtor. The substitute provides that the creditor must send the required notices to any person who is a cosigner or guarantor to the debt, in addition to the debtor, and authorizes the creditor to delegate notice requirements to the insurer or the insurer's agent. The substitute modifies the original to allow a repayment to a creditor of the costs of insurance to be in other terms, other than a balloon payment or full amortization, that is agreed to by a debtor in the original credit transaction (Sec. 307.052). C.S.H.B. 540 no longer recognizes calculations of the amount of unearned premiums contained in an insurance policy when determining the amount to be returned to the creditor upon cancellation or expiration of the insurance (Sec. 307.055). The substitute provides that the placement of insurance is for the principal interest, rather than the sole interest, of protecting the creditor if the debtor fails to insure collateral as required by the credit agreement (Sec. 307.057).