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Legal Updates






















 

Texas CPI Regulation - New Regulations

Texas has enacted SB707 amending the Texas Financial Code by the addition of a "Collateral Protection Act."  Under this new legislation, "collateral" is broadly defined to include vehicles, personal property, equipment, fixtures, inventory, receivables or real property secured by any credit or lease instrument.  We would like to highlight the following areas:

Coverage: Coverage may be single or dual interest, issued by either an admitted or approved surplus lines insurer.  This Act suggests that surplus lines is a legitimate option for Auto programs that cannot be placed in the admitted market.  Due to a lack of admitted capacity, surplus lines has been regularly used in the Mortgage Fire industry for years.   Certificate term shall not exceed 12 months or the remaining term of the credit transaction if less than or equal to 24 months.  The effective date of CPI coverage may be earlier than the date of issuance of the policy.

Notices: Within 31 days after CPI is charged, notice must be sent by first class mail.  Notice must go to all co-signors or guarantors (if at a different address).  If any notice is returned undelivered, the creditor shall locate the person using their regular procedures for locating debtors and mail a second notice to that location.  Notices must be printed in type that is underlined, in all CAPITAL letters, in all bold letters, or otherwise conspicuous.

Premium: Cost of collateral protection includes any other charges incurred by the creditor in connection with the placement of collateral protection insurance, payable by a debtor.  Premium may not be based on an amount that exceeds the actual amount of indebtedness as of the effective date of the coverage, without regard to whether the coverage limits liability to: the amount of indebtedness, cost to repair, or Actual Cash Value.

Premium Refunds: Upon cancellation, unearned premium refunds on Auto business shall continue to follow the Texas Auto Rules and Rating Manual.  Refunds shall be prorata for all other collateral.  This rule would apply to surplus lines as well as admitted policies.

Effective Date: This Act applies to certificates issued or renewed on or after September 1, 2001.  If the premium charged for any such certificate was not based upon indebtedness, then the certificate should be canceled and new certificate issued based on indebtedness.

Special Implications for CPI: The advent of this Act creates yet another state requiring unique state specific language for warning letters; not unlike states such as Missouri, New Jersey, Tennessee, and West Virginia.

Special Implications for Forced Placed Hazard (Mortgage Fire): The inclusion of real property within the definition of collateral presents two uniques issue for most Mortgage Fire programs:

  1. It is not uncommon for mortgage lenders to insure to value (i.e. appraised value, market value or last known amount of insurance).  The Act states that premium may not be based upon an amount in excess of the indebtedness.  One might conclude that the Act prohibits a lender from insuring for more than the indebtedness.  This may require further research.  The prudent interpretation is that the Limit of Liability (Amount of Insurance) may not exceed the amount of indebtedness.
  2. The Mortgage Fire industry has seen a lack of uniformity in the treatment of debtor notification and letter cycles.  Irrespective of the location of lender, all credit agreements secured by properties located within the state of Texas must comply with the Act.

This Act creates a safe harbor for creditors, insurers, and agents.  Every agent with exposures in Texas should review and become familiar with this Act.  Loan Protector maintains a state-by-state survey of laws regarding collateral protection insurance on our web site.

Click here for the full text of the Act.

 

While Loan Protector cannot offer legal advice, we felt it would be useful to our servicing clients to be aware of up-to-date legal issues regarding collateral protection insurance.

This update cannot be considered a complete and definitive source of the new Texas CPI Act.  Please consult with competent local counsel.