(1) If a check is accepted, the licensee must require that the check be made payable to the actual name of the company printed on the license and must be dated the day the loan is made.

(2) The transaction must be documented by a written agreement signed by the borrower and the licensee. The agreement must contain the name of the licensee; the transaction date; the amount of the check; a statement of the total amount charged, expressed both as a dollar amount and as an annual percentage rate (APR); and the earliest date on which the check may be deposited. The agreement must also contain a notice of the name and address of the Office of Consumer Credit Commissioner and the telephone number of the consumer helpline. Additionally, the lender shall provide a notice to the consumer that reads as follows: "This cash advance is not intended to meet long-term financial needs. This loan should only be used to meet immediate short-term cash needs. Renewing the loan rather than paying the debt in full when due will require the payment of additional charges."

(3) The borrower shall have a right to prepay the loan and redeem the check at any time prior to the due date. If the loan is prepaid in full, the lender must refund any unearned finance charges.

(4) A check may not be held for more than 31 days and then subsequently presented to the bank for payment.

(5) The licensee must post a notice of the fee schedule for engaging in a payday or deferred presentment loan.

(f) Conditions. A lender may accept a check to secure payment of a payday loan if the lender complies with the following paragraphs.

(1) Duplicate and multiple loans. The provisions of Texas Finance Code, §342.501 and §83.851 of this title (relating to Duplication of Loans) apply to loans made under the authority of this section. In accordance with Texas Finance Code, §342.501, a lender and a borrower may renew a loan, but the loan must be converted from a single payment balloon loan to a declining balance installment note. Alternatively, the payday loan or deferred presentment transaction may be renewed without limitation to the number of renewals where the effect of the total amount of the interest charge would not exceed the total amount authorized by Texas Finance Code, §342.252 and §342.259 having due regard for the amount of the cash advance and the time the cash advance is outstanding. The result is that the acquisition charge may only be earned once in a month and the installment account handling charge may continue to be earned on a equivalent daily charge basis in accordance with the limitations of Texas Finance Code, Chapter 342, Subchapter F. In lieu of a renewal, a lender and a borrower may agree to extend the maturity date of the existing payday loan or deferred presentment transaction.

(2) Collection practices. A payday loan constitutes a credit relationship for all purposes, including collection. If a borrower defaults, including the return of the check to the licensee from a financial institution due to insufficient funds, closed account, or stop payment order, the licensee may pursue all legally available civil means to collect the debt. Collection practices must be in accordance with this chapter and with the Texas Debt Collection Practices Act, Texas Finance Code, §392.001 et seq.

(3) Fair lending. A lender must make a good faith effort to assess the borrower's ability to repay the payday loan or deferred presentment transaction under the loan terms.

§83.605.Limitation on Acquisition Charge.

For a Texas Finance Code, Chapter 342, Subchapter F loan with a term of one month or less, an acquisition charge may only be contracted for, charged, or collected once during a month to the same borrower for that loan, any refinancing of that loan, or any new loan made to the borrower within the same month.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on August 11, 2006.

TRD-200604235

Leslie L. Pettijohn

Commissioner

Office of Consumer Credit Commissioner

Earliest possible date of adoption: September 24, 2006

For further information, please call: (512) 936-7640

Subchapter G. INTEREST AND OTHER CHARGES ON SECONDARY MORTGAGE LOANS

7 TAC §§83.701 - 83.708

The Finance Commission of Texas (the commission) proposes new 7 TAC Chapter 83, Subchapter G, §§83.701 - 83.708, concerning Interest and Other Charges on Secondary Mortgage Loans.

These rules are being relocated and reorganized. The agency believes that the reorganization will benefit licensees in that these rules will be in a more logical location and order and will be easier to find. The new rules are substantially similar to the rules pending repeal, as found in 7 TAC Chapter 1, Subchapter G, §§1.701 - 1.708, concerning Interest and Other Charges on Secondary Mortgage Loans. The commission's proposed repeal of Subchapter G is published elsewhere in this issue of the Texas Register .

New 7 TAC §§83.701 - 83.708 outline the methods for calculating maximum interest and other charges, and additional interest for default and deferment under Texas Finance Code, Chapter 342, Subchapter G. Additionally, the rules prescribe procedures for these transactions.

Section 83.701 (current §1.701) describes the manner for determining the maximum rate or amount of interest by type of transaction.

Section 83.702 (current §1.702) details the treatment of odd periods of time, generally those less than a month in the first installment period, for calculating interest.

Section 83.702(b) contains some clarifying language related to the calculation of interest for periods of less than a full month.

Section 83.703 (current §1.703) clarifies the procedures for assessing and collecting default charges in connection with a Subchapter G loan.

Section 83.704 (current §1.704) explains the methods and procedures for calculating and collecting a deferment charge on a Subchapter G loan.

Subsections (a) and (d) of §83.704 have experienced substantial revisions. Concerning subsection (a), the definition of "deferment" has been changed so that it will be more consistent with the definition contained in 7 TAC §1.102. Further clarification and explanation have been provided in subsection (d), concerning the computations of deferment charges. However, the methods of calculation for deferment have not changed. In addition, subsection (g) has been added to provide a regulatory statement of the agency's position that a deferment charge must be waived on any payment that is covered by an insurance claim. This waiver is also authorized by subsection (e), but the agency believes that a separate, more definitive statement on this issue would benefit licensees.

Section 83.705 (current §1.705) enumerates additional charges that may be assessed on a Subchapter G loan after consummation of the loan.

Section 83.706 (current §1.706) enumerates additional charges that may be collected on or before the closing of a Subchapter G loan.

Section 83.706(4) has been revised in order to place into regulation the agency's policy position on this matter, which has been previously addressed in compliance bulletins. The revised language specifically states (in pertinent part) that "[a]n administrative fee is a prepaid interest charge . . . ."

Section 83.707 (current §1.707) discusses the treatment and applicability of other fees in the context of a Subchapter G loan.

Section 83.708 (current §1.708) addresses contracting for balloon payments on a Subchapter G loan.

Commissioner Pettijohn has also determined that for each year of the first five years §§83.701 - 83.708 are in effect, the public benefit anticipated as a result of the changes from the previously enacted version of these rules will be that the commission's rules will be more easily understood by licensees required to comply with the rules, and will be more easily enforced. The general substance of these rules has already been in effect, as the rules are being relocated with some substantive and technical corrections. However, the substantive corrections consist of updates required by law, placement of the agency's policy positions into regulation, clarifications, and revisions made for consistency purposes. Thus, there is no anticipated cost to persons who are required to comply with the new rules as proposed. There is no anticipated adverse economic effect on small or micro businesses. There will be no effect on individuals required to comply with the sections as proposed.

The statutory provisions (as currently in effect) affected by the proposal are contained in Texas Finance Code, Chapter 342.

§83.701.Maximum Interest Charge.

(a) Precomputed secondary mortgage loans. In a precomputed secondary mortgage loan, an authorized lender may contract for, charge, or receive an amount of interest that does not exceed the applicable simple interest rate authorized by Texas Finance Code, Chapter 303, Subchapter A. Prepaid interest is not permitted unless expressly authorized by statute (e.g., an administrative fee).

(b) Interest-bearing loans. In an interest-bearing secondary mortgage loan, an authorized lender may contract for, charge, or receive any rate of interest that does not exceed the applicable amount authorized by Texas Finance Code, Chapter 303, Subchapter A, as calculated under the true daily earnings method or the scheduled installment earnings method. Prepaid interest in the form of points, such as origination or discount points, may be contracted for, charged, or received by an originating lender, so long as the total amount of interest contracted for, charged, or received, when spread over the full term of the loan as permitted by Texas Finance Code, §302.101 does not exceed the applicable interest limit in Texas Finance Code, Chapter 303, Subchapter A.

(c) Method of calculation. An authorized lender making loans under Texas Finance Code, §342.301(c) may calculate the rate and amount of interest by any method of calculation as long as the amount of interest charged does not exceed the maximum rate or amount of interest set forth in Texas Finance Code, §342.301, calculated using the specified earnings methods contained in Texas Finance Code, §342.301.

§83.702.Treatment of Periods Less Than a Full Month.

(a) To calculate a period of time less than a full month on a precomputed loan:

(1) any period before the first installment due date that includes a part of a month longer than 15 days may be treated as a full month for interest calculation purposes; and

(2) any period before the first installment due date that includes a part of the month that is 15 days or less may not be treated as a full month for interest calculation purposes. The amount of interest for the period of 15 days or less must be calculated under the true daily earnings method. This amount may be added to the first installment or, alternatively, it may be allocated among all of the installments.

(1) Texas Credit Title method. Under this method, the odd days are determined by counting the number of days beyond one month from the date of the loan to the scheduled installment due date; or

(c) An authorized lender may not contract for or charge more than the maximum rate authorized by Texas Finance Code, Chapter 303, Subchapter A in calculating the interest charge for the additional odd days in the first installment period. An authorized lender may not charge more than the authorized lender contracted for in the loan.

§83.703.Default Charges.

(a) Precomputed loans. Additional interest for default may be charged on a precomputed secondary mortgage loan, whether regular or irregular, or on a secondary mortgage loan that employs the scheduled installment earnings method, to the extent it is authorized by Texas Finance Code, §342.302 or §342.305.

(b) Interest-bearing loans. Additional interest for default may be charged on an interest-bearing Texas Finance Code, Chapter 342, Subchapter G loan as authorized under Texas Finance Code, §342.302.

(c) Contract required. No default charge may be assessed, imposed, charged, or collected unless contracted for in writing by the parties.

(e) Missed payment covered by insurance. If any payment or partial payment in default is later paid by some form of insurance, such as credit disability insurance or collateral protection insurance, any prior assessment of additional interest for default must be waived.

(f) Pyramiding prohibited. An authorized lender seeking to assess additional interest for default on a precomputed secondary mortgage loan under Texas Finance Code, §342.302 or §342.305 must comply with the prohibition on the pyramiding of late charges set forth in the Federal Trade Commission Credit Practices Rule at 16 C.F.R. §444.4 or in Regulation AA, 12 C.F.R. Part 227, promulgated by the Board of Governors of the Federal Reserve Board, as applicable.

§83.704.Deferment.

(a) Definition. A deferment means the payment of an additional interest charge to defer the payment date of a scheduled payment on a contract. A deferment charge prescribed by this section may occur in a loan transaction that employs either the precomputed or the scheduled installment earnings methods of calculation. A separate deferment charge is not applicable to a loan transaction that employs the true daily earnings method since an extension of time would be calculated on elapsed daily charges, and the parties may agree to modify the terms of the transaction as long as the modification conforms to the requirements of Texas Finance Code, Chapter 342, Subchapter G.

(b) Bilateral or mutual deferment. A borrower and a lender may mutually agree to defer any scheduled installment. There is no limit on the number of bilateral deferments that can be made during the time that a loan contract is in effect. Bilateral or mutual deferments must be agreed upon in writing.

(c) Deferment notice. Each deferment must be noted on the account record at the time the deferment is made. A written notice containing the conditions of the deferment must be furnished to the borrower. The deferment notice shall include the name of the lender, the name of the borrower, the loan number, the date of the deferment, the installment or installments being deferred, the deferment period, the amount of the deferment charge, the balance on the account, and the date and amount of the next installment due. The signature of the borrower denotes the borrower's agreement to a bilateral deferment.

(d) Computation of deferment charge for regular transaction. Each deferment charge on a regular loan transaction shall be computed in accordance with the method prescribed by the loan contract. If the loan contract does not provide for a deferment charge, then no deferment charge may be assessed or collected. A lender may employ any of the prescribed computational methods described herein so long as the computational method employed is consistently utilized throughout the term of the loan. An authorized lender may calculate the deferment charge using the balance method or the date method.

(iii) Determination of the "next succeeding unpaid installment." The due date of the next succeeding unpaid installment is the end of the "deferment period."

(iv) Calculation for the deferment charge. The calculation for the deferment charge is the scheduled interest charge for the "deferment period."

(v) Example of deferment calculation. The terms of a precomputed Texas Finance Code, §342.301 loan are as follows: Date of loan: 09/01/1997; First payment due date: 10/01/1997; Cash Advance: $2,766.48; Finance Charge: $833.52; Total of Payments: $3,600.00; Term: 36 months; Monthly installment: $100; Refunding method: Sum of the periodic balances; and Annual Percentage Rate: 18%. If an authorized lender agrees to a deferment roughly six months into the contract and the remaining precomputed balance is $3,095.00 (no adjustments are necessary), to determine the "first entirely unpaid installment," the authorized lender must divide the precomputed balance by the regular installment amount ($3,095.00 divided by $100.00 = 30.95). Because the entire amount of the installment must be unpaid, the result must be rounded to the next lowest whole number, 30. For calculation purposes, there are 30 remaining installments and 6 installments have been made. In this case, the 7th scheduled installment is being deferred. The deferment charge is calculated by determining the scheduled interest charge for the deferment period, or, from the last entirely paid installment to the "first entirely unpaid installment" (the 6th entirely paid scheduled installment) to the "next succeeding unpaid installment" (7th scheduled installment). The "next succeeding unpaid installment" is determined by subtracting one unit period from the "first entirely paid installment" (30 - 1 = 29). The calculation of the deferment charge is the difference between the interest refund of the 6th entirely paid installment (36 - 30) and the 7th first entirely unpaid installment (36 - 29). This difference would be $37.54. A scheduled installment earnings refund method would yield a slightly different result of $36.69.

(2) Date method. The date method determines the deferment charge by taking the difference between the amount of the refund of unearned interest as if a full prepayment of the loan occurred as of the date of the deferment, and the amount of the refund of unearned interest for a full prepayment of the loan one full month prior to the date of the deferment.

(e) No deferment when payment applied to account balance. If a payment has been applied to reduce an account balance, no deferment of any prior balance or installments may be made. This does not preclude the collection of a deferment fee previously assessed but not collected.

(f) No deferment when default charge already collected. No installment may be deferred if a default charge has already been collected on the account or if a partial payment in any amount has been credited to any installment. If an amount equal to one whole installment has already been credited to an account, this entry cannot be altered in order to credit part of the installment to a deferment charge.

(g) Missed payment covered by insurance. When any payment or partial payment is deferred that is later paid by some form of insurance, such as credit disability insurance, unemployment insurance, or collateral protection insurance, any prior assessment of additional interest for deferment must be waived.

(h) Accounting of payment. If a payment is submitted from which a deferment charge is taken, the excess of the amount necessary to bring the account current shall be applied to the remaining balance of the loan. However, any difference that exceeds three dollars ($3.00) shall be returned to the borrower upon the borrower's request.

(i) Noncompliance. Deferment fees not assessed or collected in accordance with the requirements of this section are subject to refund to the borrower. In the event deferment fees are refunded to the borrower, no rescheduling of the loan contract is permitted.

§83.705.Amounts Authorized To Be Charged After Consummation.

(a) Generally. A secondary mortgage loan contract may provide for any one or more of the four listed categories of charges set forth in Texas Finance Code, §342.307. These charges may then be assessed and collected by an authorized lender after consummation of the loan if appropriately included in the contract.

(b) Check return fee. An authorized lender may contract for, assess, or collect the fee authorized by Texas Business and Commerce Code, §3.506, on a secondary mortgage loan.

§83.706.Amounts Authorized To Be Collected on or Before Closing.

(a) Generally. On or before the closing of a secondary mortgage loan, an authorized lender may collect any one or more of the eight categories of charges set forth in Texas Finance Code, §342.308(a).

(b) Administrative fee. An authorized lender may collect an administrative fee pursuant to Texas Finance Code, §342.308(a)(9) on interest-bearing and precomputed loans.

(2) An administrative fee may not be contracted for, charged, or received by an authorized lender directly or indirectly on a renewal or modification of an existing obligation more than once in any 180-day period. The administrative fee may be contracted for, charged, or received in a renewal or modification if the authorized lender did not contract for, charge, or receive the administrative fee on any previous obligation within the 180-day period.

(3) Interest may not be assessed, charged, or received on an administrative fee if the assessment causes the total amount of interest to exceed the maximum amount authorized under Texas Finance Code, Chapter 342.

(4) An administrative fee is a prepaid interest charge and may be contracted for, charged, or received in addition to the contractual interest charge authorized by Texas Finance Code, §342.301(a).

(c) Cost of credit report. An authorized lender may collect the cost paid to a credit reporting agency to obtain a credit report pursuant to Texas Finance Code, §342.308(a)(5), but may not charge an additional fee for reviewing or evaluating a credit report.

(d) Survey fees. A survey fee may be charged when a survey has been performed by a surveyor, who is registered or licensed by the Texas Board of Professional Land Surveying pursuant to Texas Occupations Code, Chapter 1071, and who is not a salaried employee of the lender.

(e) Flood zone determination fees. An authorized lender may collect a flood zone determination fee when a flood zone determination is required by a federal agency.

§83.707.Other Fees.

(a) Generally. Fees not otherwise permitted by §83.705 or §83.706 of this title (relating to Amounts Authorized To Be Charged After Consummation and Amounts Authorized To Be Collected on or Before Closing) may not be charged or collected in a secondary mortgage loan transaction.

(b) Examples of unauthorized fees. Fees not authorized by either §83.705 or §83.706 of this title include, but are not limited to, commitment fees, broker fees not covered by subsection (d) of this section, pay-off statement fees, prepayment penalties, fax fees, courier fees, and escrow management fees.

(c) Escrow services. An authorized lender making a secondary mortgage loan may require a borrower to make payments into an escrow trust account for payment of anticipated tax and property insurance expenses. A fee may not be charged for managing an escrow trust account.

(d) Broker fees. An authorized lender may pay a broker fee in a secondary mortgage loan if the consideration paid by the borrower in the loan which involves a broker does not exceed the consideration paid by the borrower in a loan which does not involve a broker.

(1) Example 1: A prospective borrower is quoted a contract rate of 12% plus a 2% origination fee when he makes his inquiry directly to an authorized lender. On this same individual, a broker quotes a contract rate of 12% plus a 4% origination fee for a loan of the same amount from the same authorized lender. The charge for an additional 2% origination fee is an unauthorized charge.

(2) Example 2: A prospective borrower is quoted a finance charge of 12% plus a 2% origination fee when the borrower makes the inquiry directly to an authorized lender. On this same individual, a broker quotes a contract rate of 12% plus a 2% origination fee for a loan of the same amount from the same authorized lender. The loan was then consummated with the authorized lender paying a 2% fee to the broker for originating the loan. Since the authorized lender has absorbed the expense of the fee, no unauthorized charge has been assessed, charged, or received.

(e) Seller's points. Seller's points are treated as interest. Seller's points are aggregated with other interest charges for the purposes of a usury calculation.

(f) Discount points. Discount points are treated as interest. Discount points are aggregated with other interest charges for the purposes of a usury calculation.

(g) Origination fees. Origination fees are treated as interest. Origination fees are aggregated with other interest charges for the purposes of a usury calculation.

§83.708.Balloon Payments.

Balloon payments are authorized in a secondary mortgage loan unless prohibited by other applicable law (for example, the high cost mortgage rules of Truth in Lending, Regulation Z, 12 C.F.R. §226.32(d)(1)).

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on August 11, 2006.

TRD-200604236

Leslie L. Pettijohn

Commissioner

Office of Consumer Credit Commissioner

Earliest possible date of adoption: September 24, 2006

For further information, please call: (512) 936-7640

Subchapter H. REFUNDS FOR PRECOMPUTED LOANS

7 TAC §§83.751 - 83.758

The Finance Commission of Texas (the commission) proposes new 7 TAC Chapter 83, Subchapter H, §§83.751 - 83.758, concerning Refunds for Precomputed Loans.

These rules are being relocated and reorganized. The agency believes that the reorganization will benefit licensees in that these rules will be in a more logical location and order and will be easier to find. The new rules are substantially similar to the rules pending repeal, as found in 7 TAC Chapter 1, Subchapter H, §§1.751, 1.752, 1.754, 1.755 and 1.758 - 1.761, concerning Refunds in Precomputed Loans. The commission's proposed repeal of Subchapter H is published elsewhere in this issue of the Texas Register .

New 7 TAC §§83.751 - 83.758 outline the methods for computing refunds of unearned interest due to prepayment or acceleration of transactions under Texas Finance Code, Chapter 342, Subchapter E, F, or G transactions that are precomputed.

Section 83.751 (current §1.751) explains the scope and applicability of the subchapter.

Section 83.752 (current §1.752) prescribes the method for calculating refunds of interest on Subchapter E and G loans.

Section 83.753 (current §1.754) explains the method for refunding interest on Subchapter E and G loans with a term of 60 months or less.

Subsection (c) has been added to §83.753 to provide clarification that authorized lenders must consider deferment charges in the calculation of interest refunds.

Section 83.754 (current §1.755) explains the method for refunding interest on Subchapter E and G loans with a term of more than 60 months and for which prepayment occurs before the first installment due date.

Subsection (c) has been added to §83.754 to provide clarification that authorized lenders must consider deferment charges in the calculation of interest refunds.

Section 83.755 (current §1.758) explains the charges subject to refunding on Subchapter F loans.

Subsection (c) has been added to §83.755 to provide clarification that authorized lenders must consider deferment charges in the calculation of interest refunds.

Section 83.756 (current §1.759) explains the method for refunding installment account handling charges and acquisition charges on Subchapter F loans for which prepayment occurs before the first installment due date.

Subsection (c) has been added to §83.756 to provide clarification that authorized lenders must consider deferment charges in the calculation of interest refunds.

Section 83.757 (current §1.760) explains the method for refunding installment account handling charges and acquisition charges on Subchapter F loans for which prepayment occurs after the first installment due date and before the final installment due date.

Subsection (c) has been added to §83.757 to provide clarification that authorized lenders must consider deferment charges in the calculation of interest refunds.

Section 83.758 (current §1.761) details the situation in which a lender provides excess refunds to a borrower and the applicable procedures for handling the situation.

Commissioner Pettijohn has also determined that for each year of the first five years §§83.751 - 83.758 are in effect, the public benefit anticipated as a result of the changes from the previously enacted version of these rules will be that the commission's rules will be more easily understood by licensees required to comply with the rules, and will be more easily enforced. The general substance of these rules has already been in effect, as the rules are being relocated with some substantive and technical corrections. However, the substantive corrections consist of updates required by law, placement of the agency's policy positions into regulation, clarifications, and revisions made for consistency purposes. Thus, there is no anticipated cost to persons who are required to comply with the new rules as proposed. There is no anticipated adverse economic effect on small or micro businesses. There will be no effect on individuals required to comply with the sections as proposed.

The statutory provisions (as currently in effect) affected by the proposal are contained in Texas Finance Code, Chapter 342.

§83.751.Scope.

(a) Scope. This subchapter applies to all precomputed loan transactions made pursuant to Texas Finance Code, Chapter 342, Subchapters E, F, and G. This subchapter is inapplicable to interest-bearing loans made under Texas Finance Code, Chapter 342.

(b) Refund methods. The chosen method of determining refunds must be contracted for in the loan agreement. An authorized lender may utilize one of the following methods of determining the amount of a refund:

(1) the sum of the periodic balances method;

(2) the installment earnings method; or

(3) the true daily earnings method.

(c) Refund method for Chapter 342, Subchapter E loans. An authorized lender may not use the sum of the period balances method for a Subchapter E loan.

§83.752.Specific Application to Subchapter E and G Loans.

(a) Interest subject to refund. Precomputed interest in Texas Finance Code, Chapter 342, Subchapter E and G loans is subject to refund.

(b) Interest not subject to refund.

(1) Administrative fees. Administrative fees authorized by Texas Finance Code, §342.201(f) and §342.308(c) are not subject to refund.

(2) Per diem interest. Per diem interest on odd days in the first installment period is not subject to being refunded if the per diem interest for the first installment period has been earned and collected during the first installment period.

(3) Refunds less than one dollar. Refunds of unearned interest are not required when a partial prepayment is made or when the sum of interest to be refunded is less than $1.00.

§83.753.Refund of Precomputed Interest in Regular Subchapter E Loans.

(a) If prepayment in full is made by cash, renewal, or otherwise after the first installment due date, the authorized lender shall refund or credit to the borrower the unearned interest by the scheduled installment earnings method authorized by §83.751 of this title (relating to Scope) and identified in the loan agreement as the chosen refund method. If prepayment in full or demand for payment in full occurs during an installment period, the lender may retain an interest charge for previous elapsed periods and the number of days beginning after the installment due date and ending on the date of the prepayment or demand in full.

(b) If prepayment is made in full before the first installment due date, an authorized lender may retain an interest charge for each elapsed day between the date of the loan and the date of prepayment. The interest charge may not exceed the amount of interest allowed under the true daily earnings method for the same time period. The authorized lender shall refund or credit to the borrower the unearned interest.

(c) In calculating the amount of the refund of the unearned interest, an authorized lender must consider any installments that were deferred.

§83.754.Refund of Precomputed Interest in Subchapter G Loans.

(a) Regular Transactions.

(1) If prepayment in full is made by cash, renewal, or otherwise, the authorized lender shall refund or credit to the borrower the unearned interest by the refund method authorized by §83.751 of this title (relating to Scope) and identified in the loan agreement as the chosen refund method. One day earned into a month will allow the lender to earn the interest applicable to the full month.

(2) If prepayment in full is made by cash, renewal, or otherwise, before the first installment due date, the authorized lender shall compute the refund as provided by this paragraph.

(A) If the first installment due date is 15 days or less from the date of the loan, the lender may retain for each elapsed day between the date of the loan and prepayment before the first installment due date, 1/30th of the interest that could be retained if the first installment period were one month and the loan was prepaid in full on the first installment due date. All interest in excess of such amount shall be refunded or credited to the borrower.

(B) If the first installment due date is 16 days or greater, but less than one month, from the date of the loan, the lender may retain for each elapsed day between the date of the loan and prepayment before the first installment due date, 1/30th of the interest which could be retained if the first installment period were one month and the loan was prepaid in full on the first installment due date.

(C) If the first installment due date is more than one month from the contract date, the lender may retain for each elapsed day between the date of the loan and prepayment, 1/30th of the interest which could be retained if the first installment period were one month and the loan was prepaid in full on the first installment due date. The daily charge is multiplied by the number of elapsed days up until the first installment due date.

(b) Irregular transactions or transactions with a term of greater than 60 months.

(1) If prepayment in full is made by cash, renewal, or otherwise, after the first installment due date, the authorized lender shall refund or credit to the borrower the unearned interest by the refund method authorized by §83.751 of this title and identified in the loan agreement as the chosen refund method. The amount of interest which may be retained by the lender as earned shall be determined by use of the scheduled installment earnings method as authorized by Texas Finance Code, §342.352. If prepayment in full or demand for payment in full occurs during an installment period, the lender may retain an interest charge for previous elapsed periods and the number of days beginning after the installment due date and ending on the date of the prepayment or demand in full.

(2) If prepayment is made in full before the first installment due date, an authorized lender may retain an interest charge for each elapsed day between the date of the loan and the date of prepayment. The interest charge may not exceed the amount of interest allowed under the true daily earnings method for the same time period.

(c) Consideration of deferment charges for interest refund calculations. To calculate the amount of the refund of unearned interest, an authorized lender must consider any installments that were deferred.

§83.755.Specific Application to Subchapter F Loans.

(a) Items subject to refund. The installment account handling charge is subject to refund.

(b) Items not subject to refund. An acquisition charge is not subject to refund, as the charge is considered to be earned at the time the loan is made.

§83.756.Refund of Precomputed Interest in Subchapter F Loans; Prepayment in Full Before the First Installment Due Date.

(a) If the first installment due date is one month or less from the date of the loan, the authorized lender may retain for each elapsed day between the date of the loan and prepayment before the first installment due date, 1/30th of the installment account handling charge and acquisition charge subject to being refunded, that could be retained if the first installment period were one month and the loan was prepaid in full on the first installment due date. All interest in excess of such amount shall be refunded or credited to the borrower.

(b) If the first installment due date is more than one month from the contract date, the authorized lender may retain for each elapsed day between the date of the loan and prepayment before the first installment due date, 1/30th of the interest that could be retained if the first installment period were one month and the loan was prepaid in full on the first installment due date up to a maximum of 30 days. All interest in excess of such amount shall be refunded or credited to the borrower.

(c) To calculate the amount of the refund of unearned interest, an authorized lender must consider any installments that were deferred.

§83.757.Refund of Precomputed Interest in Subchapter F Loans; Prepayment in Full After the First Installment Due Date and Before the Final Installment Due Date.

(a) If prepayment in full is made by cash, renewal, or otherwise, the authorized lender shall refund or credit to the borrower the unearned installment account handling charge and acquisition charge subject to refund by the refund method authorized by §83.751(b) of this title (relating to Scope) and identified in the loan agreement as the chosen refund method. One day earned into a month will allow the lender to earn the interest applicable to the full month.

(b) To calculate the amount of the refund of unearned interest, an authorized lender must consider any installments that were deferred.

§83.758.Excess Refunds.

If a lender has refunded more than required to a borrower, the excess refund may not be collected from or debited from the account of the borrower, unless the borrower voluntarily agrees to pay back the excess refund, or the borrower voluntarily agrees, in writing, to have his existing account adjusted when the excess refund was made on the renewal of the preceding account.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on August 11, 2006.

TRD-200604237

Leslie L. Pettijohn

Commissioner

Office of Consumer Credit Commissioner

Earliest possible date of adoption: September 24, 2006

For further information, please call: (512) 936-7640

Subchapter I. INSURANCE

7 TAC §§83.801 - 83.812

The Finance Commission of Texas (the commission) proposes new 7 TAC Chapter 83, Subchapter I, §§83.801 - 83.812, concerning Insurance.

These rules are being relocated and reorganized. The agency believes that the reorganization will benefit licensees in that these rules will be in a more logical location and order and will be easier to find. The new rules are substantially similar to the rules pending repeal, as found in 7 TAC Chapter 1, Subchapter I, §§1.801 - 1.811 and §1.814, concerning Insurance. The commission's proposed repeal of Subchapter I is published elsewhere in this issue of the Texas Register .

Section 83.801 (current §1.801) defines terms that are used in connection with these transactions.

Section 83.802 (current §1.802) explains the procedures for property insurance that may be written in connection with a loan made under Chapter 342. The commissioner has a responsibility to determine if rates for property insurance that is obtained by the lender at rates that are not fixed or approved by the Texas Department of Insurance bear a reasonable relationship to the amount, term, and conditions of the loan, the value of the collateral, and the existing hazards or risk of loss, damage, or destruction. This rule provides the procedure for making that determination.

Section 83.803 (current §1.803) provides the limits for property insurance relative to the amount of the note and the value of the collateral. The rule also provides a procedure for substantiating the amount of property insurance, especially when the credit insurance policy covers multiple items of collateral. The procedure is necessary to determine an appropriate settlement amount when a claim is made for a partial personal property loss.

Section 83.804 (current §1.804) details the manner of determining the appropriate value of insured items, in the event of a claim. Specifically, the rule lays out the claims ratio as an approved formula for allocating value to individual items of collateral in the event of a claim when the total amount of property insurance written is less than the total value of the collateral.

Section 83.805 (current §1.805) describes the types of credit insurance authorized to be sold in connection with a Chapter 342 loan. The rule is necessary to prescribe these types of insurance and require compliance with the applicable sections of the insurance statutes.

Section 83.806 (current §1.806) requires the lender to provide a borrower with a copy of a policy or certificate of insurance for coverage sold in connection with a Chapter 342 loan. This rule is necessary to prescribe the specific information required to be disclosed to the borrower and to provide for a reasonable time frame in which the information is to be disclosed to the borrower.

Section 83.807 (current §1.807) refers the reader to other applicable requirements for placement of single-interest insurance on a loan written under the authority of Chapter 342.

Section 83.808 (current §1.808) provides the procedures for terminating insurance policies in the event that a loan has been discharged. The procedure is necessary to provide lenders guidance for complying with the credit statutes and the insurance statutes in the event of the termination of a policy.

Section 83.809 (current §1.809) explains refunding procedures when an account is paid in full due to the proceeds of an insured property loss. The procedure is necessary to provide lenders guidance in crediting accounts or refunding the unearned portions of insurance premiums and interest charges when the account has been paid in full by the insurance proceeds.

Section 83.810 (current §1.810) prescribes the procedure for cancellation of property insurance when a borrower provides a lender with evidence that the borrower has equivalent insurance. This rule is necessary to provide a procedure for the cancellation of equivalent insurance so that borrowers and lenders understand the steps required to accomplish the cancellation.

Section 83.811 (current §1.811) provides the terms and conditions for writing a nonfiling insurance policy on a Chapter 342 loan. Nonfiling insurance is insurance that is written in lieu of the fees that may be assessed for filing, recording, and releasing financing statements on the security for a loan. This rule is necessary to provide clarity to lenders regarding the instances when a charge for this insurance may be assessed.

Section 83.812 (current §1.814) outlines the procedures for the sale of gap waiver agreements in connection with a Chapter 342 loan that contains an interest charge computed under Texas Finance Code, §342.201(d). The rule describes the disclosure that must be provided to the borrower, as per Texas Finance Code, §342.4021. One of the principal consumer protections in the law is that the amount charged for the "gap waiver" fee must be reasonable; the rule establishes the maximum reasonable fee accompanied by certain limitations that may be addressed within a gap waiver agreement.

Commissioner Pettijohn has also determined that for each year of the first five years §§83.801 - 83.812 are in effect, the public benefit anticipated as a result of the changes from the previously enacted version of these rules will be that the commission's rules will be more easily understood by licensees required to comply with the rules, and will be more easily enforced. The general substance of these rules has already been in effect, as the rules are being relocated with some substantive and technical corrections. However, the substantive corrections consist of updates required by law, placement of the agency's policy positions into regulation, clarifications, and revisions made for consistency purposes. Thus, there is no anticipated cost to persons who are required to comply with the new rules as proposed. There is no anticipated adverse economic effect on small or micro businesses. There will be no effect on individuals required to comply with the sections as proposed.

The statutory provisions (as currently in effect) affected by the proposal are contained in Texas Finance Code, Chapter 342.

§83.801.Definitions.

Words and terms used in this subchapter that are defined in Texas Finance Code, Chapter 342, have the meanings as defined in Chapter 342. The following words and terms, shall have the following meanings unless the context clearly indicates otherwise.

(1) Personal property insurance--Coverage to insure tangible personal property offered as security for a loan made under Chapter 342.

(2) Property insurance--Coverage to insure either an interest in real estate or tangible personal property offered as security for a loan made under Chapter 342.

(3) Single-interest insurance--A form of property insurance that protects only the lender's interest in the property.

(4) Credit insurance--Includes credit life insurance, credit accident and health insurance, and involuntary unemployment insurance.

(5) Total personal property loss--The loss of all items of personal property listed as security for a loan and insured by a particular insurance policy.

(6) Partial personal property loss--Any loss other than a total personal property loss.

(7) Gap waiver agreement--An agreement that eliminates or reduces the deficiency when the proceeds from the borrower's insurance policy do not cover the unpaid net balance after the vehicle has suffered a total loss or constructive total loss. The unpaid net balance on the loan does not include:

(A) delinquent payments (any outstanding payment that is more than 10 days past due);

(B) late charges;

(D) unearned insurance premiums;

(E) fees added after the date of the loan; or

(F) any portion of the borrower's basic comprehensive and collision policy deductible that exceeds $1,000.

(8) Constructive total loss--A loss where the cost to repair or replace the motor vehicle covered under the gap waiver agreement would exceed an amount equal to the actual cash value of the motor vehicle minus any salvage value. The actual cash value will be determined as of the date of loss. The actual cash value will be based on the "retail value" in the National Automobile Dealers Association (NADA) or its equivalent, official used car guide. The licensee will consider the mileage, condition, and optional equipment of the motor vehicle when using the NADA, or its equivalent, official used car guide.

§83.802.Authorized Property Insurance.

(a) Property insurance, other than insurance covering a motor vehicle, written in connection with a loan made under Texas Finance Code, Chapter 342 must be written at rates not in excess of the rates fixed or approved by the Texas Department of Insurance if a rate structure has been fixed or approved for that particular type of coverage.

(b) If property insurance, other than insurance covering a motor vehicle, requested or required on a loan is sold or obtained by a licensee at a rate that is not fixed or approved by the Texas Department of Insurance, the licensee must first obtain prior acknowledgment from the commissioner that the coverage and the rate bear a reasonable relationship to:

(1) the amount, term, and conditions of the loan;

(2) the value of the collateral; and

(3) the existing hazards or risk of loss, damage, or destruction.

(c) Insurance, other than insurance covering a motor vehicle, written at rates not fixed or approved by the Texas Department of Insurance, is subject to cancellation or adjustment if the insurance is not otherwise approved by the commissioner.

(d) If a licensee is seeking authority from the commissioner under subsection (b) of this section for a rate not fixed or approved by the Texas Department of Insurance, a copy of the relevant policy that is to be issued shall be filed with the Office of Consumer Credit Commissioner, together with any evidence that is probative on the factors listed in subsection (b) of this section.

(e) Property insurance written in connection with a Texas Finance Code, Chapter 342 loan must be provided by a company authorized to do business in this state.

§83.803.Limitations on Property Insurance.

(a) Personal property insurance, other than insurance covering a motor vehicle, must not be written in an amount in excess of the total related note unless prior to writing the insurance, the complete policy of insurance, the proposed rates, and the proposed conditions have been approved by the commissioner.

(b) Property insurance must not be written for more than the value of the item or items insured.

(c) Motor vehicle insurance written in accordance with applicable law, the regulations promulgated by the Texas Department of Insurance, and the rating procedures established by the Texas Department of Insurance, is presumed to satisfy the requirements set forth in Texas Finance Code, Chapter 342, Subchapter I.

(d) Each licensee shall substantiate that the amount of personal property insurance, other than coverage on a motor vehicle, is reasonable in relation to the value of the item or items insured. The value shall be established in writing by the borrower and the licensee on each insured item and each value shall be reasonable in relation to the actual replacement cost of the item. A valuation that has been established on goods to be insured may not be increased unless it can be shown there has been a substantial change in the nature of the items insured or the value of these items.

§83.804.Claim Provisions for Property Insurance Other Than Insurance Covering Motor Vehicles.

(a) Personal property insurance, other than insurance property covering motor vehicles, written on a loan subject to Texas Finance Code, Chapter 342, should provide a procedure for determining and adjusting the value of insured items in the event of a loss. If a licensee does not utilize a formula submitted to and approved by the commissioner for adjusting the value of the items insured and if a loss occurs, the value initially stated is presumed to be the actual replacement cost of each insured item throughout the life of the policy.

(b) Personal property insurance may be written in an amount that is less than the value of the loan collateral at rates not fixed or approved by the Texas Department of Insurance. Personal property insurance may not be written unless it provides for payment of a sum not less than the claims ratio multiplied by the amount of the loss. The claims ratio is calculated by dividing the amount of insurance by the total value of the secured collateral covered by the insurance policy, rounded to the fourth digit to the right of the decimal point. For example, the terms of a transaction are as follows: the original total of payments in an installment loan is $3,000; the term is 2 1/2 years with monthly installment payments of $100; property insurance is purchased to insure three items of collateral for up to $3,000: a piano worth $2,500, a computer worth $1,500, and a television worth $500; and the piano is then stolen and reported to the insurer by the borrower. The claims ratio is calculated by dividing the value of the insurance written, $3,000, by the total value of the collateral covered by the policy, $4,500. Applying the claims ratio of 2/3 or .6667 to the amount of the loss, $2,500, leads to the conclusion that no less than $1,666.75 should be paid under the applicable property insurance policy. A licensee may only write a policy of property insurance that would provide for a payment of not less than $1,666.75 under the aforementioned facts.

§83.805.Authorized Credit Insurance.

(a) Credit insurance written in connection with a Texas Finance Code, Chapter 342 loan shall be decreasing term insurance.

(b) Credit life insurance and credit accident and health insurance shall be written in compliance with Texas Insurance Code, Chapters 1131 and 1153, and any regulations issued by the Texas Department of Insurance under the authority of those provisions.

(c) Involuntary unemployment insurance shall be written in compliance with Texas Insurance Code, Chapter 3501, and any regulations issued by the Texas Department of Insurance under the authority of that chapter.

§83.806.Provision of Policy or Certificate.

If a Texas Finance Code, Chapter 342 loan provides for the purchase of insurance by the borrower from the lender, the lender shall furnish to the borrower, within 30 days of the date of the loan, a properly executed policy or certificate of insurance. The policy or certificate of insurance shall clearly set forth:

(1) the amount of the premium;

(2) the kind of insurance provided;

(3) the coverage of the insurance; and

(4) all terms, including options, limitations, restrictions and conditions of the insurance that has been purchased.

§83.807.Single-Interest Insurance.

If a lender arranges for single-interest insurance and assesses a charge for the insurance to the borrower, the lender must comply with the provisions of Texas Finance Code, Chapter 307.

§83.808.Termination and Refund.

(a) Upon discharge of an indebtedness by prepayment, renewal, or refinancing, any insurance, other than nonfiling insurance, written under the authority of Texas Finance Code, Chapter 342, Subchapter I, shall be automatically terminated. At the option of the borrower, dual-interest motor vehicle insurance may be retained without cancellation. If a policy of insurance is terminated prior to scheduled maturity, a credit of the unearned premium shall be applied to the borrower's account or a refund of the unearned premium shall be paid by the lender to the borrower.

(b) Upon termination of a personal property insurance policy prior to the scheduled maturity of a loan, other than single-interest insurance, the licensee shall provide the borrower a refund or credit calculated in accordance with the policy approved by the commissioner. The policy shall provide for a pro rata method of making refunds. The pro rata method of making refunds involves computing a factor to apply to the total premium to determine the unearned portion. The factor is determined by dividing the term remaining on the loan by the total loan term.

(c) Upon termination of a single-interest insurance policy prior to the scheduled maturity of a loan, the lender shall provide the borrower a refund or credit calculated in accordance with the insurance policy approved by the Texas Department of Insurance.

(d) Upon termination of a credit life or credit accident and health insurance policy prior to the scheduled maturity of a loan, the lender shall provide the borrower a refund or credit calculated in compliance with Texas Insurance Code, Chapter 1153 and regulations issued by the Texas Department of Insurance under the authority of that chapter.

(e) Upon termination of a credit involuntary unemployment insurance policy prior to the scheduled maturity of a loan, the lender shall provide the borrower a refund or credit calculated in accordance with the insurance policy approved by the Texas Department of Insurance.

§83.809.Prepayment of Loan from Insurance Proceeds.

(a) Personal property insurance. If a loan is prepaid in full from the proceeds of a personal property insurance policy following a personal property loss, the refund should be computed as follows:

(1) Total personal property loss, other than motor vehicle.

(A) An interest refund shall be computed as of the date the settlement check is received by the licensee or 45 days from the date of loss, whichever occurs first.

(B) A credit insurance premium refund and single-interest insurance premium refund shall be computed as of the date the settlement check is received by the licensee.

(C) A personal property insurance premium refund, other than an insurance premium refund on a motor vehicle, shall be computed as of the day following the date of loss. In the event the borrower has requested cancellation, any dual-interest motor vehicle insurance premium refund shall be computed as prescribed by the Texas Department of Insurance manual rules and rates.

(2) Partial personal property loss, other than motor vehicle.

(A) An interest refund shall be computed as of the date the settlement check is received by the licensee or 45 days from the date of loss, whichever occurs first.

(B) A credit insurance premium refund and single-interest insurance premium refund shall be computed as of the date the settlement check is received by the licensee.

(C) A personal property insurance premium refund shall be computed as of the date the settlement check is received by the licensee. A dual-interest motor vehicle insurance premium refund shall be computed as prescribed by the Texas Department of Insurance manual rules and rates.

(3) Total or partial motor vehicle insurance loss.

(A) An interest refund shall be computed as of the date the settlement check is received or 45 days from the date of loss, whichever occurs first.

(B) A credit insurance premium refund shall be computed as of the date the settlement check is received by the licensee.

(C) A personal property insurance premium refund shall be computed as of the date the settlement check is received by the licensee. A motor vehicle insurance premium refund shall be computed as prescribed by Texas Department of Insurance manual rules and rates.

(b) Credit life insurance. If a loan is prepaid in full or in part by the proceeds of a credit life insurance claim, the refund should be computed as follows:

(1) Complete prepayment. An interest refund, credit accident and health insurance premium refund, credit involuntary unemployment insurance premium refund, single-interest insurance premium refund, and personal property insurance premium refund shall be computed as of the date of death. A dual-interest motor vehicle insurance premium refund shall be computed as prescribed by the Texas Department of Insurance manual rules and rates in the event cancellation is requested by the proper representative of the estate.

(2) Partial prepayment. If a loan is prepaid in part by the proceeds of a credit life insurance claim following the death of the primary borrower, any other credit insurance associated with the primary borrower, such as credit accident and health insurance and credit involuntary unemployment insurance, shall be canceled. The refunds of the unearned credit insurance premiums shall be computed as of the date of death.

(c) Credit accident and health insurance. If an insurance carrier has classified a disability as permanent and elected to prepay a loan in full, the interest refund, credit life insurance premium refund, credit involuntary unemployment insurance premium refund, or personal property insurance premium refund shall be computed as of the day the settlement check is received by the licensee. If cancellation is requested by the borrower, any dual-interest motor vehicle insurance premium refund shall be computed as prescribed by the Texas Department of Insurance motor vehicle manual rules and rates.

§83.810.Evidence of Equal Insurance Coverage.

If a borrower provides a lender with evidence of property insurance coverage that names the lender as a loss payee and that is equivalent to insurance purchased already through the lender, the lender must promptly cancel any equivalent property insurance or single-interest insurance. The refund of any unearned insurance premium shall be applied to the balance of the loan or refunded to the borrower.

§83.811.Nonfiling Insurance.

If a Texas Finance Code, Chapter 342 loan is renewed and a charge was assessed for nonfiling insurance in the original loan, a new charge for nonfiling insurance may not be assessed or contracted for in the renewed loan unless the term of the renewed loan extends more than five years after the date of the original loan. If different collateral is substituted or added to a loan, then a new charge for nonfiling insurance may be assessed.

§83.812.Gap Waiver Agreement.

(a) Disclosure required by Texas Finance Code, §342.4021(d).

(1) Disclosure. A lender must provide the borrower with the gap waiver agreement disclosure before presenting the borrower with the terms of the gap waiver agreement. The disclosure must not be in the loan agreement and must state that the borrower is not required to purchase the gap waiver agreement in order to obtain the loan. A lender may request that the borrower authenticate the gap waiver agreement disclosure acknowledging applicant's timely receipt of the disclosure. A licensee may rely upon verifiable procedure to show that the gap waiver agreement disclosure was provided to an applicant.

(2) Multiple applicants. In the case of multiple applicants, it is only necessary for the licensee to deliver the gap waiver agreement disclosure to one applicant.

(b) Authorized gap waiver agreement provisions. The gap waiver agreement may include a provision that:

(1) limits the calculation of the unpaid net balance;

(2) limits the scope of the gap waiver agreement to loans which require the borrower to make a balloon payment between 24 and 48 months or to loans which are repayable in 48 months or more;

(3) excludes loss or damage as a result of:

(A) an act occurring prior to the date of the loan;

(B) any dishonest, fraudulent, criminal, or illegal act resulting in a felony conviction of the borrower;

(D) conversion, embezzlement, or secretion by any person in lawful possession of the motor vehicle;

(E) confiscation; and

(F) the operation, use, or maintenance of the motor vehicle in any race, speed contest, or other contest;

(4) requires the borrower to notify the licensee of any potential loss under the gap waiver agreement; or

(5) requests the borrower to provide or complete the following documents:

(A) a gap waiver agreement claim form;

(B) proof of loss and settlement check from the borrower's basic comprehensive, collision, or uninsured/underinsured motorist policy or other parties' liability insurance policy for the settlement of the insured total loss of the motor vehicle;

(D) a copy of the police report, if any, filed in connection with the total loss to the motor vehicle.

(c) Certificate of coverage. If a borrower purchases a gap waiver agreement, the licensee must provide the borrower, within a reasonable amount of time not to exceed 10 days from the date of the loan, a certificate or similar form that clearly sets forth:

(1) the name of the borrower, and the name, address, and telephone number of the place where claims are administered;

(2) the coverage amount and term of the gap waiver agreement;

(3) the cost of the gap waiver agreement; and

(4) the terms, including the limitations, exclusions and restrictions.

(d) Premium or rate for gap waiver agreement. A licensee may charge a reasonable gap waiver agreement fee that does not exceed the rates contained in Figure: 7 TAC §83.812(d). The amount of the fee is based upon the amount financed. The fee for the gap waiver agreement can be adjusted to the nearest whole dollar. The fee may be included in the amount financed and a finance charge may be charged on the fee.

Figure: 7 TAC §83.812(d) (.pdf)

(e) Refund of unearned gap waiver agreement fee.

(1) Refunding method. Upon termination of a gap waiver agreement prior to the scheduled maturity date of a loan, the licensee shall provide the borrower a refund or credit calculated using the pro rata method. The refund must be given upon prepayment of the loan or if the lender demands payment in full of the unpaid balance. The pro rata method of making refunds involves computing a factor to apply to the total premium to determine the unearned portion. The factor is determined by dividing the term remaining on the loan by the total loan term.

(2) Rounding of unearned insurance premium. The refund credit for the gap waiver agreement can be rounded to the nearest whole dollar.

(3) Refund credit less than $1.00 not required. A refund credit is not required if the amount of the refund credit is less than $1.00.

(4) Flat cancellation within 60 days. If the borrower cancels the gap waiver agreement within 60 days from the date of the loan, the licensee will refund the entire gap waiver agreement fee. A borrower may not cancel the gap waiver agreement and then receive any benefits under the agreement.

(f) Prompt payment of claims. A licensee must comply with the payment terms of the gap waiver agreement within 60 days of receiving a completed gap waiver agreement claim form. If the licensee has all of the information that a borrower would provide in the completion of a gap waiver agreement claim form, the licensee must comply with the payment terms of the gap waiver agreement within 60 days of receipt of all of the information.

(g) Calculation of settlement amount. The calculation of the settlement amount will be calculated under one of the following methods:

(1) If the loan uses the scheduled installment earnings method, the licensee will calculate the settlement amount by adding the remaining original scheduled installments together and then subtracting any refunds due as of the date of total loss or constructive total loss; or

(2) If the loan uses the true daily earnings method, the licensee will calculate the settlement amount by determining the scheduled principal balance due as of the date of total loss or constructive total loss.

(h) Prepayment of loan by gap waiver agreement. If the gap waiver agreement is triggered by the total loss or the constructive total loss of the motor vehicle, all refunds should be calculated as of the date of loss.

(1) Insurance refunds. Examples of refunds include credit life premium, credit accident and health insurance premium, credit involuntary unemployment insurance premium, single-interest insurance premium, and personal property insurance premium.

(2) Interest refund. If the loan uses the scheduled installment earnings method, the interest refund should be calculated as of the date of loss. If the loan uses the true daily earnings method, the licensee should not earn any interest after the date of loss.

(i) Prohibited practices. A licensee cannot offer a gap waiver agreement if:

(1) the loan is unsecured, secured by personal property other than a motor vehicle, or secured by real property;

(2) the interest charge on the loan is calculated under Texas Finance Code, §342.201(a) and (e);

(3) the loan is already protected by gap insurance;

(4) the licensee has not provided the disclosure required by Texas Finance Code, §342.4021(d);

(5) the purchase of the gap waiver agreement is required for the borrower to obtain the extension of credit;

(6) the original term of the loan is less than 48 months, unless the loan contracts for a balloon payment; and

(7) the agreement includes any exclusions or limitations other than those listed in this section.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on August 11, 2006.

TRD-200604238

Leslie L. Pettijohn