Part 2. TEXAS DEPARTMENT OF BANKING

Chapter 12. LOANS AND INVESTMENTS

The Finance Commission of Texas (commission) proposes new §12.2, concerning definitions, §12.11, concerning calculation of lending limits, §12.61, concerning calculation of investment limits, and §12.62, concerning hedging investments. Existing §12.2, concerning general definitions, §12.61, concerning transition provisions, and §12.62, concerning definition of equity capital, are proposed to be repealed. The commission also proposes to amend §12.1, concerning purpose and scope, §12.3, concerning loans and extensions of credit, §12.5, concerning percentage lending limits, §12.6, concerning loans not subject to lending limits, §12.8, concerning other exceptions, §12.9, concerning aggregation and attribution, §12.10, concerning nonconforming loans, §12.33, concerning debt cancellation contracts and debt suspension agreements, and §12.91, concerning other real estate owned.

The proposals arise from two events. First, the commission completed its rule review of Chapter 12, as required by the Government Code, §2001.039, concluding that certain revisions of Chapter 12 are appropriate. Second, House Bill 2007, legislation affecting Chapter 12, was passed by the 80th Texas Legislature. Among other changes, House Bill 2007 deletes the concept of "certified surplus" in state law to create uniformity with federal standards and reduce regulatory burden. Effective September 1, 2007, state bank loan and investment limits will be calculated based on "unimpaired capital and surplus" instead of "capital and certified surplus." Under the revised law and the proposed amendments to Chapter 12, in most circumstances a bank will be able to calculate legal and investment limits quarterly, based on the quarterly calculation of capital contained in its call report.

Chapter 12, Subchapter A (§§12.1 - 12.11), implements Finance Code, §34.201, by providing detailed standards for calculating and applying a bank's legal lending limit.

The proposed amendment to §12.1(b)(1) deletes as unnecessary the "grandfather" provision for bank investments currently held that were acquired prior to September 1, 1995.

The proposal also amends citations to federal law in §12.1(b)(1) and (2) to conform to a standard format. Similarly, citations to federal law in §§12.3(b)(4), 12.5(d)(2), 12.6(b), and 12.91(b)(5) are proposed to be amended to conform to the standard format.

Existing §12.2, concerning definitions, is proposed for repeal, to be replaced by proposed new §12.2. Proposed §12.2(1) defines "unimpaired capital and surplus" as equivalent to Tier 1 capital, determined under federal risk-based capital standards. Proposed §12.2 also defines "call report," "federal risk-based capital standards," "Tier 1 capital," and "control." Finally, the two definitions in existing §12.2 are included in proposed §12.2 without material change.

Accordingly, all references to capital and certified surplus in Chapter 12 must be replaced with "Tier 1 capital." Proposed amendments to §§12.5(a), (b)(1), (c)(1), (d)(1), (e)(1), (f), 12.8(b), 12.9(e), and 12.10(a)(1) substitute "Tier 1 capital" in place of "capital and certified surplus" as the applicable measurement base.

Section 12.3 defines loans and extensions of credit. Proposed §12.3(a)(1) will clarify that intra-day overdrafts are not considered loans or extensions of credit.

Section 12.3(b)(2) currently provides that accrued and discounted interest are not considered loans and extensions of credit. The proposed amendment to §12.3(b)(2) adds exclusions for interest that has been capitalized from prior notes and interest that has been advanced under a loan agreement, consistent with similar federal law that applies to national banks.

Section 12.6 implements certain exemptions for which no statutory limits apply. Pursuant to §12.6(c), a loan to state or local government is excluded from the lending limit to the extent the loan constitutes a legally created general obligation, if the bank obtains an opinion of counsel that the loan is a valid and enforceable general obligation. Similarly, under §12.6(f), a loan is excluded from the lending limit to the extent it is secured by an unconditional takeout commitment, insurance, or guarantee of a governmental entity, if the bank obtains an opinion of counsel that the unconditional takeout commitment, insurance, or guarantee is a valid and enforceable general obligation of the purchasing, insuring, or guaranteeing entity. The requirement in these two exemptions for an opinion of counsel is not statutorily required.

Proposed amendments to §12.6(c) and (f) will allow a bank to either obtain an opinion of counsel or rely on a bond counsel letter of the attorney general on the validity and enforceability of the obligation, extension of credit, or guarantee in question. Obtaining an opinion of counsel can be expensive and time consuming for community banks. Pursuant to Government Code, Chapter 1202, the attorney general reviews and approves all bonds and similar obligations issued by state agencies, cities, counties, school districts, municipal utility districts, hospital districts, institutions of higher education and all other governmental entities or instrumentalities of the state, plus certain nonprofit corporations created to act on behalf of political subdivisions. Allowing community banks to rely upon the attorney general's bond counsel letters is anticipated to significantly reduce regulatory burden.

Existing §12.6(f) also provides that protection against loss is not materially diminished or impaired by a procedural requirement, such as "an agreement to take over only in the event of default." Proposed §12.6(f) clarifies that the phrase "an agreement to take over" means an agreement to pay on an obligation.

Under §12.9(c)(1), the common enterprise test for aggregation and attribution is stated in one instance as the existence of substantial financial interdependence between or among affiliated borrowers. Under §12.9(d), the independent source of repayment test for aggregation and attribution provides that an employer will not be considered a primary source of repayment solely because of wages and salaries paid to an employee. Some confusion exists regarding whether wages and salaries paid to an owner-employee should be considered in determining whether substantial financial interdependence exists among the employer and the owner-employee for purposes of applying the common enterprise test. The proposed amendment to §12.9(d) clarifies that the common enterprise test and the source of repayment test are intended to be independent of one another.

Proposed new §12.11 provides direction concerning calculation of lending limits. Generally, a bank may rely on its quarterly calculation of capital found in its call report. However, to prevent a bank from lending in excess of a shrinking capital base, the proposal requires a bank to recalculate its lending limit between quarters if there were a change in its capital category for purposes of prompt corrective action under federal law. In addition, the banking commissioner may address unsafe or unsound lending practices or other supervisory concerns by directing any bank to calculate its lending limit more frequently than quarterly. The banking commissioner may also permit recalculation of lending limits during a quarter based on a material change in a bank's capital arising from corporate activities, such as a merger or stock issuance.

Section 12.33, concerning debt cancellation contracts and debt suspension agreements, is modeled on federal rules of the Office of the Comptroller of the Currency (OCC) addressing the same subject, for reasons expressed in the adoption preamble published in the April 25, 2003, issue of the Texas Register (28 TexReg 3494). However, shortly after adoption of §12.33, the OCC suspended certain aspects of its rules to consider how to address some difficulties that had arisen in the context of closed-end consumer loan transactions where debt cancellation contracts and debt suspension agreements are offered through unaffiliated, non-exclusive agents, see 68 Fed. Reg. 35283 (June 13, 2003). That suspension has never been lifted.

Accordingly, proposed new subsection (i) of §12.33 suspends specified aspects of §12.33 with respect to the offer and sale of debt cancellation contracts and debt suspension agreements through an unaffiliated, non-exclusive agent, in connection with closed-end consumer credit (other than residential mortgage loans) extended by the bank through the agent.

Existing §12.61 and §12.62 are proposed for repeal. The transition provisions set out in §12.61 are no longer necessary. The definition of equity capital set forth in §12.62 relates to the law prior to House Bill 2007.

Proposed new §12.61 provides direction concerning calculation of investment limits. A state bank will determine its investment limit at the same time and in the same manner as it determines its lending limit under proposed new §12.11.

Proposed new §12.62 addresses the permissibility of hedging investments, and authorizes a state bank to make an otherwise prohibited investment or exceed the statutory limits for an investment if the investment is solely for hedging existing bank risks and not for engaging in speculative activities.

Section 12.91, concerning other real estate owned (OREO), addresses the permissible means by which a bank acquires, manages, and disposes of OREO. Finance Code, §34.004, a new law enacted by House Bill 2007 effective September 1, 2007, may permit a state bank to retain ownership of nonworking royalty interests by classifying the interests as personal property instead of real property for bank regulatory purposes. Accordingly, a proposed amendment to §12.91(a)(10) removes royalty interests approved under Finance Code, §34.004, from the definition of OREO.

A state bank's ability to acquire and hold OREO is subject to 12 U.S.C. §1831a, which restricts and prohibits insured state banks and their subsidiaries from engaging in activities and investments that are not permissible for national banks and their subsidiaries, subject to exceptions. A national bank is required to treat a royalty interest as real estate and dispose of it no later than 10 years after acquisition. Accordingly, a state bank that seeks to retain direct ownership of royalty interests beyond 10 years after acquisition must apply to and obtain approval of both the banking commissioner under Finance Code, §34.004, and the Federal Deposit Insurance Corporation under 12 C.F.R. §362.3(a)(2)(i).

Finally, a proposed amendment to §12.91 adds new subsection (h)(4) to provide that permissible means of disposing of OREO include the transfer of OREO from the bank to a passive investment subsidiary in the manner authorized by 12 C.F.R. §362.4(b)(5)(i). State bank ownership of OREO beyond 10 years after acquisition is prohibited by 12 U.S.C. §1831a.

Robert L. Bacon, Deputy Commissioner, Texas Department of Banking, has determined that, for each year of the first five years that the proposed new and amended sections and the proposed repeal are in effect, there will be no fiscal implications for state or local government as a result of enforcing or administering the sections.

Mr. Bacon has also determined that, for each of the first five years the proposed new and amended sections and the proposed repeal are in effect, the public benefit anticipated as a result of the new, amended and repealed sections will be the replacement of obsolete statutory references with correct citations, the updating and clarification of requirements, and the harmonizing of the sections and governing law. There is no anticipated cost to persons who are required to comply with the changes as proposed. There will be no adverse economic effect on small businesses.

To be considered, comments on the proposed new sections, repeals, and amendments must be submitted not later than 30 days after the date of publication of this notice. Comments should be addressed to Everette Jobe, Senior Counsel, Texas Department of Banking, 2601 North Lamar Boulevard, Suite 300, Austin, Texas 78705-4294, or by e-mail to: ejobe@banking.state.tx.us.

Subchapter A. LENDING LIMITS

7 TAC §§12.1 - 12.3, 12.5, 12.6, 12.8 - 12.11

The amendments and new sections are proposed under Finance Code §31.003(a), which authorizes the commission to adopt rules necessary or reasonable to implement and clarify applicable law, and under Finance Code, §34.201(d), which authorizes the commission to adopt rules regarding legal lending limits, including rules to define or further define terms used in the statute, or establish limits, requirements, or exemptions other than specified by the statute for particular classes or categories of loans or extensions of credit. The amendments and new sections are also proposed under the authority of Government Code, §2001.039, which requires a state agency to periodically review each of its rules and readopt, readopt with amendments, or repeal a rule based upon its rule review.

As required by Finance Code, §31.003(b), the commission considered the need to promote a stable banking environment, provide the public with convenient, safe, and competitive banking services, preserve and promote the competitive position of state banks with regard to national banks and other depository institutions in this state consistent with the safety and soundness of state banks and the state bank system, and allow for economic development in this state.

Finance Code, §34.201, is affected by the proposed amendments and new sections.

§12.1.Purpose and Scope.

(a) (No change.)

(b) Scope.

(1) This subchapter applies to all loans and extensions of credit made by a state bank and its operating subsidiaries [ on or after September 1, 1995 ]. This subchapter does not apply to loans made by an insured state bank and its domestic operating subsidiaries to the bank's "affiliates," as that term is defined in 12 U.S.C. [ United States Code (USC), ] §371c(b)(1), pursuant to the Finance Code, §34.201(a)(13), or to loans made by a state bank to the bank's operating subsidiaries, pursuant to the Finance Code, §34.201(a)(14). Except as otherwise provided, this subchapter does not apply to other loans specifically exempted from the lending limit pursuant to the Finance Code, §34.201.

(2) Loans and extensions of credit to affiliates, executive officers, directors, and principal shareholders of state banks, and their related interests, are subject to the limits prescribed by 12 U.S.C. [ USC, ] §§371c, 371c-1, 375a, and 375b, Regulation O (12 C.F.R. [ Code of Federal Regulations (CFR), ] §215.1 et seq), and 12 C.F.R. [ CFR, ] §337.3, in addition to the lending limits established by the Finance Code, §34.201, and this subchapter, where applicable.

(3) (No change.)

§12.2.Definitions.

Definitions in the Finance Code, Title 3, Subtitles A and G, are incorporated herein by reference. As used in this subchapter and in Finance Code, Chapter 34, concerning investments and loans, the following words and terms shall have the following meanings, unless the context clearly indicates otherwise.

(1) Unimpaired capital and surplus--A state bank's core capital, equal to its Tier 1 capital calculated under the federal risk-based capital standards, and referred to as Tier 1 capital is this chapter.

(2) Federal risk-based capital standards--The federal system for calculating a bank's equity capital and its specified components, set forth in appendix A to 12 C.F.R. part 325 (or appendix A to 12 C.F.R. part 208 in the case of a bank that is a member of the Federal Reserve System).

(3) Tier 1 capital--A state bank's unimpaired capital and surplus. A state bank's Tier 1 capital is calculated under the federal risk-based capital standards, is reported in the bank's most recent call report, and is periodically re-calculated as provided by §12.11 of this title (relating to Calculation of Lending Limits).

(4) Call report--The federal Consolidated Report of Condition and Income required by and filed under 12 U.S.C. §1817 (or under 12 U.S.C. §324 in the case of a bank that is a member of the Federal Reserve System), or a report of financial condition and results of operations of a state bank required by the banking commissioner under Finance Code, §31.108.

(5) Control--Control is presumed to exist when a person directly or indirectly, or acting through or together with one or more persons:

(A) owns, controls, or has the power to vote 25 percent or more of any class of voting securities of another person;

(B) controls, in any manner, the election of a majority of the directors, trustees, or other persons exercising similar functions of another person; or

(C) has the power to exercise a controlling influence over the management or policies of another person.

(6) Borrower--A person who is named as a borrower, obligor, or debtor in a loan or extension of credit, or any other person, including but not limited to a drawer, endorser, or guarantor who is considered to be a borrower under the direct benefit, source of repayment, or common enterprise tests set forth in §12.9 of this title (relating to Aggregation and Attribution).

(7) Sale of Federal funds--A transaction between depository institutions involving the transfer of immediately available funds resulting from credits to deposit balances at Federal Reserve Banks, or from credits to new or existing deposit balances due from a correspondent depository institution.

§12.3.Loans and Extensions of Credit.

(a) Loans or extensions of credit for purposes of the Finance Code, §34.201, and this subchapter include:

(1) an overdraft, regardless of whether such overdraft was pre-arranged, other than an intra-day overdraft for which payment or deposit is received by the bank before the time at which the bank closes its accounting records for the business day on which the funds were advanced;

(2) - (10) (No change.)

(b) Loans or extensions of credit for purposes of the Finance Code, §34.201, and this subchapter do not include:

(1) (No change.)

(2) accrued and discounted interest on an existing loan or extension of credit , including interest that has been capitalized from prior notes and interest that has been advanced under terms and conditions of a loan agreement ;

(3) (No change.)

(4) an advance against uncollected funds in the normal course of collection pursuant to the bank's availability schedule issued in compliance with Regulation CC (12 C.F.R. [CFR,] §229.1 et seq), including the amount of an item that must be credited to the customer under the bank's availability schedule but remains uncollected and unreturned because of a delay or defect in the collection system;

(5) - (6) (No change.)

§12.5.Percentage Lending Limits.

(a) General lending limit. Generally, a bank's total outstanding loans and extensions of credit to one borrower, as provided in the Finance Code §34.201, may not exceed 25% of the [ lesser of the ] bank's Tier 1 capital [ and certified surplus or the bank's total equity capital ]. However, certain loans or extensions of credit are subject to special lending limits as set forth in this section. These special lending limits are cumulative of one another and of the general lending limit under this subsection except as otherwise provided.

(b) Loans secured by title to readily marketable goods.

(1) Pursuant to the Finance Code, §34.201(a)(3), loans to one borrower secured by a bill of lading, bonded warehouse receipt, or similar document transferring or securing title to readily marketable goods may not exceed 50% of the [lesser of the] bank's Tier 1 capital [ and certified surplus or the bank's total equity capital ], in addition to the amount for that borrower allowed under the bank's general lending limit for loans and extensions of credit other than as provided by this subsection, provided the bank's interest in the collateral is adequately insured against loss if it is customary to do so. The market value of the goods securing the loan must at all times equal at least 115% of the amount of the outstanding loan that exceeds the general lending limit. The duration of the loan or extension of credit may not exceed six months if secured by goods that are refrigerated or frozen, or ten months if secured by nonperishable goods.

(2) - (3) (No change.)

(c) Loans secured by liens on stored agricultural products.

(1) Pursuant to the Finance Code, §34.201(a)(4), loans to one borrower secured by liens on agricultural products in secure and properly documented storage in bonded warehouses or elevators may not exceed 50% of the [ lesser of the ] bank's Tier 1 capital [ and certified surplus or the bank's total equity capital ], in addition to the amount for that borrower allowed under the bank's general lending limit for loans and extensions of credit other than as provided by this subsection, provided the bank's interest in the collateral is adequately insured against loss. The market value of the agricultural products securing the loan must at all times equal at least 125% of the amount of the outstanding loan. The duration of the loan or extension of credit arising from a single transaction or the same agricultural products may not exceed six months if secured by agricultural products that are refrigerated or frozen, or exceed ten months if secured by nonperishable agricultural products.

(2) - (4) (No change.)

(d) Loans secured by readily marketable collateral.

(1) Pursuant to the Finance Code, §34.201(a)(12), loans or extensions of credit to one borrower may exceed the bank's general lending limit by an additional 15% of the [ lesser of the ] bank's Tier 1 capital [ and certified surplus or the bank's total equity capital ] if the amount that exceeds the bank's general lending limit is fully secured by readily marketable collateral. The bank must properly perfect its security interest in the collateral to qualify for this added special lending limit and the collateral at all times must have a market value of at least 100% of the amount of the loan or extension of credit that exceeds the bank's general lending limit.

(2) For purposes of this subsection, readily marketable collateral must be financial instruments or bullion that can be promptly sold under ordinary market conditions at a fair market value determined by reliable and continuously available price quotations, based upon actual transactions on an auction or similarly available daily bid and ask price market. Financial instruments are stocks, bonds, notes, and debentures traded on a national securities exchange, over-the-counter margin stocks as defined in Regulation U (12 C.F.R. [ CFR, ] §§221.1 et seq), commercial paper, negotiable certificates of deposit, bankers' acceptances, and shares in a money market mutual fund of the type that issues shares in which banks may perfect a security interest, but not including individual mortgages. Financial instruments may be denominated in foreign currencies that are freely convertible into United States dollars.

(e) Loans secured by documents covering livestock.

(1) Pursuant to the Finance Code, §34.201(b)(2), loans or extensions of credit to one borrower secured by shipping documents or instruments that transfer or secure title to or grant a first lien security interest in livestock may not exceed 15% of the [ lesser of the ] bank's Tier 1 capital [ and certified surplus or the bank's total equity capital ], in addition to the amount allowed under the bank's general lending limit. The market value of the livestock securing the loan must at all times equal at least 115% of the amount of the outstanding loan that exceeds the general lending limit.

(2) - (3) (No change.)

(f) Loans secured by dairy cattle paper. Pursuant to the Finance Code, §34.201(b)(2), loans and extensions of credit to one borrower arising from the discount by dealers in dairy cattle of paper given in payment for the cattle may not exceed 15% of the [ lesser of the ] bank's Tier 1 capital [ and certified surplus or the bank's total equity capital ], in addition to the amount allowed under the bank's general lending limit. To qualify, the paper must carry the full recourse endorsement or unconditional guarantee of the seller and must be secured by the cattle sold, pursuant to liens that allow the bank to maintain a perfected security interest in the cattle under applicable law.

§12.6.Loans Not Subject to Lending Limits.

(a) (No change.)

(b) Bankers' acceptances. Pursuant to the Finance Code, §34.201(a)(2), acceptance of drafts eligible for rediscount under 12 U.S.C. [ USC, ] §372 and §373, or a bank's purchase of acceptances created by other banks that are eligible for rediscount under those sections, is not subject to the limits of the Finance Code, §34.201, or this subchapter. Bankers' acceptances within this exception do not include:

(1) - (3) (No change.)

(c) Obligations of state or local government. Pursuant to the Finance Code, §34.201(a)(8), a loan or extension of credit to this state or an agency or political subdivision of this state, including a county or municipality or an agency or political subdivision of a county or municipality, is not subject to the limitations of the Finance Code, §34.201, or this subchapter to the extent the loan or extension of credit constitutes a legally created general obligation of the borrower, if the lending bank has obtained an opinion of counsel or the opinion of the attorney general that the loan or extension of credit is a valid and enforceable general obligation of the borrower.

(d) - (e) (No change.)

(f) Government guaranteed loans. Pursuant to Finance Code, §34.201(a)(8), a loan or extension of credit to a borrower is not subject to the limitations of the Finance Code, §34.201, or this subchapter to the extent secured by unconditional takeout commitments, insurance, or guarantees of a governmental entity described in subsection (c) or (e) of this section [ subsection ], provided the commitment or guarantee is payable only in cash or its equivalent. If the purchasing, insuring, or guaranteeing entity is described in subsection (c) of this section, the lending bank must obtain an opinion of counsel or the opinion of the attorney general that the unconditional takeout commitment, insurance, or guarantee is a valid and enforceable general obligation of the purchasing, insuring, or guaranteeing entity. A takeout commitment, insurance, or guarantee is considered unconditional if the protection afforded the bank is not substantially diminished or impaired if loss should result from factors beyond the bank's control. Protection against loss is not materially diminished or impaired by procedural requirements such as an agreement to pay on the obligation [ take over ] only in the event of default, including default over a specific period of time, a requirement that notification of default be given within a specific period after its occurrence, or a requirement of good faith on the part of the bank.

(g) - (h) (No change.)

§12.8.Other Exceptions.

(a) (No change.)

(b) Emergency lending limits. In the event that a bank's Tier 1 capital [ and certified surplus or total equity capital ] declines sufficiently to seriously impair the bank's ability to effectively operate in its marketplace or serve the needs of its customers or the community in which it is located, the banking commissioner may, upon written application, grant the bank temporary permission to fund loans or extensions of credit in excess of the bank's legal lending limit. The banking commissioner in the exercise of discretion may limit emergency lending authority under this section to particular types or classes of loans or extensions of credit.

§12.9.Aggregation and Attribution.

(a) - (c) (No change.)

(d) Source of repayment. The expected source of repayment for each loan or extension of credit is considered the same if the primary source of repayment is the same for each borrower. An employer will not be considered a primary source of repayment under this subsection solely because of wages and salaries paid to an employee , unless the standards of subsection (c)(1) of this section are met.

(e) Loans to a corporate group. Pursuant to the Finance Code, §34.201(c), loans or extensions of credit by a bank to a corporate group may not exceed 75% of the [ lesser of the ] bank's Tier 1 capital [ and certified surplus or the bank's total equity capital ]. This limitation applies only to loans subject to the general lending limit. For purposes of this subsection, a corporate group is comprised of a person and all of its subsidiaries, and a corporation or other entity is a subsidiary of a person if the person owns or beneficially owns directly or indirectly more than 50% of the voting securities or voting interests of the corporation or other entity. Subject to the special limit of this subsection, loans or extensions of credit to a person and its subsidiary, or to different subsidiaries of a person, are not aggregated or attributed to other members of the corporate group unless either the direct benefit, common enterprise, or source of repayment test is met.

(f) - (g) (No change.)

§12.10.Nonconforming Loans.

(a) A loan or extension of credit, within a bank's legal lending limit when made, will not be considered a violation of the applicable lending limit but will be cited as nonconforming if the loan no longer complies with the bank's legal lending limit because:

(1) the bank's Tier 1 capital [ and certified surplus or total equity capital, if less, ] has declined;

(2) - (4) (No change.)

(b) - (c) (No change.)

§12.11.Calculation of Lending Limit.

(a) Calculation date. For purposes of determining compliance with Finance Code, §34.201, and this subchapter, a state bank shall determine its lending limit as of the most recent of the following dates:

(1) the last day of the preceding calendar quarter; or

(2) the date on which there is a change in the bank's capital category for purposes of 12 U.S.C. 1831o and 12 C.F.R. §325.102 (or 12 CFR §208.32 in the case of a bank that is a member of the Federal Reserve System).

(b) Effective date.

(1) A bank's lending limit calculated in accordance with subsection (a)(1) of this section is effective as of the earlier of the following dates:

(A) the date on which the bank's call report is submitted; or

(B) the date on which the bank's call report is required to be submitted under applicable federal law.

(2) A bank's lending limit calculated in accordance with subsection (a)(2) of this section is effective on the date that the limit is required to be calculated.

(c) More frequent calculations. The banking commissioner may permit a state bank to recalculate its lending limit at a point during a quarter based on a material change in a bank's capital arising from corporate activities, such as a merger or stock issuance. For safety and soundness reasons, the banking commissioner may provide written notice to a state bank directing the bank to calculate its lending limit at a more frequent interval than required by subsection (a) of this section, and the bank shall thereafter calculate its lending limit at that interval until further notice.

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 June 15, 2007.

TRD-200702454

Sarah J. Shirley

General Counsel

Texas Department of Banking

Proposed date of adoption: August 17, 2007

For further information, please call: (512) 475-1300

7 TAC §12.2

(Editor's note: The text of the following section proposed for repeal will not be published. The section may be examined in the offices of the Texas Department of Banking or in the Texas Register office, Room 245, James Earl Rudder Building, 1019 Brazos Street, Austin.)

The repeal of §12.2 is proposed under Finance Code §31.003(a), which authorizes the commission to adopt rules necessary or reasonable to implement and clarify applicable law, and under Finance Code, §34.201(d), which authorizes the commission to adopt rules regarding legal lending limits, including rules to define or further define terms used in the statute, or establish limits, requirements, or exemptions other than specified by the statute for particular classes or categories of loans or extensions of credit. The repeal is also proposed under the authority of Government Code, §2001.039, which requires a state agency to periodically review each of its rules and readopt, readopt with amendments, or repeal a rule based upon its rule review.

No statute, article or code is affected by the proposed repeal.

§12.2.General Definitions.

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 June 15, 2007.

TRD-200702455

Sarah J. Shirley

General Counsel

Texas Department of Banking

Proposed date of adoption: August 17, 2007

For further information, please call: (512) 475-1300

7 TAC §12.33

The amendments are proposed under the authority of Government Code, §2001.039, which requires a state agency to review each of its rules every four years and readopt, readopt with amendments, or repeal a rule based upon its rule review, and Finance Code, §181.003, which authorizes the commission to adopt rules as necessary for the implementation and administration of Finance Code, §§181.001, et seq.

No statute, article or code is affected by the proposed amendments.

§12.33.Debt Cancellation Contracts and Debt Suspension Agreements.

(a) - (h) (No change.)

(i) Notwithstanding the foregoing, until further notice, compliance with the following provisions of this section will not be required when a state bank, in connection with closed-end consumer credit extended by the bank (other than a residential mortgage loan), offers a debt cancellation contract or debt suspension agreement through an unaffiliated, non-exclusive agent:

(1) the requirement set forth in subsection (e) of this section to offer a periodic payment option;

(2) the requirement set forth in subsection (d)(1) of this section that a bank offering a customer a debt cancellation contract or debt suspension agreement without a refund provision also must offer the customer an option to purchase a comparable debt cancellation contract or debt suspension agreement that provides for a refund;

(3) the long-form disclosure requirement set forth in subsection (f)(2) of this section;

(4) the second short form disclosure set forth in subsection (f)(1)(B) of this section, informing the customer that he or she has the option to pay the fee in a single lump sum or in periodic payments;

(5) the third short form disclosure set forth in subsection (f)(1)(C) of this section, informing the customer that he or she has the option to purchase a debt cancellation contract or debt suspension agreement with a refund provision;

(6) the fifth short form disclosure set forth in subsection (f)(1)(E) of this section, indicating that the customer will receive additional information before being required to pay for the debt cancellation contract or debt suspension agreement; and

(7) the requirement set forth in subsection (g)(1) of this section to obtain a customer's written acknowledgment of receipt of disclosures.

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 June 15, 2007.

TRD-200702456

Sarah J. Shirley

General Counsel

Texas Department of Banking

Proposed date of adoption: August 17, 2007

For further information, please call: (512) 475-1300

7 TAC §12.61, §12.62

(Editor's note: The text of the following sections proposed for repeal will not be published. The sections may be examined in the offices of the Texas Department of Banking or in the Texas Register office, Room 245, James Earl Rudder Building, 1019 Brazos Street, Austin.)

The repeal is proposed under Finance Code §31.003(a), which authorizes the commission to adopt rules necessary or reasonable to implement and clarify applicable law, and under Finance Code, §34.101(h), which authorizes the commission to adopt rules regarding investments, including rules to define or further define terms used in the statute, to establish limits, requirements, or exemptions other than specified by the statute for particular classes or categories of securities, or to limit or expand investment authority for state banks for particular classes or categories of securities. The repeal is also proposed under the authority of Government Code, §2001.039, which requires a state agency to periodically review each of its rules and readopt, readopt with amendments, or repeal a rule based upon its rule review.

No statute, article or code is affected by the proposed repeal.

§12.61.Transition Provisions.

§12.62.Definition of Equity Capital.

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 June 15, 2007.

TRD-200702458

Sarah J. Shirley

General Counsel

Texas Department of Banking

Proposed date of adoption: August 17, 2007

For further information, please call: (512) 475-1300

7 TAC §12.61, §12.62

The new sections are proposed under Finance Code §31.003(a), which authorizes the commission to adopt rules necessary or reasonable to implement and clarify applicable law, and under Finance Code, §34.101(h), which authorizes the commission to adopt rules regarding investments, including rules to define or further define terms used in the statute, to establish limits, requirements, or exemptions other than specified by the statute for particular classes or categories of securities, or to limit or expand investment authority for state banks for particular classes or categories of securities. The new sections are also proposed under the authority of Government Code, §2001.039, which requires a state agency to periodically review each of its rules and readopt, readopt with amendments, or repeal a rule based upon its rule review.

As required by Finance Code, §31.003(b), the commission considered the need to promote a stable banking environment, provide the public with convenient, safe, and competitive banking services, preserve and promote the competitive position of state banks with regard to national banks and other depository institutions in this state consistent with the safety and soundness of state banks and the state bank system, and allow for economic development in this state.

Finance Code, Chapter 34, Subchapters A and B, is affected by the proposed new sections.

§12.61.Calculation of Investment Limit.

(a) The term "unimpaired capital and surplus" has the meaning assigned by §12.2 of this title (relating to Definitions).

(b) For purposes of determining compliance with investment restrictions under Finance Code, Chapter 34, a state bank shall determine its investment limit at the same time and in the same manner as it determines its lending limit under §12.11 of this title (relating to Calculation of Lending Limits), to be effective at the same time as its lending limit is effective under §12.11(b) of this title.

§12.62.Hedging Investments.

(a) A hedging investment is an asset held incidental to a permissible banking activity in order to hedge the bank's obligations, rather than as a security held by the bank for investment. The transaction is used to manage risks arising from otherwise permissible banking activities and not entered into for speculative purposes.

(b) A state bank may make an otherwise prohibited investment or exceed the statutory limits for an investment if for the purpose of hedging risks and not for engaging in speculative activities. Documentation underlying the investment decision must demonstrate that the hedging investment offers a particularly well matched and effective risk management mechanism for specific banking risks.

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 June 15, 2007.

TRD-200702457

Sarah J. Shirley

General Counsel

Texas Department of Banking

Proposed date of adoption: August 17, 2007

For further information, please call: (512) 475-1300

7 TAC §12.91

The amendments are proposed under Finance Code, §31.003(a), which authorizes the commission to adopt rules to accomplish the purposes of Finance Code, Title 3, Subtitle A, including rules necessary or reasonable to implement and clarify applicable law, preserve or protect the safety and soundness of state banks, and grant at least the same rights and privileges to state banks that are or may be granted to national banks domiciled in this state. As required by Finance Code, §31.003(b), the commission considered the need to promote a stable banking environment, provide the public with convenient, safe, and competitive banking services, preserve and promote the competitive position of state banks with regard to national banks and other depository institutions in this state consistent with the safety and soundness of state banks and the state bank system, and allow for economic development in this state.

Finance Code, §34.003, is affected by the proposed amendments.

§12.91.Other Real Estate Owned.

(a) Definitions. Words and terms used in this subchapter that are defined in the Finance Code, §31.002, have the same meanings as defined in the Finance Code. The following words and terms when used in this subchapter shall have the following meanings unless the context clearly indicates the contrary.

(1) - (9) (No change.)

(10) Other Real Estate Owned (OREO)--Real estate, including improvements, mineral interests, surface, and subsurface rights, owned in whole or in part or leased by a state bank, no matter how acquired, which is not a bank facility as defined by paragraph (3) of this subsection or leasehold property as permitted under the Finance Code, §34.204(a) , but excluding nonworking royalty interests classified as personal property pursuant to Finance Code, §34.004 .

(11) - (13) (No change.)

(b) - (g) (No change.)

(h) Disposition of OREO. A state bank may dispose of OREO by:

(1) - (3) (No change.)

(4) transferring the OREO to a majority-owned subsidiary in compliance with 12 C.F.R. §362.4(b)(5)(i);

(5) [ (4) ] transferring the OREO for market value to an affiliate, subject to the Finance Code, §33.109, and applicable federal law, including 12 U.S.C. [ United States Code, ] §§371c, 371c-1, and 1828(j);

(6) [ (5) ] if the OREO is a master lease, obtaining a coterminous sublease or an assignment of a coterminous sublease, provided that if the bank acquires or obtains assignment of a non-coterminous sublease, the holding period during which the master lease must be divested is suspended for the duration of the sublease and will commence running again upon termination of the sublease; or

(7) [ (6) ] entering into a transaction that does not qualify for disposal under paragraphs (1)-(5) of this section; provided that its obligation to dispose of the OREO is not met until the bank receives or accumulates from the purchaser an amount in cash, principal and interest payments, and private mortgage insurance totaling 10% of the sales price, as measured in accordance with regulatory accounting principles.

(i) (No change.)

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 June 15, 2007.

TRD-200702459

Sarah J. Shirley

General Counsel

Texas Department of Banking

Proposed date of adoption: August 17, 2007

For further information, please call: (512) 475-1300

Chapter 79. MISCELLANEOUS

Subchapter C. HOLDING COMPANIES

7 TAC §79.47

The Finance Commission of Texas ("Finance Commission") proposes to amend 7 TAC §79.47, Mutual Holding Companies to add a new subsection (e). The new subsection is proposed to clarify that a mutual holding company may own one or more intermediate subsidiary holding companies. The new subsection permits the organization of the subsidiary holding company either as part of the initial reorganization of a mutual savings bank as a mutual holding company or at any subsequent time subject to approval of the Department of Savings and Mortgage Lending (the "Department").

Finance Code Chapter 97, Subchapter B, provides that a mutual savings bank may organize a subsidiary stock savings bank and transfer the assets of the mutual savings bank to the new subsidiary, thus converting the existing entity into a mutual holding company. The result is a two-tiered structure with a mutual holding company parent (the first tier) and a subsidiary stock savings bank (the second tier). Chapter 97 requires that the mutual holding company at all times own more than 50% of the stock of the subsidiary savings bank. Frequently, however, savings banks may prefer to reorganize using a three-tiered structure. Under this structure the mutual holding company parent (first tier) may own as much as 100% but must own more than 50% of a stock subsidiary holding company (the second tier). The stock subsidiary holding company must own 100% percent of the stock savings bank (the third tier).

The three-tiered structure is permitted for federally chartered mutual holding companies. The Home Owners Loan Act (HOLA) mutual holding company provisions for federally chartered institutions (12 U.S.C.A. §1467a(o)) are similar to those found in Finance Code Chapter 97. Although neither the provisions of HOLA nor the original mutual holding company regulations of the federal Office of Thrift Supervision (OTS) specifically provided for a three-tiered holding company structure, OTS recognized this as a permitted structure in the preamble to its initial mutual holding company rules (See 58 Federal Register 44107). The OTS approved a number of three-tiered reorganizations under regulations similar to the current provisions of 7 TAC §79.47. The OTS subsequently amended the mutual holding company regulations to incorporate provisions for a three-tiered structure (See 12 C.F.R. §575.14).

The Department believes that the use of a three-tiered structure is permitted under Finance Code Chapter 97 and current rules. However, the Department believes that amending 7 TAC §79.47 to more clearly set forth this position is advantageous because it provides better guidance as to permissible structures for those mutual savings banks considering reorganization as mutual holding companies. The Department believes this is consistent with the goal of preserving parity with federal charters for state chartered savings banks.

Danny Payne, Savings and Mortgage Lending Commissioner, has determined that for the first five-year period that the new subsection, as proposed, will be in effect, there will be no fiscal implications for state and local government as a result of enforcing or administering the amended rule, and it is not expected that adoption would increase or decrease the net revenue of the Department from the industry.

Mr. Payne estimates that for the first five years that the proposed subsection is in effect, the public will benefit by providing charter parity for state chartered institutions and promoting Texas as an attractive home state for financial institutions. No difference will exist between the cost of compliance for small business and the cost of compliance for the largest business affected by the new sections.

Comments on the proposed amendments may be submitted in writing to Danny Payne, Commissioner, Department of Savings and Mortgage Lending, 2601 North Lamar, Suite 201, Austin, Texas 78705-4294, or emailed to smlinfo@sml.state.tx.us. Comments must be made not later than 30 days after the date of publication of the proposed rule in the Texas Register.

The proposal is made pursuant to Finance Code §11.302(a) authorizing the Finance Commission to adopt rules applicable to savings associations and savings banks.

The section of the Finance Code affected by the proposed new subsection is Finance Code, Chapter 97, Subchapter B, Mutual Holding Companies (Finance Code §97.051 et seq.).

§79.47.Mutual Holding Companies.

(a) - (d) (No change.)

(e) A mutual holding company may establish a subsidiary holding company as a direct subsidiary to hold 100% of the stock of its savings bank subsidiary in accordance with the provisions of this subsection.

(1) The subsidiary holding company may be established either at the time of the initial mutual holding company reorganization or at a subsequent date, subject to the approval of the Department.

(2) For the purposes of Finance Code §97.053(a)(3) and (4), the subsidiary holding company shall be treated as a savings bank issuing stock and shall be subject to the requirements of those sections. The mutual holding company parent must at all times own more than fifty percent (50%) of the outstanding stock of the subsidiary holding company.

(3) The charter and by-laws of a subsidiary holding company must be approved by the Department and may only be amended with the prior approval of the Department.

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 June 18, 2007.

TRD-200702487

John Fleming

General Counsel

Texas Department of Savings and Mortgage Lending

Earliest possible date of adoption: July 29, 2007

For further information, please call: (512) 475-1352

Chapter 84. MOTOR VEHICLE INSTALLMENT SALES

Subchapter B. INSTALLMENT SALES CONTRACT PROVISIONS

7 TAC §84.209

The Finance Commission of Texas (commission) proposes amendments to 7 TAC §84.209, concerning Model Clauses for motor vehicle installment sales contracts.

The purpose of the amendments to 7 TAC §84.209 is to correct errors in a Spanish translation of the documentary fee clause. The first translation option contained in §84.209(9)(B) has been revised to include the most accurate Spanish translation.

Leslie L. Pettijohn, Consumer Credit Commissioner, has determined that for the first five-year period the amendments are in effect, there will be no fiscal implications for state or local government as a result of administering the rule.

For each year of the first five years the amendments are in effect, Commissioner Pettijohn has also determined that the public benefit anticipated as a result of the proposed amendments will be that the commission's rules will be more accurate and will be more easily understood. There is no anticipated cost to persons who are required to comply with the amendments as proposed. There will be no adverse economic effect on small or micro businesses. There will be no effect on individuals required to comply with the amendments as proposed.

Comments on the proposed amendments may be submitted in writing to Laurie Hobbs, Assistant General Counsel, Office of Consumer Credit Commissioner, 2601 North Lamar Boulevard, Austin, Texas 78705-4207 or by email to laurie.hobbs@occc.state.tx.us. To be considered, a written comment must be received on or before the 31st day after the date the proposed amendments are published in the Texas Register. At the conclusion of the 31st day after the proposed amendments are published in the Texas Register, no further written comments will be considered or accepted by the commission.

These amendments, as well as all of the rules contained in 7 TAC Chapter 84, Subchapter B (§§84.201 - 84.210), provide model clauses and a model contract. Licensees are not required to adopt the model language contained in the rules. However, for those licensees utilizing the model clauses or contract, the prior model language (as contained in former 7 TAC Part 1, Chapter 1, Subchapter R) is acceptable and the agency will permit licensees to use the prior model language (without a non-standard contract submission) until January 1, 2008, to deplete supplies of existing forms during a transition period after the effective date of the rules. Please note that the publication of the adoption of previous amendments to §84.209 and §84.210 in the Texas Register on March 9, 2007 (32 TexReg 1231), listed the agency's implementation date as October 1, 2007. Given these additional proposed amendments, the agency intends to provide licensees until January 1, 2008, for compliance.

The amendments are proposed under Texas Finance Code §11.304, which authorizes the commission to adopt rules to enforce Title 4 of the Texas Finance Code. Additionally, Texas Finance Code, §348.513 grants the commission the authority to adopt rules to enforce the motor vehicle installment sales chapter.

The statutory provisions (as currently in effect) affected by the proposed amendments are contained in Texas Finance Code, Chapter 348.

§84.209.Model Clauses.

The following model clauses provide the plain language equivalent of provisions found in contracts subject to Texas Finance Code, Chapter 348. p>

(1) - (8) (No change.)

(9) Documentary fee.

(A) The following notice satisfies the requirements of Texas Finance Code, §348.006 if printed in a size equal to at least 10-point type that is boldfaced, capitalized, underlined, or otherwise set out from surrounding written material so as to be conspicuous and within reasonable proximity to the place at which the fee is disclosed. The parenthetical phrase may be inserted at the dealer's option or the disclosure may be made without the parenthetical phrase if the dealer does not charge an amount in excess of $50 for either ordinary motor vehicles or heavy commercial vehicles or if the contract form is not used for heavy commercial vehicles. The model clause is contained in the Itemization of Amount Financed. The documentary fee clause reads: "A documentary fee is not an official fee. A documentary fee is not required by law, but may be charged to buyers for handling documents and performing services relating to the closing of a sale. A documentary fee may not exceed $50 (for a motor vehicle contract or a reasonable amount agreed to by the parties for a heavy commercial vehicle contract). This notice is required by law."

(B) The following notice is a sufficient Spanish translation of the documentary fee disclosure required by Texas Finance Code, §348.006. The parenthetical phrase may be inserted at the dealer's option or the disclosure may be made without the parenthetical phrase if the dealer does not charge an amount in excess of $50 for either ordinary motor vehicles or heavy commercial vehicles or if the contract form is not used for heavy commercial vehicles. The Spanish translation may read: "Un honorario de documentación no es un honorario oficial [ official ]. Un honorario de documentación no es requerido por la ley, pero puede ser cargada al comprador [ comparador ] como gastos de manejo [ manojo ] de documentos y para realizar servicios relacionados con el cierre de una venta. Un honorario de documentación no puede exceder $50 (un contrato de vehículo automotor o una cantidad razonable acordada por las partes para un contrato de vehículo comercial pesado). Esta notificación es requerida por la ley." Or "Un cargo documental no es un cargo oficial. La ley no exige que se imponga un cargo documental. Pero éste podría cobrarse a los compradores por el manejo de la documentación y la prestación de servicios en relación con el cierre de una venta. Un cargo documental no puede exceder de $50 para (un contrato de vehículo automotor o una cantidad razonable acordada por las partes para un contrato de vehículo comercial pesado). Esta notificación se exige por ley."

(10) - (43) (No change.)

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 June 15, 2007.

TRD-200702444

Leslie L. Pettijohn

Commissioner

Office of Consumer Credit Commissioner

Earliest possible date of adoption: July 29, 2007

For further information, please call: (512) 936-7611

Subchapter A. REGISTRATION PROCEDURES

7 TAC §88.102

The Finance Commission of Texas (commission) proposes amendments to 7 TAC §88.102, concerning Filing of New Application for debt management services providers.

The purpose of these amendments is to establish a workable foundation to begin the regulation of for-profit entities that provide debt management services, including new filing requirements and clarification regarding information to be provided about accreditation organizations. Along with the proposed amendments to 7 TAC §88.202 and §88.304, as well as proposed new 7 TAC §88.306 and §88.307 published elsewhere in this issue of the Texas Register, the proposed amendments serve to implement the provisions of Senate Bill 884 (SB 884), as recently enacted by the 80th Texas Legislature. With SB 884, the Legislature has broadened the scope of Texas Finance Code, Chapter 394, Subchapter C, Consumer Debt Management Services, to include for-profit entities.

Section 88.102(b) has been revised to reflect the new filing requirements contained in SB 884, including certain names, business addresses, e-mail and website addresses of the applicant's debt management business. Language has been added to §88.102(b) to implement the new statutory requirement that each applicant provide the name and home address of each officer and director and each person holding 10% ownership or more. In the disclosure of principal parties, the detailed description of ownership and for-profit affiliate disclosure has been limited to nonprofit or tax exempt organizations, as required by SB 884. Regarding accreditation organizations, paragraph (8) has been added, outlining the requirement that the applicant provide the accreditation organizations for both the provider itself and its credit counselors. Additionally, some technical corrections have been made to §88.102(b) to streamline its language for better clarity.

Leslie L. Pettijohn, Consumer Credit Commissioner, has determined that for the first five-year period the amendments are in effect, there will be no fiscal implications for state or local government as a result of administering the rule as amended.

For each year of the first five years the amendments are in effect, Commissioner Pettijohn has also determined that the public benefit anticipated as a result of the proposed amendments will be that the commission's rules will reflect current statutory provisions and that there will be enhanced compliance with the credit laws. There is no anticipated cost to persons who are required to comply with the amendments as proposed. There will be no adverse economic effect on small or micro businesses. There will be no effect on individuals required to comply with the amendments as proposed.

Comments on the proposed amendments may be submitted in writing to Laurie Hobbs, Assistant General Counsel, Office of Consumer Credit Commissioner, 2601 North Lamar Boulevard, Austin, Texas 78705-4207 or by e-mail to laurie.hobbs@occc.state.tx.us. To be considered, a written comment must be received on or before the 31st day after the date the proposed amendments are published in the Texas Register . At the conclusion of the 31st day after the proposed amendments are published in the Texas Register, no further written comments will be considered or accepted by the commission.

These amendments are proposed under Texas Finance Code, §394.214, which authorizes the commission to adopt rules to carry out Texas Finance Code, Chapter 394, Subchapter C.

The statutory provisions (amendments effective September 1, 2007) affected by the proposed amendments are, or will be, contained in Texas Finance Code, Chapter 394, Subchapter C.

§88.102.Filing of New Application.

(a) (No change.)

(b) The application shall include the following required forms and filings. All questions must be answered.

(1) Application for Registration of Debt Management Services Provider [ (ADM 76) ].

(A) Required names and addresses. An applicant for a debt management services provider registration must provide the following:

(i) the applicant's name;

(ii) all other names under which the applicant conducts business;

(iii) a [ A ] physical street address [ must be listed ] for the proposed address for the applicant's principal business address and that location's telephone number; [ . If the address has not yet been determined, then the application must so state. ]

(iv) the address of each location in this state at which the applicant will provide debt management services, or if the applicant will have no such location, a statement to that effect;

(v) all other business addresses of the applicant in this state;

(vi) the electronic mail address of the applicant's responsible person listed in subparagraph (B) of this paragraph; and

(vii) the applicant's primary Internet website address.

(B) Responsible person. The person responsible for the day-to-day operation of the applicant's proposed business location must be named.

(C) (No change.)

(2) Application Questionnaire for Debt Management Services Provider [ (ADM 77) ]. All applicable questions must be answered.

(3) Disclosure of Owners and Principal Parties of Debt Management Services Provider [ (ADM 78) ].

(A) Detailed ownership and for-profit affiliate disclosure of nonprofit or tax exempt organizations. If the applicant is a nonprofit or tax exempt organization, a [ A ] detailed description of the ownership interest of each officer, director, agent, or employee of the applicant must be provided. Any member of the immediate family of an officer, director, agent, or employee of the applicant, in a for-profit affiliate or subsidiary of the applicant , or in any other for-profit business entity that provides services to the applicant or to a consumer in relation to the applicant's debt management business must also be provided.

(B) Ownership disclosure. The section inquiring about owners requires an answer based upon the applicant's entity type. If an individual's interest in an entity is community property, then spouses with a community property interest must also be listed. If the business interest is owned by a married individual as separate property, then a statement authenticating that fact should be provided.

(i) All entity types. All applicants must disclose the name and home address of each officer and director of the applicant and each person that holds at least a 10% ownership interest in the applicant.

(ii) [ (i) ] Corporations. All shareholders holding 5% or more voting stock must be named. If a parent corporation is the sole or part owner of the proposed business, a narrative or diagram must be attached that describes each level of ownership and management. This narrative or diagram requires the listing of the names of all officers, directors, and stockholders owning 5% or more stock at each level.

(iii) [ (ii) ] Other organizations. The owners, trustees, or governing persons must be named.

(4) Statutory Agent Disclosure [ (ADM 13) ]. The statutory agent is the person or entity to whom any legal notice may be delivered. The agent must list a Texas address for legal service. If the statutory agent is an individual, the address must be a residential address.

(5) Surety bond or insurance. An applicant must file with the commissioner either :

(A) a Surety Bond in the prescribed form [ (ADM 79) ]:

(i) - (ii) (No change.)

(B) evidence of [ that the applicant maintains an ] insurance [ policy in a form approved by the commissioner, ] meeting the requirements of Texas Finance Code, §394.206[ , ] and [ meeting the requirements of ] clauses (i) - (iii) of this subparagraph, as follows:

(i) - (iii) (No change.)

(6) - (7) (No change.)

(8) Accreditation organizations. The applicant must provide the names and contact information for:

(A) the independent, third-party accreditation organization of the provider; and

(B) the accreditation organization or program that certifies the provider's credit counselors.

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 June 15, 2007.

TRD-200702445

Leslie L. Pettijohn

Commissioner

Office of Consumer Credit Commissioner

Earliest possible date of adoption: July 29, 2007

For further information, please call: (512) 936-7611

7 TAC §88.202

The Finance Commission of Texas (commission) proposes amendments to 7 TAC §88.202, concerning Annual Report for debt management services providers.

The purpose of these amendments is to establish a workable foundation to begin the regulation of for-profit entities that provide debt management services, including new filing requirements, clarification regarding information to be provided about accreditation organizations and credit counselors. Along with the proposed amendments to 7 TAC §88.102 and §88.304, as well as proposed new 7 TAC §88.306 and §88.307 published elsewhere in this issue of the Texas Register, the proposed amendments serve to implement the provisions of Senate Bill 884 (SB 884), as recently enacted by the 80th Texas Legislature. With SB 884, the Legislature has broadened the scope of Texas Finance Code, Chapter 394, Subchapter C, Consumer Debt Management Services, to include for-profit entities.

Section 88.202(b) has been amended to include the number of counselors and their certifying organization or program within the annual report information. Coordinating revisions have been made to §88.304(b) (published separately in this issue) so that a provider will only be required to submit actual documentation of its counselors' certification upon request by the commissioner, with the annual report now including the basic information concerning a provider's credit counselors.

Leslie L. Pettijohn, Consumer Credit Commissioner, has determined that for the first five-year period the amendments are in effect, there will be no fiscal implications for state or local government as a result of administering the rule as amended.

For each year of the first five years the amendments are in effect, Commissioner Pettijohn has also determined that the public benefit anticipated as a result of the proposed amendments will be that the commission's rules will reflect current statutory provisions and that there will be enhanced compliance with the credit laws. There is no anticipated cost to persons who are required to comply with the amendments as proposed. There will be no adverse economic effect on small or micro businesses. There will be no effect on individuals required to comply with the amendments as proposed.

Comments on the proposed amendments may be submitted in writing to Laurie Hobbs, Assistant General Counsel, Office of Consumer Credit Commissioner, 2601 North Lamar Boulevard, Austin, Texas 78705-4207 or by e-mail to laurie.hobbs@occc.state.tx.us. To be considered, a written comment must be received on or before the 31st day after the date the proposed amendments are published in the Texas Register . At the conclusion of the 31st day after the proposed amendments are published in the Texas Register, no further written comments will be considered or accepted by the commission.

These amendments are proposed under Texas Finance Code, §394.214, which authorizes the commission to adopt rules to carry out Texas Finance Code, Chapter 394, Subchapter C.

The statutory provisions (amendments effective September 1, 2007) affected by the proposed amendments are, or will be, contained in Texas Finance Code, Chapter 394, Subchapter C.

§88.202.Annual Report.

(a) (No change.)

(b) Each year, at the time of annual renewal, an authorized debt management services provider must file with the commissioner, in a form prescribed by the commissioner, a report that contains the following:

(1) the information required by Texas Finance Code, §394.205; [ and ]

(2) a list of all owners and principal parties, including any change in ownership that occurred during the preceding calendar year ; and [ . ]

(3) information regarding the provider's credit counselors, including the number of credit counselors employed at the time the annual report is prepared, and the accreditation organization or program that certifies the provider's counselors.

(c) Upon request by the commissioner, the provider [ applicant ] must provide any other information the commissioner deems relevant concerning the provider's business and operations during the preceding calendar year for the registered location of the provider in this state where business is conducted under this chapter.

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 June 15, 2007.

TRD-200702446

Leslie L. Pettijohn

Commissioner

Office of Consumer Credit Commissioner

Earliest possible date of adoption: July 29, 2007

For further information, please call: (512) 936-7611

7 TAC §88.304

The Finance Commission of Texas (commission) proposes amendments to 7 TAC §88.304, concerning Credit Counseling Standards for debt management services providers.

The purpose of these amendments is to establish a workable foundation to begin the regulation of for-profit entities that provide debt management services, including clarification regarding information to be provided about accreditation organizations and credit counselors, and limits on compensation for credit counselors. Along with the proposed amendments to 7 TAC §88.102 and §88.202, as well as proposed new 7 TAC §88.306 and §88.307 published elsewhere in this issue of the Texas Register, the proposed amendments serve to implement the provisions of Senate Bill 884 (SB 884), as recently enacted by the 80th Texas Legislature. With SB 884, the Legislature has broadened the scope of Texas Finance Code, Chapter 394, Subchapter C, Consumer Debt Management Services, to include for-profit entities.

Revisions have been made to §88.304(b) so that a provider will only be required to submit actual documentation of its counselors' certification upon request by the commissioner, with the annual report now including the basic information concerning a provider's credit counselors. (See proposed amendments to 7 TAC §88.202, published separately in this issue.)

Subsection (c) has been added to §88.304 and prohibits the credit counselors of debt management services providers from receiving commissions or bonuses based on the number of debt management services agreements initiated, or on the sale of counseling sessions, educational programs, or materials and supplies provided. A subcommittee of the U.S. Senate performed a study regarding abusive practices in credit counseling and made a specific recommendation that employees not receive any improper incentives, including that employees should not be compensated "based upon the number of clients enrolled in debt management plans . . . ." Permanent Subcommittee on Investigations, Committee on Homeland Security and Governmental Affairs, U.S. Senate; Profiteering in a Non-Profit Industry: Abusive Practices in Credit Counseling , p. 54 (S. Rept. 109-55, Apr. 13, 2005). This amendment is intended to carry out that recommendation and prevent abusive sales tactics, as counselors will not be compensated based on the number of consumers induced to sign debt management services agreements with the employing provider. The concept for the proposed amendment to §88.304 stems from provisions contained in the 2005 bankruptcy reform regulations from the U.S. Department of Justice, as well as the Uniform Debt-Management Services Act (UDMSA) drafted by the National Conference of Commissioners on Uniform State Laws (NCCUSL).

Leslie L. Pettijohn, Consumer Credit Commissioner, has determined that for the first five-year period the amendments are in effect, there will be no fiscal implications for state or local government as a result of administering the rule as amended.

For each year of the first five years the amendments are in effect, Commissioner Pettijohn has also determined that the public benefit anticipated as a result of the proposed amendments will be that the commission's rules will reflect current statutory provisions and that there will be enhanced compliance with the credit laws. There is no anticipated cost to persons who are required to comply with the amendments as proposed. There will be no adverse economic effect on small or micro businesses. There will be no effect on individuals required to comply with the amendments as proposed.

Comments on the proposed amendments may be submitted in writing to Laurie Hobbs, Assistant General Counsel, Office of Consumer Credit Commissioner, 2601 North Lamar Boulevard, Austin, Texas 78705-4207 or by e-mail to laurie.hobbs@occc.state.tx.us. To be considered, a written comment must be received on or before the 31st day after the date the proposed amendments are published in the Texas Register . At the conclusion of the 31st day after the proposed amendments are published in the Texas Register, no further written comments will be considered or accepted by the commission.

These amendments are proposed under Texas Finance Code, §394.214, which authorizes the commission to adopt rules to carry out Texas Finance Code, Chapter 394, Subchapter C.

The statutory provisions (amendments effective September 1, 2007) affected by the proposed amendments are, or will be, contained in Texas Finance Code, Chapter 394, Subchapter C.

§88.304.Credit Counseling Standards.

(a) (No change.)

(b) A provider must provide the name and contact information of the accreditation organization or program that certifies its counselors. The provider must maintain [ submit ] documentation of the certification of a provider's credit counselors , which must be submitted upon request [ for approval ] by the commissioner. The commissioner may issue an order disapproving the accreditation organization or program if the commissioner determines that the organization or program does not provide comprehensive education training on the following:

(1) alternatives available to resolve an indebted consumer's credit problems;

(2) how to analyze a consumer's current financial condition;

(3) budget development;

(4) money management; and

(5) wise use of credit.

(c) The provider's credit counselors must receive no commissions or bonuses based on the origination of a debt management services agreement, or sale of a counseling session, an educational program, or materials and supplies provided by the provider to the consumer.

(d) [ (c) ] The provider must maintain documentation of individualized counseling and analysis that has been provided under Texas Finance Code, §394.208(a)(2).

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 June 15, 2007.

TRD-200702447

Leslie L. Pettijohn

Commissioner

Office of Consumer Credit Commissioner

Earliest possible date of adoption: July 29, 2007

For further information, please call: (512) 936-7611

7 TAC §88.306, §88.307

The Finance Commission of Texas (commission) proposes new 7 TAC §88.306, concerning Fees for Debt Management Services, and §88.307, concerning Consumer Education for debt management services providers.

The purpose of the new rules is to establish reasonable fees and minimum standards for the delivery of education to consumers. Along with the proposed amendments to §§88.102, 88.202, and 88.304 published elsewhere in this issue of the Texas Register, the proposed new rules serve to implement the provisions of Senate Bill 884 (SB 884), as recently enacted by the 80th Texas Legislature.

With the enactment of SB 884, the Legislature has broadened the scope of Texas Finance Code, Chapter 394, Subchapter C, Consumer Debt Management Services, to include for-profit entities. In particular, the bill added subsection (f) to §394.210, which provides specific rulemaking authority to the commission to "establish maximum fair and reasonable fees" for debt management services providers. Section 88.306 carries out that intent by instituting reasonable fee provisions. The concepts for many of the fees provided by §88.306 stem from fee provisions contained in the Uniform Debt-Management Services Act (UDMSA) drafted by the National Conference of Commissioners on Uniform State Laws (NCCUSL). The fees outlined by proposed §88.306 below, however, have been modified as a result of industry input in order to incorporate the best possible balance of necessary fee limitations that will be practical in application.

Section 88.306(a)(1) provides for a maximum fee of $100 for initial enrollment services associated with the establishment of a debt management services agreement with the provider.

Section 88.306(a)(2) outlines an allowable monthly service or maintenance fee of 10% of the consumer's monthly payment, with a maximum fee of $50 per month.

Section 88.306(a)(3) lists the final enumerated fee regarding counseling sessions, educational programs, or materials and supplies provided to consumers who do not enter into debt management services agreements with the provider. For consumers who are provided these services and who do not enter into agreements, the provider may charge a maximum fee of $50. The proposed language of §88.306(a)(3) is modeled after a statutory provision from the State of Kansas. This proposal, however, has been modified to exclude from the fee limitation services provided under federal mandates or programs.

Section 88.306(b) prohibits a provider from charging (without advance approval) a fee or providing credit or other insurance, coupons, club memberships, Internet or computer access, or any other services not directly related to debt management or education about personal finance. The proposed language of §88.306(b) is modeled after both the UDMSA and a recently passed bill from the State of Colorado, although this proposal has an added modifier to allow pre-approval by the commissioner.

The proposal of §88.307 serves to address the wide disparity in the amount of education provided to consumers seeking debt management services in Texas. In fact, financial consumer education is greatly needed throughout the country, as "[t]he Department of the Treasury, as well as consumer and industry groups, have identified the lack of financial literacy in the United States as a serious, widespread problem." United States General Accounting Office, Report to the Chairman and Ranking Minority Member, Special Committee on Aging, U.S. Senate; Consumer Protection: Federal and State Agencies Face Challenges in Combating Predatory Lending, p. 89 (GAO-04-280, Jan. 2004) (footnote omitted). Furthermore, a subcommittee of the U.S. Senate performed a study regarding abusive practices in credit counseling, where "current and former credit counselors and CCA [credit counseling agency] clients were interviewed and Subcommittee staff responded to advertisements from various agencies to see what advice was being given." Permanent Subcommittee on Investigations, Committee on Homeland Security and Governmental Affairs, U.S. Senate; Profiteering in a Non-Profit Industry: Abusive Practices in Credit Counseling , p. 2 (S. Rept. 109-55, Apr. 13, 2005). The Subcommittee found that the actions of some recent entrants into the credit counseling industry had resulted in an increasing number of consumer complaints about, among other things, "non-existent education." Id. The Subcommittee specifically recommended that credit counseling agencies provide consumer education in the form of "affirmative financial counseling and educational programs designed to reduce excessive indebtedness . . . ." Id. at 53.

Thus, it has become evident that minimum standards need to be set for the industry so that consumers will have an expectation of receiving consistent content and quality information in the education supplied by debt management services providers. Armed with the same high level of reliable information, consumers throughout the state can make more informed choices regarding the management of their debt. The purpose of §88.307 is to provide one set of minimum standards, across the entire industry of debt management services providers, for the delivery of consumer education.

Section 88.307(a) outlines the required consumer education, including topics, analysis, and instruction, that must be provided before a provider may enter into a debt management services agreement with a consumer. The proposed language of §88.307(a) is partly modeled after provisions contained in the 2005 bankruptcy reform regulations from the U.S. Department of Justice.

Section 88.307(b) establishes that the education provided under §88.307(a) must provide the consumer with an adequate opportunity to obtain a complete financial assessment and comprehensive counseling, relative to the consumer's personal financial situation.

Section 88.307(c) provides some suggested guidelines regarding the amount of consumer education that should be provided to consumers who enter into debt management services agreements.

Section 88.307(d) encourages debt management services providers to provide community-based financial education initiatives in addition to the required counseling for consumers who enter into agreements.

Leslie L. Pettijohn, Consumer Credit Commissioner, has determined that for the first five-year period the rules are in effect there will be no fiscal implications for state or local government as a result of administering the rules.

Commissioner Pettijohn has also determined that for each year of the first five years the rules are in effect the public benefit anticipated as a result of the new rules will be enhanced compliance with the credit laws and consistency in debt management services provided in Texas.

There may be some anticipated economic costs incurred by a person required to comply with this proposal, regarding the potential costs to deliver the required minimum education to consumers. These potential costs are not predictable due to several variable factors, including the amount of consumer education currently delivered by the provider, a provider's number of employees presently trained to provide such education, and the state of the provider's educational materials. Any potential costs of delivering the consumer education required by §88.307, however, can be offset by the fees contained in §88.306(a). It is anticipated that there will be no adverse economic effect on small businesses as compared to the effect on large businesses.

Comments on the proposed new rules may be submitted in writing to Laurie Hobbs, Assistant General Counsel, Office of Consumer Credit Commissioner, 2601 North Lamar Boulevard, Austin, Texas 78705-4207 or by e-mail to laurie.hobbs@occc.state.tx.us. To be considered, a written comment must be received on or before the 31st day after the date the proposed new rules are published in the Texas Register . At the conclusion of the 31st day after the proposed new rules are published in the Texas Register, no further written comments will be considered or accepted by the commission.

These new sections are proposed under Texas Finance Code, §394.214, which authorizes the commission to adopt rules to carry out Texas Finance Code, Chapter 394, Subchapter C. Additionally, Texas Finance Code, §394.210(f) grants the commission the authority to "establish maximum fair and reasonable fees" for debt management services providers.

The statutory provisions (amendments effective September 1, 2007) affected by the proposed new sections are, or will be, contained in Texas Finance Code, Chapter 394, Subchapter C.

§88.306.Fees for Debt Management Services.

(a) A provider may not charge or receive from a consumer, directly or indirectly (except for "fair share" and other such creditor or lender fees or contributions), a fee except for the following:

(1) an initial enrollment fee not to exceed $100, for services associated with the establishment of a debt management services agreement with the provider (e.g. setting up an account and consultation);

(2) a monthly service or maintenance fee of 10% of the consumer's monthly payment to creditors, up to a maximum of $50 per month;

(3) a fee, not to exceed $50, for a counseling session, an educational program, or materials and supplies provided by the provider to the consumer, if the consumer does not enter into a debt management services agreement with the provider. This fee limitation does not apply to any services provided pursuant to a federal mandate or program.

(b) A provider may not charge a consumer for or provide credit or other insurance, coupons for goods or services, membership in a club, access to computers or the Internet, or any other matter not directly related to debt management services or educational services concerning personal finance, unless approved by the commissioner in advance.

§88.307.Consumer Education.

(a) Required counseling for consumers who enter into debt management services agreements. Before entering into a debt management services agreement with a consumer, the provider's credit counselors must provide education to the consumer regarding budget analysis and credit counseling services that include:

(1) an outline of available opportunities to resolve the consumer's credit problems;

(2) an analysis of the consumer's current financial condition;

(3) discussion of the factors that caused such financial condition;

(4) assistance in developing options in responding to the consumer's problems without incurring negative amortization of debt; and

(5) information and instruction on the following topics:

(A) budget development;

(B) money management; and

(C) wise use of credit.

(b) Adequate opportunity for consumers. Credit counseling provided under subsection (a) of this section must give the consumer an adequate opportunity to obtain a complete financial assessment and comprehensive counseling, relative to the consumer's personal financial situation.

(c) Suggested guidelines.

(1) This subsection provides suggested guidelines for the amount of credit counseling to be provided to consumers who enter into debt management services agreements. These suggested guidelines are intended to give debt management services providers considerable flexibility to fit individual needs while providing some guidance.

(2) An optimum guideline the amount of credit counseling to be provided to consumers who enter into debt management services agreements is 45-90 minutes, depending on the unique circumstances of the consumer's debt and financial situation.

(d) Community-based financial education encouraged. Debt management services providers are encouraged to provide community-based financial education initiatives in addition to the counseling required by this section for consumers who enter into debt management services agreements.

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 June 15, 2007.

TRD-200702448

Leslie L. Pettijohn

Commissioner

Office of Consumer Credit Commissioner

Earliest possible date of adoption: July 29, 2007

For further information, please call: (512) 936-7611

Subchapter D. SECOND LIEN HOME EQUITY LOANS (SUBCHAPTER G)

7 TAC §90.403, §90.404

The Finance Commission of Texas (commission) proposes amendments to 7 TAC §90.403, concerning Model Clauses and §90.404, concerning Permissible Changes for second lien home equity loans.

The purpose of the amendments to these rules governing plain language contract provisions for Chapter 342 transactions is to implement changes required by recently passed legislation, and to make revisions enhancing consistency and clarity.

In reference to the recent legislation, House Bill 2061 (HB 2061) was signed by Governor Perry and went into immediate effect during the 2007 legislative session. This bill amends the Notice of Confidentiality Rights contained in Texas Property Code, §11.008, and now requires that this notice be included on any instrument transferring an interest in real property, whether or not any social security numbers or driver's license numbers are contained in the instrument. The commission last adopted amendments concerning these confidentiality notices at the February 23, 2007, commission meeting. As part of that adoption, the commission removed the notices from the model contracts. At that time, §11.008 required that the notice be given only if social security numbers or driver's license numbers were actually present in the transferring instrument. The change at that time was intended to reflect the current industry practice of not including such information on security documents, triggering inclusion of the notice only if the lender disclosed the borrower's personal information.

With the recent passage of HB 2061, however, the confidentiality notice is now mandatory on all instruments transferring an interest in real property. Thus, the commission is proposing that the Notice of Confidentiality Rights clauses included throughout the plain language rules be returned to the model contracts and the required nature of the notices be returned to the rule text in compliance with HB 2061. Consequently, with respect to the confidentiality notices, these proposed amendments will result in the rules and model contracts more closely resembling their state prior to the February 23, 2007, adoption. Proposed amendments concerning the Notice of Confidentiality Rights are contained in §90.403(c)(37). The notice is proposed for return to the model contract contained in the figure for 7 TAC §90.404(a)(8).

Two revisions to enhance consistency and clarity are being proposed for the figures in 7 TAC §90.403(b)(11) and §90.404(a)(7). In §90.403(b)(11), which contains the property insurance model provision, the plural personal pronoun "We" is being replaced with "You" for consistency purposes. As amended, §90.403(b)(11) will include language parallel to the other property insurance sections contained throughout the plain language rules.

Regarding §90.404(a)(7), a comment offered prior to the last adoption has been reconsidered concerning the home equity disclosure statement. For the best clarity, the commission now agrees that the disclosure should be amended as follows: "THIS IS [SECURITY DOCUMENT SECURES] AN EXTENSION OF CREDIT AS DEFINED BY SECTION 50(a)(6), ARTICLE XVI OF THE TEXAS CONSTITUTION." The deleted language inappropriately refers to a security document, whereas Figure §90.404(a)(7) is a model home equity note.

Leslie L. Pettijohn, Consumer Credit Commissioner, has determined that for the first five-year period the amendments to these rules are in effect, there will be no fiscal implications for state or local government as a result of administering the amendments.

For each year of the first five years the amendments to these rules are in effect, Commissioner Pettijohn has also determined that the public benefit anticipated as a result of the proposed amendments will be that the commission's rules will reflect current statutory provisions and will be more easily understood. There is no anticipated cost to persons who are required to comply with the amendments as proposed. There will be no adverse economic effect on small or micro businesses. There will be no effect on individuals required to comply with the amendments as proposed.

These amendments as well as all of the rules contained in recently adopted Chapter 90 provide model clauses and model contracts. Licensees are not required to adopt the model language contained in the rules. However, regarding §§90.101 - 90.604, for those licensees utilizing the model contracts, the prior model language (as contained in former 7 TAC, Part 1, Chapter 1, Subchapter Q) is acceptable and the agency will permit licensees to use the prior model language (without a non-standard contract submission) until January 1, 2008, to deplete supplies of existing forms during a transition period after the effective date of the rules. Please note that the publication of the adoption of previous amendments to §§90.105, 90.403, 90.404, 90.503, 90.504, 90.603, and 90.604 in the Texas Register on March 9, 2007, (32 TexReg 1232) listed the agency's implementation date as October 1, 2007. Given these additional proposed amendments, some required by recent legislation, the agency intends to provide licensees until January 1, 2008, for compliance.

Comments on the proposed amendments may be submitted in writing to Laurie Hobbs, Assistant General Counsel, Office of Consumer Credit Commissioner, 2601 North Lamar Boulevard, Austin, Texas 78705-4207 or by email to laurie.hobbs@occc.state.tx.us. To be considered, a written comment must be received on or before the 31st day after the date the proposed amendments are published in the Texas Register . At the conclusion of the 31st day after the proposed amendments are published in the Texas Register, no further written comments will be considered or accepted by the commission.

The amendments are proposed under Texas Finance Code §11.304, which authorizes the commission to adopt rules to enforce Title 4 of the Texas Finance Code. Additionally, Texas Finance Code, §342.551 grants the commission the authority to adopt rules to enforce the consumer loans chapter.

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

§90.403.Model Clauses.

(a) (No change.)

(b) For a Chapter 342, Subchapter G second lien home equity loan contract:

(1) - (10) (No change.)

(11) Property insurance. The model provision regarding property insurance reads:

Figure: 7 TAC §90.403(b)(11) (.pdf)

(12) - (25) (No change.)

(c) For the security document for a Chapter 342, Subchapter G second lien home equity loan contract:

(1) - (36) (No change.)

(37) Notice of confidentiality rights disclosure. On or after January 1, 2004, [ if ] the security document [ includes the borrower's social security number or driver's license number, it ] must incorporate a "Notice of Confidentiality Rights" disclosure. The disclosure or notice must:

(A) appear on the top of the first page of the security document , either above or directly below the document heading ;

(B) - (C) (No change.)

§90.404.Permissible Changes.

(a) A licensed lender may consider making the following types of changes to the second lien home equity loans plain language model clauses:

(1) - (6) (No change.)

(7) A sample model note is presented in the following example.

Figure: 7 TAC §90.404(a)(7) (.pdf)

(8) A sample model security document is presented in the following example.

Figure: 7 TAC §90.404(a)(8) (.pdf)

(b) (No change.)

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 June 15, 2007.

TRD-200702449

Leslie L. Pettijohn

Commissioner

Office of Consumer Credit Commissioner

Earliest possible date of adoption: July 29, 2007

For further information, please call: (512) 936-7611

7 TAC §90.503, §90.504

The Finance Commission of Texas (commission) proposes amendments to 7 TAC §90.503, concerning Model Clauses and §90.504, concerning Permissible Changes for second lien purchase money loans.

The purpose of the amendments to these rules governing plain language contract provisions for Chapter 342 transactions is to implement changes required by recently passed legislation.

House Bill 2061 (HB 2061) was signed by Governor Perry and went into immediate effect during the 2007 legislative session. This bill amends the Notice of Confidentiality Rights contained in Texas Property Code, §11.008, and now requires that this notice be included on any instrument transferring an interest in real property, whether or not any social security numbers or driver's license numbers are contained in the instrument. The commission last adopted amendments concerning these confidentiality notices at the February 23, 2007, commission meeting. As part of that adoption, the commission removed the notices from the model contracts. At that time, §11.008 required that the notice be given only if social security numbers or driver's license numbers were actually present in the transferring instrument. The change at that time was intended to reflect the current industry practice of not including such information on security documents, triggering inclusion of the notice only if the lender disclosed the borrower's personal information.

With the recent passage of HB 2061, however, the confidentiality notice is now mandatory on all instruments transferring an interest in real property. Thus, the commission is proposing that the Notice of Confidentiality Rights clauses included throughout the plain language rules be returned to the model contracts and the required nature of the notices be returned to rule text in compliance with HB 2061. Consequently, with respect to the confidentiality notices, these proposed amendments will result in the rules and model contracts more closely resembling their state prior to the February 23, 2007, adoption. Proposed amendments concerning the Notice of Confidentiality Rights are contained in §90.503(c)(35). The notice is proposed for return to the model contract contained in the figure for 7 TAC §90.504(a)(8).

Leslie L. Pettijohn, Consumer Credit Commissioner, has determined that for the first five-year period the amendments to these rules are in effect, there will be no fiscal implications for state or local government as a result of administering the amendments.

For each year of the first five years the amendments to these rules are in effect, Commissioner Pettijohn has also determined that the public benefit anticipated as a result of the proposed amendments will be that the commission's rules will reflect current statutory provisions and will be more easily understood. There is no anticipated cost to persons who are required to comply with the amendments as proposed. There will be no adverse economic effect on small or micro businesses. There will be no effect on individuals required to comply with the amendments as proposed.

Comments on the proposed amendments may be submitted in writing to Laurie Hobbs, Assistant General Counsel, Office of Consumer Credit Commissioner, 2601 North Lamar Boulevard, Austin, Texas 78705-4207 or by email to laurie.hobbs@occc.state.tx.us. To be considered, a written comment must be received on or before the 31st day after the date the proposed amendments are published in the Texas Register . At the conclusion of the 31st day after the proposed amendments are published in the Texas Register, no further written comments will be considered or accepted by the commission.

These amendments as well as all of the rules contained in recently adopted Chapter 90 provide model clauses and model contracts. Licensees are not required to adopt the model language contained in the rules. However, regarding §§90.101 - 90.604, for those licensees utilizing the model contracts, the prior model language (as contained in former 7 TAC, Part 1, Chapter 1, Subchapter Q) is acceptable and the agency will permit licensees to use the prior model language (without a non-standard contract submission) until January 1, 2008, to deplete supplies of existing forms during a transition period after the effective date of the rules. Please note that the publication of the adoption of previous amendments to §§90.105, 90.403, 90.404, 90.503, 90.504, 90.603, and 90.604 in the Texas Register on March 9, 2007, (32 TexReg 1232) listed the agency's implementation date as October 1, 2007. Given these additional proposed amendments, some required by recent legislation, the agency intends to provide licensees until January 1, 2008, for compliance.

The amendments are proposed under Texas Finance Code §11.304, which authorizes the commission to adopt rules to enforce Title 4 of the Texas Finance Code. Additionally, Texas Finance Code, §342.551 grants the commission the authority to adopt rules to enforce the consumer loans chapter.

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

§90.503.Model Clauses.

(a) - (b) (No change.)

(c) For the security document for a Chapter 342, Subchapter G second lien purchase money loan contract:

(1) - (34) (No change.)

(35) Notice of confidentiality rights disclosure. On or after January 1, 2004, [ if ] the security document [ includes the borrower's social security number or driver's license number, it ] must incorporate a "Notice of Confidentiality Rights" disclosure. The disclosure or notice must:

(A) appear on the top of the first page of the security document , either above or directly below the document heading ;

(B) - (C) (No change.)

§90.504.Permissible Changes.

(a) A licensee may consider making the following types of changes to the second lien purchase money loans plain language model clauses:

(1) - (7) (No change.)

(8) A sample model security document is presented in the following example.

Figure: 7 TAC §90.504(a)(8) (.pdf)

(b) (No change.)

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 June 15, 2007.

TRD-200702450

Leslie L. Pettijohn

Commissioner

Office of Consumer Credit Commissioner

Earliest possible date of adoption: July 29, 2007

For further information, please call: (512) 936-7611

7 TAC §90.603, §90.604

The Finance Commission of Texas (commission) proposes amendments to 7 TAC §90.603, concerning Model Clauses and §90.604, concerning Permissible Changes for second lien home improvement contracts.

The purpose of the proposed amendments to these rules governing plain language contract provisions for Chapter 342 transactions is to implement changes required by recently passed legislation.

House Bill 2061 (HB 2061) was signed by Governor Perry and went into immediate effect during the 2007 legislative session. This bill amends the Notice of Confidentiality Rights contained in Texas Property Code, §11.008, and now requires that this notice be included on any instrument transferring an interest in real property, whether or not any social security numbers or driver's license numbers are contained in the instrument. The commission last adopted amendments concerning these confidentiality notices at the February 23, 2007, commission meeting. As part of that adoption, the commission removed the notices from the model contracts. At that time, §11.008 required that the notice be given only if social security numbers or driver's license numbers were actually present in the transferring instrument. The change at that time was intended to reflect the current industry practice of not including such information on security documents, triggering inclusion of the notice only if the lender disclosed the borrower's personal information.

With the recent passage of HB 2061, however, the confidentiality notice is now mandatory on all instruments transferring an interest in real property. Thus, the commission is proposing that the Notice of Confidentiality Rights clauses included throughout the plain language rules be returned to the model contracts and the required nature of the notices be returned to rule text in compliance with HB 2061. Consequently, with respect to the confidentiality notices, these proposed amendments will result in the rules and model contracts more closely resembling their state prior to the February 23, 2007, adoption. Proposed amendments concerning the Notice of Confidentiality Rights clauses are contained in §90.603(b)(15) and §90.603(f)(35). The notices are proposed for return to the model contracts contained in the figures for 7 TAC §90.604(a)(12) and §90.604(a)(16).

Leslie L. Pettijohn, Consumer Credit Commissioner, has determined that, for the first five-year period the proposed amendments to these rules are in effect, there will be no fiscal implications for state or local government as a result of administering the amendments.

For each year of the first five years the amendments to these rules are in effect, Commissioner Pettijohn has also determined that the public benefit anticipated as a result of the proposed amendments will be that the commission's rules will reflect current statutory provisions and will be more easily understood. There is no anticipated cost to persons who are required to comply with the amendments as proposed. There will be no adverse economic effect on small or micro businesses. There will be no effect on individuals required to comply with the amendments as proposed.

Comments on the proposed amendments may be submitted in writing to Laurie Hobbs, Assistant General Counsel, Office of Consumer Credit Commissioner, 2601 North Lamar Boulevard, Austin, Texas 78705-4207 or by e-mail to laurie.hobbs@occc.state.tx.us. To be considered, a written comment must be received on or before the 31st day after the date the proposed amendments are published in the Texas Register. At the conclusion of the 31st day after the proposed amendments are published in the Texas Register, no further written comments will be considered or accepted by the commission.

These proposed amendments as well as all of the rules contained in recently adopted Chapter 90 provide model clauses and model contracts. Licensees are not required to adopt the model language contained in the rules. However, regarding §§90.101 - 90.604, for those licensees utilizing the model contracts, the prior model language (as contained in former 7 TAC Part 1, Chapter 1, Subchapter Q) is acceptable; and the agency will permit licensees to use the prior model language (without a non-standard contract submission) until January 1, 2008, to deplete supplies of existing forms during a transition period after the effective date of the rules. Please note that the publication of the adoption of previous amendments to §§90.105, 90.403, 90.404, 90.503, 90.504, 90.603, and 90.604 in the Texas Register on March 9, 2007, (32 TexReg 1232) listed the agency's implementation date as October 1, 2007. Given these additional proposed amendments, some required by recent legislation, the agency intends to provide licensees until January 1, 2008, for compliance.

The amendments are proposed under Texas Finance Code, §11.304, which authorizes the commission to adopt rules to enforce Title 4 of the Texas Finance Code. Additionally, Texas Finance Code, §342.551, grants the commission the authority to adopt rules to enforce the consumer loans chapter.

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

§90.603.Model Clauses.

(a) (No change.)

(b) For a Chapter 342, Subchapter G second lien home improvement loan contract for use in a transaction that does not allow for withdrawals or multiple advances:

(1) - (14) (No change.)

(15) Notice of confidentiality rights disclosure. On or after January 1, 2004, [ if ] the security document [ includes the borrower's social security number or driver's license number, it ] must incorporate a "Notice of Confidentiality Rights" disclosure. The disclosure or notice must:

(A) appear on the top of the first page of the security document , either above or directly below the document heading ;

(B) - (C) (No change.)

(c) - (e) (No change.)

(f) For a Chapter 342, Subchapter G second lien home improvement loan deed of trust for use in a transaction that allows for withdrawals or multiple advances:

(1) - (34) (No change.)

(35) Notice of confidentiality rights disclosure. On or after January 1, 2004, [ if ] the security document [ includes the borrower's social security number or driver's license number, it ] must incorporate a "Notice of Confidentiality Rights" disclosure. The disclosure or notice must:

(A) appear on the top of the first page of the security document , either above or directly below the document heading ;

(B) - (C) (No change.)

§90.604.Permissible Changes.

(a) A licensee may consider making the following types of changes to the second lien home improvement contracts plain language model clauses:

(1) - (11) (No change.)

(12) A sample model contract that does not allow for withdrawals or multiple advances is presented in the following example.

Figure: 7 TAC §90.604(a)(12) (.pdf)

(13) - (15) (No change.)

(16) A sample model deed of trust that allows for withdrawals or multiple advances is presented in the following example.

Figure: 7 TAC §90.604(a)(16) (.pdf)

(b) (No change.)

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 June 15, 2007.

TRD-200702451

Leslie L. Pettijohn

Commissioner

Office of Consumer Credit Commissioner

Earliest possible date of adoption: July 29, 2007

For further information, please call: (512) 936-7611

Chapter 91. CHARTERING, OPERATIONS, MERGERS, LIQUIDATIONS

Subchapter H. INVESTMENTS

7 TAC §91.801

The Credit Union Commission proposes amendments to §91.801, concerning investments in credit union service organizations (CUSOs). The proposed amendments provide additional guidance on the type and amount of a credit union's investment in a CUSO, disclose that the limitation is based on generally accepted accounting principles, and edit some language for consistency and clarity. The amendments also eliminate the need for a separate audit of a CUSO if the CUSO is wholly owned by the credit union and is included in the consolidated audit of the parent credit union. Because the rule gives credit unions broad latitude to invest in CUSOs, the Commission has added a provision giving the commissioner the authority to limit the activities for a particular credit union based on financial or management reasons. Finally, the amendments provide that if an investment in a CUSO exceeds the limits of subsection (d) solely due to an increase in profitability, the credit union is not required to divest the excess.

The amendments are proposed as a result of the Department's general rule review.

Betsy Loar, General Counsel, has determined that for the first five year period the amended rule is in effect there will be no fiscal implications for state or local government as a result of enforcing or administering the proposed rule.

Ms. Loar has also determined that for each year of the first five years the amended rule is in effect, the public benefits anticipated as a result of enforcing the rule will be greater clarity and ease of use of the rule. There is no anticipated effect on small businesses as a result of adopting the amended rule. There is no economic cost anticipated to credit unions or individuals for complying with the amended rule if adopted.

Written comments on the proposal must be submitted within 30 days after its publication in the Texas Register to Betsy Loar, General Counsel, Credit Union Department, 914 East Anderson Lane, Austin, Texas 78752-1699. Oral comments on the proposal can be made at the Commission's Legislative Advisory Committee meeting on Friday, September 21, 2007 at 9:00 a.m. at 914 East Anderson Lane, Austin, Texas 78752.

The amendments are proposed under §15.402 of the Texas Finance Code, which authorizes the Commission to adopt reasonable rules for administering Title 2, Chapter 15 and Title 3, Subchapter D of the Texas Finance Code, and under Texas Finance Code §124.351 and §124.352, which authorize the Commission to establish rules for investments.

The specific sections affected by the proposed amended rule are Texas Finance Code, §124.351 and §124.352.

§91.801.Investments in Credit Union Service Organizations.

(a) (No change.)

(b) A credit union by itself, or with other parties, may [ only ] organize, invest in or make loans to a CUSO only if it [ which ] is structured and operated in a manner that demonstrates to the public that it maintains a legal existence separate from the credit union. A credit union and a CUSO must operate so that:

(1) - (6) (No change.)

(c) Notice. A credit union shall provide written notice to the commissioner of its intent to make an initial investment in a CUSO , make an initial loan to a CUSO, make a material change to a CUSO's organizational structure, or perform new activities in an existing CUSO at least 15 days prior to commencing [ efforts to effect ] such activity. The written notice must include a complete description of the credit union's investment in or loan to the CUSO, the activity to be conducted, and a representation and undertaking that the activity will be conducted in accordance with applicable law and in a manner that will limit potential exposure of the credit union to no more than the loss of funds invested in, or loaned to, the CUSO. The credit union shall provide any additional information reasonably requested by the commissioner, which may include a written legal opinion that the CUSO has either been established in a manner that will limit the credit union's potential exposure, or that the new activity or change to its organizational structure will not result in the credit union's potential exposure being more than the loss of funds invested in or loaned to the CUSO.

(d) Limitations. The board of directors of a credit union that organizes, invests in, or lends to any CUSO shall establish, in writing, the maximum amount relative to the credit union's net worth, that will be invested in or loaned to any one CUSO. This maximum amount may not exceed the statutory limit established by Texas Finance Code §124.352(b). Total investments in and total loans to CUSOs will be measured consistent with generally accepted accounting principles (GAAP) and [ Investments and loans described in this section ] shall not, in the aggregate, exceed the greater of 10% of the total assets or 100% of net worth [ capital ] of the credit union, unless the credit union receives the prior written approval of the commissioner. The amount of loans to CUSOs, cosigned, endorsed, or otherwise guaranteed by the credit union, shall be included in the aggregate for the purpose of determining compliance with the limitations set forth in this section.

(e) Prohibitions. No credit union may invest in or make loans to a CUSO:

(1) - (4) (No change.)

(5) if the CUSO is not adequately [ sufficiently ] bonded or insured for its operations;

(6) if the CUSO does not obtain an annual opinion audit, by a licensed Certified Public Accountant, on its financial statements in accordance with generally accepted auditing standards, unless the investment in or loan to the CUSO by any one or more credit unions does not exceed $100,000 or the CUSO is wholly owned and the CUSO is included in the annual consolidated financial statement audit of its parent credit union ; or

(7) (No change.)

(f) Permissible activities and services. The commissioner may, based upon supervisory, legal, or safety and soundness reasons, limit any CUSO activities or services, or refuse to permit any CUSO activities or services. Otherwise, a [ A ] credit union may invest in or loan to a CUSO that is engaged in providing products and services that include, but are not limited to:

(1) - (4) (No change.)

(g) - (h) (No change.)

(i) Exclusion. A credit union which has a net worth ratio greater than six percent (6%) and is deemed adequately capitalized by its insuring organization may invest in or make loans to a CUSO that is not limited by the restriction set forth in subsection (e)(3) of this section; provided the activities of the CUSO are exclusively limited to activities which could be conducted directly by a credit union or are incidental to the conduct of the business of a credit union. Notwithstanding this exclusion, all other provisions of the act and this chapter applicable to a CUSO apply. In the event a credit union's net worth [ or capital ] declines below the required thresholds, the credit union may not renew, extend the maturity of, or restructure an existing loan, advance additional funds or increase the investment in the CUSO without the prior written approval of the commissioner.

(j) Divestiture. If the limitations in subsection (d) of this section are reached or exceeded solely because of the profitability of the CUSO and the related GAAP valuation of the investment under the equity method, divestiture is not required. A credit union may continue to invest up to the limitation without regard to the increase in the GAAP valuation resulting from a CUSO's profitability.

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 June 18, 2007.

TRD-200702506

Harold E. Feeney

Commissioner

Credit Union Department

Earliest possible date of adoption: July 29, 2007

For further information, please call: (512) 837-9236

7 TAC §91.802

The Credit Union Commission proposes amendments to §91.802, concerning other investments. The amendments refine and clarify definitions and standards, restrict the permissible ratings for some investments, and require that maturity dates match for repurchase transactions. The amendments also add a federal parity provision, a mechanism for modifying or terminating a credit union's investment authority, and a provision giving the commissioner authority to waive any of the limitations or requiremen