Proposed Rules Title 7

(b) Except as set out in this section, the finance commission agencies adopt, by reference, the summary judgment procedure in Rule 166a, Texas Rules of Civil Procedure. In addition, the following requirements shall also apply:

(1) The administrative law judge shall hear oral argument on all motions for summary judgment unless the judge expressly waives this requirement.

(2) Before filing the motion, the party moving for summary judgment, in consultation with the administrative law judge's clerk, must schedule the motion for submission on oral argument at least 21 days after the date on which it is filed. If there is an applicable statutory deadline by which the agency must hold a hearing, the submission date must be within the deadline unless it has been waived by both parties.

(3) The party moving for summary judgment must serve on all opposing parties, with a copy of the motion for summary judgment, a notice containing the following information:

(A) the time, date, and place when the administrative law judge will hear oral argument on the motion;

(B) disclosure that any party opposing the motion must file affidavits, other written material, and any cross-claims or counterclaims, with the administrative law judge by the close of business seven days before the date of submission on oral argument;

(C) disclosure that the administrative law judge may take the allegations in the motion as true unless contested by opposing parties through affidavits or other written material; and

(D) disclosure that the administrative law judge will not hear any oral testimony related to the motion.

(4) If one of the agencies files the motion for summary judgment, the agency head or the administrative law judge must sign the notice.

(5) In the administrative law judge's discretion, the judge may set the motion for summary judgment on the same date as an evidentiary hearing scheduled in the cause which is the subject of the motion for summary judgment.

(6) The administrative law judge's proposal for decision recommending summary judgment shall be circulated for exceptions, replies to exceptions, and the filing of briefs before it is sent to the agency heads in compliance with §9.34 of this title (relating to Post-hearing Proceedings).

§9.25.The Hearing.

(a) The administrative law judge has authority analogous to that of a district judge sitting without a jury in a civil case and may make such rulings and issue such orders as may be required to provide a fair, just, expeditious, orderly, and proper hearing. Hearings are open to the public, except that matters made confidential by law must be considered in executive session if requested. If an executive session is not requested before confidential evidence is introduced, the confidentiality of such evidence is considered to have been waived.

(b) At the time and place set for hearing, the administrative law judge shall proceed with the hearing as nearly as may be according to the rules of procedure governing the trial of civil cases in the courts of this state. The party with the burden of proof shall present such party's case, followed by other parties in the sequence assigned by the administrative law judge. Each party shall have the opportunity to present such party's case, by calling and examining witnesses, offering documentary evidence, and making legal arguments. Each party shall have the opportunity to contest the admissibility of evidence and cross-examine opposing witnesses on any matter relevant to the issues even if the matter was not covered in direct examination. A party must make an objection to testimony or an evidentiary offer in a timely manner, stating the basis for the objection, or the objection is waived.

(c) In a case involving an original application for a license, the burden of proof is on the applicant. In cases involving an order to cease and desist, the imposition of penalties, the collection of restitution for violations of law, or an agency's failure to renew an existing license, the burden of proof is on the agency.

(d) A party pleading an "affirmative defense" as defined in Texas Rules of Civil Procedure, Rule 94, has the burden to prove that defense.

(e) The assertion that an applicant for an original or renewal license qualifies for the license under Chapter 53 of the Occupations Code (related to the collateral consequences of a criminal conviction) is an affirmative defense. The applicant for the original or renewal license has the burden to prove the satisfaction of the conditions on which the applicant would be entitled to the license under the Occupations Code. The existence of mitigating circumstances related to a criminal conviction is an affirmative defense. The applicant for an original or renewal license has the burden to prove the existence of such mitigating circumstances.

(f) Unless otherwise provided by statute, the burden of proof shall be by a preponderance of the evidence.

(g) If an applicant for an original license application fails to appear at a scheduled hearing and the agency can prove proper service of notice of the hearing, the administrative law judge may deny the application based on the applicant's failure to carry its burden of proof. If the respondent fails to appear at a hearing in which the agency has the burden of proof, the agency attorney must prove actual or constructive service of a notice of hearing and must present evidence sufficient to prove the agency's case. Failure of the respondent to answer or to appear and contest the agency's case may be considered as some evidence supporting an adverse inference that respondent could not defend or rebut the agency's case.

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 20, 2008.

TRD-200803215

Leslie L. Pettijohn

Executive Director

Finance Commission of Texas

Earliest possible date of adoption: August 3, 2008

For further information, please call: (512) 936-7621

PART 2. TEXAS DEPARTMENT OF BANKING

CHAPTER 25. PREPAID FUNERAL CONTRACTS

SUBCHAPTER B. REGULATION OF LICENSES

7 TAC §25.25

(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 Finance Commission of Texas (commission), on behalf of the Department of Banking (department), proposes the repeal of §25.25, concerning conversion from trust to insurance funded benefits. The commission is simultaneously proposing new §25.25 concerning the same subject in this issue of the Texas Register. A prior proposed repeal of existing §25.25, as published for comment in the Texas Register in the December 28, 2007, issue of the Texas Register (32 TexReg 9894), has been withdrawn, as noted elsewhere in this issue of the Texas Register.

Finance Code, Chapter 154 (Chapter 154), and rules adopted under Chapter 154, codified in Title 7, Chapter 25 of the Texas Administrative Code, provide an exclusive regulatory framework that allows a person in this state to arrange and pay for a funeral in advance. Chapter 154 imposes a duty upon the department and grants the department the authority to license and regulate sellers of prepaid funeral benefits to ensure that prepaid funeral benefits contracts (prepaid contracts) are performed and funded in accordance with their terms at the time of need.

Existing prepaid contracts for trust-funded prepaid funeral benefits may be converted to insurance-funded prepaid funeral benefits under Finance Code, §154.204, if the department finds that the proposed insurance-funded arrangement safeguards the rights and interests of the individuals who purchased the prepaid contracts to substantially the same degree as the trust-funded arrangement proposed to be replaced. Rule §25.25 was designed to guide an applicant to incorporate certain features that the department considers essential to the finding required by Finance Code, §154.204, and to eliminate other features that detract from the required finding. However, since the original adoption of existing §25.25 in 1996, developments have outpaced its content. Because of the extent of the proposed revisions to §25.25, the commission is proposing a new §25.25, rather than amendments to the existing section. The repeal will not be adopted unless new §25.25 is adopted.

Stephanie Newberg, Deputy Commissioner of the Texas Department of Banking, has determined that, for each of the first five years the proposed repeal is in effect, there will be no fiscal implication for state or local governments. Ms. Newberg has further determined that, for each year of the first five years that the proposed repeal is in effect, the anticipated public benefit will be the deletion of duplicative regulations. The repealed section will be replaced with updated and more specific and understandable regulations that are consistent with the department's current interpretation and application of Finance Code, §154.204, and that will enhance the department's enforcement of, and insurance permit holders' compliance with, the regulatory requirements of Chapter 154. For each year of such first five years, there will be no economic cost to persons required to comply with the proposed repeal. Finally, Ms. Newberg has determined that the proposed repeal will not have an adverse effect upon small businesses or micro-businesses.

To be considered, comments on the proposed repeal must be submitted no later than 5:00 p.m. on August 4, 2008. Comments should be addressed to General Counsel, Texas Department of Banking, Legal Division, 2601 North Lamar Boulevard, Suite 300, Austin, Texas 78705-4294. Comments may also be submitted by email to legal@banking.state.tx.us.

The repeal of existing §25.25 is proposed under Finance Code, §154.204, which provides for department approval of a conversion from trust-funded prepaid funeral benefits to insurance-funded prepaid funeral benefits to safeguard the rights and interests of the individual who purchases a prepaid funeral benefits contract, and under Finance Code, §154.051, which authorizes the commission to adopt rules relating to the enforcement and administration of Chapter 154.

Finance Code, §154.204, is affected by the proposed repeal.

§25.25.Conversion from Trust to Insurance Funded Benefits.

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 20, 2008.

TRD-200803185

A. Kaylene Ray

General Counsel

Texas Department of Banking

Proposed date of adoption: October 17, 2008

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

7 TAC §25.25

The Finance Commission of Texas (commission), on behalf of the Department of Banking (department), re-proposes new §25.25, concerning conversion from trust-funded to insurance-funded benefits under Finance Code, §154.204. The proposed new section is designed to replace existing §25.25, concerning conversion from trust to insurance funded benefits, which the commission is simultaneously proposing for repeal in this issue of the Texas Register. A prior proposed §25.25 and the accompanying proposed repeal of existing §25.25, published in the December 28, 2007, issue of the Texas Register (32 TexReg 9894, 9895), have been withdrawn, as noted elsewhere in this issue of the Texas Register.

Finance Code, Chapter 154 (Chapter 154), and rules adopted under Chapter 154, codified in Title 7, Chapter 25 of the Texas Administrative Code (TAC), provide an exclusive regulatory framework that allows a person in this state to arrange and pay for a funeral in advance. Chapter 154 imposes a duty upon the department and grants the department the authority to license and regulate sellers of prepaid funeral benefits to ensure that prepaid funeral benefits contracts (prepaid contracts) are performed and funded in accordance with their terms at the time of need.

Existing prepaid contracts for trust-funded prepaid funeral benefits may be converted to insurance-funded prepaid funeral benefits under Finance Code, §154.204, if (1) the department finds that the proposed insurance-funded arrangement safeguards the rights and interests of the individuals who purchased the prepaid contracts (purchasers) to substantially the same degree as the trust-funded arrangement, and (2) each purchaser is notified in writing of the terms of the proposed conversion and the purchaser's right to decline the conversion. Existing §25.25 specifies the required form of an application for conversion and nominally addresses the required notice to purchasers. The rule was designed to guide an applicant to incorporate certain features that the department considers essential to the finding required by Finance Code, §154.204, and to eliminate other features that detract from the required finding. However, since the original adoption of existing §25.25 in 1996, developments have outpaced its content.

Licensed sellers of insurance-funded prepaid funeral benefits are now either insurance companies or affiliates of insurance companies that sell through designated funeral providers acting as agent, both for the seller with respect to the contract, and for the insurance company with respect to the funding insurance policy. Insurance companies that wish to participate in the Texas preneed market will often form a subsidiary to acquire a license under Chapter 154. A number of these affiliate sellers resist accepting responsibility for verifying that funeral services and merchandise are ultimately delivered in accordance with the contract and for maintaining the records the department requires for examination. In addition, a recent failure of an insurance-funded permit holder and its affiliated insurance company has raised concerns about the financial viability and sustainability of insurance-funded permit holders. Selling insurance-funded prepaid funeral benefits involves incurring long-term regulatory commitments in exchange for immediate, front-loaded compensation. Permit holders that lack the resources to fulfill their responsibilities in the later years of a contract's existence are at risk of failure, and may attempt resisting applicable regulatory requirements as a means of survival. This situation is unacceptable.

As a result of these concerns, proposed new §25.25 will require more information regarding the business plan and financial condition of the post-conversion permit holder. The application for conversion must demonstrate that the post-conversion permit holder has or will have access to the financial and other resources necessary to discharge its contractual and statutory obligations as a permit holder, and that the post-conversion permit holder recognizes its future responsibilities to administer its unmatured contracts until finally performed, to verify that each contract is performed and funded in accordance with its terms and Chapter 154, and to maintain the records required under 7 TAC §25.10. Further, the applicant must undertake to again seek licensure and take over administration and management of the converted contracts that remain outstanding if the post-conversion permit holder were to fail despite the required reassurances.

Although the department has attempted to be sensitive to concerns expressed by insurance-funded permit holders regarding regulatory burden and has sought to reduce application requirements to the extent possible, the requirements of proposed new §25.25 continue to reflect the department's longstanding interpretation and application of Finance Code, §154.204. Under that section, the department cannot approve a proposed conversion unless it finds that the proposed insurance-funded arrangement will safeguard the rights and interests of purchasers to substantially the same degree as the trust-funded arrangement sought to be replaced. Among other matters, unless the applicant demonstrates to the satisfaction of the department that the insurance-funded contracts will be performed and funded in compliance with their terms and Chapter 154, and that the permit holder will maintain or have access to the records the department requires to determine such compliance, the department will not be able to make the required finding, and the application for conversion will not be approved.

Proposed §25.25(a) sets forth definitions applicable to §25.25. Proposed §25.25(b) describes the general standards applicable to whether a proposed conversion will safeguard the rights and interests of the purchasers to substantially the same degree as the trust-funded benefits arrangement sought to be replaced, as required by Finance Code, §154.204. While the department will consider any matter relevant to the determination of substantial equivalency, at a minimum, the proposed insurance policy must be a deferred fixed annuity that meets defined parameters, substantially similar to existing §25.25, and the post-conversion permit holder must be the insurance company or an affiliate of the insurance company. The new requirement should not create any regulatory burden on industry because such affiliation already exists, as previously noted.

Proposed §25.25(b) also clarifies that, as a general matter, the post-conversion permit holder must accept responsibility for verifying that converted contracts are appropriately performed and for maintaining required records for examination, and must demonstrate the organizational and financial capability to discharge its accepted responsibilities. As previously discussed, these provisions are proposed to address perceived recalcitrance in the industry and are statutorily based, see Finance Code, §154.053 and §154.103(b).

The required content of an application for conversion is prescribed by proposed §25.25(c) in 20 numbered paragraphs. In large part, these content requirements already exist, either in existing §25.25 or in written policies and checklists developed since §25.25 was last amended. These supplemental policies and checklists are routinely furnished to prospective applicants to provide additional detail regarding determinations of substantial equivalency under Finance Code, §154.204, and the additional information the applicant should submit to support a positive determination. However, additional informational requirements are proposed in response to identified potential risks to the purchaser.

Proposed §25.25(c)(1) requires submission of a letter from the applicant to the commissioner requesting conversion, and describes the required content of the letter. Proposed §25.25(c)(2) requires submission of the agreement among the applicant, the post-conversion permit holder, and the insurance company regarding the transfer, receipt, and application of trust funds upon conversion, with described content requirements. These provisions are generally consistent with current practice as it has developed under existing §25.25, although proposed §25.25(c)(2)(C) includes several new undertakings by the post-conversion permit holder regarding future compliance with Chapter 154 and adopted regulations.

Proposed §25.25(c)(3) requires submission of the estimated total commissions and other compensation to be paid by the insurance company in connection with the conversion to each insurance agent that controls, is controlled by, or is under common control with the applicant or a funeral provider under any of the prepaid contracts to be converted. Current practice requires disclosure of all compensation paid to any party in connection with issuance of the conversion annuities, see existing §25.25(c)(3)(B)(i) and (J). The department believes the disclosure can be appropriately limited to compensation paid to the original permit holder and/or funeral provider as an inducement to agree to conversion.

Proposed §25.25(c)(4) requires submission of a written agreement between the post-conversion permit holder and the applicant that requires the applicant in the conversion to relinquish the previously maintained, individual prepaid contract ledgers and the post-conversion permit holder to maintain the ledgers after conversion. This requirement is new and is intended to address certain compliance issues that have arisen in recent years.

Proposed §25.25(c)(5) requires the applicant to submit the written agreement between the post-conversion permit holder and each funeral provider designated under any prepaid contract to be converted. Among other matters, the agreement must obligate the funeral provider to provide documentation of funeral performance as requested by the post-conversion permit holder to enable compliance with Chapter 154, and must obligate the parties to protect any nonpublic personal financial or health information of the purchaser and contract beneficiary. These requirements are new and intended to address certain recurring compliance issues that have been previously discussed. In those common circumstances in which the applicant is also the funeral provider, the agreements required by proposed §25.25(c)(4) and (5) can be combined into one.

If the insurance company is not also the proposed post-conversion permit holder, proposed §25.25(c)(6) requires the applicant to submit a written agreement between the post-conversion permit holder and the insurance company that obligates the insurance company to provide documentation regarding the annuities as requested by the post-conversion permit holder to enable compliance with Chapter 154. Further, the agreement must obligate the parties to protect any nonpublic personal financial or health information of the purchaser and contract beneficiary. These requirements are new and intended to address arguments that regulatory compliance cannot be achieved because the parties are prevented by federal law from sharing such information with each other.

If the insurance company is not also the proposed post-conversion permit holder, proposed §25.25(c)(7) requires the insurance company, or its insurance holding company, to commit to the department in writing to take all necessary steps to maintain the existence of the post-conversion permit holder, cause the permit holder to annually renew its permit if renewal is required by Finance Code, §154.107, and provide adequate resources to the post-conversion permit holder to enable it to maintain the financial condition and general fitness necessary to discharge the post-conversion permit holder's responsibilities under Finance Code, Chapter 154, and this chapter. This proposed requirement will not apply if the post-conversion permit holder demonstrates that it independently has the organizational and financial resources to discharge its permit holder responsibilities, and does not intend to rely on the insurance company to provide such resources.

Pursuant to proposed §25.25(c)(8), as part of its application, the applicant must commit to the department in writing to obtain and annually renew a permit under Chapter 154 and assume the post-conversion permit holder's responsibilities with respect to each converted contract that remains outstanding if the post-conversion permit holder or a duly licensed successor fails to renew its permit as required.

Proposed §25.25(c)(9) addresses the form of annuity proposed to be issued as part of the conversion and is substantially similar to existing requirements, see existing §25.25(d)(2).

Proposed §25.25(c)(10) is new and requires a written summary of the pre-conversion, federal income tax status of the purchasers' trusts as qualified funeral trusts under 16 U.S.C. §685 or grantor trusts. The summary must also include a description of the post-conversion manner in which taxable income arising from the annuities will be reported for federal income tax purposes.

Proposed §25.25(c)(11) requires submission of information regarding past performance of annuities previously issued by the insurance company that are similar to the form of annuity to be issued in the proposed conversion. This requirement is new.

Proposed §25.25(c)(12) requires submission of a copy of the form of assignment, if any, to be used in assigning annuity rights or proceeds to the post-conversion permit holder. This provision is substantially similar to current practice, see existing §25.25(c)(3)(K).

Proposed §25.25(c)(13) addresses the qualifications of the post-conversion permit holder by requiring financial statements, similar to existing §25.25(c)(3)(G), as well as information regarding the existing portfolio of prepaid contracts held by the proposed post-conversion permit holder. If any aspect of administering the prepaid contracts to be converted will be outsourced, the contractors that will perform these functions must be disclosed. If any such contractor is affiliated with the post-conversion permit holder, additional information regarding the contracting relationship must be disclosed.

Proposed §25.25(c)(14) addresses the qualifications of the insurance company that will issue the annuities in the proposed conversion, and requires submission of a list of the current financial strength ratings of the insurance company determined by A.M. Best Company, Standard & Poor's, Wiess Research, Duff & Phelps, and Moody's Investors Service, among other matters.

Proposed §25.25(c)(15) requires department approval of the proposed newspaper notice and proposed notification letters to be sent to purchasers. The notification letter from the applicant that advises each purchaser of the terms of the proposed conversion and the purchaser's right to decline the conversion is a key statutory predicate to conversion under Finance Code, §154.204, and therefore must fully and fairly disclose all material information necessary for the purchaser to make an informed decision whether to remain in the trust-funded prepaid funeral benefits arrangement. Accordingly, proposed §25.25(c)(15)(A) and (B) address the content of the notice.

With respect to some aspects of a conversion, the department has no reasonable basis upon which to conclude that the insurance-funded arrangement will safeguard the rights and interests of the purchasers to substantially the same degree as a trust-funded arrangement, due to core statutory differences in the nature of the funding mechanism. In these cases, full and fair disclosure of the differences between insurance funding and trust funding will enable the purchaser to make an informed decision. For example, Finance Code, §154.351, provides that the prepaid funeral guaranty fund was established "to guarantee performance by sellers of prepaid funeral benefits contracts of their obligations to the purchasers under the provisions of this chapter governing prepaid funeral trusts." As implemented by 7 TAC §§25.17 - 25.20, the guaranty fund is tasked to find a successor funeral provider if a trust-funded permit holder is unable to fulfill its prepaid contracts. In appropriate cases the guaranty fund may pay a funeral provider an additional amount in excess of the trust funds underlying the prepaid contracts in exchange for honoring the contracts as originally written, with no extra charges to the purchasers. This guarantee of contract performance does not apply to insurance-funded contracts and the distinction should be disclosed to the purchaser, as required by proposed §25.25(c)(15)(B)(i).

If the notification letter contains promotional statements or claims that express subjective rather than objective views of the merits or benefits of conversion, proposed §25.25(c)(15)(B)(ii) requires disclosure of the estimated total commissions and other compensation to be paid in connection with the conversion to each identified insurance agent that controls, is controlled by, or is under common control with the applicant or the designated funeral provider under the prepaid contract to be converted. Any compensation from the conversion to be paid to an applicant or funeral provider that is encouraging acceptance of the conversion constitutes information that is material to the purchaser's decision, and must be disclosed.

To the extent the conversion has potential tax implications for the purchaser, full and fair disclosure requires the notification letter to explain the anticipated change in tax treatment. (A disclaimer of tax expertise that urges the purchaser to consult his or her attorney or accountant regarding the described tax issues may also be appropriate.) An example of possible tax implications and required disclosures is included in proposed §25.25(c)(15)(B)(iv), but other tax-related disclosures may be required in specific circumstances.

Proposed §25.25(c)(16) requires submission of a pre-conversion summary of specified contract data, and proposed §25.25(c)(17) requires a pro forma post-conversion summary of similar data assuming the conversion occurs as proposed. These requirements are substantially similar to current requirements, see existing §25.25(c)(3)(C) and (D).

If the applicant will not be selling trust-funded prepaid contracts or administering previously sold trust-funded contracts after the conversion, proposed §25.25(c)(18) requires the applicant to submit a completed form to voluntarily cancel its trust-funded permit, although the cancellation will not be processed unless the conversion is approved and will not be effective until after the department completes the close-out examination of the applicant. This provision matches current practice although not included as a requirement in existing §25.25.

Finally, proposed §25.25(c)(19) requires submission of the conversion application fee required by 7 TAC §25.23, and proposed §25.25(c)(20) is a catch-all provision that requires submission of any other formal or informal agreements or understandings between the parties that relate to the proposed conversion or to future conduct with respect to the converted contracts after conversion.

Proposed §25.25(d) describes how the department will process an application, and articulates the right of the applicant or the post-conversion permit holder to request a hearing if the application is denied or approved with conditions unacceptable to the applicant or the post-conversion permit holder.

Proposed §25.25(e) sets forth the standard conditions that will be imposed by an order approving conversion and not subject to objection. For example, the order approving conversion will require the conversion transaction to be fully implemented and completed on or before the 150th day after the date of the conversion order, and will require certain reports regarding the conversion process to be filed with the department by specific dates. The order will also prohibit issuance of the funding annuities until after the purchasers have the opportunity to decline conversion, unless the issuance can be reversed without harm should the purchaser eventually decline conversion.

Under proposed §25.25(e)(2), the order will require initial notification of purchasers to be made by two means: (i) public notice in a newspaper, and (ii) letter from the applicant to each purchaser by certified mail or another form of mail that requires or provides proof of delivery to the last known address of the purchaser. Further, as described in proposed §25.25(e)(3), a prepaid contract for which the notification letter is returned unclaimed may not be converted until the applicant takes additional steps to locate a new address and resends the notification letter one more time. If a new address is not found, the applicant is required to review the contract in relation to abandoned property laws and report its conclusions to the department before converting the contract.

Stephanie Newberg, Deputy Commissioner, Texas Department of Banking, has determined that for the first five-year period the proposed section is in effect, there will be no fiscal implications for state government or for local government as a result of enforcing or administering the section.

Ms. Newberg has further determined that, for each year of the first five years that the proposed section is in effect, the new section would benefit the public by consolidating the content requirements of an application for conversion under Finance Code, §154.204, into a single rule. Further, the anticipated public benefit will include the elimination of possible confusion caused by outdated information in the rule. The consumer protection required by Finance Code, §154.204, will be enhanced as a result of the department's evaluation of the expanded and more specific information that will be contained in an application for conversion, the improved notice to purchasers of their options under a conversion, and delivery verification requirements applicable to the notice.

Ms. Newberg has also determined that, for each year of such first five years, there will be additional economic cost to persons required to comply with the proposed new section as compared to the existing rule. The proposed section adds a requirement for public notice by newspaper publication of an approved application, estimated to cost $300 - $1,000 per application, depending on the market in which the notice is published. The proposal also adds a requirement that the notification letter be sent to purchasers by certified mail or another form of mail that requires or provides proof of delivery to the last known address of the purchaser. The additional cost for proof of delivery will vary proportionally with the number of contracts proposed for conversion. Use of traditional certified mail, return receipt requested by mail, would cost approximately $4.90 per contract, although lower-cost and bulk delivery options are available.

Finally, Ms. Newberg has determined that the proposal may have an adverse economic effect upon small businesses and micro-businesses. Government Code, §2006.001(2), defines "small business" with reference to three components: (A) the entity must be for-profit, (B) the entity must be independently owned and operated, and (C) it must have fewer than 100 employees or less than $6 million in annual gross receipts. Each of these three elements must be met in order for an entity to qualify as a small business. Currently, 414 entities are licensed under Chapter 154 to sell prepaid funeral benefits. Of that number, two are nonprofit and 157 are subsidiaries of other companies and therefore not independently owned and operated. The 255 remaining permit holders are small businesses that may be affected by the rule, because each has less than 100 employees and less than $6 million in annual gross receipts. Of these 255 small businesses, 238 have less than 20 employees and further qualify as micro-businesses.

However, an application to convert a trust-funded prepaid funeral benefits arrangement to an insurance-funded arrangement is an optional action unrelated to licensed activities and license maintenance, and the identified small businesses or micro-businesses will generally not be required to alter their business practices as a result of the rule. While the applicant will typically be an existing trust-funded permit holder and more than likely would qualify as a small business, the costs associated with a conversion application are typically absorbed by the insurance company proposing to issue the funding annuities or by its affiliated post-conversion permit holder, and no insurance company-affiliated permit holder currently qualifies as a small business or micro-business because none are independently owned and operated. Nevertheless, increased costs paid by the insurance company or its affiliated permit holder may be passed on to a small business applicant in the form of reduced compensation for agreeing to the conversion. These possible reductions are inherently the product of negotiations between the parties and cannot be estimated.

Government Code, §2006.002, requires a state agency considering adoption of a rule that would have an adverse economic effect on small businesses or micro-businesses to reduce that effect if doing so is legal and feasible considering the purpose of the statute under which the rule is to be adopted. The purpose of Finance Code, §154.204, is to protect purchasers holding existing contracts for trust-funded prepaid funeral benefits by imposing two requirements before the trust funded permit holder may convert the existing trust-funded arrangement to an insurance-funded arrangement (absent the affirmative consent of each purchaser). First, Finance Code, §154.204(a), requires the department to approve an application for conversion only if it finds that the proposed insurance-funded arrangement safeguards the rights and interests of the purchasers to substantially the same degree as the trust-funded arrangement proposed to be replaced. Second, Finance Code, §154.204(b), requires that each purchaser be notified in writing of the terms of the proposed conversion and given the opportunity to decline the conversion and remain in the existing trust-funded arrangement. The possible adverse economic effect on small businesses or micro-businesses arises from changes related to the second requirement.

The department is advised that it is not uncommon for about 20% of the mailed conversion notices to be returned to sender or otherwise undeliverable, an unacceptable failure rate with respect to the statutory requirement to notify each purchaser of the right to decline the conversion. The department considered requiring each purchaser to affirmatively acknowledge receipt of the notice of the proposed conversion before that purchaser's contract could be converted. However, this option was determined to impose a disproportionate administrative burden and cost on a trust-funded permit holder compared to other options that provide reasonable assurance that notice has been received by the purchaser. Accordingly, the proposed section requires publication of a newspaper notice as a supplemental means of notifying purchasers and requires proof of delivery of the conversion notice as a means of identifying those purchasers for whom notification requires additional effort. Any cost associated with these additional notification efforts are outweighed by the benefit to purchasers. The now withdrawn proposal for new §25.25, published in the December 28, 2007, issue of the Texas Register (32 TexReg 9895), required the notice to be sent by certified mail. As a means of reducing possible adverse economic effect on small businesses or micro-businesses, the current proposal also permits use of another form of mail that provides proof of delivery to the last known address of the purchaser.

The department also considered not adopting changes to the section as a means of reducing possible adverse economic effect on small businesses or micro-businesses, but rejected this approach as not feasible considering the purpose of Finance Code, §154.204(b), that each purchaser be notified in writing of the terms of the proposed conversion and the purchaser's right to decline the conversion.

The department also considered and rejected the idea of exempting small businesses from the additional notification requirements as neither legal nor feasible considering the purpose of Finance Code, §154.204(b). There is no basis under the statute for providing less protection to those who purchase from small businesses.

To be considered, comments on the proposed new section must be submitted no later than 5:00 p.m. on August 4, 2008. Comments should be addressed to General Counsel, Texas Department of Banking, Legal Division, 2601 North Lamar Boulevard, Suite 300, Austin, Texas 78705-4294. Comments may also be submitted by email to legal@banking.state.tx.us.

A public hearing to receive comments on the proposed new rule will be held on Wednesday, July 30, 2008 at 10:00 a.m. at the Brown Heatly Building, 4900 North Lamar Boulevard, Room 1410, Austin, Texas.

New §25.25 is proposed under Finance Code, §154.204, which provides for department approval of a conversion from trust-funded prepaid funeral benefits to insurance-funded prepaid funeral benefits to safeguard the rights and interests of the individual who purchases a prepaid funeral benefits contract, and under Finance Code, §154.051, which authorizes the commission to adopt rules relating to the enforcement and administration of Chapter 154.

Finance Code, §154.204, is affected by the proposed new section.

§25.25.Conversion from Trust-Funded to Insurance-Funded Benefits.

(a) Definitions. Definitions of words and terms in Finance Code, §154.002, are incorporated in this section by reference. The following words and terms have the following meanings when used in this section, unless the context clearly indicates otherwise.

(1) Aggregate trust funds--The trust funds to be transferred with respect to an individual prepaid contract as of the transfer date, comprised of the paid-in principal plus the earnings attributable to that prepaid contract. As the context may require, the term also refers to the sum of the aggregate trust funds for all prepaid contracts subject to conversion.

(2) Applicant--A permit holder under Finance Code, Chapter 154, who files an application under this section.

(3) Contract beneficiary--The person named in a prepaid contract as the intended recipient of contracted funeral merchandise and services.

(4) Conversion--A transaction under Finance Code, §154.204, and this section, to convert all outstanding trust-funded prepaid funeral benefits under existing prepaid contracts administered by the applicant to insurance-funded prepaid funeral benefits to be administered by the post-conversion permit holder after conversion.

(5) Insurance company--The insurance company designated in an application filed under this section to issue the annuities required for the conversion. The insurance company may also be the post-conversion permit holder if permitted under applicable insurance law and regulations.

(6) Paid-in principal--The amount required to be deposited in trust by the applicant with respect to an individual prepaid contract pursuant to Finance Code, §154.253. As the context requires, the term may also refer to the total amount deposited in trust by the applicant for all prepaid contracts.

(7) Post-conversion permit holder--The permit holder designated in an application filed under this section to hold and administer the prepaid contracts after conversion. The post-conversion permit holder may also be the insurance company if permitted under applicable insurance law and regulations.

(8) Prepaid contract--A contract for prepaid funeral benefits under Finance Code, Chapter 154.

(9) Purchaser--An individual who purchased a trust-funded prepaid contract that is the subject of an application filed under this section. The purchaser may also be the contract beneficiary. If permitted by the context, the term includes the purchaser's authorized agent.

(10) TDI--Texas Department of Insurance.

(11) Unpaid principal balance--The unpaid portion of the purchase price of a prepaid contract.

(b) Standards for approval and eligibility. The department will not approve a proposed conversion unless the following general requirements have been met.

(1) Standards for approval. The proposed insurance-funded benefits arrangement must safeguard the rights and interests of the purchasers to substantially the same degree as the trust-funded benefits arrangement sought to be replaced, as provided by Finance Code, §154.204, and this section. An application may be approved or denied without the necessity of a hearing, subject to the right of the applicant or the post-conversion permit holder to request a hearing. Without limiting its ability to consider any matter relevant to the determination of substantial equivalency, the department will not approve a proposed conversion unless:

(A) the form(s) of insurance policy proposed for use in the conversion is a single or flexible premium deferred fixed (not variable) annuity that is structured to protect and preserve the existing rights and interests of the purchaser, including the amount of funds the purchaser would be entitled to receive upon cancellation of the prepaid contract and the amount of funds payable upon maturity of the prepaid contract;

(B) the post-conversion permit holder directly or indirectly controls, is controlled by, or is under common control with the insurance company;

(C) neither the applicant nor the post-conversion permit holder have a record of noncompliance with respect to the requirements of Finance Code, Chapter 154, and this chapter, as evidenced by paragraph (2) of this subsection;

(D) the post-conversion permit holder accepts responsibility for verifying that the prepaid contracts proposed for conversion are performed in accordance with their terms, and undertakes to maintain the records the department requires to determine compliance with Finance Code, Chapter 154, and this chapter; and

(E) the post-conversion permit holder demonstrates the organizational and financial capability to discharge its accepted responsibilities.

(2) Eligibility. At the time the application is filed, processed and approved, the applicant and the post-conversion permit holder must each be in good standing with the department. To be in good standing with the department, the department's most recent report of examination of either permit holder must not cite any violation of applicable laws and regulations or other material deficiencies that have not been remedied or corrected to the satisfaction of the department, and the permit holder must not be delinquent with respect to any fees or filings due to the department. Within 45 days after an application for conversion is filed with the department, the department may conduct an examination of the applicant or the post-conversion permit holder or both before approving or denying the application if an examination has not been conducted within the preceding 12 months or for the purpose of verifying that previously cited violations or other deficiencies have been satisfactorily eliminated or corrected.

(c) Contents of application. An application for conversion must respond to each paragraph of this subsection by number. Overlapping or duplicate responses may be cross-referenced for brevity.

(1) Letter requesting conversion. The applicant shall submit a letter to the commissioner, signed by a duly authorized officer, that:

(A) requests approval of the conversion of the applicant's prepaid contracts;

(B) requests authorization to transfer the applicant's responsibility for the prepaid contracts to the post-conversion permit holder;

(C) summarizes the amount of aggregate trust funds by depository and account number and the component amounts of paid-in principal and earnings, and requests authorization to transfer the aggregate trust funds from the currently approved depository or trustee to the insurance company;

(D) represents that the applicant is in compliance with Finance Code, §154.301, regarding prepaid contracts presumed to be abandoned, and has filed the reports and delivered funds as required by Finance Code, §154.304; and

(E) if the applicant is not an individual, includes a certified resolution of the applicant's board authorizing the conversion, the application, and the execution of related documents by the submitting officer.

(2) Agreement regarding conversion. The applicant must submit an original, signed copy of the agreement among the applicant, the post-conversion permit holder, and the insurance company regarding the transfer, receipt, and application of trust funds upon conversion that, among other matters, contains the following provisions:

(A) agreement of the parties that all prepaid contracts of the applicant in existence as of the date of the application will be subject to conversion, excluding prepaid contracts that are presumed abandoned under Finance Code, §154.301;

(B) agreement of the insurance company that:

(i) the formula for determining the cash surrender value or cancellation benefit of each annuity to be issued in the conversion will be at least as generous to the purchaser as the formula that would have applied under Finance Code, §154.155, had the prepaid contract not been converted from trust-funded to insurance-funded;

(ii) the face amount of the annuity to be issued with respect to each prepaid contract will not be less than the amount of aggregate trust funds transferred for that prepaid contract;

(iii) for any prepaid contract which is not fully paid and the balance due not included in the annuity described in clause (ii) of this subparagraph, the face amount of the supplemental annuity to be issued may not be less than the unpaid principal balance, and no credit or reduction will be applied to the unpaid principal balance for earnings attributable to paid-in principal under the prepaid contract;

(iv) upon request, a copy of the specifications page of the funding annuity or annuities will be furnished to the purchaser of the prepaid contract to be funded; and

(v) no commissions or other compensation will be paid out of or deducted from the aggregate trust funds to be transferred in the proposed conversion.

(i) maintain all records required by §25.10 of this title (relating to Recordkeeping Requirements for Insurance-Funded Contracts);

(ii) verify that each death or cancellation benefit claim under a converted prepaid contract is paid in accordance with Finance Code, Chapter 154, and this chapter;

(iii) verify that each prepaid contract is performed by the funeral provider at maturity in accordance with its terms;

(iv) verify that any additional charges imposed by the funeral provider and collected from the decedent's representatives are for additional services or merchandise not otherwise contemplated by and funded under the prepaid contract and, if not, promptly refund or require the funeral provider to refund any prepaid contract overcharges to the decedent's representatives; and

(v) if within the five-year period following approval of the conversion a purchaser presents a fully executed prepaid contract that was not listed in the applicant's pre-conversion or post-conversion summaries and provides proof of payments made on the contract, take action to cause the insurance company to issue one or more annuities with respect to the previously omitted prepaid contract as if it had originally been included in the conversion or, if cancellation is requested by the purchaser, pay or take action to cause the purchaser to be paid the cancellation benefit due, provided that the obligation imposed by this clause is limited to 5.0% of the aggregate trust funds transferred, subject to a minimum total responsibility of $5,000 and a maximum total responsibility of $20,000.

(3) Compensation to insiders. The applicant must submit a written disclosure of the estimated total commissions and other compensation to be paid by the insurance company in connection with the conversion to each insurance agent that controls, is controlled by, or is under common control with the applicant or a funeral provider under any of the prepaid contracts to be converted, expressed as a percentage, dollar amount, or both, and the identity of each such agent.

(4) Agreement of post-conversion permit holder and applicant. The applicant must submit a written agreement between the post-conversion permit holder and the applicant that, at a minimum, requires the applicant to relinquish the individual prepaid contract ledgers formerly maintained by the applicant under §25.11 of this title (relating to Record Keeping Requirements for Trust-Funded Contracts) and obligates the post-conversion permit holder to maintain such ledgers to reflect the paid-in principal and the unpaid principal balance under each converted prepaid contract.

(5) Agreements between post-conversion permit holder and funeral providers. The applicant must submit the written agreement between the post-conversion permit holder and each person designated as the funeral provider under any prepaid contract to be converted that, at a minimum:

(A) sets forth the nature and scope of the relationship between the permit holder and the funeral provider and the respective rights and responsibilities of the parties with respect to the prepaid contracts of that funeral provider, including allocation of responsibilities for refunding any prepaid contract overcharges identified by the permit holder or the department;

(B) requires the funeral provider to perform and deliver the funeral benefits under each converted prepaid contract of that funeral provider in accordance with its terms;

(C) requires the funeral provider to provide the post-conversion permit holder with the documentation necessary to enable the permit holder to maintain the records required by Finance Code, Chapter 154, and §25.10 of this title; and

(D) obligates the parties to protect any nonpublic personal financial or health information of the purchaser and contract beneficiary under the prepaid contract in compliance with applicable law.

(6) Agreement of post-conversion permit holder and insurance company. If the proposed post-conversion permit holder is not the insurance company, the applicant must submit a written agreement between the post-conversion permit holder and the insurance company that, at a minimum, requires the insurance company to provide the post-conversion permit holder with the documentation necessary to enable the permit holder to maintain the records required by §25.10 of this title. The agreement must also obligate the parties to protect any nonpublic personal financial or health information of the purchaser and contract beneficiary under each converted prepaid contract and the owner and insured under each annuity issued in the proposed conversion in compliance with applicable law.

(7) Commitment of insurance company. If the post-conversion permit holder is not the insurance company and is unable to independently demonstrate that it has the organizational and financial resources to discharge its permit holder responsibilities, or otherwise intends to rely on the insurance company to provide such resources, the insurance company or its insurance holding company must commit to the department in writing to take all necessary steps to maintain the existence of the post-conversion permit holder, cause the permit holder to annually renew its permit if renewal is required by Finance Code, §154.107, and provide adequate resources to the post-conversion permit holder to enable it to maintain the financial condition and general fitness necessary to discharge the post-conversion permit holder's responsibilities under Finance Code, Chapter 154, and this chapter.

(8) Commitment of applicant. The applicant must commit to the department in writing to obtain and annually renew a permit under Chapter 154 and assume the post-conversion permit holder's responsibilities with respect to each converted contract for any year in which any converted contract remains outstanding and the post-conversion permit holder or a duly licensed successor fails to renew its permit as required with respect to the converted contracts, as evidenced by a final order revoking the permit. The commitment must obligate the applicant to submit its completed application with all required fees not later than the 31st day after the date the department notifies the applicant in writing of the facts that require licensure under the commitment.

(9) Form of annuity. The applicant must submit a copy of the form(s) of annuity proposed to be issued as part of the conversion. The submitted form(s) must be accompanied by a copy of the TDI notice of action approval letter. The applicant and not TDI is responsible for ensuring that the form of annuity complies with this section. Among other matters, the annuity must:

(A) provide guaranteed growth of the death benefit of no less than 2.0% compounded annually on gross premiums paid beginning in the first year of the policy;

(B) provide a formula for determining cash surrender value or cancellation benefit that will be at least as generous to the purchaser as the formula that would have applied under Finance Code, §154.155, had the prepaid contract not been converted from trust-funded to insurance-funded;

(C) provide a death benefit for the duration of the prepaid contract that equals the sum of the aggregate trust funds transferred at conversion, all future premiums paid, and accumulated growth thereon as provided by subparagraph (A) of this paragraph, provided that the death benefit can never be less than the amount that would have been available under the prepaid contract on the date of conversion had the prepaid contract not been converted from trust-funded to insurance-funded; and

(D) not include any provision that allows for contesting coverage or limiting death benefits, refers to or requires a physical examination, or otherwise operates as an exclusion, limitation, or condition on payment of death benefits other than provisions requiring submission of proof of death or surrender of the annuity at the time the annuity matures or is canceled.

(10) Federal income tax treatment. The applicant must submit a written summary describing the pre-conversion, federal income tax status of the purchasers' trusts, in the aggregate, as either qualified funeral trusts under 16 U.S.C. §685 or grantor trusts, for the preceding taxable year. Disclosure of differing treatment of individual purchaser trusts is not required if the summary identifies and quantifies the percentage of purchaser trusts treated as grantor trusts and qualified funeral trusts. The applicant must also describe the post-conversion manner in which taxable income arising from the annuities will be reported for federal income tax purposes, including taxable income arising from payment of cash surrender value.

(11) Past performance. The applicant must submit an historical yield table or graph reflecting the annual rate of growth in the death benefit under previously issued annuities similar to the form of annuity proposed to be issued by the insurance company in the proposed conversion, expressed as a percentage for each year of the most recent five-year period, to the extent such annuities were in existence in those periods. For purposes of this paragraph, the annual growth under the annuity equals the growth rate credited by the insurance company to the death benefit for the year.

(12) Form of assignment. The applicant must submit a copy of the form of assignment, if any, to be used in assigning annuity rights or proceeds to the post-conversion permit holder.

(13) Qualifications of post-conversion permit holder. With respect to the post-conversion permit holder, the applicant must submit:

(A) if the proposed post-conversion permit holder is not also the insurance company, a copy of the post-conversion permit holder's most recent annual financial statements and the most current year-to-date financial statements;

(B) a list of all previous conversions in this state accepted by the post-conversion permit holder and, with respect to each conversion, the date of the order approving the conversion and the date that the converted prepaid contracts were formally transferred to the post-conversion permit holder;

(C) a summary of the number and aggregate purchase price of all prepaid contracts administered by the post-conversion permit holder as of the end of the immediately preceding calendar year;

(D) a description of how the prepaid contracts to be converted will be administered by the post-conversion permit holder, including a description of activities or functions, other than delivery of funeral services and merchandise by the designated funeral provider, that will be outsourced and the contractor that will perform such activities or functions; and

(E) if any contractor named in response to subparagraph (D) of this paragraph directly or indirectly controls, is controlled by, or is under common control with the post-conversion permit holder, a summary of the contracting relationship for each of the preceding three fiscal years that includes a description of the services performed and the compensation paid by the post-conversion permit holder.

(14) Qualifications of insurance company. With respect to the insurance company, the applicant must submit:

(A) a letter from the insurance company addressed to the department, dated not more than 60 days prior to the date the application is filed, representing that the insurance company is in good standing and currently authorized to conduct the business of insurance in this state;

(B) to the extent available, a list of the current financial strength ratings of the insurance company determined by A.M. Best Company, Standard & Poor's, Wiess Research, Duff & Phelps, and Moody's Investors Service; and

(C) a list of all previous conversions in this state that were funded by the insurance company and, with respect to each conversion, the date of the order approving the conversion and the date that trust funds were formally transferred to the insurance company.

(15) Notice to purchasers. The applicant must submit the proposed form of public notice required by subsection (e)(2) of this section and each proposed notification letter to be sent to purchasers from the applicant, the post-conversion permit holder, or the insurance company for approval by the department.

(A) The proposed form of notification letter from the applicant must:

(i) provide full and fair disclosure of all material information necessary to enable the purchaser to understand the terms of the proposed conversion and the impact on the purchaser and the purchaser's contract;

(ii) notify the purchaser of the purchaser's right under Finance Code, §154.204(b), to decline the conversion and remain in the existing trust-funded funeral benefit arrangement by filing a written request with the department within 60 days;

(iii) include a form that the purchaser can fill out and submit to the department to decline the conversion;

(iv) inform the purchaser that a copy of the specifications page of the funding annuity is available upon request; and

(v) advise the purchaser that questions or complaints regarding the prepaid contract or the proposed conversion may be directed to the Texas Department of Banking, 2601 North Lamar Boulevard, Austin, Texas 78705; 1-877-276-5554 (toll free); or www.banking.state.tx.us.

(B) Without limiting the requirement to fully and fairly disclose all material information in the notification letter, with respect to the specific issues or in the specifically described circumstances below, the notification letter must:

(i) disclose that the prepaid funeral guaranty fund will no longer guarantee performance of the prepaid contract after conversion and, if the designated funeral provider ceases doing business for any reason after conversion but before performance of the contract, the purchaser may be responsible for contracting with another funeral provider and arranging for life insurance proceeds to be paid to the new funeral provider, who may not be obligated to provide the previously selected funeral services and merchandise for the same price specified in the contract;

(ii) if the notification letter contains promotional statements or claims that express subjective rather than objective views of the merits or benefits of conversion, disclose the estimated total commissions and other compensation to be paid by the insurance company in connection with the conversion to each insurance agent, identified by name, that controls, is controlled by, or is under common control with the applicant or the funeral provider under the prepaid contract to be converted, expressed as a dollar amount;

(iii) if the prepaid contract allows the contract beneficiary to be changed, disclose that the contract beneficiary may no longer be changed after the funding annuity is issued; and

(iv) disclose that the trustee or applicant, as the case may be, will no longer be liable for or otherwise assume payment of federal income taxes on taxable income from the trust, and describe the manner in which and to whom taxable income arising from the annuities will be reported:

(I) if, with regard to the preceding taxable year, the pre-conversion trustee elected to treat the prepaid contract as a qualified funeral trust under 16 U.S.C. §685, or if the applicant voluntarily assumed and paid any tax liability attributable to taxable income from the trust that would otherwise have been reported to the purchaser; and

(II) if taxable income arising from the annuities upon death or cancellation will be reported to the purchaser, contract beneficiary, or contract beneficiary's estate for federal income tax purposes.

(16) Pre-conversion summary. The applicant must submit a pre-conversion summary pertaining to each prepaid contract to be converted, determined as of a date no earlier than 30 days prior to the date the application is filed, with totals for all prepaid contracts to be converted, if applicable, addressing each of the following categories:

(A) name and, if available, date of birth of the purchaser;

(B) date of contract;

(D) paid-in principal;

(E) unpaid principal balance, if any;

(F) accumulated earnings;

(G) cancellation benefit due to the purchaser, assuming cancellation were to occur on the calculation date;

(H) amount eligible to be withdrawn from the trust fund by the applicant upon death of the contract beneficiary, assuming death were to occur on the calculation date; and

(I) amount retained by the applicant under Finance Code, §154.252.

(17) Pro forma post-conversion summary. The applicant must submit a pro forma post-conversion summary pertaining to each prepaid contract as if converted, determined as of the same date as the pre-conversion summary, with totals for all prepaid contracts, if applicable, addressing each of the following categories:

(A) name of annuitant;

(B) contract purchase price;

(D) unpaid principal balance, if any;

(E) the amount of transferred trust funds applied to the premium for the annuity;

(F) amount retained by the applicant under Finance Code, §154.252;

(G) cash surrender value of each annuity, assuming the annuity were to be surrendered on the calculation date; and

(H) death benefit under each annuity, assuming death were to occur on the calculation date.

(18) Voluntary cancellation of permit. If the applicant will not sell trust-funded prepaid contracts or administer previously sold trust-funded prepaid contracts after the conversion, the applicant must submit a completed form to voluntarily cancel its trust-funded permit. The applicant's voluntary cancellation will not be processed unless the conversion is approved, and will not be effective until the department completes the close-out examination of the applicant.

(19) Application fee. In connection with an application submitted under this section, the applicant must submit the conversion application fee required by §25.23 of this title (relating to Application Fees).

(20) Side agreements. To the extent not otherwise required by this subsection, the applicant must submit copies of any other agreements between or among the applicant, a funeral provider, the post-conversion permit holder, and/or the insurance company that contain contractual provisions or informal understandings or undertakings addressing any aspect of the proposed conversion or the future relationship among the applicant, a funeral provider, the post-conversion permit holder, and/or the insurance company with respect to any converted prepaid contract.

(d) Consideration of application; hearing. If the application is deficient, the department may require any person connected with the proposed conversion to submit additional information. An application may be approved or denied without the necessity of a hearing, subject to the right of the applicant or the post-conversion permit holder to request a hearing.

(1) Conditions in order approving conversion. An order approving conversion will impose certain conditions that are not subject to objection, as described in subsection (e) of this section. The order may also impose other, nonstandard conditions specific to the conversion at issue. The applicant or the post-conversion permit holder must submit a written request for hearing pursuant to paragraph (2) of this subsection if any nonstandard condition in the order is objectionable, in which case the order is deemed to be a denial. Consummation of the conversion transaction constitutes confirmation of acceptance by the applicant, the post-conversion permit holder, and the insurance company of any conditions imposed by the order and is considered for all purposes an agreement with the department enforceable against the applicant, the post-conversion permit holder, and the insurance company.

(2) Hearing. The applicant or the post-conversion permit holder may file a written request for hearing with the commissioner on or before the 30th day after the date of the order denying the application, or an order imposing nonstandard conditions objectionable to the applicant or the post-conversion permit holder, stating with specificity the reasons the applicant alleges that the decision of the department is in error. The request for hearing will be forwarded to the administrative law judge who must enter appropriate orders and conduct the hearing on or before the 60th day after the date the request for hearing was received, or as soon as is otherwise reasonably possible, under Chapter 9 of this title (relating to Rules of Procedure for Contested Case Hearings, Appeals, and Rulemakings) and Government Code, Chapter 2001. The applicant or the post-conversion permit holder has the burden of proof to demonstrate that the proposed insurance-funded prepaid funeral benefits safeguards the rights and interests of each affected purchaser to substantially the same degree as the existing trust-funded prepaid funeral benefits sought to be replaced. A denial of an application may not be appealed until a final order is issued.

(e) Standard conditions in order approving conversion. An order approving conversion will impose six required conditions that are not subject to objection. Failure to satisfy any of these conditions constitutes a violation of an order of the commissioner subject to possible enforcement action under Finance Code, Chapter 154.

(1) The order approving conversion will prohibit issuance of the annuities prior to the expiration of the time period for a purchaser to decline conversion, including any extended time period required by paragraph (4) of this subsection, except that the annuities may be issued prior to that date if expiration of the time period will occur during the free look period or if a purchaser electing to decline conversion will not be required to pay an early withdrawal penalty for cancellation of the annuity.

(2) Pursuant to Finance Code, §154.204(b), the order approving conversion will require the applicant to notify purchasers of the proposed conversion by the following means:

(A) The notification letter from the applicant described by subsection (c)(15) of this section must be sent to purchasers by certified mail or another form of mail that requires or provides proof of delivery to the last known address of the purchaser.

(B) The applicant must publish a one-time public notice in a newspaper of general circulation in the county in which the applicant is located, or in another publication or location as directed by the department, as evidenced by a publisher's affidavit attesting to the date of publication, advising purchasers of trust-funded prepaid contracts from applicant of the pending conversion, the right of a purchaser to decline conversion, and the manner in which a purchaser may obtain more information about the purchaser's rights and options regarding the conversion.

(3) The order approving conversion will provide that a prepaid contract for which the notification letter is returned unclaimed may not be converted to the insurance-funded funeral benefit arrangement approved in the order unless the requirements of this paragraph are met.

(A) With respect to each notification letter returned unclaimed because the address is incorrect, the addressee is unknown or has moved without leaving a forwarding address, or the addressee's forwarding order has expired, the applicant must search for a new address for the purchaser using available non-fee based resources. If a new address is located, the applicant must resend the notification letter one time in the manner required by subsection (e)(2)(A) of this section.

(B) With respect to each unclaimed notification letter for which a new address is not located and with respect to each re-mailed notification letter that is returned unclaimed, the applicant must review the related contract file in light of the returned letter to verify or change its prior determination that the contract should not be presumed abandoned under Finance Code, §154.301, and must retain documentation evidencing its review for examination by the department. A prepaid contract subject to this paragraph may be converted to the insurance-funded funeral benefit arrangement approved in the order only if the applicant makes a new affirmative finding that the contract should not be presumed abandoned. On or before the 120th day after the date of the order, the applicant must submit a report to the department summarizing its activities under this subparagraph and reporting the basis for findings made.

(4) The order approving conversion will require the post-conversion permit holder, on or before the 120th day after the date of the order, to submit to the department a notarized statement attesting that the annuities have been issued and funded on behalf of the purchasers listed in the pro forma post-conversion summary included in the conversion application and disclosing the date that the notification letters included in the conversion application were mailed to the purchasers.

(5) The order approving conversion will require the post-conversion permit holder, on or before the 120th day after the date the trust funds are transferred as authorized by the order, to submit to the department a final post-conversion summary pertaining to each converted prepaid contract, determined as of the conversion date, with totals for all prepaid contracts, if applicable, addressing each of the following categories:

(A) name of annuitant;

(B) policy number of the annuity issued to the annuitant, or of each annuity if a supplemental annuity is also issued;

(D) paid-in principal;

(E) unpaid principal balance, if any;

(F) the amount of transferred trust funds applied to the premium for each annuity;

(G) amount retained by the applicant under Finance Code, §154.252;

(H) cash surrender value of each annuity, assuming the annuity were to be surrendered on the conversion date; and

(I) death benefit under each annuity, assuming death were to occur on the conversion date.

(6) The order approving conversion will require the conversion transaction to be fully implemented and completed on or before the 150th day after the date of the conversion order.

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 20, 2008.

TRD-200803184

A. Kaylene Ray

General Counsel

Texas Department of Banking

Proposed date of adoption: October 17, 2008

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

PART 5. OFFICE OF CONSUMER CREDIT COMMISSIONER

CHAPTER 84. MOTOR VEHICLE INSTALLMENT SALES

SUBCHAPTER B. INSTALLMENT SALES CONTRACT PROVISIONS

7 TAC §§84.201 - 84.203

The Finance Commission of Texas (commission) proposes new §§84.201 - 84.203, concerning Retail Installment Contracts, with regard to motor vehicle sales finance dealers licensed by the Office of Consumer Credit Commissioner.

The new rules contain new operational provisions regarding the calculation and collection of charges. The purpose of the new operational rules is to conform the commission's rules to current practice, to provide clarification for licensees required to comply with the rules, and to provide more specific guidance for the examination process. The following paragraphs outline the individual purposes of each proposed rule.

Section 84.201 explains the methods and procedures for calculating time price differential in connection with a motor vehicle retail installment sales contract.

Section 84.202 outlines the procedures for assessing and collecting a default charge in connection with a motor vehicle retail installment sales contract.

Section 84.203 explains the methods and procedures for calculating and collecting a deferment charge in connection with a motor vehicle retail installment sales contract.

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 determined that for each year of the first five years the new operational rules are in effect the public benefit anticipated will be that the commission's rules will conform to current practice, will be more easily understood by licensees required to comply with the rules, and will be more easily enforced.

Effective September 1, 2002, Texas Finance Code, Chapter 348 has required motor vehicle sales finance dealers to be licensed by the Office of Consumer Credit Commissioner. The agency also conducts examinations to ensure compliance with Chapter 348. The proposed new rules provide guidance and clarification for the examination process used to establish that compliance.

There is no anticipated cost to persons who are required to comply with the rules as proposed. There will be no effect on individuals required to comply with the rules as proposed. There is no anticipated adverse economic effect on small or micro-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 rules are published in the Texas Register . At the conclusion of the 31st day after the proposed rules are published in the Texas Register, no further written comments will be considered or accepted by the commission.

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

The rules affect Texas Finance Code, Chapter 348.

§84.201.Time Price Differential.

(a) Precomputed retail installment sales contracts. A retail installment sales contract may not contain a time price differential charge that exceeds the add-on rates authorized by Texas Finance Code, §348.104 or the alternative simple time price differential rate authorized by Texas Finance Code, §348.105 as calculated by the add-on method or scheduled installment earnings method. Prepaid time price differential in the form of points is not permitted.

(b) Time price differential-bearing retail installment sales contracts. A retail installment sales contract may not contain a time price differential charge that exceeds the maximum annualized daily rate authorized by Texas Finance Code, §348.104 or the alternative simple time price differential rate authorized by Texas Finance Code, §348.105 as calculated by the true daily earnings method. Prepaid time price differential in the form of points is not permitted.

(c) Minimum time price differential. In lieu of the time price differential charge specified under subsections (a) and (b) of this section, a retail seller may charge a minimum time price differential charge of $25.

(d) Method of calculation.

(1) Regular payment contract using sum of the periodic balances method. The time price differential charge is computed using the add-on rates authorized by Texas Finance Code, §348.104 or the alternative time price differential rate authorized by Texas Finance Code, §348.105 converted to an equivalent add-on rate per $100 per annum.

(A) Base time price differential charge. The base time price differential charge is determined by multiplying the principal balance subject to a finance charge, as defined by §84.102(11) of this title (relating to Definitions), by the applicable add-on rate per $100 per year for the corresponding term of the contract. If the retail installment contract is payable for a period that is shorter or longer than a year or is for an amount that is less or greater than $100, the amount of the time price differential charge is decreased or increased proportionately.

(B) Add-on rates. The applicable add-on rate per $100 per year is determined by the model year designated by the manufacturer of the vehicle.

(C) Deferred sales tax. For usury purposes, the deferred sales tax is allocated on a straight line basis. A straight line basis is calculated by dividing the original gross deferred sales tax amount by the original term of the contract. The allocation of the deferred sales tax for the final payment must be adjusted for any rounding differences. The payment amount disclosed on the retail installment sales contract must include the straight line allocation of the deferred sales tax per installment.

(D) Conversion of the alternative time price differential rate to an add-on rate per $100 per annum. The maximum add-on rate per $100 per annum cannot exceed the add-on rate contained in Figure: 7 TAC §84.201(d)(1)(D). The add-on rate per $100 per annum is determined by converting the current maximum alternative rate authorized by Texas Finance Code, §348.105 to an equivalent add-on rate for the given monthly term of the contract. The simple alternative time price differential rate used in Figure: 7 TAC §84.201(d)(1)(D) is 18% per annum. If the alternative simple time price differential rate is adjusted according to Texas Finance Code, Chapter 303 and is greater than 18% per annum, the add-on rates shown in Figure: 7 TAC §84.201(d)(1)(D) should be adjusted accordingly.

Figure: 7 TAC §84.201(d)(1)(D) (.pdf)

(2) Scheduled installment earnings method. The scheduled installment earnings method can be used for both regular and irregular payment contracts.

(A) Maximum time price differential. The maximum time price differential charge is computed by applying the applicable maximum daily rate to the unpaid principal balance subject to a finance charge, as defined by §84.102(11) of this title, as if each payment will be made on its scheduled installment date. A payment received before or after the due date does not affect the amount of the scheduled reduction in the unpaid principal subject to a finance charge. The computation of the time price differential must comply with the U.S. Rule as defined by §84.102(19) of this title.

(B) Maximum annualized daily rate.

(i) Sales tax advanced transactions. On sales tax advanced transactions using the scheduled installment earnings method, the annualized daily rate is either:

(I) the annual percentage rate disclosed on the retail installment sales contract; or

(II) the contract rate if the retail seller requires the retail buyer to purchase credit life or credit accident and health insurance.

(ii) Sales tax deferred transactions. On sales tax deferred transactions using the scheduled installment earnings method, the annualized daily rate is the contract rate.

(iii) Effective rate. The maximum annualized daily rate cannot exceed the effective rate contained in Figure: 7 TAC §84.201(d)(2)(B)(iii) for the equivalent monthly period and appropriate add-on rate per $100 determined by the model year designated by the manufacturer of the vehicle. The effective rates contained in Figure: 7 TAC §84.201(d)(2)(B)(iii) are the current maximum annualized daily rate authorized by Texas Finance Code, §348.104 or the alternative simple time price differential rate authorized by Texas Finance Code, §348.105. The alternative simple time price differential rate authorized by Texas Finance Code, §348.105 is 18% per annum. If the alternative simple time price differential rate is adjusted according to Texas Finance Code, Chapter 303 and is greater than effective rate contained in Figure: 7 TAC §84.201(d)(2)(B)(iii), the published rate will be highest effective rate.

Figure: 7 TAC §84.201(d)(2)(B)(iii) (.pdf)

(iv) Irregular payment contract effective rate. On a retail installment sales contract that is an irregular payment contract, the highest effective rate is determined by taking the closest monthly effective rate as shown in Figure: 7 TAC §84.201(d)(2)(B)(iii) assuming that the contract was payable in substantially equal successive monthly installments beginning one month from the date of the contract.

(I) The closest monthly period is determined as follows:

(-a-) Count the number of days from the date of the contract to the originally scheduled maturity date;

(-b-) Divide the results of item (-a-) of this subclause by 365;

(-c-) Multiply the results of item (-b-) of this subclause by 12.

(II) If the results of subclause (I) of this clause are exactly halfway or more between the two monthly periods, the closest monthly period is rounded up to the next monthly period. For example, if the closest monthly period is determined to be 14.50 months, the maximum annualized daily rate is the effective rate for 15 months.

(III) If the results of subclause (I) of this clause are less than halfway between the two monthly periods, the closest monthly period is rounded down to the previous monthly period. For example, if the closest monthly period is determined to be 14.49 months, the maximum annualized daily rate is the effective rate for 14 months.

(D) Contract rate less than the maximum annualized daily rate. If a retail seller consummates a retail installment sales contract with a contract rate that is less than the maximum annualized daily rate, the retail seller must compute the time price differential charge at the disclosed contract rate.

(3) True daily earnings method. The true daily earnings method can be used for both regular and irregular payment contracts.

(A) Maximum time price differential. The maximum time price differential charge is computed by applying the applicable daily rate to the unpaid principal balance subject to a finance charge, as defined by §84.102(11) of this title. The computation of the time price differential must comply with the U.S. Rule as defined by §84.102(19) of this title. The earned time price differential charge is computed as follows:

(i) multiply the unpaid principal balance subject to a finance charge by the applicable daily rate; and

(ii) multiply the results of clause (i) of this subparagraph by the number of days the actual unpaid principal balance subject to a finance charge is outstanding.

(B) Maximum annualized daily rate.

(i) Sales tax advanced transactions. On sales tax advanced transactions using the true daily installment earnings method, the annualized daily rate is either:

(I) the annual percentage rate disclosed on the retail installment sales contract; or

(II) the contract rate if the retail seller requires the retail buyer to purchase credit life or credit accident and health insurance.

(ii) Sales tax deferred transactions. On sales tax deferred transactions using the true daily installment earnings method, the annualized daily rate is the contract rate.

(I) The closest monthly period is determined as follows:

(-a-) Count the number of days from the date of the contract to the originally scheduled maturity date;

(-b-) Divide the results of item (-a-) of this subclause by 365;

(-c-) Multiply the results of item (-b-) of this subclause by 12.

(E) Allocation of payment. If the retail installment sales contract does not prescribe the method for the application of the payment, the payment should be applied in the following order:

(i) amount of the straight line allocation of the deferred sales tax, if the transaction is a sales tax deferred transaction;

(ii) default charges or deferment charges;

(iii) earned but unpaid time price differential charge; and

(iv) anything else owed under the contract.

§84.202.Default Charge.

(a) Definition. A default charge is the additional charge for a late payment on a contract. The term default charge is synonymous with the term delinquency charge as contained in Texas Finance Code, §348.107.

(b) Precomputed regular payment contract using sum of the periodic balances method. For a regular payment contract employing the add-on method and the refunding method of the sum of the periodic balances, a holder may assess, charge, and collect a default charge not to exceed 5% of the scheduled payment or a default charge on the past due amount computed at the maximum daily rate authorized for the contract from the due date to the date that the past due amount is paid.

(c) Scheduled installment earnings method. For a regular or an irregular payment contract employing the scheduled installment earnings method, a holder may assess, charge, and collect a default charge not to exceed 5% of the scheduled payment and a default charge on the past due amount computed at the maximum daily rate authorized for the contract from the due date to the date that the past due amount is paid.

(d) True daily earnings method. For a regular payment contract or an irregular payment contract employing the true daily earnings method, a holder may assess, charge, and collect a default charge not to exceed 5% of the scheduled payment and a default charge on the past due amount computed at the maximum daily rate authorized for the contract from the due date to the date that the past due amount is paid. The default charge authorized under this subsection is in addition to the contractual time price differential charge earned on the principal balance subject to a finance charge.

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

(f) Default period.

(1) Ordinary vehicles and non-heavy commercial vehicles. A default charge may not be assessed until the 15th day after the installment due date. For example, if the installment due date is the 1st of the month, a default charge may not be assessed until the 17th of the month.

(2) Heavy commercial vehicles. A default charge may not be assessed until the 10th day after the installment due date. For example, if the installment due date is the 1st of the month, a default charge may not be assessed until the 12th of the month.

(g) Pyramiding prohibited. An authorized lender seeking to assess additional interest for default on a retail installment sales contract under Texas Finance Code, Chapter 348 must comply with the prohibition on the pyramiding of late charges set forth in the Federal Trade Commission Credit Practices Rule at 16 C.F.R. §444.4.

(h) Default charge on final installment balloon payment. If the retail buyer elects to pay the final balloon payment instead of refinancing the balloon payment as permitted by Texas Finance Code, §348.123, a default charge is allowed on the balloon payment.

(i) Default charge on deferred downpayment. A default charge under Texas Finance Code, §348.107 is not allowed on a deferred downpayment.

§84.203.Deferment Charge.

(a) Definition. A "deferment" means the payment of an additional charge to defer the payment date of a scheduled payment or partial payment on a contract. A deferment charge prescribed by this section may occur in a retail installment transaction that employs the precomputed add-on method for regular payment contracts using the sum of the periodic balances, the scheduled installment earnings method, or the true daily earnings method. This section applies only to an amendment relating to the deferment of all or a part of one or more installments, and does not apply to amendments relating to renewing, restating, or rescheduling the unpaid balance under a retail installment sales contract. The parties to a retail installment sales contract may agree to modify the terms of the transaction as long as the amendment conforms to the requirements of Texas Finance Code, Chapter 348, Subchapter B.

(b) Bilateral or mutual deferment. A retail buyer and a holder may mutually agree to defer all or a part of one of more scheduled installments. Bilateral or mutual deferments must be agreed upon in writing. The signature of the retail buyer on the deferment notice denotes the retail buyer's agreement to a bilateral deferment.

(c) Deferment notice. Each deferment must be noted on the account record at the time the deferment is made. A written notice containing the conditions of the deferment must be furnished to the retail buyer as required by Texas Finance Code, §348.116. The deferment notice must include the name of the holder, the name of the retail buyer, the account number of the retail buyer, the date of the deferment, the installment or installments being deferred, the deferment period, the amount of the deferment charge, the balance on the account, and the date and amount of the next installment due.

(d) Limitation of number of installments being deferred per amendment. A holder may only defer the equivalent of three monthly installments per amendment. This limitation applies to the number of whole or partial installments that can be deferred, not the length of time an installment can be deferred.

(e) Computation of deferment charge. A holder of a retail installment sales contract under Texas Finance Code, Chapter 348 may calculate the deferment charge by any method of calculation as long as the deferment charge does not exceed the maximum amount permitted by Texas Finance Code, §348.114 and this section.

(1) Regular payment contract using sum of the periodic balances method.

(A) Base deferment charge. For a regular payment contracts employing the add-on method and the refunding method of the sum of the periodic balances, a holder may assess, charge, and collect a base deferment charge computed by:

(i) Multiplying the amount of the installment or installments being deferred by the maximum effective rate authorized for the contract;

(ii) dividing the results of clause (i) of this subparagraph by 12; and

(iii) multiplying the results of clause (ii) of this subparagraph by the number of months the installment or installments are being deferred.

(B) Additional deferment costs. In addition to the base deferment charge authorized by this section, the holder of a retail installment sales contract may collect from the retail buyer the amount of the additional cost to the holder for:

(i) premiums for continuing in force any insurance coverages provided by the retail installment contract; and

(ii) any additional necessary official fees.

(2) Scheduled installment earnings method or true daily earnings method.

(A) Base deferment charge. For a regular or an irregular payment contract employing the scheduled installment earnings method or true daily earnings method, a holder may assess, charge, and collect a base deferment charge computed by:

(i) Multiplying the amount of the installment or installments being deferred by the maximum daily rate authorized for the contract; and

(ii) multiplying the results of clause (i) of this subparagraph by the actual number of days the installment or installments are being deferred.

(i) premiums for continuing in force any insurance coverages provided by the retail installment contract; and

(ii) any additional necessary official fees.

(f) Negative accrual of time price differential. In a retail installment sales contract employing the true daily earnings method, the deferment of any payment may not result in the negative accrual of the time price differential.

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

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

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 20, 2008.

TRD-200803224

Leslie L. Pettijohn

Commissioner

Office of Consumer Credit Commissioner

Earliest possible date of adoption: August 3, 2008

For further information, please call: (512) 936-7621

SUBCHAPTER G. EXAMINATIONS

7 TAC §§84.702, 84.707 - 84.709

The Finance Commission of Texas (commission) proposes new §84.702 and §§84.707 - 84.709, concerning Examinations, with regard to motor vehicle sales finance dealers licensed by the Office of Consumer Credit Commissioner.

The new rules contain new operational provisions regarding misleading advertising and recordkeeping requirements. The purpose of the new operational rules is to conform the commission's rules to current practice, to provide clarification for licensees required to comply with the rules, and to provide more specific guidance for the examination process. The following paragraphs outline the individual purposes of each proposed rule.