SENATE, No. 2126

STATE OF NEW JERSEY

INTRODUCED JUNE 5, 1997

By Senators INVERSO and CARDINALE

An Act concerning collateral protection insurance and supplementing Title 17 of the Revised Statutes.

    Be It Enacted by the Senate and General Assembly of the State of New Jersey:

    1. This act shall be known and may be cited as the "Collateral Protection Act."

    2. As used in this act:

    "Collateral" means all property, real or personal, used to secure payment or performance pursuant to a credit transaction.

    "Collateral protection insurance" means insurance purchased by a creditor providing coverage against loss, expense or damage to collateral as a result of fire, theft, damage or other risks that would impair the creditor's interest in the collateral, which insurance is purchased as a result of the debtor's failure to provide evidence of insurance or failure to maintain insurance covering the collateral. "Collateral protection insurance" shall not include (1) insurance to protect the creditor following completion of foreclosure and sale or repossession and sale of the collateral, (2) credit insurance, mortgage protection insurance or other insurance issued to cover the life or health of the debtor, (3) mortgage insurance, or (4) title insurance. The fact that the insurance may have some other designation or title, such as "creditor placed insurance," shall not mean it is not collateral insurance as defined in this act.

    "Cost of collateral insurance protection insurance" or "cost" means all amounts paid by the creditor to obtain the insurance, including all premiums paid and all broker's commissions and fees, whether the commission is paid to the creditor, to a person or entity that is an affiliate of the creditor or to a person or entity which is unrelated to the creditor or whether such commissions are for a fixed percentage, and shall include all premiums, fees, penalties and administrative costs charged to the creditor upon cancellation of the collateral protection insurance.

    "Credit agreement" means the open-end or closed-end loan agreement, promissory note, mortgage, security agreement, sales agreement, line of credit agreement or other document or documents that set forth the terms of the credit transaction.

    "Credit transaction" means any transaction pursuant to which a creditor gives consideration for an obligation by a debtor to make payment or repayment at a future date or dates, which obligation is secured in whole or in part by collateral. "Credit transaction" includes, but is not limited to, an advance of money, opening a line of credit, a letter of credit and an installment sale.

    "Creditor" means any entity chartered, licensed or otherwise authorized by law to provide credit through a credit transaction and includes successors and assignees of the original creditor.

    "Debtor" means a natural person obligated to a creditor pursuant to a credit transaction where the money, property or services which are the subject of the transaction are primarily for personal, family or household purposes, whether the obligation is primary or secondary, and includes all persons who are successors to a debtor.

    3. a. Collateral protection insurance may be obtained by a creditor, with the cost to be paid or reimbursed by the debtor, if:

    (1) the terms of the credit agreement require the debtor to obtain and continue to maintain insurance protecting against loss or damage to the collateral and the debtor has not obtained or does not maintain such insurance;

    (2) the creditor mails a notice at least 30 calendar days, but not more than 90 calendar days before purchasing collateral protection insurance;

    (3) the notice is mailed to the debtor at the address on file with the creditor, by certified mail, return receipt requested, or if not accepted by the debtor or not deliverable, by United States mail, first class, postage prepaid, containing the following message or a message having substantially the same meaning:

NOTICE AND WARNING

We have not received evidence that you have purchased the insurance required by your [insert type of credit transaction]. Unless you provide us with the evidence that you have the required insurance within 30 days from date this letter was mailed, we may purchase insurance to protect our interest.

You are responsible for the cost, including earned premiums, commissions and fees, of the insurance purchased by us. You may pay us the amount of the costs, or if not, we may add the cost to your obligation to us and repayment will include interest at the rate of the original obligation. The effective date of coverage of the insurance we purchase will be the date your coverage lapsed or the date by which you failed to provide proof of the required coverage. The coverage we purchase may be more expensive than insurance you can obtain on your own. The amount of coverage we purchase will not be greater than the outstanding balance as of the effective date of the coverage we purchase, which may be less than the value of your property. As a result, you may be underinsured. The coverage we purchase will not include any liability coverage for claims made against you and will not satisfy any mandatory liability insurance law or financial responsibility law of this or any other state.

If you provide us with evidence that you have obtained the required insurance, we will then cancel the insurance that we have purchased; but you will be obligated to pay us any cost we have incurred, including premiums, commissions and administrative fees which we may have incurred for our obtaining the coverage. Please note that you are responsible for these costs even if you actually have the required insurance but do not provide us with timely evidence that it is in effect; and

    (4) the debtor fails to provide evidence to the creditor of the insurance required by the credit transaction agreement within 30 days of the date the notice was mailed pursuant to this section.

    b. The creditor is authorized to and has the authority to take the actions and obtain collateral protection insurance on the terms and conditions set forth in the form of the statutory notice provided in subsection a. of this section. The notice and warning may contain other information deemed pertinent by the creditor, provided that the information is not contradictory to the provisions of this act or other statutory law.

    4. a. Within 14 calendar days following the placement of the collateral protection insurance, the creditor shall mail or cause a notice to be mailed to the debtor at the address on file with the creditor, by certified mail, return receipt requested or if not accepted by the debtor or not deliverable, by United States mail, first class, postage prepaid, informing the debtor that:

    (1) collateral protection insurance has been purchased by the creditor with respect to the following credit transaction: [insert type of credit transaction];

    (2) the cost of the collateral protection insurance is $ ;

    (3) the amount stated under paragraph (2) of this subsection is due immediately; and

    (4) if a cash payment for the amount stated under paragraph (2) of this subsection is not received within 30 calendar days, the creditor may add that amount to the loan balance.

    b. The costs charged to the debtor shall not be excessive or discriminatory. Any cost or element of cost which is approved by the Department of Banking and Insurance or filed with the department and not disapproved, pursuant to P.L.1944, c.27 (C.17:29A-1 et seq.) or P.L.1982, c.114 (C.17:29AA-1 et seq.), shall not be deemed to be excessive or discriminatory for the purposes of this act.

    5. a. The effective date of the collateral protection insurance policy purchased by the creditor shall not be sooner than the earlier of the date the debtor's insurance lapsed or the date that the debtor failed to provide evidence of insurance on the collateral.

    b. The face amount of the collateral protection insurance policy shall not exceed the outstanding balance of the obligation as of the effective date of the coverage purchased by the creditor even though the coverage may exceed the actual cash value or cost of repair.

    c. A collateral protection insurance policy term may, but need not, extend to the full life of the credit transaction.

    6. a. Collateral protection insurance shall terminate or shall be canceled upon the occurrence of any of the following:

    (1) the date the creditor is provided with evidence of proper insurance coverage purchased by the debtor as required by the credit transaction agreement;

    (2) completion of foreclosure, including sale, or repossession or similar event, including sale;

    (3) the date that there is no further balance due from the debtor to the creditor; or

    (4) the date specified in the collateral protection insurance policy.

    b. If the collateral protection insurance is canceled and there is any unearned premium paid by the debtor which is refunded to the creditor, the creditor shall pay or credit the debtor with the amount of the refund. All statements of the loan balance and activity provided by the creditor to the debtor shall include all amounts debited or credited to the obligation due to the purchase and cancellation of collateral protection insurance.

    7. Collateral protection insurance may be obtained from an insurance carrier chosen by the creditor which is licensed or otherwise authorized to provide such insurance in this State, and shall be set forth in an individual policy or certificate of insurance.

    8. a. A creditor that places or a person that receives commissions or fees arising out of collateral protection insurance shall not be liable to any debtor, guarantor or other party for the placement of collateral protection insurance, except if the purchase of collateral protection insurance is the result of error by the creditor. If the creditor does not substantially comply with the provisions of this act in purchasing collateral protection insurance, the sole and exclusive remedy of the debtor is that the debtor does not have to pay for the insurance and any associated creditor fees or costs. A creditor is not, by virtue of this act, required to purchase collateral protection insurance or otherwise insure collateral.

    b. This act shall not create a cause of action to the debtor or any third party:

    (1) for the purchase or placement of collateral protection insurance in substantial compliance with the terms of this act;

    (2) for not purchasing collateral protection insurance;

    (3) as a result of the amount or level of coverage, geographical scope of coverage or deductible associated with collateral protection insurance purchased by the creditor;

    (4) because the creditor purchases collateral protection insurance that protects only the interest of the creditor or less than all of the interest of the debtor; or

    (5) nondisclosure of commissions or fees included in costs.

    c. The list under subsection b. of this section does not imply that a cause of action is otherwise created by this act.

    d. This act shall not apply to credit transactions involving extensions of credit primarily for business, commercial or agricultural purposes, and shall not be deemed to regulate or limit the rights of the parties to a business, commercial or agricultural transaction to contract for terms and provisions regarding insurance otherwise not prohibited by law.

    9. Neither this act nor the purchase of collateral protection insurance nor receipt of commission or other consideration by the creditor shall impose a fiduciary relationship between the creditor and debtor. Placement of collateral protection insurance is for the purpose of protection of the interest of the creditor when the debtor fails to insure collateral as required by the credit transaction agreement.

    10. This act shall not impair any other remedies, rights or options available to a creditor pursuant to law, regulation, ruling or contract.

    11. If a credit transaction involves more than one debtor, notices or warnings required to be mailed under this act, shall be mailed to the primary debtor.

    12. This act shall apply to all credit transactions entered into in this State or where the debtor resides in this State, provided, however, that if the debtor resides in another state, compliance with that state's requirements regarding notice of purchase by the creditor of collateral protection insurance shall be deemed compliance with the notice provisions of this act.

    13. This act shall apply to all credit transactions whether entered into prior or subsequent to the effective date of this act and shall

apply only to collateral protection insurance purchased after the effective date of this act.

    14. This act shall take effect immediately.

STATEMENT

    This bill clarifies the rights of the parties to a consumer loan agreement in which the borrower is required to insure the collateral for the loan. It permits the lender to obtain collateral protection insurance if the borrower does not comply with the borrower's obligations regarding the purchase of insurance. Under the bill, the lender is required to send a notice to the borrower, by certified mail, return receipt requested, or if rejected by the borrower or not deliverable, by United States Mail, postage prepaid, indicating to the borrower that the lender has no proof that the borrower has complied with the requirement to purchase collateral protection insurance. If the borrower does not provide evidence of such purchase within 30 days from the date of the notice, the lender may purchase insurance to protect the lender's interest in the collateral and the borrower will be required to reimburse the lender for the lender's cost of purchasing collateral protection insurance. The lender must send a notice of the purchase of collateral protection insurance, including the cost of the insurance, to the borrower by certified mail, return receipt requested, or if rejected by the borrower or not deliverable, by United States mail, postage prepaid, and inform the borrower that the borrower is to reimburse the lender by cash within 30 days, or if that has not taken place, the lender may add the cost to the principal balance of the loan.

    The bill requires the lender to inform the borrower that even if the lender purchases collateral protection insurance, it may not cover the value of the property, possibly resulting in the borrower being underinsured; and provides that if the purchase of collateral protection insurance is due to the error of the lender, the borrower would not be liable to the lender for the cost of the collateral protection insurance.

Regulates the purchase of collateral protection insurance by consumer lenders.