Transfer the Regulation of Premium Finance Companies to the Office of the Consumer Credit Commissioner

The Legislature should transfer the regulation of premium finance companies to the Office of the Consumer Credit Commissioner.


Background
Premium finance companies licensed under provisions of Chapter 24 of the Texas Insurance Code consist of independent finance companies, insurance agents, insurance companies and other financial institutions such as banks, savings and loans and credit union s. The Texas Department of Insurance (TDI) has a Premium Finance Unit to license, examine, investigate and otherwise regulate the 335 premium finance companies operating in Texas. In calendar 1991, the premium finance industry made 549,390 loans totaling $1.317 billion. In fisca l 1992, TDI conducted 64 examinations, or 20 percent of total licensees, and investigated 137 complaints.

State law regulating premium finance companies requires that persons making loans by entering into premium finance agreements with insured or prospec tive insureds must first obtain a license from TDI. The law requires premium finance agreements to be in a written form approved by the agency and specifies the items the agreement must include. For example, all agreements must include the amount of the pr emium, the down payment, the finance charge expressed as an annual percentage rate and other disclosures to provide consumers with a clear understanding of the terms of the agreement.

State law provides that TDI may suspend or revoke a license if it deter mines that the licensee has failed to return all amounts due from the premium finance company to the person whose insurance policy has been canceled. In addition, engaging in the operation of a premium finance company without a license constitutes a Class B misdemeanor.

While premium finance companies offer credit services to finance insurance premiums, they are not acting as insurance companies or agents. Rather, they are acting as credit providers, and TDI is assuming a regulatory function involving cred it practices and not insurance practices. This regulatory function is misplaced and detracts from the agency s primary mission. In addition, TDI is often placed in the potentially difficult situation of enforcing commercial contractual relationships betwe en insurance companies and premium finance companies. This role is clearly inconsistent with that of a regulatory agency.

The Office of Consumer Credit Commissioner (OCCC) is responsible for regulating all credit providers in the state except banks, savin gs and loans, credit unions and premium finance companies. Certain credit providers, such as consumer loan companies and pawnshops, are subject to licensing and examination by OCCC. Retail credit sellers and holders are required to register with the agency and are subject to various provisions of the Texas Credit Code. In fiscal 1992, OCCC regulated 1,634 loan companies, 1,421 pawnshops and 3,353 pawnshop employees. It registered 11,324 retail sellers/holders and conducted examinations of approximately 39 percent of licensed loan companies and 47 percent of pawnshops. OCCC projects its examination coverage rate to rise to 50 percent in fiscal 1993.

As the discussion above indicates, premium finance companies are not engaged in the insurance business. They simply provide a loan for the payment of insurance premiums. As such, the activities of these companies are more similar to other credit providers, such as those regulated by OCCC. In fact, there is considerable overlap between the types of companies reg ulated by the respective agencies. Nearly a third of all premium finance companies regulated by TDI are consumer finance companies already regulated by OCCC.

The result of having premium finance companies regulation performed at TDI and other credit oversight done by OCCC is that two agencies must train staff, incur administrative overhead and spend resources conducting examinations and investigations to overse e similar operations. In addition to redundant costs, this current regulatory scheme could resul t in inconsistent regulatory approaches being used when a consistent statewide approach would be more desirable. Most states regulate premium finance companies through a credit, not an insurance, regulatory agency.

The required premium finance company license is renewable annually. Increasingly, the Texas Sunset Commission is recommending the conversion of annual license renewal requirements to a biennial basis where there would be no adverse regulatory impact. Such a process improves agency cash flow, reduces biennial administrative costs and increases biennial interest earnings.


Recommendations
A. The responsibility for the regulation of premium finance companies should be transferred from the Texas Department of Insurance (TDI) to the Office of the Consumer Credit Commissioner (OCCC). Statutory changes should be enacted to provide for sufficien t rulemaking authority and to ensure consistency in the regulation of credit providers.

B. The Texas Credit Code should be amended to provide for the biennial renewal of all licenses and registrations issued by the Office of the Consumer Credit Commissioner.

The recommendation consolidates the regulation of premium finance credit into the Office of the Consumer Credit Commissioner. This would result in the evaluation being conducted by an agency that already oversees similar programs. Implementing the recomme ndation also would eliminate the current annual license and registration renewal process and in its place institute a biennial process.


Implications
Cons olidating like functions within OCCC would result in operational savings and reductions in personnel from economies of scale in the licensing, examination and overall regulation of premium finance companies. These efficiencies would allow for an examinati on coverage of approximately 50 percent equal to the examination coverage for other OCCC regulated populations but higher than TDI s current examination coverage of 20 percent. This additional coverage would be achieved at a lower overall cost per examination, and would ensure an adequate examination coverage consistent with that of other credit providers.

OCCC s experience in regulating credit providers and its existing staff resources would also enhance the state s ability to consistently apply consumer credit statutes, and to unify programs of public information and consumer protection. The TDI would be free to appropriately focus its resources on insurance-related matters.

A biennial licensing and registration renewal process would result in administra tive, postage and printing savings as well as improve agency cash flow. It also would produce additional interest earnings for the state and would bring the agency in line with the renewal requirements of most licensing agencies.


Fiscal Impact
Consolidation would result in the movement of costs and revenues generated as a result of regulating the premium finance industry from one agency to another. Both agencies receive their funding from the industries under regulation, and any reduction in th e administrative costs would be passed back the industries, not directly to the state. Therefore, no costs, revenues or savings for licensing, examination or administration are shown.

The biennial licensing requirement would produce approximately $11,000 in cost savings each year, as a result of postage, printing supplies and personnel required to do mailing and licensing paperwork. Also, approximately $31,000 in additional interest ea rnings would be realized in the first year of each biennium. A portion of the interest earnings would likely be realized in the second year of each biennium due to varying and mid-year license and registration renewal dates. However, for purposes of simplicity, the additional biennial interest earnings are reflected equally in each of the two years of each biennium. This convention would not distort the biennial revenue gain (except in fiscal 1998) since all additional earnings would be realized within a particular biennial period.

Savings to the Gain to the Net Gain to the
Office of Consumer Office of Consumer Office of Consumer
Fiscal Credit Commission Credit Commission Credit Commission Change in
Year Expense Account 509 Expense Account 509 Expense Account 509 FTEs

1994 $11,000 $31,000 $42,000 0
1995 11,000 0 11,000 0
1996 11,000 31,000 42,000 0
1997 11,000 0 11,000 0
1998 11,000 31,000 42,000 0