PART 4. TEXAS DEPARTMENT OF LICENSING AND REGULATION
CHAPTER 77. SERVICE CONTRACT PROVIDERS AND ADMINISTRATORS
The Texas Commission of Licensing and Regulation (Commission) adopts amendments to existing rules at 16 Texas Administrative Code (TAC), Chapter 77, §§77.40 - 77.42 and 77.70, and the repeal of §77.93, regarding the Service Contract Providers and Administrators program, without changes to the proposed text as published in the February 23, 2024, issue of the Texas Register (49 TexReg 947). These rules will not be republished.
EXPLANATION OF AND JUSTIFICATION FOR THE RULES
The rules under 16 TAC, Chapter 77, implement Texas Occupations Code, Chapter 1304, the Service Contract Regulatory Act.
The adopted rules implement House Bill (HB) 1560, 87th Legislature, Regular Session (2021), which repealed the former Residential Service Company Act (Occupations Code, Chapter 1303), and amended Chapter 1304 to include residential service contracts as a type of service contract under the regulatory authority of the Texas Department of Licensing and Regulation (Department). The adopted rules additionally clarify the Department's interpretation of the financial security requirements of Chapter 1304 and correct an obsolete statutory reference in the rules.
Under the Service Contract Regulatory Act, to obtain or renew a registration, providers must demonstrate the ability to meet their financial obligations to service contract holders. In general, Occupations Code §1304.151 requires providers to satisfy one of three financial requirements: insuring their contracts under a reimbursement insurance policy, maintaining a funded reserve account and security deposit, or meeting net worth requirements. If a provider uses a reimbursement insurance policy, Occupations Code §1304.152 requires the policy to meet certain financial requirements.
HB 1560 enacted Occupations Code §1304.157, which provides that residential service contract providers may meet the financial security requirements of Chapter 1304 by using a reimbursement insurance policy issued by a captive insurance company and maintaining a funded reserve. In this scenario, §1304.157 exempts the policy from the financial requirements of §1304.152 and prescribes a formula for determining the minimum funded reserve for these providers, which differs from the formula provided in §1304.151 for other providers. The adopted rules are necessary to clarify that residential service contract providers electing to financially qualify using an insurance policy from a captive insurance company must also maintain the funded reserve as provided in §1304.157(c).
Occupations Code §1304.157 also requires residential service contracts to include a certain disclosure statement if the seller of the contract is not employed by a registered provider or administrator. Although this disclosure statement generally mirrors that required by the rule at 16 TAC §77.93, the rule contains obsolete references to the repealed Residential Service Company Act. The adopted rules are necessary to resolve this discrepancy, and do so by repealing §77.93 and adding a reference to the statutorily required disclosure statement in the rules at §77.70(d), which concerns the disclosure responsibilities of providers and administrators.
Under Occupations Code §1304.151(a)(2), one of the methods by which providers may meet the Act's financial security requirements is by both maintaining a funded reserve account and placing in trust a security deposit. For providers electing this option, the amount of the required deposit varies under subsections (b) through (b-4) depending on the type of service contract sold, and in the case of motor vehicle dealers, gross revenue generated the preceding year. For residential service contract providers, the minimum deposit is $25,000.
The formula for determining the required balance in the funded reserve account is stated in Occupations Code §1304.151(b). This formula was amended by House Bill (HB) 4316, 88th Legislature, Regular Session, effective September 1, 2023, and is now computed by subtracting the amount of any claims paid from the product of 40 percent and the gross consideration the provider received from consumers from the sale of all service contracts issued and outstanding in this state.
Because the statutory formula does not contain a floor, a problem arises of whether the Department must grant a registration when a provider elects this financial security option but, due to the amount of claims paid relative to revenue from contracts sold, the statutory formula does not appear to require either a positive balance or an amount that establishes to the Department's satisfaction the provider's ability to meet its obligations. Under subsection (e), the executive director is generally not permitted to impose additional financial security requirements beyond those set forth in §1304.151. Under §1304.1025(b), however, the executive director may not issue or renew a registration unless a provider demonstrates to the executive director's satisfaction an ability to meet its obligations under service contracts and the Act.
The adopted rules clarify the Department's interpretation that, where a provider elects to establish financial security under §1304.151(a)(2), and the amount of security deposit and funded reserve balance are insufficient to evidence that the provider can meet its obligations under service contracts and the Act, the Department has the authority to deny or refuse to renew a registration, or to require the provider to establish financial security under another of the authorized methods.
SECTION-BY-SECTION SUMMARY
The adopted rules amend §77.40, Financial Security--General Requirements. The adopted rules amend subsection (b) to remove unnecessary language. The adopted rules also insert a new subsection (c) to describe the method of financial security provided by Occupations Code §1304.157(c), under which residential service contract providers may insure contracts under a reimbursement insurance policy issued by a captive insurance company if they also maintain a required funded reserve account. The subsections that follow the insertion are re-lettered.
The adopted rules amend §77.41, Financial Security--Reimbursement Insurance Policy. The adopted rules insert language in subsection (c) to clarify that a residential service contract provider who elects to insure its contracts under a reimbursement insurance policy issued by a captive insurance company must also maintain a funded reserve account.
The adopted rules amend §77.42, Financial Security--Funded Reserve Account and Security Deposit. The adopted rules insert a new subsection (f) to include language clarifying that where a provider elects to establish financial security under Occupations Code §1304.151(a)(2) and the amount of security deposit and funded reserve balance are insufficient to evidence that the provider can meet its obligations, the Department has the authority to deny or refuse to renew a registration, or to require the provider to establish financial security under another of the authorized methods.
The adopted rules amend §77.70, Responsibilities of Providers and Administrators. The adopted rules insert into subsection (d)(1) a necessary reference to Occupations Code §1304.157.
Lastly, the adopted rules repeal §77.93, Disclosures, in its entirety.
PUBLIC COMMENTS
The Department drafted and distributed the proposed rules to persons internal and external to the agency. The proposed rules were published in the February 23, 2024, issue of the Texas Register (49 TexReg 947). The public comment period closed on March 25, 2024. The Department did not receive any comments from interested parties on the proposed rules.
COMMISSION ACTION
At its meeting on May 21, 2024, the Commission adopted the proposed rules as published in the Texas Register.
STATUTORY AUTHORITY
The adopted rules are adopted under Texas Occupations Code, Chapters 51 and 1304, which authorize the Texas Commission of Licensing and Regulation, the Department's governing body, to adopt rules as necessary to implement these chapters and any other law establishing a program regulated by the Department.
The statutory provisions affected by the adopted rules are those set forth in Texas Occupations Code, Chapters 51 and 1304. No other statutes, articles, or codes are affected by the adopted rules.
The legislation that enacted the statutory authority under which the adopted rules are proposed to be adopted is House Bill 1560, 87th Legislature, Regular Session (2021) and House Bill 4316, 88th Legislature, Regular Session (2023).
The agency certifies that legal counsel has reviewed the adoption and found it to be a valid exercise of the agency's legal authority.
Filed with the Office of the Secretary of State on May 24, 2024.
TRD-202402349
Doug Jennings
General Counsel
Texas Department of Licensing and Regulation
Effective date: June 13, 2024
Proposal publication date: February 23, 2024
For further information, please call: (512) 475-4879
STATUTORY AUTHORITY
The adopted repeal is repealed under Texas Occupations Code, Chapters 51 and 1304, which authorize the Texas Commission of Licensing and Regulation, the department's governing body, to adopt rules as necessary to implement these chapters and any other law establishing a program regulated by the department.
The statutory provisions affected by the adopted repeals are those set forth in Texas Occupations Code, Chapters 51 and 1304. No other statutes, articles, or codes are affected by the adopted repeals.
The legislation that enacted the statutory authority under which the adopted rules are proposed to be adopted is House Bill 1560, 87th Legislature, Regular Session (2021) and House Bill 4316, 88th Legislature, Regular Session (2023).
The agency certifies that legal counsel has reviewed the adoption and found it to be a valid exercise of the agency's legal authority.
Filed with the Office of the Secretary of State on May 24, 2024.
TRD-202402350
Doug Jennings
General Counsel
Texas Department of Licensing and Regulation
Effective date: June 13, 2024
Proposal publication date: February 23, 2024
For further information, please call: (512) 475-4879