Can a Texas lender make you buy manufactured-home insurance from a company it picks?

Plain-English summary

A member of the Texas House asked how far a lender can go when it requires insurance on a manufactured home it is financing. The questions came out of chapter 6A of the old Texas Credit Code (article 5069), which governed credit sales and consumer loans for manufactured and mobile homes. Under that chapter a creditor could require the buyer to carry physical damage (property) insurance on the home.

The Attorney General drew a line between two different things. First, the creditor could dictate the shape of the policy: it could require a paid-in-full policy and could set the policy term, even a term longer than twelve months, because nothing in chapter 6A or any other state statute limited the term. Second, and going the other way, the creditor could not dictate where the buyer bought the insurance. Subsection (2) of article 5069-6A.08 required the creditor to tell the buyer, in writing, that the buyer could furnish equivalent coverage from any insurance company authorized to do business in Texas. Article 21.48A of the Insurance Code reinforced that rule by flatly barring a lender from requiring, directly or indirectly, that a borrower buy the insurance through any particular agent or insurer.

The opinion also read the statute's "good cause" exception narrowly. If the buyer brought its own policy, subsection (9) let the creditor refuse it only for "good cause." Harmonizing that phrase with section 3(c) of article 21.48A, the Attorney General concluded "good cause" meant a reasonable, nondiscriminatory basis tied solely to the insurer's financial soundness or its ability to service the policy, not a way back into forcing a creditor-chosen company. Finally, the opinion found that no state statute ever required a creditor to finance the buyer's insurance, whether the buyer asked before or after the credit transaction closed.

Currency note

This opinion was issued in 1992. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here. Article 5069 of Vernon's Texas Civil Statutes (the old Texas Credit Code) was repealed and recodified into the Texas Finance Code after this opinion, and the Insurance Code has since been recodified as well, so the article numbers cited here may no longer correspond to current law.

Background and statutory framework

Chapter 6A of article 5069, V.T.C.S., regulated credit sales and consumer loans for the purchase of manufactured homes, a term the chapter defined to cover both manufactured and mobile homes along with attached furnishings sold with the dwelling. V.T.C.S. art. 5069-6A.01, 5069-6A.02. A creditor extending or arranging that credit could require the buyer to carry physical damage insurance on the property, V.T.C.S. art. 5069-6A.08(1), and could finance the cost of that required insurance, as well as other coverage the buyer requested, as part of the transaction, id. art. 5069-6A.08(4).

On the term and form of the policy, the opinion found no statutory ceiling. "Coverage," which the creditor was allowed to designate, referred in industry usage to the amount and extent of the risk insured, not its duration. Subsection (5), which required a creditor that was not financing the policy to disclose the policy's term, implied that the creditor could specify a term in the first place, and subsection (6) contemplated coverage running through the life of the credit transaction. The Attorney General therefore concluded a creditor could require a paid-in-full policy of a term it selected. The opinion noted that the legislature gave creditors the power to require insurance so they could protect their interest in the collateral, so the creditor could require coverage for as long as it held that interest.

On the choice of insurer, two statutes pointed the same way. Subsection (2) of article 5069-6A.08 required the creditor to tell the buyer that the buyer could procure equivalent coverage "through any insurance company authorized to transact business in this state," subject to subsection (9). Article 21.48A of the Insurance Code, which governed all lenders, barred a lender from requiring, "directly or indirectly," as a condition of financing, that the borrower buy insurance through any particular agent or insurer. Ins. Code art. 21.48A, § 2(b). The legislature had recently reaffirmed the same policy, declaring its intent to "preserve to each citizen the right to choose his own agent or insurance carrier." Ins. Code art. 21.14, § 5. Parallel anti-coercion provisions appeared across the Credit Code for installment loans, secondary mortgage loans, retail installment sales, and motor-vehicle financing.

The "good cause" exception in subsection (9) let a creditor refuse a buyer-supplied policy, but the Attorney General harmonized that phrase with section 3(c) of article 21.48A, which let a lender refuse an insurer only "on reasonable and nondiscriminatory grounds relating to its financial soundness or its facility to service the policy." Reading the two together, the opinion concluded a creditor could not reject the consumer's chosen insurer unless it had that kind of reasonable, nondiscriminatory ground. The opinion supported its reading of when a refusal is justified with Texas State Highway Dep't v. Fillmon, 236 S.W.2d 635, 637 (Tex. Civ. App.—Austin), aff'd, 242 S.W.2d 172 (Tex. 1951). The opinion also relied on prior Attorney General Opinions MW-564 (1982), H-1216 (1978), and V-1215 (1951).

Common questions

Could a manufactured-home lender require a paid-in-full insurance policy?
Yes. The opinion found nothing in chapter 6A or any other state statute that stopped a creditor from requiring the buyer to provide a paid-in-full property insurance policy.

Could the lender set how long the policy had to last?
Yes. The opinion found no statutory limit on the term, so the creditor could require a term it selected, even one longer than twelve months. The rationale was that the creditor could require insurance for as long as it held an interest in the home.

Could the lender make the buyer use the lender's own insurance company?
No. The buyer had the right to furnish equivalent coverage from any insurer authorized in Texas. Both article 5069-6A.08(2) and Insurance Code article 21.48A barred a lender from forcing the borrower to buy through a particular agent or insurer.

What did "good cause" to refuse the buyer's policy mean?
The opinion read it narrowly. Apart from refusing coverage that was not equivalent to what it required, a creditor could reject the buyer's chosen insurer only for a reasonable, nondiscriminatory reason tied to the insurer's financial soundness or its ability to service the policy.

Did the lender have to finance the insurance?
No. The opinion found no statute requiring a creditor to finance the buyer's insurance, whether the buyer asked for that financing before or after the credit transaction closed.

Citations

• V.T.C.S. art. 5069-6A.01, 5069-6A.02, 5069-6A.05(1), 5069-6A.08, 5069-6A.12
• V.T.C.S. art. 5221f (Texas Manufactured Housing Standards Act)
• Ins. Code art. 21.48A, §§ 1(1), 2(b), 3(c), 4(a), 4(b)
• Ins. Code art. 21.14, § 5
• Ins. Code art. 24.01
• 15 U.S.C. § 1601 et seq. (Truth-in-Lending Act); 12 C.F.R. § 226.1 et seq. (Regulation Z)
• Texas State Highway Dep't v. Fillmon, 236 S.W.2d 635, 637 (Tex. Civ. App.—Austin), aff'd, 242 S.W.2d 172 (Tex. 1951)
• Tex. Att'y Gen. Ops. V-1215 (1951), H-1216 (1978), MW-564 (1982)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/dan-morales/dm-0117
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1992/dm0117.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain — the linked PDF is authoritative.

Office of the Attorney General
State of Texas

DAN MORALES
ATTORNEY GENERAL

May 13, 1992

Honorable Edmund Kuempel
Committee on House Administration
Texas House of Representatives
P. O. Box 2910
Austin, Texas 78768-2910

Opinion No. DM-117

Re: Whether, in a manufactured home credit transaction, V.T.C.S. article 5069-6A.08 allows a creditor to require a consumer to purchase the required insurance from an insurer of the creditor's choosing, and related questions (RQ-190)

Dear Representative Kuempel:

You ask several questions about article 5069-6A.08, V.T.C.S., a part of chapter 6A of the Texas Credit Code. Chapter 6A regulates credit sales and consumer loans for the purchase of manufactured homes.[1] See V.T.C.S. art. 5069-6A.01. Chapter 6A of article 5069 permits creditors that extend credit to or arrange credit for consumers for the purchase of manufactured homes to require the consumer to purchase physical damage insurance on "the property involved in a credit transaction." V.T.C.S. art. 5069-6A.08(1). The creditor may finance as part of the credit transaction the costs of the physical damage or property insurance that the creditor requires the consumer to purchase. Id. art. 5069-6A.08(4). The chapter also authorizes the creditor to finance as part of the credit transaction the costs of any other insurance coverage, such as credit life and credit health and accident insurance, that the consumer requests.[3] Id.

[1] Article 5069-6A.05(1), V.T.C.S., requires a creditor in a manufactured home credit transaction to comply with the federal Truth-in-Lending Act, 15 U.S.C. § 1601 et seq., as implemented by regulation Z, 12 C.F.R. § 226.1 et seq. See V.T.C.S. arts. 5069-6A.01, 5069-6A.02(1). We limit our answer, however, to state law.

[2] For purposes of chapter 6A, article 5069-6A.02(2), V.T.C.S., defines "[m]anufactured home" to include both manufactured and mobile homes, as well as "any furniture, appliances, drapes, carpets, wall coverings, or other items that are attached to or comprise a part of the dwelling and that are included in the cash price and sold in conjunction with the [home]." V.T.C.S. art. 5069-6A.02(2)(a); see id. art. 5221f (Texas Manufactured Housing Standards Act).

[c] Article 5069-6A.02(c) defines "[c]reditor" as "a person involved in a credit transaction who: (i) extends or arranges for the extension of the credit; or (ii) is a retailer or broker, as defined by the Texas Manufactured Housing Standards Act, as amended . . . , and participates in arranging for the extension of credit." The Texas Manufactured Housing Standards Act in turn defines "[r]etailer."

You first ask whether, if a consumer purchases the required insurance from someone other than the creditor, the creditor may demand that the consumer provide a one year paid-in-full insurance policy. We understand that by "required insurance" you mean physical damage or property insurance and that you use the word "demand" to indicate a situation in which, as a condition precedent to extending financing, the creditor requires the consumer to purchase a one year paid-in-full insurance policy.

Article 5069-6A.08 permits a creditor to designate the property insurance coverage the consumer must obtain. Id. art. 5069-6A.08(1). While chapter 6A does not define "coverage," we understand that the industry uses the term to refer to the amount and extent of the risk insured, not to the duration, or term, of the risk insured. BLACK'S LAW DICTIONARY 330 (5th ed. 1979); id. at 1193 (defining "risk" as "danger or hazard of a loss of the property insured; . . . specified contingency or peril"); cf. 12 APPLEMAN, INSURANCE LAW AND PRACTICE § 7001, at 5 (rev. ed. 1981) (listing as element essential to insurance contract inclusion of risks insured against, and as essential element of all contracts, duration of contract). Thus, by its use of the word "coverage" subsection (1) does not explicitly preclude a creditor requiring a consumer to purchase an insurance policy of a term specified by the creditor.

Whether or not article 5069-6A.08(1), by its use of the word "coverage," permits a creditor to require an insurance policy of a specified term, we believe that another provision of chapter 6A implicitly permits a creditor to specify the term of the property insurance. Subsection (5) of article 5069-6A.08 mandates that if the creditor is not financing the costs of the property insurance policy, the creditor must disclose in the credit document the term of the required property insurance. Subsection (5) thus impliedly permits a creditor to require a consumer to purchase a property insurance policy of a specified term. Additionally, chapter 6A.08 appears to contemplate that the creditor may require continuous coverage throughout the entire term of the credit transaction. V.T.C.S. art. 5069-6A.08(6) (stating that creditor may include any insurance premium included in the credit transaction and paid as part of the total of payments, "even if the term of the insurance is less than the term of the credit transaction"); see Attorney General Opinion MW-564 (1982).

We are unaware of any other state statute or rule that controls or bears on the length of term the creditor may require for property insurance coverage.

Additionally, we find no provision in chapter 6A or in any other state statute that precludes a creditor from requiring a paid-in-full policy. Although chapter 6A allows a creditor to require that a consumer insure the property involved in a credit transaction, that chapter addresses the time of payment of property insurance premiums only in connection with insurance escrows. V.T.C.S. art. 5069-6A.12(1), (2). Absent the establishment of an escrow arrangement, chapter 6A does not address the time of payment of insurance premiums. V.T.C.S. art. 5069-6A.08(1). Accordingly, we believe that a creditor may require the consumer to provide a paid-in-full property insurance policy.

Your second, third, and fourth questions are interconnected, and we will answer them together. In essence, you ask whether, when a creditor is willing to finance the required property insurance, the creditor must finance that insurance policy regardless of which insurance company the consumer chooses.[6] We note again that no state statute requires a creditor to finance a consumer's property insurance coverage. See id.; supra pp. 1-2. For those creditors that choose to finance the consumer's required property insurance, however, provisions in article 5069-6A and in the Insurance Code limit the creditor's rights.

We note that insurance agencies may be owned and operated by the same, or substantially the same, individuals who own and operate the creditor-lending institution. Attorney General Opinion MW-564. Information submitted in response to your request states that sometimes a creditor that requires physical damage insurance will inform a consumer that the creditor will finance the required insurance, but only if the consumer purchases the insurance policy from the creditor or from an agent or insurance company the creditor selects. In our opinion this practice violates article 5069-6A.08, V.T.C.S., as well as article 21.48A of the Insurance Code.

Article 5069-6A.08 does not explicitly forbid a creditor from requiring a consumer to purchase required insurance from the creditor or from an insurance agent or company of the creditor's choosing. However, subsection (2) of article 5069-6A.08, V.T.C.S., states in pertinent part as follows:

When [a creditor requires a consumer to insure the collateral property], the creditor shall furnish to the consumer a statement that clearly and conspicuously states that insurance is required in connection with the transaction and that the consumer has the option of procuring and furnishing equivalent insurance coverages through any insurance company authorized to transact business in this state subject to the limitations of Subsection (9) of this section.

By requiring creditors to inform consumers that the consumer can purchase an insurance policy with coverage equivalent to that designated by the creditor from any insurance company authorized to do business in this state subject to the limitations articulated in subsection (9), see infra pp. 7-8, chapter 6A implicitly precludes a creditor from requiring a consumer to purchase insurance from a certain insurance agent or company.[7]

All lending institutions, including those extending credit in manufactured home credit transactions, are subject to article 21.48A. Compare Ins. Code art. 21.48A § 1(1) with V.T.C.S. art. 5069-6A.02(2)(c), (d).[8] Article 21.48A provides as follows:

No Lender shall directly or indirectly impose or require as a condition of any financing or lending of money or the renewal or the extension thereof, that the purchaser or borrower or his successors, shall procure any policy of insurance or the renewal or extension thereof, covering the property involved in the transaction, from or through any particular agent or agents, solicitor or solicitors, insurer or insurers, or any other person or persons, or from or through any particular type or class of any of the foregoing.

Ins. Code art. 21.48A, § 2(b) (emphasis added). This provision, in conjunction with the definition of lender in article 21.48A of the Insurance Code, clearly bars a creditor, including a creditor in a manufactured home credit transaction, from requiring a consumer to purchase required property insurance from a specified agent or company as a condition precedent to the creditor's financing of the insurance premiums.[9] Finally, the Texas legislature recently has reiterated its intent to prohibit insurance agents from coercing persons to purchase insurance from that agent, and to "preserve to each citizen the right to choose his own agent or insurance carrier." Ins. Code art. 21.14, § 5 (as amended by Acts 1991, 72d Leg., ch. 242, § 11.74). Clearly, the state policy is to forbid a creditor or an insurance agent from directly or indirectly requiring a person to purchase an insurance policy from an agent the creditor or insurance agent designates. See also V.T.C.S. arts. 5069-4.02(8) (stating that lender in installment loan transaction "shall not by any method, directly or indirectly, require the purchase of insurance from an agent or broker designated by the lender"), 5069-5.03(8) (same, but referring to lender in secondary mortgage loan transaction), 5069-6A.07(6) (providing that buyer in retail installment sales transaction shall have privilege of selecting insurance company acceptable to seller or noteholder), 5069-7.06(3) (prohibiting entity financing motor vehicle installment loan from requiring, as condition of entity's financing motor vehicle, prospective purchaser to purchase required insurance coverage from any particular source). Accordingly, a creditor electing to finance the cost of property insurance must allow the consumer to procure and furnish "equivalent insurance coverages through any insurance company authorized to transact business in this state subject to the limitations of Subsection (9) of this section."[10] Id. art. 5069-6A.08(2) (emphasis added).

Under subsection (9) of article 5069-6A.08,

[i]f the consumer procures required insurance from someone other than the creditor, the creditor has the right for good cause to refuse to accept certain insurance policies from insurance companies designated by the creditor. The reason for such a refusal shall, on request by the consumer, be set forth in writing and delivered to the consumer. [Emphasis added.]

"Good cause," as used in subsection (9), is undefined.[11] Your fourth question asks, therefore, what "good cause" means in this context. Initially, we note that a creditor always may refuse to accept insurance coverage that is not equivalent to the coverage the creditor requires. In connection with a creditor's ability to refuse insurance policies from insurance companies on grounds not related to equivalence, we look to article 21.48A of the Insurance Code for guidance as to the meaning of "good cause." As we have stated above, article 21.48A governs the conduct of all lenders, including those involved in manufactured home credit transactions. See supra p. 6. Section 3 of article 21.48A states that

[n]othing contained in Section 2 hereof shall be deemed to prevent such Lender from

     . . . .

     (c) refusing to accept or approve insurance in any particular insurer on reasonable and nondiscriminatory grounds relating to its financial soundness or its facility to service the policy.

See also Attorney General Opinion H-1216 (1978). In 1969, the legislature amended section 3(c) to read as it does currently. Acts 1969, 61st Leg., ch. 424 § 2, at 1448. Consequently, the language of section 3(c) is identical now to its language in 1979, when the legislature enacted chapter 6A, article 5069, V.T.C.S. We presume that the legislature, when it enacted chapter 6A, was aware of the existence of article 21.48A, section 3(c) of the Insurance Code. Attorney General Opinion V-1215 (1951) at 2.

If "one statute deals with a subject in general terms, and another statute deals with a part of the same subject in a more detailed way, the two should be harmonized if possible." 2B SUTHERLAND STATUTORY CONSTRUCTION § 51.05 (5th ed. 1992). Article 21.48A of the Insurance Code regulates lenders generally, whereas chapter 6A, article 5069, V.T.C.S., regulates only creditors in manufactured home credit transactions. Both statutes preclude a lender who is willing to finance the cost of insuring the collateral from mandating that a borrower obtain insurance from a specified insurance agent or company. See supra pp. 5-7. Compare Ins. Code art. 21.48A, § 2(b) with V.T.C.S. art. 5069-6A.08(2). Additionally, both article 21.48A, section 3(c) of the Insurance Code and V.T.C.S. article 5069-6A.08(9) permit a lender to refuse, on limited grounds, the insurance company the consumer has selected. Under article 21.48A, section 3(c), the lender must base the refusal on "reasonable and nondiscriminatory grounds" relating only to the insurance company's financial soundness, or the insurance company's facility to service the policy. Under article 5069-6A.08, subsection (9), the lender must base the refusal on "good cause." We believe that the phrase "good cause" as used in article 5069-6A.08, subsection (9) should be construed so that subsection (9) is consistent with Insurance Code article 21.48A, section 3(c). Thus, a creditor in a manufactured home credit transaction cannot refuse to accept a property insurance policy from an insurance company of the consumer's choice unless the creditor has "reasonable and nondiscriminatory grounds" relating only to the insurance company's financial soundness or the insurance company's facility to service the policy.[12]

In your fifth question, you ask whether a creditor is required to finance any insurance allowed by chapter 6A if the consumer requests financing after the date of the credit transaction. By the phrase "any insurance allowed by Chapter 6A" you mean to include property insurance policies that the creditor may require, as well as any other insurance coverage the consumer may request. See supra notes 2-3 and accompanying text. As we indicated above, we find no requirement in chapter 6A or in any other state statute requiring a creditor to finance any insurance coverage, either before or after the date of the credit transaction. See V.T.C.S. art. 5069-6A.08(4) (stating that "creditor may finance as part of the credit transaction" any required or requested insurance) (emphasis added). Subsection (3) of article 5069-6A.08, however, permits a creditor and consumer to agree that the consumer will purchase any insurance allowed by chapter 6A after the date of the credit document and to agree to include the amount of the premium for any insurance in the unpaid balance. Subsection (3) does not require the creditor to finance insurance purchased after the date of the credit transaction. Indeed, subsection (3) expressly permits the consumer and creditor to agree that the consumer will purchase any additional insurance in accordance with an insurance premium financing agreement[13] and will be treated separately from the transaction. See Ins. Code ch. 24 (providing for financing of insurance premiums).

[12] If coverage under the required insurance is such that a creditor has reason to believe that an insurance company is not totally sound or that a particular insurance company will be unable to service a policy, the creditor may refuse the policy. See Texas State Highway Dep't v. Fillmon, 236 S.W.2d 635, 637 (Tex. Civ. App.—Austin), aff'd, 242 S.W.2d 172 (Tex. 1951).

[13] An insurance premium finance agreement is "an agreement by which an insured or prospective insured promises to pay to a premium finance company the amount advanced or to be advanced under the agreement to an insurer or to an insurance agent in payment of premiums on an insurance contract . . . ." Ins. Code art. 24.01(2). Article 24.01(1) defines "insurance premium finance company."

Finally, you ask whether, when a creditor requires a consumer to purchase property insurance under article 5069-6A.08(1), the creditor can require the term of the policy to be longer than twelve months. As we stated in answer to your first question, we find no statutory limitation on the term of required property insurance. The legislature enacted the provision allowing a creditor to require insurance on the property to enable the creditor to protect its interests in the property. Logically, the creditor can require insurance on the property for as long as it has an interest in that property.

In conclusion, nothing in article 5069-6A.08, V.T.C.S., prohibits a creditor from requiring a consumer to purchase a paid-in-full property insurance policy for the term that the creditor selects. This result obtains whether the consumer acquires the insurance coverage before or after the date of the credit transaction. Additionally, V.T.C.S. article 5069-6A.08(2), (9), as well as article 21.48A, sections 2(b), 3(c) of the Insurance Code require a creditor to accept an insurance policy that provides coverage equivalent to the insurance coverage the creditor requires from any company that is authorized to transact business in Texas, unless the creditor has good cause to refuse. We also conclude that "good cause" means a reasonable and nondiscriminatory basis that relates solely to the financial soundness of the insurance company, or the insurance company's facility to service the policy.

                               SUMMARY

        Nothing in article 5069-6A.08, V.T.C.S., prohibits a creditor from requiring a consumer to purchase a paid-in-full property insurance policy or insurance for the term that the creditor selects. This result obtains whether the consumer acquires the insurance coverage before or after the date of the credit transaction. Additionally, V.T.C.S. article 5069-6A.08(2), (9), as well as article 21.48A, sections 2(b), 3(c) of the Insurance Code require a creditor to accept a property insurance policy that provides coverage equivalent to the insurance coverage the creditor requires from any company that is authorized to transact business in Texas, unless the creditor has good cause to refuse. We conclude that "good cause" means a reasonable and nondiscriminatory basis that relates solely to the financial soundness of the insurance company, or the insurance company's facility to service the policy.

                                       DAN MORALES
                                       Attorney General of Texas

WILL PRYOR
First Assistant Attorney General

MARY KELLER
Deputy Assistant Attorney General

RENEA HICKS
Special Assistant Attorney General

MADELEINE B. JOHNSON
Chair, Opinion Committee

Prepared by Kymberly Oltrogge
Assistant Attorney General