Can I charge a late fee for past due accounts? How do I finance premiums in my agency? What interest rate can I charge? Do I have to file anything with the State of Texas? Can I accept credit card payments?
These are just a few of the questions regarding interest rates and premium finance that Texas agents ask every day. While you should discuss any proposed finance plan with your attorney, here are some simple and not so simple answers to those questions.
Agents can charge a late fee on past due accounts, but without a signed written agreement with your insured, you can charge no more than 6% per year (.5% per month). Interest can only be charged beginning 30 days after the account is due and payable, and only on the past due balance. With or without a written agreement, you shouldn't charge a late charge on the prior months' late charge.
Late Charge and Installment Plan Options
With a signed written agreement between you and the insured, you can charge up to 18 percent per year (1.5 percent per month). There are two fairly simple options you can use. Most agencies choose the late charge option, as the forms, record-keeping and legal requirements are simpler than the installment plan option. Here's how they work.
Late charge option: Under this plan, the premium is due in a single payment and you charge interest only on amounts that are not paid when due. You send a bill for the entire amount owed, to be paid in 30 days (or a similar period), and charge interest if it is not paid when due.
To use this option, you must have a signed customer agreement in which the customer agrees to pay for purchases on the customer's account in full within the 30 day period and which provides that, if the customer has not paid in full with that time, the account will be delinquent and a late charge of 18 percent per annum will accrue on the balance.
The agreement should include your agency's name and address, and provide for payment at that address and the insured's name and address. Some agencies who use this option keep signed agreements for each insured, in case they are ever needed; other get the agreement signed when they take an application. If future purchases are contemplated, you may want your account agreement to provide for late charges in the event of delinquency on future purchases, as well as on the current purchase.
The late charge option may be used only for actual and unanticipated late payment; you can't charge a finance charge for the period of time prior to the due date of the account, and you can't give the customer the right to pay in multiple installments.
However, if the customer can't pay the bill when due, you can accept payments as he makes them; but any account not paid in full on the initial due date must be treated as delinquent. This would include sending delinquency statements and, if delinquency is not promptly resolved, terminating charge privileges. It would also include any other steps you normally use to collect delinquent accounts.
It is recommended that statements be mailed not later than 30 days before the due date. This gives the customer time to pay to avoid the late charge. Late charge statements should include the opening balance, payments credits, purchases, plus the late charge and a statement of how the late charge is calculated. Late charge should not be charged on unpaid late charge.
Installment Plan Option: While installment financing is more flexible, it involves more legal expense and complexity. The advantage is that you can charge up to 18 percent per annum on the unpaid balance each month.
With this option, you set minimum monthly payments, and the customer can pay the minimum or more each month. The customer pays no finance charge for the month in which the insurance is purchased but, after the first month, the customer pays a finance charge on the full balance owed. This is similar to a retail charge account.
This option is subject to technical legal requirements, including Truth-in-Lending and other federal regulations, and serious penalties can be charged against you for noncompliance.
The written agreement for the installment plan is more complicated than the agreement for the late charge. It must set out the minimum monthly payment, the customer's billing rights under the Fair Credit Billing Act, the annual and monthly percentage rate, and other Truth-in-Lending Act and state law requirements.
The installment plan statement must be mailed at least 14 days before the end of the "free ride" period. It must include an account summary, including the previous balance, payments, other credits, balance on which the finance charge is computed, finance charge, and new balance. The statement must also include the month's closing date, a statement of how the finance charge is computed, the periodic and annual percentage rates, and other Truth-in-Lending and Fair Credit Billing Act requirements.
There is no requirement under either of these options that agents file any reports with the Texas Department of Insurance or the Consumer Credit Commission. However, various penalties apply to overcharging and to failure to comply with required disclosure. The penalties are stiff and can include three times the amount of overcharge, forfeiture of the debt and attorneys fees.
Licensed Premium Finance Companies
Another alternative is formation of a premium finance company, which is regulated by the Texas Department of Insurance. Such a company must be licensed, file annual reports and follow stringent regulations. A recent twist on this option is "turn-key" licensing and financing assistance from commercial premium finance companies, where the agency receives assistance and financial compensation for arranging the financing of the agency's policyholders. For additional information on licensing a premium finance company, see also TDI's web site for "Licensing of Premium Finance Companies."
Agents are permitted to negotiate compensation for the placement of premium finance business with premium finance companies without having to obtain a license. (See Premium Finance Compensation.)
Credit Card Payments
Can insurance agents accept premium payments by charging the amount to a customer's credit card? Can agents collect an additional fee to offset the transaction fee charged by the credit card company? The answers to these questions are addressed in this article: Credit Card Payments for Premiums.
Financing TAIPA Policies
Insurers writing policies assigned to them by the Texas Automobile Insurance Plan Association are required to offer an installment plan consisting of a 20% down payment, 8 monthly installments, and a $3 monthly service fee. If an agent chooses to offer financing through a TDI-licensed premium finance company, the insured must sign a disclosure form detailing the differences in the two plans. Premium Finance Comparison Disclosure forms (downloadable at the TDI web site, in PDF format) can be obtained from the Premium Finance Unit, MC 107-5A, TDI, P.O. Box 149104, Austin, Texas 78714.