SECTION 77.42. Financial Security--Funded Reserve Account and Security Deposit

(a) A provider that uses a funded reserve account and security deposit to comply with the financial security requirements of Texas Occupations Code §1304.151, will not be allowed to obtain or renew a registration unless the provider:

(1) maintains the funded reserve account and the security deposit at or above the financial levels required under Texas Occupations Code §1304.151(b) or §1304.151(b-1) - (b-4). The amounts under §1304.151(b) are calculated using a form prescribed by the department. The amounts under §1304.151(b-1) - (b-3) for a motor vehicle dealer who is only selling service contracts for vehicles sold by the dealer are as follows:

(A) $25,000 for a motor vehicle dealer that generated $1,125,000 or less in annual gross revenue from the sale of in-state service contracts in the preceding calendar year; or

(B) $50,000 for a motor vehicle dealer that generated more than $1,125,000 but less than $2,500,000 in annual gross revenue from the sale of in-state service contracts in the preceding calendar year; or

(C) $75,000 for a motor vehicle dealer that generated more than $2,500,000 in annual gross revenue from the sale of in-state service contracts in the preceding calendar year.

(D) If a motor vehicle dealer has no gross revenue from the in-state sale of service contracts in the preceding calendar year, the security deposit shall be $25,000.

(2) meets the requirements under this section; and

(3) submits the most recent audited financial statements as prescribed under Texas Occupations Code §1304.151(b).

(b) The funded reserve account maintained by the provider must:

(1) be kept separate from the provider's operating accounts;

(2) be clearly identified as the "{Provider's Name} Texas Service Contracts Funded Reserve Account"; and

(3) not be used for any purpose other than to cover the provider's obligations under its service contracts that are issued and outstanding in this state.

(c) In addition to maintaining the funded reserve account, the provider must submit one of the following forms of security deposit:

(1) A certificate of deposit that is issued by a qualified financial institution, assigned to the executive director, and for the benefit of the department;

(2) A deposit of cash; or

(3) An original letter of credit acceptable to the department that:

(A) is irrevocable;

(B) is issued by a qualified financial institution which is financially responsible in the amount of the letter of credit;

(C) does not require examination of the performance of the underlying transaction between the department and the provider;

(D) is payable to the department on demand or within a reasonably brief period of time after presentation of all required documents; and

(E) does not include any condition that makes payment to the department contingent upon the consent of or other action by the provider or other party.

(d) Funded reserve accounts that existed prior to September 1, 2019 and that involve in-state service contracts sold by motor vehicle dealers on their own inventory may be reduced to the new amounts required by Texas Occupations Code §1304.151(b-1) - (b-3) as follows:

(1) A deposit of cash in excess of the amounts in Texas Occupations Code §1304.151(b)(b-1) - (b-3) may be withdrawn by the provider, so that the balance meets the reduced minimum requirements. Proof that the balance meets the reduced minimum requirements must be provided to the department within thirty days of the withdrawal.

(2) A provider with a letter of credit issued by a qualified financial institution may withdraw and replace a letter that exceeds the amounts in Texas Occupations Code §1304.151(b-1) - (b-3) with a letter that meets the reduced minimum requirements. A provider may also opt to retain a current letter of credit that exceeds the reduced amounts or replace it the time of their next license renewal.

(3) A provider with a certificate of deposit issued by a qualified financial institution may choose to withdraw and replace a certificate that exceeds the amounts in Texas Occupations Code §1304.151(b-1) - (b-3) with a certificate that meets the reduced minimum requirements. A provider may also opt to wait until a current certificate reaches maturity to withdraw and replace.

(e) Upon request, the department may require the provider to submit the following additional financial reports:

(1) claims paid reports;

(2) account statements;

(3) monthly activity reports; or

(4) actuarial reports.

Source Note: The provisions of this §77.42 adopted to be effective November 16, 2009, 34 TexReg 7791; amended to be effective October 15, 2010, 35 TexReg 9083; amended to be effective March 1, 2012, 37 TexReg 1319; amended to be effective December 1, 2019, 44 TexReg 7185; amended to be effective June 15, 2022, 47 TexReg 3455