I. INTRODUCTION
The Homeowners Protection Act of 1998 was adopted by Congress on July 14, 1998, and signed by President Clinton on July 29, 1998. The law, effective July 29, 1999, provides for cancellation of private mortgage insurance (PMI) when the loan-to-value ratio on a residential mortgage hits certain benchmarks. The law also requires lenders to provide specific disclosures regarding PMI. While the law does not require lenders to cancel or terminate “lender paid mortgage insurance” (LPMI), it does require disclosures for transactions with this type of PMI. The law does not apply to mortgages existing prior to July 29, 1999, although all borrowers are notified annually that they may be able to cancel their PMI.
II. CANCELLATION AND TERMINATION OF PMI
The law provides two separate rules for terminating PMI on most loans, with special treatment given to “high-risk” loans. Applicable to most loans, the law: (1) allows a borrower to initiate a cancellation request; and (2) provides for automatic termination of PMI.
A. Borrower Initiated Cancellation
Under the law, borrowers may initiate a request to cancel their PMI after the PMI “cancellation date.” The PMI “cancellation date” is the date that: (1) the principal balance of the loan, based upon the borrower’s actual payments, reaches 80% of the original value (defined as the lesser of the sales price of the property, as reflected in the contract, or the appraised value at the time of consummation of the residential mortgage transaction) of the property securing the loan; or (2) the principal balance of the loan, based solely upon the initial amortization schedule and irrespective of the borrower’s actual payments reaches 80% of the original value of the property securing the loan. In such cases, the borrower must: (1) submit to the loan’s servicer, after the “cancellation date” a written request to cancel the PMI; (2) have a “good payment history,” (defined as no payments 30 or more days late within 12 months of the cancellation date and no payments 60 or more days late within 24 months of the cancellation date); (3) satisfy any requirement of the holder of the mortgage for providing evidence that the value of the property has not declined below the original property value; (4) satisfy any requirement of the holder of the mortgage for certifying that the equity in the property securing the loan is unencumbered by a subordinate lien.
The benchmarks established for initiating the cancellation request are generally designed to assure that the PMI cancellation will not expose the lender to significant risk. In light of the provisions of (3) and (4) above, lenders may want to establish a policy setting forth their requirements for the borrower to provide evidence that the value of the property has not declined below the original property value and to certify that the equity in the property securing the loan is unencumbered by a subordinate lien.
Any borrower satisfying the foregoing requirements is entitled to have their PMI cancelled by the loan servicer. Loan servicers are prohibited from requiring PMI payments from the borrower 30 days after the later of the borrower’s cancellation request or the date on which the borrower meets all of the requirements.
B. Automatic Termination of PMI
If a borrower does not qualify for, or has not initiated a cancellation request as outlined above, the new laws automatic termination rules will most likely apply. The law requires the PMI in connection with a residential mortgage transaction to automatically terminate: (1) on the “termination date” if the borrower is current on the required payments; or (2) on the date after the termination date on which the borrower becomes current on the payments required by the terms of the residential mortgage transaction. For purposes of automatic PMI termination, the “termination date” is defined as the date, based solely on the initial amortization schedule and irrespective of the borrower’s actual payments, that the loan’s principal balance reaches 78% of the original value of the property securing the loan.
In any case where the PMI is required to be automatically terminated (i.e., when the principal balance reaches 78% of the original value of the property securing the loan) the loan servicer is prohibited from requiring PMI payments from the borrower more than 30 days after the later of the termination date or the date after the termination date on which the borrower becomes current on the payments required by the terms of the loan.
In addition, even if the PMI has not been terminated based upon the borrower-initiated cancellation rules or the automatic termination rules described above, the lender must terminate PMI at the half-life of the loan (mid-point of the original loan amortization schedule) provided the borrower is current on loan payments at that time.
C. High Risk Transactions
There are exceptions designed to protect lenders where the loan is a “high-risk” loan. The law includes special termination rules for these “high-risk” loan transactions. If a loan has an original principal balance within the applicable conforming loan limit for the secondary market (based on Fannie Mae and Freddie Mac guidelines) the lender must terminate PMI at the mid-point of the original loan amortization, provided the borrower is current on loan payments at that time. For all other loans, lenders are allowed to establish their own guidelines for determining “high-risk” loans. In such cases, a lender must terminate PMI when the principal balance on the loan, based solely on the initial amortization schedule and irrespective of the borrower’s actual payments, reaches 77% of the original value of the property.
III. POTENTIAL PMI CANCELLATION AND TERMINATION VIOLATIONS
The Consumer Financial Protection Bureau (CFPB) has issued a compliance bulletin to provide guidance to assist residential mortgage servicers and subservicers (collectively, servicers) in their compliance with the private mortgage insurance (PMI) cancellation and termination provisions of the Homeowners Protection Act of 1998 (HPA). The compliance bulletin explains HPA requirements and describes examples from CFPB’s supervisory experience of PMI cancellation and termination procedures that violate the HPA or create a substantial risk of noncompliance.
A. PMI Refunds
In general, the HPA prohibits a servicer from collecting PMI premiums more than 30 days after the termination date, or, when a borrower requests cancellation, more than 30 days after the later of the date the borrower’s request is received or the date on which the borrower satisfies any evidence and certification requirements of the holder of the mortgage for PMI cancellation. When a servicer collects unearned PMI premiums, the HPA requires the servicer to return such unearned premiums to the borrower no later than 45 days after the termination or cancellation of the borrower’s PMI coverage. In one or more mortgage servicing examinations, CFPB examiners have found instances of improper collection of unearned PMI premiums and excessive delays in processing borrower requests for PMI cancellation.
Supervision has also noted in one or more prior examinations that some servicers engage in a practice of placing the amount of the returned premiums into the borrower’s escrow account. Supervision has cited at least one servicer for a Section 4902(f) violation because, after crediting funds to the borrower’s escrow account, the servicer’s vendor kept the returned premiums in the borrower’s escrow account indefinitely rather than returning the premiums to the borrower within 45 days. The CFPB cautions servicers to monitor third-party vendors and to ensure that any unearned PMI premiums are returned directly to the borrower within 45 days rather than placed indefinitely in the borrower’s escrow account.
B. Annual Disclosures
When PMI is required in connection with a residential mortgage transaction, the HPA requires a servicer to provide the borrower an annual written statement disclosing the borrower’s right to PMI cancellation or termination and an address and telephone number that the borrower may use to contact the servicer to determine whether the borrower may cancel PMI. In one or more prior mortgage servicing examinations, CFPB examiners have found instances in which servicers did not send the required annual disclosures to borrowers, or in which servicers did not include in the annual disclosures the contact information that the HPA requires.
C. Investor Guidelines
Many mortgage loans are owned by Government-Sponsored Enterprises, or GSEs, such as Fannie Mae or Freddie Mac. These and other loan investors often create their own internal PMI cancellation guidelines that may include PMI cancellation provisions beyond those that the HPA provides.
The CFPB cautions servicers to implement investor guidelines in a way that does not lead them to violate consumer financial law. Both the HPA and some investor requirements contain similar LTV thresholds for PMI cancellation and termination, and use similar measures of the property’s value. Servicers should nonetheless remember that investor guidelines cannot restrict the PMI cancellation and termination rights that the HPA provides to borrowers.
1. Loan to Value Requirements
Some investor guidelines base the PMI cancellation date LTV calculations on the current value of the borrower’s property, in contrast to the HPA, which bases the cancellation date LTV calculations on the property’s original value. Investor guidelines using LTV calculations based on the current value of the property may permit PMI cancellation in some situations when the HPA does not provide borrowers with a right to request PMI cancellation based on the original value of the property. For example, as described above, a borrower whose property value has declined below the original value may not be eligible for borrower-requested PMI cancellation under the HPA. Such a borrower may nonetheless still be able to request PMI cancellation under investor guidelines that permit PMI cancellation using LTV calculations based on the current value of the property, if such guidelines do not disqualify a borrower whose property has declined below the original value. As another example, increases in a borrower’s property value after the origination of the loan do not affect the borrower’s PMI cancellation right under the HPA, because the HPA bases the cancellation right on the original value of the property. However, such property value increases may affect the borrower’s LTV ratio based on the current value of the property, and may allow PMI cancellation under investor guidelines at an earlier date than the date the HPA provides borrowers with a right to request PMI cancellation.
In one or more prior mortgage servicing examinations, Supervision has observed that many servicers confuse or replace HPA requirements with elements of investor guidelines. For example, in at least one examination, CFPB examiners noted that a servicer incorrectly applied an investor’s 75% PMI cancellation LTV threshold to the original value of the property, instead of the 80% LTV threshold required by the HPA, and improperly denied a borrower’s cancellation request on that ground. Similarly, in at least one examination, CFPB examiners noted that a servicer relied entirely on investor guidelines to determine a borrower’s PMI cancellation rights and had no policies in place to ensure that PMI was properly canceled in accordance with HPA requirements.
2. Seasoning
The HPA does not contain any requirements for a loan’s tenure before a borrower may request cancellation or be eligible for automatic PMI termination. Nonetheless, in at least one examination, CFPB examiners noted that a servicer imposed a two-year seasoning requirement to automatically terminate PMI, when the HPA does not provide for such a requirement.
The CFPB expects mortgage servicers, among others subject to the HPA, to incorporate into their compliance management systems adequate measures to ensure compliance with HPA requirements.
IV. CONSUMER DISCLOSURE REQUIREMENTS
Consumer disclosure requirements established by the law vary for fixed-rate loans, adjustable-rate mortgages and “high risk” loans. Disclosure rules (except for the disclosures discussed at III. (G) below) apply to loans made on or after July 29, 1999. The disclosure requirements apply only to transactions in which the lender requires PMI.
A. Fixed Rate Loans
Lenders are required to give two disclosures at the time a fixed-rate mortgage loan is consummated. First, the lender must provide the borrower with an initial loan amortization schedule. Second, the lender must give the borrower a disclosure which includes statements of the following: (1) that the borrower can elect to cancel PMI using the borrower-initiated cancellation rules based solely upon the amortization schedule; (2) that the borrower may be able to cancel PMI using the borrower-initiated cancellation rules earlier than the date specified in the amortization schedule, based upon actual payments; (3) that PMI will automatically terminate under the automatic termination rules, and a statement of the automatic termination date; and (4) that there are exceptions to the borrower’s right to cancel and the automatic termination for “high-risk” loans, and whether those exemptions apply.
B. Adjustable Rate Loans
A lender must provide a disclosure upon the consummation of an adjustable-rate loan, which includes statements of the following: (1) that the borrower can elect to cancel PMI following the borrower-initiated cancellation rules on the PMI “cancellation date,” and that the servicer will notify the borrower of the “cancellation date”; (2) that PMI will automatically terminate on the “termination date,” and the servicer will notify the borrower either of the termination or that PMI will terminate when the borrower is current on loan payments; (3) that there are exceptions to the borrower’s right to cancel and the automatic termination for “high-risk” loans, and whether those exemptions apply. Under the disclosure requirements for adjustable rate loans, the loan servicer is required to track the loan’s “cancellation date” and “termination date,” as the servicer is required to provide disclosures on each of these dates.
C. Additional Disclosure For “High-Risk” Transactions
In cases determined to be “high-risk” transactions, lenders must also disclose that the transaction is a “high-risk” transaction and that in no case may the lender require PMI beyond the date that is the mid-point of the amortization schedule, provided the borrower is current on loan payments at that time.
D. Annual Disclosure Requirement
The law also contains a requirement for the lender or servicer to annually provide a disclosure stating the borrower’s rights under the new law, including the borrower-initiated PMI cancellation rules and the automatic PMI termination rules. The disclosure is also required to provide an address and telephone number the borrower could use to inquire whether the borrower may cancel PMI.
E. Notification Upon Cancellation or Termination
The servicer of a loan must provide to the mortgagor a notice not later than thirty days after the date of cancellation or termination of the requirement of PMI. The notice must be in writing and shall notify the mortgagor: (1) that the PMI has terminated and that the mortgagor no longer has private mortgage insurance; and (2) that no further premiums, payments, or other fees shall be due or payable by the mortgagor in connection with the PMI.
If a servicer determines that a mortgage does not meet the requirement for automatic termination or borrower cancellation of PMI, the servicer must provide written notice to the mortgagor of the grounds relied upon in making this determination. For example, permissible grounds for making such a determination may involve the lack of a good payment history or the fact that the borrower is not current on his or her loan as of the termination date. The results of any appraisal used to make a determination that a mortgage does not meet the requirements for termination or cancellation must be included in the grounds set forth in the written notice.
F. Disclosure Requirement for LPMI Transactions
Even though the law does not require lenders to terminate LPMI, lenders must provide two additional disclosures for transactions involving LPMI.
First, lenders must provide, no later than the time of the loan commitment, a disclosure which contains the following: (1) that LPMI differs from borrower-paid PMI and that the borrower cannot cancel LPMI, while borrower-paid PMI can be cancelled by the borrower or will automatically terminate, pursuant to the federal law; (2) that LPMI usually results in higher interest rates and can only be terminated if the loan is refinanced, paid off or otherwise terminated; (3) that both LPMI and borrower-paid PMI have benefits and disadvantages (the disclosure must include a generic analysis of the differing costs and benefits of LPMI and borrower-paid PMI over a ten-year period, assuming prevailing interest rates and property appreciation rates); and (4) that LPMI may be tax deductible for federal income tax purposes.
Second, lenders must provide a disclosure, within 30 days of the “termination date”, that would have applied if the transaction included borrower-paid PMI rather than LPMI. The disclosure must state that the borrower may wish to review financing options that could eliminate the PMI requirement in connection with the loan.
G. Annual Disclosure Requirement for Loans in Existence Prior to July 29, 1999
Loans made prior to July 29, 1999, are subject to an annual disclosure requirement. The lender or servicer must disclose that the borrower may, under certain circumstances, be able to cancel PMI with the consent of the lender or in accordance with applicable state law. The disclosure must also include an address and telephone number the borrower can use to inquire whether the borrower may cancel PMI.
V. CIVIL LIABILITY AND PENALTIES FOR NON-COMPLIANCE
The law allows borrowers to sue a lender or servicer for violations of the law and, if successful, may recover actual damages, statutory damages up to $2,000, plus court costs and attorney’s fees. The law specifically allows class-action lawsuits and establishes a two-year statute of limitations from the date a violation is discovered.