Homeowners Protection Act (PMI Cancellation Act)

Overview

The Homeowners Protection Act of 1998 (HPA), 12 U.S.C. § 4901. et seq., also known as the “PMI Cancellation Act,” was signed into law on July 29, 1998, became effective on July 29, 1999, and was amended on December 27, 2000, to provide technical corrections and clarification. The HPA addresses homeowners’ difficulties in canceling private mortgage insurance (PMI) coverage. It establishes provisions for canceling and terminating PMI, sets disclosure and notification requirements, and requires the return of unearned premiums.

The Dodd-Frank Act granted authority to the Consumer Financial Protection Bureau to supervise and enforce compliance with HPA for entities within its jurisdiction, including credit unions with assets over $10 billion.

PMI is insurance that protects lenders from the risk of default and foreclosure. PMI allows prospective buyers who cannot, or choose not to, provide significant down payments to get mortgage financing at affordable rates. It is used a great deal to facilitate “high-ratio” loans (loans in which the loan to value (LTV) ratio exceeds 80%). With PMI, the lender can recover costs associated with the resale of foreclosed property, and accrued interest payments or fixed costs, such as taxes or insurance policies, paid before resale.

Excessive PMI coverage provides little extra protection for a lender and does not benefit the borrower. In some instances, homeowners have experienced problems in canceling PMI. At other times, lenders may have agreed to terminate coverage when the borrower’s equity reached 20%, but the policies and procedures for canceling or terminating PMI coverage varied widely among lenders. Before HPA, homeowners had limited options when lenders refused to cancel their PMI coverage. Even homeowners in the few states that had laws regarding PMI cancellation or termination had difficulties in canceling or terminating their PMI policies. HPA now protects homeowners by prohibiting life of loan PMI coverage for borrower-paid PMI products and establishing uniform procedures for canceling and terminating PMI policies.

The full text of the HPA can be found here.

Definitions
Associated Risks
Examination Objectives
Examination Procedures
Checklist

Associated Risks

Compliance risk can occur when the credit union fails to implement the necessary controls to comply with the HPA.

Reputation risk can occur when the credit union incurs fines and penalties or receives negative publicity or decreased membership confidence as a result of failure to comply with the HPA.

Strategic risk can occur when the board of directors fails to perform necessary due diligence in reviewing existing and prospective products and services for compliance with the HPA.

Examination Objectives ^[1]

To determine the credit union’s compliance with the Homeowners Protection Act of 1998 (HPA), as amended.
To assess the quality of the credit union’s policies and procedures for implementing the HPA.
To determine how reliable the credit union’s internal controls and procedures for monitoring the credit union’s compliance with the HPA are.
To initiate corrective action when violations of HPA are identified, or when policies or internal controls are deficient.

Examination Procedures

Through discussions with management and reviewing available information, determine if the credit union’s internal controls are adequate to ensure compliance with the HPA. Consider the following:
1. Organization charts;
2. Process flowcharts;
3. Policies and procedures;
4. Loan documentation;
5. Checklists;
6. Training; and
7. Computer program documentation.
Review any compliance audit material, including work papers and reports, to determine whether:
1. The credit union’s procedures address all applicable provisions of HPA;
2. The credit union takes steps to follow up on previously identified deficiencies;
3. The procedures the credit union uses include samples covering all product types and decision centers;
4. The compliance audit work the credit union performs is accurate;
5. The credit union includes significant deficiencies and their causes in reports to management and/or to the Board of Directors;
6. The credit union takes corrective action in a timely and appropriate manner; and
7. The frequency of compliance review is appropriate.
Review sample transactions, disclosure and notification forms, and the credit union’s policies and procedures to ensure the credit union provides:
1. Initial Disclosures for
  1. fixed rate mortgages,
  2. adjustable rate mortgages,
  3. high risk loans, if applicable, and
  4. lender paid mortgage insurance;
2. Annual Notices for
  1. fixed and adjustable rate mortgages and high risk loans, and
  2. existing residential mortgages; and
3. Notices of
  1. cancellation,
  2. termination,
  3. grounds for not canceling PMI,
  4. grounds for not terminating PMI,
  5. cancellation date for adjustable rate mortgages, and
  6. termination date for lender paid mortgage insurance.

(Refer to Appendix A for required content of the disclosure and notices.)

Using the above sample and bank policies and procedures, determine that the credit union does not charge borrowers for any required disclosures or notifications. (§4906)

Obtain and review a sample of recent written requests from borrowers to cancel their private mortgage insurance (PMI) on “non-high risk” residential mortgage transactions. Verify that the insurance was cancelled on either:
1. The date the principal balance of the loan was first scheduled to reach 80% of the original value of the property based on the initial amortization schedule (in the case of a fixed rate loan) or amortization schedule then in effect (in the case of an adjustable rate loan); or
2. The date the principal balance of the loan actually reached 80% of the original value of the property based on actual payments, according to the applicable provisions in 12 U.S.C. 4902(a) of HPA (i.e., good payment history, current payments and, if required by the lender, evidence that the value of the mortgaged property did not decline, and certification that the borrower’s equity was unencumbered by a subordinate lien). (§ 4902(a))
Obtain and review a sample of “non-high risk” PMI residential mortgage transactions where the borrower did not request cancellation. Select loans from the sample that have reached a 78% or lower LTV ratio based on the original value of the property and that are not current. Verify that PMI was terminated on the date that the principal balance of the loan was first scheduled to reach 78% of the original value of the mortgaged property (if the borrower was current) or on the first day of the first month after the date that the borrower became current. (§4902(b)) Verify that the date was based on the initial amortization schedule (in the case of a fixed rate loan) or the amortization schedule then in effect (in the case of an adjustable rate loan).
Obtain a sample of PMI-covered residential mortgage transactions (including high-risk loans, if any) that are at or beyond the midpoint of their amortization period. Determine whether PMI was terminated by the first day of the following month if the loan was current. If the loan was not current at the midpoint, determine that PMI was terminated by the first day of the month following the day the loan became current. If, at the time of the examination, a loan at the midpoint is not current, determine whether the credit union is monitoring the loan and has systems in place to ensure that PMI is terminated when the borrower becomes current. (§ 4902(c) and 4902(g)(2))
If applicable, obtain a sample of any lender defined “high risk” PMI residential mortgage transactions that have a 77% or lower LTV based on the original value of the property. Verify that PMI was cancelled on the date that the principal balance of the loan was scheduled to reach 77% of the original value of the mortgaged property. (§4902(g)(1)(B)) Verify that this date was based on the initial amortization schedule (in the case of a fixed rate loan) or the amortization schedule then in effect (in the case of an adjustable rate loan).
Obtain a sample of loans that have had PMI cancelled or terminated (the samples obtained above can be used). For PMI loans cancelled upon the borrowers’ requests, determine that the credit union did not require any PMI payment(s) beyond 30 days of the borrower satisfying the evidence and certification requirements to cancel PMI. (§4902(e)(1) For the PMI loans that received automatic termination or final termination, determine that the credit union did not require any PMI payment(s) beyond 30 days of termination. (§§ 4902(e)(2) and 4902(e)(3))
Using the samples in steps 5, 6, and 7, determine if the credit union returned unearned premiums, if any, to the borrower within 45 days after cancellation or termination. (§4902(f)(1))

Appendix A

This appendix provides guidance about the timing and required content of disclosures and notices to be made in connection with the Act.

Initial disclosures at consummation for fixed rate residential mortgage transactions must include:
1. A written amortization schedule. (§ 4903(a)(1)(A)(i))
2. A notice that the borrower may submit a written request to cancel PMI as of the date that, based on the initial amortization schedule, the principal balance is first scheduled to reach 80% of the original value of the mortgaged property, regardless of the outstanding balance of the mortgage, or such earlier date that, based on actual payments, the principal balance actually reaches 80% of the original value of the mortgaged property and the borrower has a good payment history and has satisfied the lender’s requirements that the value of the mortgaged property has not declined and is unencumbered by subordinate liens. (§ 4903(a)(1)(A)(ii)(I) and (II))
3. The date, based on the initial amortization schedule, the loan balance is scheduled to reach 80% of the original value of the mortgaged property. (§ 4903(a)(1)(A)(ii)(I))
4. A notice that PMI will automatically terminate on the date that, based on the amortization schedule and regardless of the outstanding balance of the mortgage, the principal balance is first scheduled to reach 78% of the original value of the mortgaged property if the loan is current. (§4903(a)(1)(A)(ii)(III))
5. The date the loan balance is scheduled to reach 78% LTV. (§ 4903(a)(1)(A)(ii)(III))
6. Notice that exemptions to the right to cancel and automatic termination exist for high risk loans and whether such exemptions apply. (§ 4903(a)(1)(A)(ii)(IV))
Initial disclosures at consummation for adjustable rate residential mortgage transactions must include a notice that:
1. The borrower may submit a written request to cancel PMI as of the date that, based on the amortization schedule(s) and regardless of the outstanding balance of the mortgage, the principal balance is first scheduled to reach 80% of the original value of the mortgaged property or an earlier date that, based on actual payments, the principal balance actually reaches 80% of the original value of the mortgaged property and the borrower has a good payment history and has satisfied the lender requirements that the value of the mortgaged property has not declined and is unencumbered by subordinate liens. (§ 4903(a)(1)(B)(i))
2. The servicer will notify the borrower when the cancellation date is reached, i.e., when the loan balance represents 80% of the original value of the mortgaged property.(§ 4903(a)(1)(B)(i))
3. PMI will automatically terminate when the loan balance is first scheduled to reach 78% of the original value of the mortgaged property regardless of the outstanding balance of the mortgage and the loan is current. (§ 4903(a)(1)(B)(ii))
4. On the termination date, the borrower will be notified of the termination or the fact that PMI will be terminated when the loan becomes current. (§ 4903(a)(1)(B)(ii))
5. Exemptions to the right to cancel and automatic termination exist for high-risk loans and whether such exemptions apply. (§ 4903(a)(1)(B)(iii))
Lender has established standards regarding the type of evidence it requires borrowers to provide to demonstrate that the value of the mortgage property has not declined and they are provided when a request for cancellation occurs. (§ 4902(a)(4)(A))
Lender provides written initial disclosures at consummation for high-risk residential mortgage transactions (as defined by the lender or Fannie Mae or Freddie Mac), that PMI will not be required beyond the midpoint of the amortization period of the loan, if the loan is current. (§ 4903(a)(2))
When the credit union acts as servicer for residential mortgage transactions, it provides an annual written statement to the borrowers explaining their rights to cancel or terminate PMI and an address and telephone number to contact the servicer to determine whether they may cancel PMI. (§ 4903(a)(3))

Note: This disclosure may be included on RESPA’s annual escrow account disclosure or IRS interest payment disclosures.

When the credit union acts as servicer, it provides an annual written statement to each borrower who entered into a residential mortgage before July 29, 1999, that includes:
1. A statement that under certain circumstances the borrower may cancel PMI with the consent of the lender or according to applicable state law. (§ 4903(b)(1))
2. An address and telephone number that the borrower may use to contact the servicer to determine whether the borrower may cancel the PMI. (§ 4903(b)(2))

Note: This disclosure may be included on RESPA’s annual escrow account disclosure or IRS interest payment disclosure.

When the credit union acts as servicer for residential mortgage transactions, it provides borrowers written notices within 30 days after the date of cancellation or termination of PMI that the borrower no longer has PMI and that no further PMI payments or related fees are due. (§ 4904(a))
When the credit union services residential mortgage transactions, it returns all unearned PMI premiums to the borrower within 45 days of either termination upon the borrower’s request or automatic termination under the HPA. (§ 4902(e))
When the credit union acts as servicer for residential mortgage transactions, it provides borrowers written notices of the grounds it relied on (including the results of any appraisal) to deny a borrower’s request for PMI cancellation, no later than 30 days after the date the request is received, or the date the borrower satisfies any evidence and certification requirements established by the lender, whichever is later. (§ 4904(b)(1) and 4904(b)(2)(A))
When the credit union acts as servicer for residential mortgage transactions, it provides borrowers written notices of the grounds it relied on (including the results of any appraisal) for refusing to automatically terminate PMI not later than 30 days after the scheduled termination date. (§ 4904(b)(2)(B))

Note: The scheduled termination date is reached when, based on the initial amortization schedule (in the case of a fixed rate loan) or the amortization schedule(s) (in the case of an adjustable rate loan), the principal balance of the loan is first scheduled to reach 78% of the original value of mortgaged property, assuming the borrower is current on that date or the earliest date after on which the borrower becomes current.

When the credit union acts as a servicer for adjustable rate residential mortgage transactions, the credit union notifies borrowers that the cancellation date has been reached.(§ 4903(a)(1)(B)(i))
When the credit union acts as a servicer for adjustable rate residential mortgage transactions, the credit union notifies the borrowers on the termination date that PMI has been cancelled or will be cancelled as soon as the borrower is current on loan payments. (§ 4903(a)(1)(B)(ii))
When the credit union requires “Lender Paid Mortgage Insurance” (LPMI) for residential mortgage transactions, it provides a written notice to a prospective borrower on or before the loan commitment date that includes:
1. A statement that LPMI differs from borrower paid mortgage insurance (BPMI) in that the borrower may not cancel LPMI, while BPMI is subject to cancellation and automatic termination under the HPA. (§ 4905(c)(1)(A))
2. A statement that LPMI usually results in a mortgage with a higher interest rate than BPMI. (§ 4905(c)(1)(B)(i))
3. A statement that LPMI only terminates when the transaction is refinanced, paid off, or otherwise terminated. (§ 4905(c)(1)(B)(ii))
4. A statement that LPMI and BPMI both have benefits and disadvantages and a generic analysis reflecting the differing costs and benefits of each over a 10-year period, assuming prevailing interest and property appreciation rates. (§ 4905(c)(1)(C))
5. A statement that LPMI may be tax-deductible for federal income taxes if the borrower itemizes expenses for that purpose. (§ 4905(c)(1)(D))
When the lender requires LPMI for residential mortgage transactions and the credit union acts as servicer, it notifies the borrower in writing within 30 days of the termination date that would have applied if it were a BPMI transaction that the borrower may wish to review financing options that could eliminate the requirement for PMI. (§ 4905(c)(2))
The credit union prohibits borrower-paid fees for the disclosures and notifications required under the HPA. (§4906)