The Consumer Financial Protection Bureau (CFPB) issued this compliance bulletin to remind lenders about the parameters for cancellation or termination of Private Mortgage Insurance (PMI).

The bulletin recaps the passage of the Homeowners’ Protection Act (HPA) that became effective on July 29, 1999. The bill was passed to protect homeowners, and required servicers to provide an “out” from paying for PMI eternally (life of loan). The law provided uniformity in legal requirements for establishing standards for PMI cancellation and termination.

The 3 ways to cancel or termination of PMI and MIP

 

  1. Borrower-Requested Termination,
  2. Automatic Termination, and
  3. Final Termination

An interesting fun fact is this: since the law wasn’t passed until July 1999, it wasn’t until August 2014 when the HPA Final Termination guidelines would begin to apply for a 30-year loan.

So, here’s what it means in plain language so you can explain it to your prospects and past clients.

We have all learned by now, either by trial and error or by reading about results from a CFPB audit that resulted in fines and other regulatory consequences, that when the CFPB addresses a topic like this, they are likely on the hunt, or just came off one that resulted in evidence of noncompliance with a rule.

Let’s break down the basics of the cancellation and termination requirements:

  • 1. Borrower-requested cancellation
    • a. Borrower must initiate with a written request to servicer
      b. Borrower may make extra principal payments that advance the rate of reaching an 80% LTV ratio based on original value (lower of sales price or appraised value)
      c. If certain parameters are met at the time of the request the PMI must be cancelled as of the “cancellation date”
      • i. Cancellation date is defined as either the date on which the principal residence of the mortgage is first scheduled to reach an 80% LTV of the original value of the property (regardless of the outstanding balance), or the date on which the principal balance of the mortgage reaches 80% based on actual payments
      d. On a borrower-requested cancellation, in addition to the 80% LTV threshold, the borrower must meet other specific requirements:
      • i. Borrower must have a good payment history – no 30-day late payments in past 12 months or payments that were 60 or more days past due in the 12-month period beginning 24 months before the later of the cancellation date or the date the borrower requests cancellation
        ii. Borrower must be current on loan
        iii. Borrower must satisfy any requirement of the servicer to provide evidence that the borrower’s equity in the property is not subject to a subordinate lien, and
        iv. The borrower must satisfy any requirement of the servicer to provide evidence that the value of the property has not declined below the original value (this documentation requirement must be defined by the servicer in advance)

The lender may opt to have an appraisal ordered to determine that the current value has not declined below the original value and the lender can require the borrower to pay for this cost.

  • 2. Automatic Termination:
    • a. PMI must be automatically cancelled on the termination date. The termination date is defined as the date on which the principal balance is first scheduled to reach 78% of the original value of the property regardless of outstanding balance for that mortgage on that date.
      b. If the borrower is delinquent or not current as of the termination date, the Homeowners’ Protection Act requires that PMI automatically terminate on the first day of the month beginning after the date that the borrower becomes current on the loan.
      c. If these conditions are met, PMI must be cancelled even if the property has declined below the original value.
      d. Lenders may not require the borrower to obtain a property valuation as a condition of automatic termination.
      e. With the automatic termination process, a borrower MAY NOT advance the termination date by making additional payments to lower the principal balance.


    3. Final Termination:
    • a. When PMI is not terminated under a borrower-requested termination or an automatic termination, the Homeowners’ Protection Act provides that a requirement for PMI coverage cannot be imposed beyond the first day of the month following the date that is the midpoint of the amortization period of the loan, if the borrower is current on the loan on such date.

It would be wise to become familiar with learning the specifics on the supervisory findings. This is a good educational tool to use when financing a borrower that is using conventional financing and when the financing requires PMI due to the LTV.

Remember that the HPA does not apply to FHA/VA or USDA loans.

Lenders and servicers are reminded that they must send an annual disclosure to the borrower reminding them of their rights under the HPA.

Here’s a link to read the entire CFPB Bulletin - CFPB Compliance Bulletin 2015-03 for Private Mortgage Cancellation and Termination dated 8.4.15.

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