By Katalina M. Bianco, J.D.
The Consumer Financial Protection Bureau is nudging lenders about the Homeowners Protection Act requirements on the cancellation and termination of private mortgage insurance. CFPB Bulletin 2015-03 is intended to help mortgage servicers comply with the HPA. Notably, the CFPB said it had identified substantial confusion over the cancellation and termination of PMI, and bureau examinations have uncovered violations of several provisions.
“Consumers should not be billed for unnecessary private mortgage insurance,” said CFPB Director Richard Cordray. “We will continue to supervise mortgage servicers to ensure they are treating borrowers fairly, and today’s guidance should help servicers come into compliance with the Homeowners Protection Act.”
The bulletin addresses borrower-requested cancellation, automatic termination, final termination, and PMI refunds.
Borrower-requested cancellation. A borrower may initiate cancellation of PMI coverage for residential mortgage transactions by submitting a written request to the servicer. For a borrower who has initiated cancellation, the HPA provides that if the borrower meets certain requirements, PMI must be cancelled on the “cancellation date.” If the borrower does not meet those requirements on the “cancellation date,” the HPA provides that PMI be canceled at a later date once the borrower meets the specified requirements. “Cancellation date” is defined as, at the option of the borrower, either: the date on which the principal balance of the mortgage is first scheduled to reach 80 percent of the original value of the property (regardless of the outstanding balance), or (2) the date on which the principal balance of the mortgage reaches 80 percent of the original value of the property based on actual payments.
The bulletin outlines additional requirements that a borrower must meet to request cancellation, such as having a good payment history and being current on the loan.
Automatic termination. The HPA provides that if the borrower is current on the loan, the requirement for PMI must automatically be terminated on the “termination date.” The “termination date” is defined as the date on which the principal balance of the mortgage is first scheduled to reach 78 percent of the original value of the property securing the loan. If the borrower is not current on the loan on the termination date, the HPA requires that PMI automatically terminate on the first day of the first month beginning after the date that the borrower becomes current on the loan. If these conditions are met, automatic termination of PMI is required even if the current value of the property has declined below the original value.
Final termination. If PMI is not terminated under the borrower-requested cancellation or automatic termination provisions, the HPA 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, on that date, the borrower is current on the loan.
Because the HPA applies only to residential mortgage loans consummated on or after July 29, 1999, the effective date of the Act, standard 30-year mortgage loans would not have started becoming eligible for final PMI termination under this provision until August 2014. The CFPB reminds servicers that they should have appropriate policies, procedures, and processes in place to ensure that they are terminating borrowers’ PMI coverage consistent with the HPA requirements, particularly with respect to the final termination provisions.
PMI refunds. 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, according to the bulletin. The bureau also found that some servicers engage in a practice of placing the amount of the returned premiums into the borrower’s escrow account and, in at least one instance, a servicer was cited because its vendor kept the returned premiums in the borrower’s escrow account indefinitely rather than returning the premiums within 45 days as required by the HPA. The CFPB cautions servicers to monitor vendors so as to ensure the timely return of unearned PMI premiums to borrowers.
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