Lenders and residential mortgage servicers are being warned by the CFPB to tighten up their compliance with the private mortgage insurance (PMI) cancellation and termination practices. On August 4, 2015, the CFPB issued Bulletin 2015-03. While the Bulletin offers nothing new in way of interpretation, it does highlight several practices that violate the Act or create a substantial risk of noncompliance.
Under the Homeowners Protection Act (the “Act”), lenders are required to cancel the PMI requirement once the loan reaches certain thresh holds or upon the borrower’s request, assuming the borrower’s meets certain requirements.
Borrower Requested Cancellation:
The Act requires lenders/servicers to cancel PMI upon a borrower’s request if the borrower meets certain requirements. Assuming the borrower meets the requirements, the lender/servicer is required to cancel PMI on either: (a) the date the principal balance is first scheduled to reach 80% of the original value of the property; or (b) the date on which the principal balance reaches 80% of the original value of the property based on actual payments. In order to qualify, the borrower must have a good pay history, be current on the loan, satisfy the any requirement by the mortgage holder that the property is not subject to a subordinate lien and that the value of the property has not declined below the original value.
With respect to borrower requested cancellation, the CFPB emphasizes that the cancellation date/ 80% loan to value threshold must be based upon the original value and not the current value. While appraisals may be used and the borrower may be required to pay for the same, they may only be used to ascertain whether the current value has declined below the original value. Appraised value is not the measuring stick for calculating the cancellation date.
The Act additionally requires that PMI be automatically cancelled on the date on which the principal balance is first scheduled to reach 78% of the original value of the property securing the loan. If the borrower is not current on the loan of the termination date, PMI is required to be cancelled on the first day of the first month that the borrower becomes current.
The CFPB Bulletin notes the following cautions:
- Where a loan is subject to automatic termination, current value plays no role and therefore, servicers cannot require as a condition of termination that the borrower provide evidence of the property’s current value; and
- Borrowers cannot advance the termination date by prepayment.
The Act provides that if the PMI is not terminated either by borrower request or automatic termination, it terminates at the midpoint of the amortization period, provided the borrower is current. The Bulletin points out that since the Act only applies to mortgages consummated after July 29, 1999, the final termination provisions have only impacted the typical thirty year mortgage since August 2014. The Bulletin reminds servicers and lenders to make sure policies, procedures and processes are in place to ensure PMI coverage is being properly and timely terminated.
The Bulletin highlights other areas of concern, as well:
- PMI Refunds: The CFPB noted that PMI refund issues have been observed in examinations and notes the following:
- Policies, procedures and processes need to be in place to insure that PMI termination is done within the time periods set forth in the Act;
- To the extent unearned premiums are collected, likewise, policies, procedures and processes need to be in place to insure they are refunded within the time periods set forth in the Act; and
- Moreover, refunds must be returned directly to the borrower and cannot be placed indefinitely in escrow accounts.
- Annual Disclosures: Servicers are also reminded that:
- The Act requires annual disclosures be made to inform borrowers of their right to PMI cancellation and termination; and
- That the Notice must include contact information for the servicers regarding PMI cancellation and termination.
- Investor Guidelines: The Bulletin also serves as a reminder that investor guidelines cannot restrict the PMI cancellation and termination rights that the Act provides to borrowers.
While the Bulletin does not contain anything new, it serves as an indicator that the CFPB will make PMI a point of emphasis in future examinations.