On August 4, 2015 the Consumer Financial Protection Bureau (CFPB) issued a compliance bulletin on the private mortgage insurance (PMI) cancellation and termination provisions contained in the Homeowners Protection Act (HPA). The HPA applies to residential mortgage loans consummated on or after July 29, 1999. The Bulletin provides guidance from the CFPB on requirements in the HPA and lists specific examples of conduct the CFPB considers non-compliant.
Prior to passage of the HPA, there were no federally imposed requirements on PMI. The HPA set an 80% loan to value threshold for “borrower requested cancellation” of PMI, in addition to other requirements. In the context of a requested PMI cancellation, the HPA permits the lender to require evidence that the present value of the property has not declined from its original value. The HPA also set a 78% loan to value ratio for “automatic termination” of PMI. In contrast to the requested cancellation provisions, the automatic termination provisions of the HPA do not permit the lender to request evidence that the original value of the property has not declined. Furthermore, if the borrower is not current on the loan on the automatic termination date, the PMI must be automatically cancelled if the borrower becomes current after the termination date. Finally, the HPA provides for “final termination” of PMI at the midpoint of the amortization period established by the loan documents, which for a standard 30-year mortgage loan is the 180th payment.
With regards to these provisions the CFPB cautions: “Supervision has identified violations of this provision in one or more examinations, both for borrowers who were current on the ‘termination date’ and for borrowers who were delinquent on the ‘termination date’ but later became current. The CFPB encourages servicers to be mindful that in contrast to the cancellation date, the termination date does not permit a mortgage holder to require evidence of the property’s current value, nor is a servicer required to determine the actual principal balance based on actual payments. Rather, the automatic termination date is not dependent on fluctuations in property value.” The CFPB Bulletin goes on to note that while investor guidelines may purport to set other requirements for PMI cancellation and termination, they cannot impose higher cancellation and termination requirements than those imposed by the HPA. Additionally, where PMI premiums are collected in violation of the HPA, the CFPB cautions that they should be promptly returned to the borrower, and no placed in escrow indefinitely.
This Bulletin signals renewed interest in the CFPB in PMI and the requirements imposed by the HPA. It is also likely to generate interest from the plaintiff’s bar, since the HPA provides for statutory damages, attorney’s fees and can be a vehicle for class actions. Lenders and loan servicers should therefore promptly evaluate their PMI cancellation and termination policies and procedures to ensure that these requirements are met and higher standards for PMI cancellation and termination are not imposed.
The complete CFPB Bulletin 2015-03 on Private mortgage Insurance Cancellation and Termination can be found on the CFPB’s website here.