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Private Mortgage Insurance (PMI) Termination Clarifications

Houe

Congress passed The Homeowners Protection Act of 1998 to address borrowers’ difficulties in cancelling PMI when they had reached a certain level of equity in the property. The statute requires the following:

Automatic termination of borrower-paid private mortgage insurance when the mortgage balance is first scheduled to reach 78% of the original appraised value of the property securing the loan. This applies if the borrower is current on the scheduled termination date or, if the borrower is not current, on the first day of the first month beginning after the date that the mortgagor becomes current.

Because the Consumer Financial Protection Bureau (CFPB) recognized the industry confusion over implementation of the PMI cancellation and termination requirements, on August 4, 2015, the CFPB issued a Bulletin that provides additional explanations and guidance to mortgage servicers regarding the cancellation of private mortgage insurance (PMI). It should be clear that no new responsibilities or requirements were proposed or implemented, through the Bulletin.

The August 4, 2015 Bulletin clarifies that automatic PMI termination is required even if the current value of the property has declined below the original value.

Since current market value is not a factor in determining the “automatic” termination date, servicers are prohibited from requiring a borrower to pay for an appraisal or other valuation as a condition of termination of PMI. Conversely, Borrowers cannot speed up the automatic termination date by making additional principal payments to lower the balance of the mortgage.

It should be noted that “automatic termination” differs significantly from the borrower requested “cancellation date.” The borrower requested “cancelation date” is the date on which the principal balance of the mortgage is first scheduled to reach 80% of the “original value” of the property, based on actual payments. The CFPB Bulletin reminds servicers that in contrast to the borrower requested “cancellation date,” the “automatic termination date” does not allow a mortgage holder to require evidence of property value. Rather, the automatic termination date is not dependent on fluctuations in property value.

Additionally, the 2015 CFPB Supervisory Highlights Report found that borrowers who were delinquent on payments when their mortgage balance reached 78% of the original value based on the original amortization schedule, were disproportionately penalized by servicers failing to automatically cancel the borrower’s PMI when the borrower became current. As a result, many servicers collected unearned premiums in violation of the Homeowners Protection Act. It remains to be seen what penalties might be implemented on servicers that collected unearned premiums in the future.

Full text of the August 4, 2015 Bulletin is available here.

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