The Homeowners Protection Act of 1998 (HPA), also known as the "PMI Cancellation Act," addresses homeowners' difficulties in canceling private mortgage insurance (PMI) coverage.1 HPA became effective on July 29, 1999 and applies primarily to mortgage loan transactions consummated on or after that date to finance the acquisition, initial construction, or refinancing of a single-family dwelling that serves as a borrower's principal residence.
PMI facilitates lending at affordable rates to borrowers who cannot, or choose not to, provide adequate down payment by protecting lenders from the risk of default and foreclosure. It is generally used when the loan to value (LTV) ratio of a residential mortgage transaction would exceed 80 percent at settlement. As loan principal payments are made, the LTV ratio of a loan that was above 80 percent at settlement will generally decline, creating the opportunity for the cancellation or termination of the insurance. HPA protects homeowners by prohibiting life-of-loan PMI coverage when the borrower pays the PMI premium and establishes uniform procedures for cancellation and termination of PMI policies.
Borrower Paid vs. Lender Paid PMI
There are two types of PMIBorrower Paid PMI (BPMI) and Lender Paid PMI (LPMI). With BPMI, as the name suggests, the borrower pays the PMI premium and the interest rate on the loan is generally the market level rate for similar quality loans. With LPMI, the payments are made by a person or organization other than the borrower and the interest rate on the loan is generally higher than that on a similar quality loan with BPMI.
BPMI can be terminated at the borrower's request or under other conditions, as discussed below. However, LPMI is terminated only when the mortgage is refinanced, paid off, or otherwise terminated.
Cancellation and Termination Non High-Risk Mortgages
Borrower paid PMI on non high-risk mortgages can be cancelled or terminated in three ways: borrower request, automatic termination, or final termination.2 A borrower can initiate PMI cancellation by submitting a written request to the servicer. Upon receiving the request, the servicer must take action to cancel PMI when the principal balance of the loan reaches or is first scheduled to reach 80 percent of the original value, provided that the borrower also has a good payment history, is current on payments, and satisfies any requirement of the mortgage holder for (i) evidence that the value of the property has not declined below the original value and/or (ii) certification that the borrower's equity in the property is not subject to a subordinate lien.
A servicer is required to automatically terminate PMI, even without a request from the borrower, on the date that the principal balance of the mortgage is first scheduled to reach 78 percent of the original value of the property, provided that the borrower is current on payments. If the borrower is not current on that date, then PMI must be terminated on the first day of the first month following the date that the borrower becomes current.
If PMI was not canceled at the borrower's request or by the automatic termination provision, the final termination provisions apply. Under these provisions, the servicer must terminate PMI coverage by the first day of the month immediately following the date that is the midpoint of the loan's amortization period if, on that date, the borrower is current on payments. If the borrower is not current on that date, PMI should be terminated when the borrower does become current.
The Act requires the lender to provide disclosures at consummation that describe the borrower's rights for PMI cancellation and termination. Initial disclosures vary, based upon whether the transaction is at a fixed or adjustable rate, involves borrower paid or lender paid PMI, or is a high-risk loan. The borrower must also be provided with certain annual and other notices concerning PMI cancellation and termination.
For additional information on each of the ABCs of PMI, and for information beyond the ABCs, please refer to the text of the legislation. If you have specific questions on the requirements of HPA or their application to your institution, please contact your primary regulator. If you are supervised by the Federal Reserve Bank of Philadelphia, please contact Supervising Examiner Robert Snarr or Supervising Examiner John Fields through the Regulations Assistance Line at (215) 574-6568.
The views expressed in this article are those of the author and are not necessarily those of this Reserve Bank or the Federal Reserve System.