Management of Private Mortgage Insurance – Cancellation & Termination
The Consumer Financial Protection Bureau (CFPB) is making increased efforts to ensure residential mortgage servicers and subservicers are complying with the Homeowners Protection Act of 1998 (HPA, also referred to as the PMI Cancellation Act) as it relates to rules governing private mortgage insurance (PMI). Institutions should take great pains to establish policies and procedures that meet these requirements.
HPA originally took effect July 29, 1999, and was later amended on December 27, 2000. It established uniform national provisions for canceling and terminating PMI and established requirements for disclosures, notifications and the return of unearned premium requirements.
HPA Compliance Focus in 2015
On August 4, 2015, the CFPB released a bulletin with guidance regarding residential mortgage servicer and subservicer compliance with HPA provisions. The CFPB guidance is a result of observed instances of improper management of PMI cancellations and terminations violating or creating substantial noncompliance risk with HPA provisions. The new guidance is evidence of the current focus on HPA compliance, and all entities subject to the HPA should ensure compliance with the provisions.
In today’s regulatory environment, vendor management remains a hot topic given the potential compliance risks associated with a third-party vendor. It’s important for financial institutions and nonbank mortgage servicers to regularly monitor vendors with PMI administrative responsibility for HPA compliance.
Borrower-Requested Cancellation – Through written request to the servicer, a borrower may initiate the cancellation of his or her PMI coverage. Before the servicer can cancel PMI, multiple borrower requirements detailed in the HPA must be met.
For borrower-requested cancellations—assuming all other borrower requirements detailed in the HPA are met—the HPA defines the “cancellation date” as the date “when the principal balance of the loan reaches (based on actual payments) or is first scheduled to reach 80 percent of the ‘original value,’ irrespective of the outstanding balance …”
Beyond reaching the 80 percent loan-to-value (LTV) threshold, the HPA also requires the borrower to satisfy “any requirement of the mortgage holder for evidence of a type established in advance that the value of the property has not declined below the original value.” Servicers may require a property appraisal, paid for by the borrower, to determine if the property has declined below the original value. The guidance cautions servicers that if a property appraisal is obtained, it should be used only to determine if the property has declined below the original value. The “cancellation date” must be calculated based on when the principal balance is scheduled to reach or has reached 80 percent of the property’s original value.
Automatic Termination – Per the HPA, if the borrower is current, the servicer is required to automatically terminate PMI for residential mortgages on the “termination date.” This is defined as the date the mortgage’s principal balance is first scheduled to reach 78 percent of the original value of the secured property (based solely on the initial amortization schedule in the case of a fixed-rate loan or on the amortization schedule then in effect in the case of an adjustable-rate loan, irrespective of the outstanding balance). If the borrower isn’t current as of the termination date, the servicer is required to automatically terminate PMI on the first day of the first month following the date the borrower becomes current.
The HPA also clarifies that for automatic termination, lenders aren’t protected against property values declining below the original value. Therefore, the CFPB emphasizes that, when automatically terminating PMI, servicers cannot require borrowers to pay for a property valuation and the termination date isn’t dependent on declining property values since the original value.
The guidance notes violations of this provision have been identified, including not canceling PMI for current borrowers on the termination date and not terminating PMI for delinquent borrowers that became current after the termination date.
Final Termination – The HPA requires “final termination” midway through the amortization schedule for borrowers current on their loans, assuming there has been no borrower-requested cancellation and automatic termination hasn’t been triggered. The midpoint of the amortization period is defined as halfway between the first day of the amortization period established at consummation and the date the mortgage is scheduled to be amortized.
Based on the effective date of the HPA, the CFPB points out standard 30-year mortgages started becoming eligible for final termination in August 2014. Therefore, the CFPB’s guidance provided a reminder to servicers of final termination requirements, noting appropriate policies, procedures and processes must be in place to ensure compliance.
PMI Refunds – In accordance with the HPA, the servicer should cease collection of PMI premiums within 30 days after the termination date or, for borrower-requested cancellation, the latter of the date the request was received or the date the borrower satisfies any evidence and certification requirements of the mortgage holder. The HPA requires the servicer to return all unearned premiums directly to the borrower within 45 days of PMI cancellation or termination.
The recent CFPB guidance points out instances where unearned premiums weren’t timely returned to the borrower or were distributed to the borrower’s escrow account rather than sent directly to the borrower. The CFPB guidance again encourages servicers to have policies and procedures in place that ensure unearned premiums aren’t improperly retained or applied.
Annual Disclosures – For all borrowers with PMI, the servicer is required to provide the borrower an annual written statement disclosing the borrowers’ rights to cancellation and termination. The disclosure also must contain a telephone number and an address to contact the servicer about cancellation and termination.
The CFPB has noted cases in which annual disclosures weren’t sent and contact information contained within the annual disclosure didn’t meet HPA requirements.
Investor Guidelines – HPA outlines the minimum requirements for PMI elimination, and the recent CFPB guidance cautions servicers to implement investor guidelines in a way that doesn’t restrict borrower rights under the HPA. For example, if investor requirements state the borrower is eligible for cancellation at an LTV of 85 percent of the original property value, the servicer may follow the investor guideline since it doesn’t violate HPA provisions. If the investor guidelines are more restrictive for the borrower than the HPA provisions, the CFPB cautions servicers to carefully monitor investor guidelines for HPA compliance.
Servicers also are prohibited from implementing any seasoning period or mandatory minimum length of time PMI must be in place. The CFPB noted one case in which the servicer required the borrower to have PMI for 24 months prior to being eligible for termination. There is no minimum required time to hold PMI, and servicers must ensure HPA compliance through adequate policies and procedures.
For more information on how the recent CFPB guidance could affect your institution, contact your BKD advisor.