Written By: Stacey Sprain, Op-Ed Writer
I was asked recently to speak about private mortgage insurance cancellation so I thought this would be a good topic to cover this week. Below is part one of a three part series on this topic.
The federal law that covers private mortgage insurance cancellation is called the Homeowners Protection Act of 1998 (HPA). This act is also known as the PMI Cancellation Act.
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The law includes two basic consumer protections:
1. It requires lenders to inform home buyers—both at closing and annually—about their right to request mortgage insurance cancellation and how to do it.
2. It requires lenders to automatically cancel insurance for those who do not request cancellation.
Even without the law, Private mortgage insurance is generally cancelable once the homeowner builds up enough equity in the home. While investors set their own cancellation requirements, 90 percent of borrowers cancel their PMII within 60 months. The mortgage insurance company itself does not make the decision to cancel insurance.
Background: The Homeowners Protection Act of 1998 became effective in July 1999.The act, also known as the PMI Cancellation Act, addresses the difficulties homeowners have experienced in canceling private mortgage insurance (PMI) coverage. It establishes provisions for the cancellation and termination of PMI, sets forth disclosure and notification requirements, and requires the return of unearned premiums.
Before implementation of the act, many homeowners experienced problems in canceling PMI. In some instances, lenders may have agreed to terminate coverage when the borrower’s equity reached 20 percent, but the policies and procedures used for canceling or terminating PMI coverage varied widely among lenders. Homeowners had limited recourse when lenders refused to cancel their PMI coverage. Even homeowners in the few states that had laws pertaining to PMI cancellation or termination noted difficulties in canceling or terminating their PMI policies. The act protects homeowners by prohibiting life-of-loan PMI coverage for borrower-paid PMI products and establishing uniform procedures for the cancellation and termination of PMI policies.
What Loans Are Covered under HPA?
Generally, the HPA applies to residential mortgage transactions obtained on or after July 29, 1999, but it also has requirements for loans obtained before that date. This law does not cover government-guaranteed loans.
What is the definition of a Residential Mortgage Transaction for purposes of the applicability of HPA?
There are four requirements for a transaction to be considered a residential mortgage transaction:
(1) A mortgage or deed of trust must be created or retained;
(2) The property securing the loan must be a single-family dwelling;
(3) The single-family dwelling must be the primary residence of the borrower; and
(4) The purpose of the transaction must be to finance the acquisition, initial construction, or refinancing of that dwelling.
How the Law Works
The law is designed to simplify and create consistency in the PMI cancellation process. Here's what the law calls for:
• Initial disclosure—For loans originated on or after July 29, 1999, lenders must give borrowers a written notice at closing that explains they have Private MI on their mortgage and that they have the right to have it canceled at a certain point.
• Annual disclosure—Lenders must send borrowers an annual reminder that they have Private MI and have the right to request cancellation once they've met cancellation requirements. This requirement applies to all loans with cancelable Private MI, not just those obtained after July 29, 1999.
• Borrower-initiated cancellation—for most loans originated on or after July 29, 1999, a lender must cancel Private MI at the request of a borrower whose mortgage balance is 80 percent of the original value of the house. The borrower must be up to date on mortgage payments and have no other loans on the house. The lender must be satisfied that the property value has not declined.
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• Automatic termination—For most insured loans originated on or after July 29, 1999, Private MI will be canceled automatically when the mortgage balance is at 78 percent of the original value of the house. The borrower must be up to date on mortgage payments. Otherwise, insurance will be canceled automatically once the borrower becomes current.
Exception: For mortgages defined as high risk, the lender will automatically cancel the Private MI at the mid-point of the loan. On a 30-year mortgage, for example, insurance will be canceled after 15 years. Check with your lender about whether your mortgage falls into the high-risk category.
About The Author
Stacey Sprain - As an op-ed writer, Ms. Stacey Sprain is currently a NAMP® Certified Ambassador Loan Processor (NAMP®-CALP). With over 15+ years of mortgage banking experience, Stacey is also a Quality Control Manager for a major mortgage lending institution.
