Private Mortgage Insurance (PMI) in the United States

In Plain-English Law

Private Mortgage Insurance as defined by Nolo’s Encyclopedia of Everyday Law (p. 437-455):(PMI) Insurance that reimburses a mortgage lender if the buyer defaults on the loan and the foreclosure sale price is less than the amount owed the lender (the mortgage plus the costs of the sale).

Private Mortgage Insurance Cancellation and Termination

Cancellation and termination provisions of the Homeowners Protection Act of 1998 (HPA)

The Homeowners Protection Act became effective on July 29, 1999, and was later amended on December 27, 2000, to provide technical corrections and clarification. Prior to its enactment, no federal law provided borrowers or mortgagors with a right to cancel their private mortgage insurance coverage, and the few state laws that provided private mortgage insurance cancellation rights at that time each contained separate and different standards. While some
lenders would terminate private mortgage insurance coverage when a borrower or mortgagor reached a certain level of equity in the property, other lenders would keep private mortgage insurance coverage in place for the life of the loan, and borrowers often had trouble determining their lenders’ PMI cancellation standards. The U.S. Congress passed the
Homeowners Protection Act to address these borrower difficulties in cancelling private mortgage insurance and to institute uniform nationwide standards for private mortgage insurance cancellation and termination.

Borrower-Requested Cancellation

A borrower or mortgagor may initiate cancellation of private mortgage insurance coverage for residential mortgage transactions by submitting a written request to the servicer. For a borrower who has initiated cancellation, the HPA provides that, if the borrower meets certain requirements, private mortgage insurance shall be cancelled on the “cancellation date” (2 12 USC 4902(a)). If the borrower does not meet those requirements on the “cancellation date,” the HPA provides that private mortgage insurance must be canceled at a later date once the borrower meets the specified requirements. The HPA defines “cancellation date” as, at the option of the borrower, either: (1) the date on which the principal balance of the mortgage is first scheduled to reach 80 percent of the “original value” of the property (regardless of the outstanding balance), or (2) the date on which the principal balance of the mortgage reaches 80 percent of the “original value” of the property based on actual payments (12 USC 4901(2)). For fixed rate mortgages, the amortization calculation is based on the initial amortization
schedule. For adjustable-rate mortgages, the amortization calculation is based on the amortization schedule then in effect for the mortgage. The term “original value” generally means the lesser of the sales price of the secured property, as reflected in the contract, or the appraised value at the time of loan consummation. 12 USC 4901(12).

As noted, in addition to reaching the 80% loan-to-value (LTV) threshold, the borrower or mortgagor must meet certain other requirements for borrower-requested cancellation:

• The borrower must have a good payment history (12 USC 4902(a)(2)). The Homeowners Protection Act defines “good payment history” generally as the borrower having made no payments that were 30 days or more past due in the prior 12 months, or payments that were 60 days or more past due in the 12-month period beginning 24 months before the later of the cancellation date or the date the borrower requests cancellation. 12 USC 4901(4).
• The borrower or mortgagor must be current on the loan (12 USC 4902(a)(3));
• The borrower must satisfy any requirement of the holder of the mortgage for certification that the borrower’s equity in the property is not subject to a subordinate lien (12 USC 4902(a)(4)(B)); and
• Finally, the borrower or mortgagor must satisfy any requirement of the holder of the mortgage for evidence (of a type established in advance and made known to the borrower by the servicer) that the value of the property has not declined below the original value (12 USC 4902(a)(4)(A)).

A borrower may make extra principal payments that advance the cancellation date. In
determining whether a borrower meets the requirements for borrower-requested cancellation of private mortgage insurance coverage, servicers may require a property appraisal as evidence that the value of the property has not declined below the original value, and servicers may require the borrower to pay for the appraisal. This appraisal should be used only to determine whether the property’s value has declined below the original value. If the property’s value has not declined below the original value, the servicer must assess the timing of the borrower’s private mortgage insurance cancellation by calculating when the principal balance of the mortgage is scheduled to reach or has reached 80% of the original value of the property, based either on the appropriate amortization schedule or actual payments.

Automatic Termination

In addition to providing borrowers with a right to requestprivate mortgage insurance cancellation, the Homeowners Protection Act provides that, if the borrower is current on the loan, the requirement forprivate mortgage insurance must automatically be terminated for residential mortgage transactions on the “termination date” (12 USC 4902(b)(1)).

The Homeowners Protection Act defines the “termination date” as the date on which the principal balance of the mortgage is first scheduled to reach 78 percent of the original value of the property securing the loan (irrespective of the outstanding balance for that mortgage on that date). (USC 4901(18)). For fixed rate mortgages, the amortization calculation is based on the initial amortization schedule. For adjustable-rate mortgages, the amortization calculation is based on the amortization schedule then in effect.

If the borrower is not current on the loan on the “termination date,” the Homeowners Protection Act requires that PMI automatically terminate on the first day of the first month beginning after the date that the borrower becomes current on the loan (12 USC 4902(b)(2)).
If these conditions are met, automatic termination of private mortgage insurance is required even if the current value of the property has declined below the original value. Because current value is not a factor in determining the “termination date,” servicers may not require a borrower to pay for a property valuation as a condition of automatic termination of the private mortgage insurance.

Additionally, a borrower cannot advance the “termination date” by making additional payments to lower the principal balance of the mortgage. This is unlike the borrower-requested “cancellation date” described above, which is the date on which the principal balance of the mortgage is first scheduled to reach 80 percent of the “original value” of the property or the date on which the principal balance of the mortgage reaches 80 percent of the “original value” based on actual payments (12 USC 4901(12)).

Final Termination

If the private mortgage insurance is not terminated under the borrower-requested cancellation or automatic termination provisions, the Homeowners Protection Act provides that a requirement for the private mortgage insurance coverage cannot be imposed beyond
the first day of the month following the date that is the midpoint of the amortization period of the loan if, on that date, the borrower is current on the loan (12 USC 4902(c)).

The midpoint of the amortization period is the point in time halfway through the period that begins on the first day of the amortization period established at consummation and ends when the mortgage is scheduled to be amortized. For a standard 30-year mortgage loan, the midpoint of the amortization period would be the first day of the month following the 180th payment (12 USC 4901(7)).

Since the Homeowners Protection Act applies only to residential mortgage loans consummated on or after July 29, 1999, standard 30-year mortgage loans would not have started becoming eligible for final the private mortgage insurance termination under this provision until August 2014. The CFPB reminds servicers that they should have appropriate policies, procedures, and processes in place to ensure that they are terminating borrowers’ the private mortgage insurance coverage consistent with the Homeowners Protection Act requirements, particularly with respect to the final termination provisions.

PMI Refunds

In general, the Homeowners Protection Act prohibits a servicer from collecting the private mortgage insurance premiums more than 30 days after the termination date, or, when a borrower requests cancellation, more than 30 days after the later of the date the borrower’s request is received or the date on which the borrower satisfies any evidence and certification requirements of the holder of the mortgage for the private mortgage insurance cancellation (12 USC 4902(e)). The “evidence and certification requirements” are those referenced in 12 USC 4902(a)(4) .
When a servicer collects unearned PMI premiums, the Homeowners Protection Act requires the servicer to return such unearned premiums to the borrower no later than 45 days after the termination or cancellation of the borrower’s the private mortgage insurance coverage (12 USC 4902(f)).

Annual Disclosures

When the private mortgage insurance is required in connection with a residential mortgage transaction, the Homeowners Protection Act requires a servicer to provide the borrower an annual written statement disclosing the borrower’s right to private mortgage insurance cancellation or termination and an address and telephone number that the borrower may use to contact the servicer to determine whether the borrower may cancel the private mortgage insurance (12 USC 4903(a)(3)).

Loan-to-Value Requirements

Some investor guidelines base the private mortgage insurance cancellation date Loan-to-Value (LTV) calculations on the current value of the borrower’s property, in contrast to the Homeowners Protection Act, which bases the cancellation date Loan-to-Value calculations on the property’s original value. Investor guidelines using Loan-to-Value calculations based
on the current value of the property may permit the private mortgage insurance cancellation in some situations when the Homeowners Protection Act does not provide borrowers with a right to request the private mortgage insurance cancellation based on the original value of the property. For example, as described above, a borrower whose property value has declined below the original value may not be eligible for borrower-requested the private mortgage insurance cancellation under the Homeowners Protection Act. Under the Homeowners Protection Act, the borrower’s private mortgage insurance automatic termination right would be unaffected by the property’s decline in value.

Such a borrower may nonetheless still be able to request the private mortgage insurance cancellation under investor guidelines that permit the private mortgage insurance cancellation using Loan-to-Value calculations based on the current value of the property, if such guidelines do not disqualify a borrower whose property has declined below the original value. As another example, increases in a borrower’s property value after the origination of the loan do not affect the borrower’s the private mortgage insurance cancellation right under the Homeowners Protection Act, because the HPA bases the cancellation right on the original value of the property.
However, such property value increases may affect the borrower’s Loan-to-Value ratio based on the current value of the property, and may allow the private mortgage insurance cancellation under investor guidelines at an earlier date than the date the Homeowners Protection Act provides borrowers with a right to request the private mortgage insurance cancellation.

Seasoning

The Homeowners Protection Act does not contain any requirements for a loan’s tenure before a borrower may request cancellation or be eligible for automatic the private mortgage insurance termination. Nonetheless, in at least one examination, the Consumer Financial Protection Bureau examiners noted that a servicer imposed a two-year seasoning requirement to automatically terminate PMI, when the Homeowners Protection Act does not provide for such a requirement.