CFPB issues guidance on canceling private mortgage insurance
AML AND COMPLIANCE NEWS |
On Aug. 4, 2015, the Consumer Financial Protection Bureau (CFPB) issued a Compliance Bulletin 2015-03 to provide guidance on the cancellation and termination requirements of private mortgage insurance (PMI) under the Homeowners Protection Act of 1998 (HPA). The bulletin was issued in response to the violations identified by the CFPB pertaining to the rule. As a result, the CFPB has issued this bulletin to assist mortgage servicers in complying with the requirements of PMI coverage addressing borrower-requested cancellations, automatic terminations, final termination, PMI refunds and annual disclosures.
Servicers are reminded that PMI coverage may be canceled at the request of the borrower on the cancellation date. The cancellation date is defined in the HPA 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." The borrower must meet certain requirements before the PMI may be canceled:
- Submit a written request
- Principal balance of the mortgage reaches 80 percent of the original value of the property based on the amortization schedule or based on the actual payments made.
- Be current on the loan
- Satisfies any requirements of the mortgage holder for evidence that the value of the property has not declined below the original value, and certification stating that the borrower's equity in the property is not subject to a subordinate lien.
The CFPB also reminds servicers that under borrower-requested cancellations,
- Borrowers may make additional payments to advance the cancellation date.
- Servicers may require an appraisal (at the borrower's expense) for evidence that the value of the property has not declined below the original value.
Servicers are reminded they must automatically terminate PMI coverage on the termination date, provided that the borrower is current on the loan. The termination date is considered to be the date in "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)." However, if the borrower is not current on the loan on the termination date, PMI must be automatically terminated the first day of the month following the month in which the borrower becomes current on the loan.
Also, the CFPB reminds servicers that under automatic terminations,
- Borrowers may not advance the termination date by making additional payments to lower the principal balance.
- Servicers must terminate PMI even if the current value of the property is less than the original value. As a result, servicers may not require an appraisal since the current value of the property is not a determining factor as to whether the PMI coverage can be terminated.
The CFPB identifies the following areas as ones with which servicers have violated the requirements of the HPA:
- Final termination—If PMI coverage is not canceled at the customer's request or automatically terminated, PMI coverage cannot be enforced after the first day of the month following the date that is the midpoint of the amortization period of the loan.
- PMI refunds—Collecting PMI premiums more than 30 days after the termination date or, in the case of borrower-requested cancellations, more than 30 days after the date of the borrowers request or the date in which borrower satisfies any requirements of the holder of the mortgage, whichever is later, is prohibited. If unearned PMI premiums are collected, the servicer is required to refund them to the borrower no later than 45 days after the cancellation or termination date.
- Annual disclosures—Provide an annual written disclosure to the borrower stating the borrower's right to PMI cancellation or termination as well as an address and telephone number which the borrower may use to contact the servicer regarding the termination of PMI.
- Investor guidelines—Investor guidelines may not restrict PMI cancellation or termination rights provided to the borrower. As a result, servicers should implement these guidelines in a manner that does not violate the HPA.