Warnings From The CFPB On Private Mortgage Insurance
On August 4, 2015 the Consumer Financial Protection Bureau ("CFPB") issued a compliance bulletin containing warnings on the private mortgage insurance ("PMI") cancellation and termination procedures contained in the Homeowners Protection Act ("HPA"). The warnings relate to borrower-requested cancellation, automatic termination, final termination, refunds and annual disclosures required under the HPA and should be noted by lenders and residential mortgage servicers. A summary of the topics and issues addressed in the bulletin follows:
A borrower may initiate cancellation of PMI 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, PMI shall be cancelled on (1) the date on which the principal balance of the mortgage is first scheduled to reach 80% 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% of the original value of the property based on actual payments (the "Cancellation Date").
CFPB Warning—For timing purposes, the Cancellation Date is calculated based on the original value and not the current value of the property. Any appraisal should only be used 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 PMI calculation 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 on the appropriate amortization schedule or actual payments.
In addition to providing borrowers with a right to request PMI cancellation, the HPA provides that, if the borrower is current on the loan, the requirement for PMI must automatically be terminated for residential mortgage transactions on the date on which the principal balance of the mortgage is first scheduled to reach 78% of the original value of the property securing the loan (irrespective of the outstanding balance of the mortgage on that date) (the "Termination Date"). If the borrower is not current on the loan on the Termination Date, the HPA 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.
CFPB Warning—Automatic termination of PMI is required even if the current value of the property has declined below the original value and servicers may not require a borrower to pay for a property valuation as a condition of automatic termination of PMI.
If PMI is not terminated under the borrower-requested cancellation or automatic termination provisions, the HPA provides that a requirement for PMI 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.
CFPB Warning—Servicers should have appropriate policies, procedures, and processes in place to ensure that they are terminating borrowers' PMI coverage consistent with the HPA requirements, particularly with respect to the final termination provisions.
In general, the HPA prohibits a servicer from collecting PMI premiums more than 30 days after the termination date, or, when a borrower requests cancellation, more than 30 days after the latter 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 PMI cancellation. When a servicer collects unearned PMI premiums, the HPA 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 PMI coverage.
CFPB Warning—CFPB examiners have noted that some servicers engage in a practice of placing the amount of the returned premiums into the borrower's escrow account and have cited at least one servicer for a violation because, after crediting funds to the borrower's escrow account, the servicer's vendor kept the returned premiums in the borrower's escrow account indefinitely rather than returning premiums to the borrower within 45 days. The CFPB cautions servicers to monitor third-party vendors and to ensure that any unearned PMI premiums are returned directly to the borrower within 45 days rather than placed indefinitely in the borrower's escrow account.
When PMI is required in connection with a residential mortgage transaction, the HPA requires a servicer to provide the borrower an annual written statement disclosing the borrower's right to PMI 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 PMI.
CFPB Warning—CFPB examiners have found instances in which servicers did not send the required annual disclosures to borrowers, or in which servicers did not include the contact information required by the HPA.
Ultimately, the bulletin shows the CFPB's renewed interest in PMI and the requirements imposed by the HPA. Because the HPA provides for statutory damages, attorneys' fees and can be a vehicle for class actions, lenders and loan servicers should evaluate their policies and procedures relating to PMI to ensure compliance with the HPA.