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2.15 Failure to Discontinue Private Mortgage Insurance

Private mortgage insurance (PMI) protects a mortgage holder against loss caused by the borrower’s default and subsequent foreclosure.259 PMI is required by lenders and the GSE guidelines when the loan-to-value ratio at origination is greater than eighty percent. PMI premiums are based on the amount and terms of the loan and may vary according to the loan-to-value ratio, the type of loan, the borrower’s credit score, and the amount of coverage required by the lender. Premiums are commonly paid by the borrower on a monthly basis and escrowed along with the homeowner’s hazard insurance and property taxes. In some instances, however, the lender may pay the PMI premiums in return for a higher interest rate.

The Homeowners Protection Act of 1998 (HPA) provides for, among other things, cancellation upon request and automatic termination of borrower-paid PMI in certain circumstances. The HPA applies to “residential mortgage transactions,” which are defined as mortgage loan transactions originated on or after July 29, 1999, that finance the acquisition, initial construction, or refinancing of a single-family dwelling that serves as the borrower’s principal residence.260 Under the Act, borrower-paid PMI must be automatically terminated on the date that the loan is scheduled to reach seventy-eight percent of the original value of the property securing the loan, regardless of the actual loan balance or property value.261 “Original value” is defined as the lesser of the sales price of the property, as reflected in the purchase contract, or the appraised value at the time of loan consummation.262 Under automatic termination, there is no provision that protects the lender against declines in property value or subordinate liens. Automatic termination applies only if the borrower is current on mortgage payments.263 If the borrower is not current, then the PMI must be terminated if and when the borrower becomes current.264

Alternatively, the borrower may request termination of borrower-paid PMI when the principal balance of the loan reaches eighty percent of the original value.265 The borrow must submit a written cancellation request, have a good payment history,266 and be current on loan payments. Additionally, the lender may require the borrower to provide evidence that the value of the property has not declined and certification that the borrower’s equity in the property is not subject to a subordinate lien.

Finally, if the PMI has not been automatically terminated or canceled at the borrower’s request, the servicer must terminate it on the first day of the month immediately following the midpoint of the amortization period, if the borrower is current on payments.267

If PMI is terminated or canceled, the servicer may not require further premium payments more than thirty days after the termination or cancellation.268 Any unearned premiums must be returned to the borrower within forty-five days after the termination or cancellation of the PMI.269 This requirement has been interpreted to mean that the funds attributable to unearned premiums must actually be paid to the borrower, not just credited to the borrower’s escrow account.270

There are some exceptions to the general HPA provisions. First, modification of the terms or conditions of a loan may trigger recalculation and redisclosure of the termination date to reflect the modified loan terms.271 Second, special rules apply to “high-risk” loans.272 Third, the cancellation and termination provisions of the Act do not apply to lender-paid PMI.273 However, in the case of lender-paid PMI, the servicer must send a special notice to the borrower within thirty days of the date that would have been the termination date if the PMI was borrower-paid. The notice must indicate that the borrower should review financing options that could eliminate the PMI requirement.

A private right of action is available under the HPA, and servicers, mortgagees, or mortgage insurers may be liable in individual cases for actual and statutory damages (up to $2000), together with reasonable attorney fees and costs.274 However, the statute limits the liability of the servicer when the “failure of the servicer to comply with the requirements” is “due to the failure of a mortgage insurer or mortgagee to comply.”275 Individuals or classes may enforce the statute. The borrower must bring an HPA action within two years after the borrower discovers the violation.276

It is important to note that the GSE guidelines differ in some material respects from the requirements of the HPA. First, while the HPA applies only to single-family dwellings, the GSE guidelines provide for termination of PMI for loans secured by certain multi-unit and investment properties; the guidelines also provide for the termination of PMI for loans originated prior to the HPA’s effective date.277 In addition, the GSEs permit cancellation of PMI upon the borrower’s request based on the current value of the property, whereas the trigger points under the HPA are tied to the original value of the property.278 Under the GSE guidelines, the loan-to-value ratio necessary for the cancellation of PMI must be either seventy-five or eighty percent, depending on the seasoning of the loan. These investor guidelines cannot restrict the PMI cancellation and termination rights that the HPA provides to borrowers.279

Borrowers may also obtain relief from PMI obligations based upon the terms of the loan280 or upon state law. A few states have enacted legislation to regulate PMI. For example, in California, if PMI is required as a condition of securing a loan, the lender must notify the borrower whether they have a right to cancel the insurance and under what conditions the insurance can be canceled.281 In Minnesota, borrowers have the right to cancel PMI when the unpaid principal balance of the loan falls below eighty percent of the current fair market value of the property.282 These state statutes, however, are enforceable only to the extent that they are not preempted by federal law.283

By its terms, the HPA specifically preempts any provisions of state law “relating to the requirements for obtaining or maintaining private mortgage insurance in connection with residential mortgage transactions, cancellation or automatic termination of such private mortgage insurance, any disclosure information addressed by [the HPA], and any other matter specifically addressed by [the HPA].”284 A specific carve-out from this preemption provision is available to states that had existing laws regulating PMI, to the extent that those laws are not inconsistent with the HPA.285 State laws generally are not considered inconsistent with HPA if they provide borrowers with greater protections. Courts are divided as to whether the HPA preempts state UDAP and common law tort claims involving PMI.286

At least one court has held that the borrower’s obligation to pay PMI may be altered in a chapter 13 bankruptcy, so long as the anti-modification provision in section 1322(b)(2) does not apply.287 Another court found that the terms of HAMP modification implicitly eliminated the borrower’s PMI obligation.288

Common servicing problems related to the termination of private mortgage insurance include:

  • • Failure to automatically terminate PMI for borrowers current on their payments.289
  • • Failure to terminate PMI when the borrower was delinquent on the automatic termination date, but later becomes current.290
  • • Substituting the new property valuation at the time of a modification for the original value when recalculating PMI termination dates.291
  • • Excessive delays in processing borrower requests for PMI cancellation.292
  • • Crediting unearned PMI premiums to the borrower’s escrow account rather than refunding the unearned premiums to the borrower.293
  • • Failure to send annual disclosures, or sending incomplete annual disclosures.294
  • • Relying solely on investor guidelines when making PMI cancellation and termination determinations.295 As noted above, investor guidelines cannot restrict the PMI cancellation and termination rights that the HPA provides to borrowers.
  • • Mixing the HPA requirements and investor guidelines (for example, requiring a loan-to-value ratio of 75% based on the original property value, or imposing a seasoning requirement).296

Footnotes

  • 259 {252} See National Consumer Law Center, Mortgage Lending §§ 3.1.7, 7.5 (3d ed. 2019), updated at www.nclc.org/library.

  • 260 {253} 12 U.S.C. § 4901(15). Regulators consider a condominium, townhouse, cooperative, or manufactured home to be a single-family dwelling covered under the Act. See, e.g., Fed. Deposit Ins. Corp., FDIC Compliance Examination Manual § V-5.1 (Sept. 2015).

  • 261 {254} 12 U.S.C. §§ 4901(18), 4902(b).

    For fixed-rate loans the termination date is based solely on the initial amortization schedule. For adjustable-rate loans, the amortization schedule then in effect is used to determine the termination date. 12 U.S.C. § 4901(18).

  • 262 {255} 12 U.S.C. § 4901(12).

  • 263 {256} 12 U.S.C. § 4902(b).

    The Act does not define “current.” According to Fannie Mae, “[a] borrower’s payments are considered current if the payment due in the month preceding the scheduled termination date, or the mid-point of the amortization period, as applicable, and all outstanding late charges were paid by the end of the month in which the payment was due.” Fannie Mae Single-Family Servicing Guide, at B-8.1-04 Automatic Termination of Conventional Mortgage Insurance (May 15, 2019), available at www.fanniemae.com.

  • 264 {257} 12 U.S.C. § 4902(b).

  • 265 {258} 12 U.S.C. §§ 4901(2), 4902(a).

  • 266 {259} 12 U.S.C. § 4901(4) (defining “good payment history”).

  • 267 {260} 12 U.S.C. § 4902(c).

  • 268 {261} 12 U.S.C. § 4903(e)(2).

  • 269 {262} 12 U.S.C. § 4902(f).

  • 270 {263} Consumer Fin. Prot. Bureau, Bulletin 2015-03, Compliance Bulletin: Private Mortgage Insurance Cancellation and Termination 4 (Aug. 4, 2015); CFPB Supervisory Highlights § 2.1.3 (Winter 2013).

  • 271 {264} 12 U.S.C. § 4902(d). See Fried v. JP Morgan Chase & Co., 850 F.3d 590 (3d Cir. 2017) (PMI must be calculated based on the original value rather than the value at the time of modification); Rice v. Green Tree Servicing, L.L.C., 2015 WL 5443708 (N.D. W. Va. Sept. 15, 2015) (granting summary judgment to borrower, requiring PMI termination post-modification). See also Rodriguez v. Chase Home Fin., L.L.C., 2011 WL 4435633 (N.D. Ill. Sept. 23, 2011) (new PMI disclosures not required upon loan modification).

  • 272 {265} 12 U.S.C. § 4902(g). High-risk loans are divided into two groups: (1) loans with original principal balances that do not exceed the GSE conforming limits; and (2) any other mortgages.

  • 273 {266} 12 U.S.C. § 4905.

  • 274 {267} 12 U.S.C. § 4907. See Rice v. Green Tree Servicing, L.L.C., 2015 WL 5443708 (N.D. W. Va. Sept. 15, 2015).

  • 275 {268} 12 U.S.C. § 4907(c).

  • 276 {269} 12 U.S.C. § 4907(b).

  • 277 {270} Fannie Mae Single-Family Servicing Guide, at B-8.1-04 Automatic Termination of Conventional Mortgage Insurance (May 15, 2019), available at www.fanniemae.com (the midpoint rule applies to loans closed before July 9, 1999, regardless of property type; on or after July 29, 1999, it applies if the property is a one- to four-unit investment property or a two- to four-unit principal residence); Freddie Mac Single-Family Seller/Servicer Guide § 8203.3 (Mar. 2, 2016), available at www.freddiemac.com.

  • 278 {271} Fannie Mae Single-Family Servicing Guide, at B-8.1-04 Automatic Termination of Conventional Mortgage Insurance (May 15, 2019), available at www.fanniemae.com (setting forth criteria for cancellation based on current property value); Freddie Mac Single-Family Seller/Servicer Guide § 8203.2 (Mar. 2, 2016), available at www.freddiemac.com.

  • 279 {272} 12 U.S.C. § 4908(b) (stating that the HPA supersedes any conflicting provision contained in any agreement relating to the servicing of a residential mortgage loan entered into by Fannie Mae, Freddie Mac, or any private investor or note holder). See Rice v. Green Tree Servicing, L.L.C., 2015 WL 5443708 (N.D. W. Va. Sept. 15, 2015).

  • 280 {273} Compare Kochin v. Norwest Mortg., Inc., 2001 WL 856206 (Minn. Ct. App. July 31, 2001) (affirming judgment in favor of homeowners when servicer failed to terminate PMI in contradiction to loan-approval conditions document), with Bennett v. Bank United, 114 S.W.3d 76 (Tex. App. 2003) (note and deed of trust contemplated life-of-loan PMI and conferred no right of cancellation).

  • 281 {274} Cal. Civ. Code § 2954.6 (West). See also Conn. Gen. Stat. §§ 36a-725 through 36a-726 (lender must notify borrower under what conditions borrower has right to cancel); 765 Ill. Comp. Stat. § 930/15 (lender must notify borrower under what conditions borrower has right to cancel); Md. Code Ann., Fin. Inst. § 5-508 (West) (incorporating federal law); N.Y. Ins. Law § 6503(d) (McKinney) (mortgagor not required to pay PMI if loan-to-value ratio is less than 75%, but no private right of action).

  • 282 {275} Minn. Stat. § 47.207.

  • 283 {276} See 12 U.S.C. § 4908 (describing protections for state laws). See National Consumer Law Center, Mortgage Lending § 3.1.7 (3d ed. 2019), updated at www.nclc.org/library.

  • 284 {277} 12 U.S.C. § 4908.

  • 285 {278} Id.

  • 286 {279} See National Consumer Law Center, Mortgage Lending § 3.1.7 (3d ed. 2019), updated at www.nclc.org/library.

  • 287 {280} In re Lanois, 516 B.R. 680 (Bankr. D.R.I. 2014). See also National Consumer Law Center, Consumer Bankruptcy Law and Practice § 11.6 (12th ed. 2020), updated at www.nclc.org/library (discussing modification of secured creditors’ rights).

  • 288 Washington v. Ditech Fin. L.L.C., 2020 WL 2551523 (S.D. Tex. May 19, 2020) (HAMP modification document listed new payment amount including escrow but did not include PMI; court held that superseded any prior PMI requirement; HAMP guideline regarding continuation of PMI may have been binding on servicer, but not borrower).

  • 289 {281} Consumer Fin. Prot. Bureau, Bulletin 2015-03, Compliance Bulletin: Private Mortgage Insurance Cancellation and Termination 3 (Aug. 4, 2015).

  • 290 {282} CFPB Supervisory Highlights § 2.5.4 (Summer 2015).

  • 291 {283} See Fried v. JP Morgan Chase & Co., 850 F.3d 590 (3d Cir. 2017); Rice v. Green Tree Servicing, L.L.C., 2015 WL 5443708 (N.D. W. Va. Sept. 15, 2015) (granting summary judgment to borrower, requiring PMI termination post-modification).

  • 292 {284} CFPB Supervisory Highlights § 2.2.2 (Summer 2013).

  • 293 {285} Consumer Fin. Prot. Bureau, Bulletin 2015-03, Compliance Bulletin: Private Mortgage Insurance Cancellation and Termination 4 (Aug. 4, 2015); CFPB Supervisory Highlights § 2.1.3 (Winter 2013).

  • 294 {286} Consumer Fin. Prot. Bureau, Bulletin 2015-03, Compliance Bulletin: Private Mortgage Insurance Cancellation and Termination 4 (Aug. 4, 2015). See 12 U.S.C. § 4903(a)(3) (requiring annual written statements to borrower describing termination and cancellation rights as well as providing contact information).

  • 295 {287} Consumer Fin. Prot. Bureau, Bulletin 2015-03, Compliance Bulletin: Private Mortgage Insurance Cancellation and Termination 5–6 (Aug. 4, 2015).

  • 296 {288} CFPB Supervisory Highlights § 2.1.3 (Winter 2013) (finding servicer imposed two-year seasoning requirement even though HPA does not contain such a requirement).