Homeowner's Protection Act
HPA penalties in class actions cannot exceed what amount?
$500,000 or 1 % of the defendant's net worth
Under the HPA, a buyer has a good payment history if he or she has not made a payment that was _____ or more days past due within the first 12 months of the last two years prior to the later of the cancellation date or the date on which the borrower requests cancellation.
60
The HPA requires a servicer to automatically terminate PMI for residential mortgage transactions on the date on which the principal balance of the mortgage reaches what percentage of the original value of the secured property?
78%
Cont'd
A borrower is considered to have a good payment history if he or she: Has not made a payment that was 60 days or more past due within the first 12 months of the last two years, measured from the date on which the mortgage reaches the 80% threshold or the borrower submits a cancellation request, whichever comes later Has not made a payment that was 30 days or more past due within the 12 months prior to the later of the date on which the loan reaches the 80% threshold or the date on which the borrower requests cancellation After establishing that the borrower has a good payment history, the next step is to show that the property value has not fallen and the property itself is not securing other liens. If for some reason the value of the property has decreased since the loan was originated, the borrower may need to wait until automatic termination PMI can occur. When PMI is successfully cancelled, the servicer may not require further PMI payments or premiums more than 30 days after the later of the date on which: The borrower's written cancellation was received, or The borrower satisfactorily shows that the property has not decreased below its original value and is not subject to a subordinate lien (12 U.S.C. §4902(e)(1))
Penalties for Violation of the HPA
A borrower who brings an individual action for violations of the HPA may recover: Actual damages, including interest, which will accrue from the date when the violation first occurs Statutory damages of up to $2,000 The costs of bringing the action Reasonable attorney's fees In class actions, penalties differ for entities that are subject to regulation by the federal banking agencies, the National Credit Union Association, or the Farm Credit Administration, and those that are not. For entities that are regulated by these agencies, the penalties are: Statutory damages, which are the lesser of $500,000 or 1% of the defendant's net worth Costs of bringing the action Reasonable attorney's fees For entities that are not regulated by the federal banking agencies, the National Credit Union Association, or the Farm Credit Administration, the penalties are: Actual damages, including interest Statutory damages of up to $1,000 per class member, not to exceed the lesser of $500,000 or 1% of the defendant's net worth Costs of bringing the action Reasonable attorney's fees The statute of limitations for an action for violations of the HPA is two years after the date on which the violation was discovered (12 U.S.C. §4907(b)).
Return of Premiums
A loan servicer is required to return all unearned PMI premiums to the borrower within 45 days after cancellation or termination of PMI coverage. Within 30 days after notification by the servicer of cancellation or termination of PMI coverage, a mortgage insurer must return to the servicer any amount of unearned premiums it is holding, which must then be returned to the borrower (12 U.S.C. §4902(f)).
Exceptions to Cancellation and Termination of PMI
At present, Fannie Mae and Freddie Mac have not yet established exact guidelines for identifying what conforming loans may be classified as "high-risk." Nonconforming loans are residential mortgage transactions that have original principal balances that exceed Freddie Mac and Fannie Mae conforming loan limits. Examples of nonconforming loans include jumbo loans and nonprime loans. The HPA expressly states that it is up to the lender to establish whether a nonconforming loan is high-risk (12 U.S.C. §4902(g)(1)(B)). Even if a lender determines that a mortgage is a high-risk loan, the Act provides that PMI must still be cancelled upon the earlier of: When the mortgage reaches the midpoint of the amortization period, or When the principal balance of the loan reaches 77% of the original value of the property For a fixed-rate loan, this determination must be made based on the initial amortization schedule, regardless of any outstanding loan balance. For an adjustable-rate loan, this determination must be based on the amortization schedule in effect as of that date, regardless of the outstanding loan balance (12 U.S.C. §4902(g)(1)(B)(ii)).
Required Disclosures and Notifications
Disclosures that are required for a given transaction depend on the date on which the loan is consummated. For mortgages that closed before July 29, 1999, there is only one disclosure requirement. This is the requirement to provide the borrower with an annual notice advising him or her that, in certain circumstances, it is possible to cancel PMI. The notice must include an address and a telephone number that the borrower can use to obtain more information on cancelling PMI. For loans that closed on or after July 29, 1999, there are numerous disclosure and notification requirements related to their PMI cancellation and termination rights. This section will explore those requirements, which differ slightly for fixed- and adjustable-rate mortgages.
The cancellation date for a(n) ____________________ occurs on the date on which the principal balance of the mortgage, based on the initial amortization schedule, reaches 80% of the original value of the property securing the loan.
Fixed-rate mortgage
The HPA's provisions apply to all of the following, except:
Government-insured FHA loans
If PMI applies to a(n) ______________ loan, the lender must provide the borrower with a notification stating that PMI is no longer required after the borrower reaches the midpoint of the amortization of the loan.
High Risk
The borrower-requested mortgage insurance and automatic termination requirements do not apply to which of the following loan types?
High-risk loan
Definitions Cont'd
High-risk loans: residential mortgage loans that, at consummation, have high risks associated with them (12 U.S.C. §4902(g)(1)). Initial amortization schedule: a schedule established at the time that a fixed-rate residential mortgage loan transaction is consummated, showing: The amount of principal and interest that is due at regular intervals to pay off the principal balance and accrued interest over the loan term, and The unpaid principal balance of the loan after each scheduled payment is made (12 U.S.C. §4901(5)) Loan commitment: a prospective lender's written confirmation of its approval of the prospective borrower's application for a mortgage loan, including any applicable closing conditions (12 U.S.C. 4905(a)(3)). Original value: the lesser of the sales price of the property securing the mortgage or the appraised value at the time the transaction was consummated (12 U.S.C. §4901(12)). When a transaction is a refinance of the borrower's principal dwelling, the "original value" is the appraised value that the lender uses to approve the refinance. Residential mortgage: mortgage, loan, or other evidence of security interest in a single-family dwelling that is the borrower's principal residence (12 U.S.C. §4901(14)). Residential mortgage transaction: for purposes of the HPA, this term is limited to transactions that were consummated on or after July 29, 1999, and that use a single-family dwelling serving as the borrower's principal residence to secure a mortgage (12 U.S.C. §4901(15)). Servicer: defined under the HPA as the person responsible for servicing a loan, including the person who makes or holds a loan if that person also services it (12 U.S.C. §2605(i)(2)). Under this definition, lenders that service their own loans are clearly covered. When this course references lenders, it is referencing those that service their loans (12 U.S.C. § 4901 (16)).
Disclosures for Fixed Rate Mortgages
If PMI applies to a fixed-rate mortgage, the lender must provide the borrower with each of the following at the time of the closing: An initial amortization schedule Written notice that the borrower can request cancellation of PMI on the cancellation date The notice must state the actual date on which the borrower may request cancellation, based on the amortization schedule (the date on which the LTV ratio will reach 80%) Written notice that the borrower can request earlier cancellation if they accelerate payment of the loan, reaching an 80% loan-to-value ratio ahead of schedule Written notice that cancellation of PMI is automatic on the termination date (the date on which LTV ratio reaches 78%) Written notice of any applicable exemption from the right to cancel PMI or automatic termination of PMI (12 U.S.C. §4903(a)(1)(A))
Disclosures for High-Risk Loans
If PMI applies to a loan that is determined to be a high-risk loan, the lender must provide the borrower with a notification stating that: PMI is not required when the borrower reaches the midpoint of the amortization period of the loan Termination of PMI is automatic at the midpoint of the amortization period if the borrower is current on payments (12 U.S.C. §4903(a)(2))
Final Termination
If PMI coverage on a residential mortgage transaction was not cancelled either by borrower request or through automatic termination, the lender or servicer must terminate PMI coverage by the first day of the month immediately following the midpoint date of the loan's amortizaton period. The only requirement for final termination is that the borrower be current on payments as of that date (12 U.S.C. §4902(c)). If the borrower is not current on payments as of that date, PMI should be terminated when the borrower does become current. The midpoint of the amortization period is halfway through the period between the first day of the amortization period established at consummation and the date on which the mortgage is scheduled to be amortized. The servicer may not require further payments or premiums of PMI more than 30 days after the date on which final termination of PMI occurs (12 U.S.C. §4902(e)(3)).
Disclosure Requirements for Lender-Paid Mortgage Insurance
Lender-paid mortgage insurance (LPMI) is PMI that is required for a residential mortgage transaction and that is paid for by a person other than the borrower. In the case of LPMI, the HPA requires that the lender provide written notice to the borrower not later than the date on which a loan commitment is made. The written notice must advise the borrower of the differences between LPMI and borrower-paid PMI (BPMI) in that LPMI: Cannot be cancelled by the borrower or automatically terminated Usually results in a mortgage loan having a higher interest rate than it would in the case of BPMI Terminates only when the mortgage is refinanced, paid off, or otherwise terminated The notice must also provide that: LPMI and BPMI have both benefits and disadvantages, including a generic analysis of the costs and benefits of a mortgage in the case of LPMI versus BPMI over a ten-year period, assuming prevailing rates for interest and property appreciation LPMI may be tax-deductible for federal income taxes if the borrower itemizes expenses for that purpose Within 30 days of the termination date that would apply in the case of BPMI, the servicer is required to provide the borrower with a written notice indicating that he or she may wish to review financing options that could eliminate the need for PMI in the transaction (12 U.S.C. §4905(c)(2)).
HPA
Lenders may require borrowers to purchase mortgage insurance in a mortgage loan transaction when the loan-to-value (LTV) ratio is high. This allows borrowers who have little money to invest in an upfront down payment to obtain mortgage financing while simultaneously offering the lender protection against borrower default. Historically, an 80% LTV ratio ensured that the borrower had enough interest in the property to continue making payments. Though some lenders agreed to terminate or cancel PMI when the borrower reached 20% equity, policies and procedures for doing so varied widely among lenders, and some did not allow cancellation at any time. Homeowners also had limited recourse if lenders refused to cancel PMI. In response to these challenges, Congress enacted the Homeowners Protection Act (HPA) in 1998 to facilitate the cancellation of PMI. The HPA can be found under 12 U.S.C. Chapter 49. It is implemented and enforced primarily by the Consumer Financial Protection Bureau (CFPB), though the federal bank regulatory agencies, National Credit Union Administration, and the Farm Credit Administration have authority over smaller depository institutions.
A lender's written confirmation of its approval, including any applicable closing conditions, of a prospective borrower's application for a residential mortgage loan is known as a:
Loan commitment
Annual Disclosures and Notifications upon Cancellation or Termination of PMI
Loan servicers are required to provide borrowers with an annual notice that reminds them of their right to the cancellation or termination of PMI. The notice must also provide an address or telephone number that borrowers can use to contact their loan servicers with questions about the ability to cancel PMI. Servicers may include this disclosure with the annual escrow account disclosure required by the Real Estate Settlement Procedures Act (RESPA) (12 U.S.C. §4903(a)(3)). Within 30 days of the cancellation or termination of PMI, the servicer or lender must notify the borrower that: The borrower no longer has PMI, and The borrower will no longer be required to pay PMI premiums (12 U.S.C. §4904 (a)) If a borrower does not qualify for PMI cancellation or automatic termination, the servicer must provide the borrower with a written notice of the grounds relied on for that determination. If an appraisal was used in making the determination, the servicer must give the appraisal results to the borrower. If a borrower does not qualify for cancellation, the notice must be provided not later than 30 days following the later of: The date on which the borrower's request for cancellation is received, or The date on which the borrower satisfies any evidence and certification requirements of the mortgage holder If the borrower does not meet the requirements for automatic termination, the notice must be provided no later than 30 days after the scheduled termination date (12 U.S.C. §4904(b)).
Borrower-Requested Termination
The HPA allows borrowers to cancel PMI when each of the following conditions is met: The principal balance on a mortgage loan has reached 80% of the original value of the property securing the loan The borrower has a good payment history, as defined under the HPA The borrower is current on payments due under the terms of the lending agreement The borrower satisfies requirements that the lender or servicer imposes for:Evidence that the value of the property has not declined below its original value, andCertification that the borrower's equity in the property is not subject to a subordinate lien The borrower submits a written cancellation request (12 U.S.C. §4902(a)(4)) When a lender or servicer receives a borrower's request to cancel PMI, it will advise the borrower of the type of verification needed regarding the value of the property, as well as the verification needed to ensure that there are no other liens on the property.
The Scope of the HPA
The HPA applies to residential mortgages on single-family homes serving as the borrower's principal dwelling. This includes condominiums, townhouses, and cooperative or mobile homes. The HPA is applicable to refinances, construction loans, and purchase money mortgages, and covers lenders, loan servicers, and insurers. The requirements of the HPA vary based on whether a mortgage is: A "residential mortgage" or a "residential mortgage transaction" Defined as high-risk, either by the lender in the case of nonconforming loans or by Fannie Mae and Freddie Mac in the case of conforming loans Financed under a fixed rate or an adjustable rate, or Covered by borrower-paid mortgage insurance (BPMI) or lender-paid mortgage insurance (LPMI) The HPA does not apply to protected state laws that are consistent with its provisions. "Protected" state laws are those that were enacted no later than two years after the enactment date of the HPA; essentially, this is intended to protect state PMI laws that were already in place when the HPA was enacted and do not conflict with its requirements. Inconsistencies between federal and protected state laws will be resolved in favor of the state laws offering more protection to consumers; the HPA will supersede those offering fewer protections.
Automatic Termination
The HPA generally requires a lender or servicer to automatically terminate PMI for residential mortgage transactions when a mortgage reaches 78% of the original value of the property securing the loan. For termination to occur, the borrower must be current on payments on the automatic termination date. If the borrower is not current on that date, automatic termination will not occur until the first day of the first month after the date on which the borrower becomes current (12 U.S.C. §4902(b)). The only home value that is relevant to the automatic termination of PMI is the original value, which is the sales price or appraised value at the time the mortgage was consummated, whichever is less. If PMI is terminated, the servicer may not require further payments or premiums of PMI more than 30 days after the termination date or, if the borrower is not current on payments as of the termination date, the date on which he or she becomes current after the termination date (12 U.S.C. §4902(e)(2)).
Which of the following factors is necessary in order for a servicer or lender to terminate PMI automatically?
The borrower must be current on his or her payments
Cancellation and Termination for High Risk Loans
The borrower-requested and automatic termination requirements for PMI do not apply to high-risk loans, which are defined by the HPA as loans that have high risks associated with them at consummation (12 U.S.C. §4902(g)(1)). The HPA does not offer a precise definition of "high-risk loans," leaving much discretion to the lender to determine whether a transaction represents a high degree of risk. Under the HPA, high-risk loans that are subject to final termination at the midpoint of the amortization period are divided into two categories: Conforming loans (defined as high-risk by Fannie Mae and Freddie Mac) Nonconforming loans (defined as high-risk by the lender)
If there is LPMI, the lender must provide a written notice to the borrower no later than:
The date on which a loan commitment is made
If PMI coverage on a residential mortgage transaction was not cancelled at the borrower's request or by the automatic termination provision, a servicer must terminate PMI coverage by:
The first day of the month immediately following the date that is the midpoint of the loan's amortization period
Exceptions
The provisions of the Homeowners Protection Act apply only to conventional loans. They do not apply to: Government-insured FHA or VA loans Loans protected by PMI paid for by the lender The HPA includes an exclusion for lender-paid mortgage insurance, which the law defines as PMI that is required for a residential mortgage transaction and for which payments are made by a person other than the borrower (12 U.S.C. §4905(a)(2)). Though most of the provisions of the HPA do not apply to lender-paid mortgage insurance, there are some special disclosure requirements; these are discussed in a subsequent section of the course.
Prohibited Practices
The receipt of any payments or premiums for PMI after the date of termination or cancellation is prohibited. Within 45 days after the cancellation or termination of PMI, any unearned premiums must be returned to the borrower (12 U.S.C. §4902(f)). Further, it is a violation to impose any fees on borrowers for providing disclosures and notices that are required under the law (12 U.S.C. §4906).
Termination of PMI for Mortgage Transactions
There are three ways to terminate or cancel PMI for mortgages that are not high-risk mortgages: Borrower request Automatic termination Final termination
Definitions under the Homeowner's Protection Act
Violations of the HPA may be treated as violations other corresponding acts (12 U.S.C. §4909(b)(1)). In carrying out its enforcement authority under the Act (taking an enforcement action against a violator), each enforcement agency is subject to several requirements. Agencies must: Notify the mortgagee or servicer of any compliance failure under the Act For each compliance failure, require the mortgagee or servicer to correct the borrower's account to reflect the date on which PMI should have been cancelled or terminated, and Require the mortgagee or servicer to reimburse the borrower for any unearned premiums paid after the date on which PMI should have been cancelled or terminated (12 U.S.C. §4909(c))
Enforcement Authority
Violations of the HPA may be treated as violations other corresponding acts (12 U.S.C. §4909(b)(1)). In carrying out its enforcement authority under the Act (taking an enforcement action against a violator), each enforcement agency is subject to several requirements. Agencies must: Notify the mortgagee or servicer of any compliance failure under the Act For each compliance failure, require the mortgagee or servicer to correct the borrower's account to reflect the date on which PMI should have been cancelled or terminated, and Require the mortgagee or servicer to reimburse the borrower for any unearned premiums paid after the date on which PMI should have been cancelled or terminated (12 U.S.C. §4909(c))
Disclosures for ARMs
When PMI applies to an ARM, the adjustable rate prevents the lender from knowing the exact date on which the loan-to-value ratio will reach 80%. At closing, the lender must provide the borrower with: Written notice that the borrower can request cancellation of PMI on the cancellation date and that the loan servicer will notify the borrower when the cancellation date is reached Written notice that cancellation of PMI is automatic on the termination date and that the loan servicer will notify the borrower when the termination date is reached Written notice of any applicable exemption from the right to cancel PMI or automatic termination of PMI (12 U.S.C. §4903(a)(1)(B))