In this week’s article, we’re going back to the basics again in our second edition covering PMI cancellation and termination requirements. If you missed the previous article covering PMI notification requirements, you can find it using the following link – Back to the Basics – PMI Notification Requirements
Let’s begin by taking a look at borrower requested cancellation.
A borrower may initiate cancellation of Private Mortgage Insurance or PMI coverage by submitting a written request to the servicer of the loan.
At that point, the servicer must take action to cancel PMI when the cancellation date occurs, which is when the principal balance of the loan reaches 80 percent of the “original value,” based on the initial amortization schedule in the case of a fixed rate loan or amortization schedule currently in effect for ARM, loans any date after –
- The borrower submits a written cancellation request
- The borrower has good payment history
- The borrower is current, and
- The borrower satisfies any requirement of the mortgage, such as:
- Evidence that the value of the property has not declined below the original value, and
- Certification that the borrower’s equity in the property is not subject to a subordinate lien.
Once the PMI is canceled, the servicer may not require further PMI payments or premiums more than 30 days after the latter of:
- The date on which the written request was received or,
- The date on which the borrower satisfied evidence that the value of the property has not declined, and the property is not subject to a second lien.
Now, I mentioned that the borrower may request the cancellation of PMI when the loan’s principal balance reaches 80 percent of the “original value”. The original value is the lesser of the sales price or appraised value at the time of consummation of the loan.
Suppose a borrower requests cancellation of private mortgage insurance, but the loan does not qualify for cancellation. In that case, the servicer must provide the borrower a written statement explaining that cancellation has been denied and the reason or reasons for the denial.
This notification must be provided no 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 reason for denial resulted in an appraisal of the property, the Act requires disclosure of the results of the appraisal, presumably containing the appraised value of the property.
If the private mortgage insurance has not been terminated 30 days after the termination date, the mortgagee must notify the mortgagor and explain that the private mortgage insurance has not been canceled.
Now, let’s take a look at automatic termination requirements.
The Act requires a servicer to automatically terminate PMI for residential mortgage transactions on the date on which –
- The mortgage’s principal balance is first scheduled to reach 78 percent of the original value of the secured property (based on the initial amortization schedule in the case of a fixed-rate loan or on the current amortization schedule in effect if it’s an adjustable-rate loan).
- If the borrower is not current with their payments on that date, then on the first day of the first month following the date that the borrower becomes current.
Again, if PMI is canceled or terminated, the servicer may not require further payments or premiums of PMI more than 30 days after the termination date or the date following the termination date on which the borrower becomes current on the payments, whichever is sooner.
If PMI coverage on a residential mortgage transaction was not canceled at the borrower’s request or by automatic termination, then the 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, IF, on that date, the borrower is current on their payments.
For example, on a loan with a 30-year amortization schedule, the midpoint would be at the end of the 15th year of the 30-year term. If the borrower is not current on that date, then PMI must be terminated when the borrower does become current. Again, the servicer may not require further payments or premiums of PMI more than 30 days after PMI is terminated.
A servicer must 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 to permit the servicer to return such premiums to the borrower.
As always, thank you for being a loyal member of the Temenos Compliance Advisory team. It is our pleasure to help relieve your institution from the burden of regulatory compliance.
*The content of this article was obtained from the FDIC’s summary of the Homeowner’s Protection Act found in the following link – HOPA