On August 4, 2015, the Bureau of Consumer Financial Protection (CFPB) issued a bulletin (CFPB Bulletin 2015-03) to assist residential mortgage servicers and subservicers (Servicers) with their compliance obligations regarding private mortgage insurance (PMI) cancellation and termination under the Homeowners Protection Act of 1998 (HPA). The HPA was enacted by Congress to implement uniform nationwide standards for PMI cancellation and termination. Through its supervisory activities and examinations, the CFPB has identified various violations of HPA and instances which create a substantial risk of noncompliance:

Borrower-Requested Cancellation
A borrower may initiate cancellation of PMI coverage by submitting a written request to its Servicer. The borrower must meet certain requirements as of the cancellation date¹ or the cancellation will be delayed until the borrower can demonstrate good payment history, a current status on the loan, no subordinate lien exists on their equity and the property value is equal to or greater than the original value. The CFPB reminds Servicers that the cancellation date is based on the original value and not the current value of the property. Property appraisals should be used only to determine whether the property’s value has declined below the original value. 

Automatic Termination
PMI coverage shall be automatically cancelled when the borrower is current on the loan as of the termination date.² If a borrower is not current on the loan on the termination date, PMI will automatically terminate on the first day of the first month beginning after the borrower becomes current on the loan. If these conditions are met, automatic termination of PMI is required even if the current value of the property has declined below the original value. Violations by Servicers have been identified both for borrowers who were current on the termination date and for borrowers who were delinquent on the termination date but later became current. 

Final Termination
The HPA provides that Servicers may not impose a requirement for PMI coverage beyond the first day of the month following the midpoint of the amortization period of the loan if, on that date, the borrower is current on the loan. This is important because the HPA applies only to residential mortgage loans consummated on or after July 29, 1999, which means that standard 30-year mortgage loans started becoming eligible for final PMI termination in August 2014. The CFPB reiterates that Servicers should have appropriate policies in place to specifically address the final termination provisions.

PMI Refunds
The HPA prohibits a Servicer from collecting PMI premiums more than 30 days after the termination date, or more than 30 days after the later of, a borrower cancellation request being received or the date on which the borrower satisfies any evidence and certification requirements for PMI cancellation. The HPA also requires Servicers to return such unearned premiums to the borrower no later than 45 days after the termination or cancellation of the borrower’s PMI coverage. However, the CFPB has observed improper collection of unearned PMI premiums and excessive delays in processing borrower requests for PMI cancellation, noting in one or more prior examinations that some Servicers engage in a practice of placing the amount of the returned premiums into the borrower’s escrow account. At least one Servicer has been cited for keeping returned premiums in the borrower’s escrow account indefinitely rather than returning the premiums to the borrower.

Annual Disclosures
HPA requires Servicers to provide annual written statements disclosing the borrower’s right to PMI cancellation or termination. These disclosures must provide an address and telephone number that the borrower may use to contact the Servicer to determine whether the borrower may cancel PMI.

Investor Guidelines
Investor guidelines, including Government-Sponsored Enterprises(“GSEs”) may be implemented by Servicers but must be done so in consideration of HPA. Servicers are not to rely entirely on the elements of investor guidelines, as those investor guidelines cannot restrict the PMI cancellation and termination rights that the HPA provides to borrowers. Unfortunately, the CFPB has observed Servicers confusing or replacing HPA requirements with elements of investor guidelines resulting in improperly denying a borrower’s cancellation request. 

Practice Tips

• As current value is not a factor in determining the “termination date,” under HPA automatic cancellation provisions, servicers may not require a borrower to pay for a property valuation as a condition of automatic termination of PMI. 
• Servicers must ensure their policies and procedures are in compliance with HPA and that current controls are in place to identify borrowers that are eligible for automatic cancellation of their PMI coverage.
• Servicers must return any unearned PMI premiums are directly to the borrower within 45 days rather than placed indefinitely in the borrower’s escrow account.
• The HPA does not contain any requirements for a loan’s tenure before a borrower may request cancellation or be eligible for automatic PMI termination.

Endnotes
1 Cancellation date is defined 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.”
2 Termination date is defined as the date on 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).