The Homeowner's Protection Act of 1998 (the "Act") became effective July 29, 1999. The Act addresses difficulties homeowners have in cancelling private mortgage insurance ("PMI"). The Act provides for disclosure and notification requirements and requires the return of unearned premiums.
PMI Required for Loans with Less than 20 Percent Equity
Currently, industry practices and regulatory requirements require borrowers to purchase PMI in connection with loans having a loan to value ratio ("LTV") in excess of 80 percent (e.g., there is less than 20 percent equity in the property). The premium for PMI is paid monthly with borrower's regular payment of principal, interest and escrow amounts. Lenders have not been uniform in their policies about releasing borrowers from the PMI requirement once equity builds, such that borrowers have more than 20 percent equity in their homes.
The release of this requirement has the effect of reducing the borrower's monthly payment.
Automatic Termination of PMI Required Below 80 Percent LTV
The Act only applies to single-family residences (but not vacation homes), investment properties and multi-family dwellings. Essentially, the Act requires that a lender must release the borrower from the obligation to purchase PMI when the balance of a loan is reduced to an 80 percent LTV, if the borrower so requests. When the LTV reaches 78 percent of the property's "original value", automatic termination is required. Release of the obligation to furnish PMI is not required if the borrower does not have a good payment history.
Even where PMI is retained because of the borrower's unfavorable payment history, however, when the loan has been reduced to 50 percenet of the original amount of the loan, and provided the borrower is then current on the loan, the Act requires a final termination of the PMI requirement. Notwithstanding these general rules, there are certain "high risk" loans which are not subject to the Act.
Certain Disclosures Required at Closing
The Act also requires certain disclosures at loan closing. These disclosures differ depending on whether the mortgage is a fixed rate mortgage, an adjustable rate mortgage or a high risk loan. Certain annual notices are required in certain cases. Additionally, notices are required upon cancellation or termination of the PMI requirement and upon denial of termination, whether requested by borrower or automatic.
The Act prohibits any charge or other cost to be assessed against the borrower for compliance with the Act. Regulation Z (Truth in Lending) now requires that the payment schedule required (Section 226.18(g) of Regulation Z) reflect the consumer's PMI payments until the date on which the creditor must automatically terminate coverage under applicable law, even though the borrower may have a right to request that the insurance be canceled earlier.
The Homeowners Protection Act provides protection to homeowners from some of the abuses of lenders who were tardy in cancelling or refusing to cancel the PMI. The Act provides for termination deadlines and established penalties for lenders who failed to comply. Further, the Act required a return to the Homeowner of all unearned PMI premiums.
The Act provides a balance of allowing lenders to be protected by requiring a PMI, while providing protection to homeowners against lender abuses regarding the PMI.