The sometimes-overlooked requirements of the Homeowners Protection Act

When we think about the requirements of the Homeowners Protection Act (HOPA), which governs loans with private mortgage insurance (PMI), generally what comes to mind are the initial disclosure requirements, cancellation and termination provisions, and the systems’ correct calculation of the “original value.” These are only a few of the requirements of HOPA.  In this article we will address some of the other requirements that seem to be forgotten from time to time. 

In addition to the initial disclosure provided at loan closing, HOPA has an annual written statement requirement. The content of the statement depends on when the loan was consummated. For residential mortgage loans originated prior to July 29, 1999, an annual written statement must be delivered to each borrower who entered into the transaction that includes:

• A statement that PMI may, under certain circumstances, be canceled by the borrower with the consent of the lender or in accordance with applicable state law, and 
• An address and telephone number that the borrower may use to contact the servicer to determine whether the borrower may cancel the PMI.

If the loan was consummated on or after July 29, 1999, the annual statement must include:

• The borrower’s rights to cancel or terminate PMI, and 
• An address and telephone number where the servicer can be contacted to determine whether the borrower may cancel PMI.

Both of these notices may be included on the RESPA annual escrow account disclosure or with the Internal Revenue Service (IRS) interest payment disclosures.

A borrower who wants to cancel PMI must satisfy any requirements of the financial institution to verify that the property securing the mortgage has not declined below the original property value and that the residence securing the mortgage is unencumbered by a subordinate lien. 

These requirements must be established in advance by the financial institution, and the institution must notify the borrower of the requirements promptly after receiving the request to cancel PMI. It is common to see these requirements included on annual notices when a financial institution wants to reserve these rights.

If the financial institution denies a borrower’s PMI cancellation request, it must provide a written notice of the grounds relied on for making that determination, including the results of any appraisal, if applicable. The notice must be delivered no later than 30 days after the date the request is received or the date on which the borrower satisfies any evidence and certification requirements established by the lender, whichever is later.

Also, while cancellation criteria allow for actual payments and include provisions for subordinate liens, the property value not declining below the original property value, and the borrower having a good payment history, the criteria for termination do not include these provisions. 

Also, a financial institution does not have to terminate PMI until the original loan balance (not based on actual payments) is first scheduled to reach 78% of the original value of the property based on amortization schedules.

When a borrower cancels or the financial institution terminates PMI, the institution must provide the borrower with a written notice, within 30 days after the date of cancellation or termination, that the borrower no longer has PMI and that no further PMI payments or related fees are due. If on the scheduled termination date the borrower is not current and the lender does not terminate the PMI, then within 30 days after the termination date, the servicer must send the borrower a notice that the requirement for PMI was not terminated because of the borrower‘s delinquency. In addition, within 45 days of either termination or cancellation, the servicer must refund all unearned PMI premiums to the borrower. This refund includes any PMI premiums that may be held in escrow even as part of the escrow cushion.  

Also, the rules above only apply to borrower-paid PMI (BPMI); lender-paid PMI (LPMI) also has a disclosure requirement. Lender-paid PMI requires a notice not later than when the loan commitment is made that explains the differences between LPMI and BPMI. In addition, not later than 30 days after the termination date that would have applied had the borrower purchased BPMI, the servicer must provide to the borrower a written notice indicating that the borrower may wish to review financing options that could eliminate the requirement for LPMI in connection with the mortgage.

As you can see, there are many timing and notice requirements found within the regulation. We recommend creating a checklist and sample letters to help ensure employees understand what information must be provided, when it must be provided, and who it must be provided to.