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  4. Background and Summary of the Homeowners Protection Act

Background and Summary of the Homeowners Protection Act

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The Homeowners Protection Act limits a creditor’s right to require private mortgage insurance (PMI) once a consumer’s equity in his or her home reaches a certain level. The act grants consumers the right to request cancellation of the PMI once the loan balance reaches 80 percent of the property’s original value. The accumulated equity in the home is calculated on the basis of either amortization schedules or actual payments. Before terminating PMI, a lender may ensure that the value of the home has not declined, that the individual has a good payment history, and that the equity in the home is unencumbered. The act also requires lenders to cancel PMI automatically when the loan balance reaches 78 percent of the property’s original value but also contains exceptions for high-risk loans. Once the insurance is canceled, the mortgage servicer must return any unearned premiums to the consumer. Finally, the act imposes civil liability on servicers, lenders, and insurers who violate the act and requires federal banking agencies to enforce the act.
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DISCLOSURE REQUIREMENTS

Lenders and servicers must provide borrowers with initial amortization schedules and disclosures concerning cancellation of PMI at the time of loan consummation and additional disclosures annually. Lenders must disclose the date at which borrowers can expect automatic termination of their PMI (generally, when the loan balance is first scheduled to reach 78 percent of the original value of the mortgaged property). Consumers can also request PMI cancellation at 80 percent loan-to-value, provided certain conditions are met. Disclosure requirements vary depending on whether the loan involves borrower-paid PMI or lender-paid PMI or is classified as a fixed-rate or adjustable-rate mortgage or is designated as a high-risk loan.
If PMI was required in connection with a residential mortgage entered into before July 29, 1999, the servicer must disclose to the borrower, in an annual written statement, (1) that PMI may, under certain circumstances, be cancelled by the borrower with the consent of the lender, or in accordance with state law; and (2) an address and telephone number that the borrower may use to contact the servicer to determine whether the borrower may cancel the PMI.
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