December 8, 2004
CANCELLATION OF PRIVATE MORTGAGE INSURANCE
By: Janet L. Kaminski, Associate Legislative Attorney
You asked for information regarding cancellation of private mortgage insurance.
The federal Homeowners Protection Act of 1998 establishes rules for automatic termination and borrower cancellation of private mortgage insurance (PMI) on home mortgages. For home mortgages signed on or after July 29, 1999, the mortgage lender must automatically cancel PMI when the equity in a borrower's home reaches 22% based on the original property value, if mortgage payments are current. A borrower may request PMI cancellation when the equity in his home reaches 20% based on the original property value, if mortgage payments are current. For mortgages signed before July 29, 1999, the borrower may request PMI cancellation once his home equity exceeds 20%, but federal law does not require the lender to cancel it.
A mortgage lender must provide written disclosure of the conditions under which PMI may be cancelled to the mortgage applicant at the time the mortgage application is filed and annually thereafter.
HOMEOWNERS PROTECTION ACT OF 1998
The federal Homeowners Protection Act of 1998 establishes rules for automatic termination and borrower cancellation of private mortgage insurance (PMI) on home mortgages signed on or after July 29, 1999 (U.S.C. § 4901 - § 4910; copy enclosed).
The Federal Trade Commission's (FTC) Bureau of Consumer Protection issues consumer education publications. Following the enactment of the Homeowners Protection Act of 1998, the FTC published a consumer alert (copy enclosed) regarding the cancellation of private mortgage insurance (PMI) in light of the federal law.
Home mortgage lenders often require a borrower to have PMI if he puts down less than 20% toward the purchase of the home. PMI protects the lender if the borrower defaults on the loan. The rules established under the Homeowners Protection Act apply to certain home mortgages signed on or after July 29, 1999 for the purchase, initial construction, or refinance of a single-family home. They do not apply to government-insured Federal Housing Administration (FHA) or Veterans' Affairs (VA) loans or loans with lender-paid PMI.
The lender must automatically terminate PMI when the borrower's principle balance of the mortgage reaches 78% of the original value of the property, if mortgage payments are current. In other words, PMI automatically terminates when the borrower reaches 22% equity. If mortgage payments are not current, then the lender must cancel PMI on the first day of the month beginning after payments become current.
Alternatively, a borrower may request PMI be cancelled when the principle balance of the mortgage reaches 80% (i.e., when equity equals 20%). The lender will agree to the request if: (1) the request is in writing, (2) the borrower has a good payment history on the mortgage, (3) the mortgage payments are current, and (4) the borrower has satisfied any mortgage-holder requirements for (a) proving that the property value is at or above the original property value and (b) certifying that the property is unencumbered by other liens.
Regardless, a lender must cancel PMI on the first day of the month following the mid-point date of the loan's amortization period if mortgage payments are current.
For mortgages signed before July 29, 1999, the borrower may request PMI cancellation once his home equity exceeds 20%, but federal law does not require the lender to cancel it.
The Homeowners Protection Act also requires the lender to inform new borrowers about PMI cancellation at the closing and annually thereafter. Mortgage servicers must provide a telephone number to all borrowers to call for information about PMI cancellation. Within 30 days of PMI cancellation, the servicer must notify the borrower in writing that the PMI has been cancelled and that no further payments are due in connection with PMI.
The act imposes penalties for violators. A court may award damages and interest accruing from the date of the violation. Damages are generally limited to $2,000 in an individual action, $500,000 in a class action, court costs, and reasonable attorney fees.
STATE LAW REQUIRES DISCLOSURE
Under state law, a mortgage lender who requires a borrower to pay for PMI as a condition of obtaining the loan must provide written disclosure to the applicant when he files the mortgage application. The disclosure must include: (1) that the purpose of PMI is to protect the lender in case the borrower defaults; (2) that PMI is required to obtain the mortgage and under what conditions the lender may release the borrower from the obligation; (3) a good faith estimate of the initial and monthly costs of the PMI. A mortgage lender who charges a higher interest rate instead of requiring PMI, must provide written disclosure of this to the applicant when he files the mortgage application. These state disclosure rules do not apply to any mortgages insured or guaranteed by any government agency (CGS §§ 36a-725 and 726, copy enclosed).