** Since July 29, 1999 servicers and lenders have been required to follow specific guidelines set forth
in the Act. Complaints from borrowers and studies regarding PMI pointed to the need for borrower
protection and lender/servicer guidelines. The Senate Committee on Banking, Housing and Urban
Affairs reports concluded that "the marketplace does not provide the necessary incentives for PMI
cancellation, since protections that PMI offers flows to the parties who are not paying for it."1 Home
purchases before July 29, 1999 do not fall within the guidelines of the Act. The Act outlines
requirements on a single-family dwelling (single-family dwelling'' means a residence consisting of one
family dwelling unit). For homes purchased before July 29, 1999 PMI may be cancelled once the
borrower exceeds twenty percent (20%) equity in his or her home, but federal law does not require
the servicer to cancel this insurance.
Tips for Lenders/Servicers
For home mortgages signed on or after July 29, 1999, the Act requires lenders/servicers to disclose
to borrowers their PMI cancellation rights. There are variations in lender/servicer disclosure
requirements to the borrower, based on who pays the PMI – the borrower or lender/servicer,
whether the loan has a fixed or variable rate, and whether the loan is considered “high-risk.” The Act’
s basic lender/servicer requirements and disclosure notifications are listed below:
Automatic PMI termination once the borrower reaches 22% equity in his or her home based
on the original property value.
•Exceptions to termination;
•The loan is “high-risk;”
•The borrower has not been current on payments within the year prior to termination of PMI;
•There is a lien on the property; and
•The PMI is lender/servicer-paid.
With some exceptions, the lender/servicer must provide notification to the borrower at
commencement of the mortgage loan, and yearly thereafter. The notification must include:
•The parameters of the borrower’s right to cancel under the Act;
•The requirement of automatic termination once the borrower’s mortgage loan reaches seventy-eight
percent (78%) of the original property value;
•Whether the borrower’s loan may fall within the definition of “high risk;” and
•Any exceptions to cancellation that may apply to the borrower’s loan.
Lender/servicer-paid PMI coverage disclosures to the borrower
•The differences between lender/servicer vs. borrower-paid PMI;
•Information disclosing that lender/servicer-paid PMI usually results in a higher interest rate to
•Lender/servicer-paid PMI terminates only when refinancing occurs, the loan is paid in full or
Lenders/Servicers should note:
1) It is the mortgage lender’s/servicer’s responsibility - not the mortgage insurer - to refund any
unearned premiums back to the borrower within a 45-day time period after cancellation of PMI.
2) The servicer is required to notify the borrower in writing, no later than 30 days after the date of
cancellation or termination of a private mortgage insurance:
•That the private mortgage insurance has terminated and that the borrower no longer has private
•That no further premiums, payments, or other fees shall be due or payable by the borrower in
connection with the private mortgage insurance.
Tips for Borrowers
It is wise for borrowers to be well informed of their rights and responsibilities regarding PMI
insurance options and cancellation. Borrowers should rely on information obtained through
governmental materials, rather than private informational pamphlets and websites. Borrower rights
under the Act regarding PMI fluctuate and depend on certain factors.
These factors include:
1) who is paying the PMI - borrower vs. lender/servicer;
2) whether the borrower requests cancellation upon meeting certain loan to payment criteria; and
3) whether the loan reaches the automatic cancellation time frame.
Borrower cancellation of PMI on the cancellation date is based on:
•Submission of a written request of PMI cancellation to the lender/servicer;
•A good payment history on the mortgage loan as defined in the Act;
•Evidence that the value of the property securing the mortgage has not declined; and
•There are no subordinate liens on the property.
Automatic cancellation of PMI is based on:
•Whether the borrower holds a "high-risk" loan;
•If the borrower has retained a "good payment history;” and
•The age of the mortgage loan.
In a lender/servicer-paid PMI situation, when the borrower has reached the seventy-eight percent
(78%) loan-to-value ratio (and PMI would automatically be cancelled) the Act requires the
lender/servicer to encourage the borrower to consider refinancing options. PMI payment plans and
fees vary widely. Borrowers should research their options before closing to ensure they receive a
payment plan that meets their income criteria. Borrowers should realize PMI companies have the right
to decline coverage. If the borrower requests PMI cancellation, the lender/servicer may require a
home appraisal. The servicer is required to provide its address and telephone number to the borrower
for PMI informational purposes.
The Act provides a civil remedy to the borrower, including actual damages suffered from violations
of the Act, as well as penalties imposed on the lender/servicer and insurer. The federal banking
agency is in charge of enforcing this law as outlined in the Act. There has been much discussion
regarding the pros and cons of private mortgage insurance. There is an argument that PMI is only
mechanism used to protect lender/servicer companies at the expense of the borrower. However,
those who dispute this argument point out that home ownership has become an icon of the American
dream. Consequently, PMI has made this dream more attainable - while providing greater protection
to mortgage lenders/servicers.
1 Mortgage Banking Commentary, 1998, Kirkpatrick & Lockart, LLP.
2 Original value is defined to be the lesser of the sales price or the appraised value of the mortgage property at the time the loan was made;
lenders are not required to
take into account increases in property value in determining whether a borrower may cancel PMI coverage.
3 Good payment history: The term ``good payment history'' means, with respect to a mortgagor, that the mortgagor has not-- (A) made a
mortgage payment that
was 60 days or longer past due during the 12-month period beginning 24 months before the date on which the mortgage reaches the cancellation
date; or (B) made a
mortgage payment that was 30 days or longer past due during the 12-month period preceding the date on which the mortgage reaches the
cancellation date. (HPA
** The previous commentary was published by Loanofficer.com as part of their informative newsletter- comments made in this issue are for
informational purposes-your situation may not include all or part of the issues raised here. Please consult your Lender's servicing dept. for a
true account of the procedures necessary to take "PMI" payments off of your mortgage loan.
|PMI, for Buyer's of Properties after January 1st, 2007 are now able to deduct their payments for
PMI. This makes a convincing argument for One Loan financing where in the past a 1st and 2nd
Combo was the tax deductible way to go!