Introduction
Private Mortgage Insurance (”PMI”) is additional insurance that lenders may require from homebuyers who obtain loans that are more than 80 percent of their new home’s value. This insurance is typically paid by the borrower to insure the lender against a default on the loan.
Prior to passage of the federal law, the Homeowner’s Protection Act (HPA) of 1998–12 U.S.C §§ 4903 through 4909, most lenders honored a borrower’s request to drop PMI coverage if their loan balance was paid down to 80 percent of the property value and they had a good payment history. However, the burden was on the borrower to request cancellation and many borrowers were not aware that they had this option. The HPA makes PMI cancellation automatic under certain circumstances.
The HPA generally applies to loans on or after July 29, 1999 on a single-family dwelling that is the principal residence of the borrower. This law does not cover certain government-guaranteed loans. In addition, the HPA has different requirements for loans classified as “high-risk”–that is, non-conforming mortgages loans as defined by Fannie Mae and Freddie Mac.
California law on PMI cancellation can be found in California Civil Code § 2954.12 (which applies only to loans made on or after January 1, 1998) and California Civil Code § 2954.7 (applies to loans originating before that date). The California PMI cancellation law applies to owner-occupied, one-to-four unit residential real property.
In general, the HPA supersedes state PMI laws for the applicable dwellings after July 29, 1999; however, the federal law does permit state law to require certain additional conditions.
This legal article discusses both the HPA and the California law, when it applies and the cancellation of PMI.
Q: 1. Where can I find the law for cancellation of PMI?
A: California law on PMI cancellation can be found in California Civil Code § 2954.12 (applies only to loans made on or after January 1, 1998) and California Civil Code § 2954.7 (for loans originating before that date).
Federal law on PMI cancellation can be found in the Homeowners Protection Act (HPA) at 12 U.S.C. §§ 4901 et seq. and it generally applies to loans on or after July 29, 1999 (12 U.S.C. § 4901 (15)).
Q: 2. To what types of properties does the PMI cancellation law apply?
A:
Federal Law (HPA): The law applies only to a single-family (one unit property) dwelling that is the principal residence of the borrower (12 U.S.C. § 4901 (15) and (17)) and for loans made on or after July 29, 1999.
California Law: The law applies to owner-occupied, residential one-to-four unit properties (Cal. Civ. Code § 2954.7(1)(3)(for loans originating before January 1, 1998); Cal. Civ. Code § 2954.12(a)(1)(applies only to loans made on or after January 1, 1998) ).
Q: 3. When can a buyer cancel PMI?
A:
Under Federal Law (for loans made on or after July 29, 1999):
Cancellation by Borrower
The PMI can be cancelled, at the option of the borrower, on the date (”cancellation date”) on which the principal balance of the mortgage:
(i) based solely on the initial amortization schedule for that mortgage, and irrespective of the outstanding balance for that mortgage on that date, is first scheduled to reach 80 percent of the original value of the property securing the loan; or
(ii) based solely on actual payments, reaches 80 percent of the original value of the property securing the loan.
(12 U.S.C. § 4901(2).)
The borrower must also comply with all of the following conditions:
(1) submit a request in writing to the loan servicer to cancel to PMI insurance;
(2) have a good payment history with respect to the loan;
(3) be current on the payments;
(4) have satisfied the lender’s requirements to show that the value of the property has not declined below its’ original value; and
(5) there are no other mortgages or subordinate liens (for example, you have not taken out a second mortgage, a home equity loan, or home equity line of credit).
(12 U.S.C. § 4902(a).)
Automatic Cancellation
The PMI must be automatically cancelled by the lender on the date (”termination date”) with respect to a fixed-rate loan or adjustable rate loan and based solely on the initial amortization schedule when the loan is first scheduled to reach 78 percent of the original value. (12 U.S.C. § 4901(18).)
Furthermore, the borrower must be current on the payments by the termination date for the automatic cancellation right.
If the borrower is not current on that date, then the termination date is the first day of the first month beginning after the date that the borrower becomes current. (12 U.S.C. § 4902(b).)
Under California Law:
For Loans Made On or After January 1, 1998
The law prohibits the lender from charging or collecting future payments from a borrower for PMI or mortgage guarantee insurance when all of the following conditions are met:
The loan is for personal, family, household, or purchase money purposes and the secured property is owner-occupied, one-to-four unit residential real property (Cal. Civ. Code 2954.12(a)(1)).
The loan amount owed by the borrower on the senior deed of trust or mortgage is equal to or less than 75% of the lesser of the original sales price, if the loan was made at the time of the purchase, or the appraised value of the home at the time the loan was made, for loans made after purchase (Cal. Civ. Code 2954.12(a)(1)).
The borrower is current on payments at the time the right to cancellation accrues and no more than one of the borrower’s scheduled monthly payments has been 30 days past due within the last 12 months (Cal. Civ. Code 2954.12(a)(2) and (3)).
No Notice of Default (NOD) has been recorded against the real property pursuant to Civil Code Section 2924 during the 12 months preceding the right to cancellation as a result of a nonmonetary default (Cal. Civ. Code 2954.12(a)(5)).
The loan was made or executed after January 1, 1998 (Cal. Civ. Code 2954.12(a)(4)).
For Loans Made Prior to January 1, 1998
Under prior law–California Civil Code Section 2954.7– the PMI can be removed only at the borrower’s request.
The borrower must comply with the following conditions:
The request to terminate future PMI payments must be in writing (Cal. Civ. Code 2954.7(a)(1)).
The origination date of the loan must be at least 2 yars prior to the date of the written request to terminate PMI (Cal. Civ. Code 2954.7(a)(2)).
The loan must be for personal, family, houselhold, or purchase money purposes and secured by an owner-occupied, one-to-four unit residential real property(Cal. Civ. Code 2954.7(a)(3)).
The unpaid principal balance owed on the note must be 75 percent or less or either of the following: (A) the sale price of the property at the origination date of the loan provided that the current fair market value is equal to or greater than the original appraised value, or (B) the current fair market value as determined by an appraisal (with lender’s choice of appraiser but paid for by the borrower) (Cal. Civ. Code 2954.7(a)(4)).
The borrower must be current on the loan at the time the request for PMI cancellation is made and the payments over the 24 months preceding the request cannot have been more than 30 days past due (Cal. Civ. Code 2954.7(a)(5)).
No NOD has been recorded as a result of a nonmonetary default by the borrower during the 24-month period immediately preceding the request (Cal. Civ. Code 2954.7(a)(5)).
Q: 4. Under the federal law HPA, what happens if the lender doesn’t automatically cancel the PMI?
A: Within 45 days after the automatic termination of PMI or borrower requested cancellation of PMI, all unearned premiums for PMI must be returned to the borrower by the servicer (12 U.S.C. § 4902(f)(1)).
Q: 5. Under California law, what happens if the lender doesn’t automatically cancel the PMI?
A: The law states that “the lender or servicer. . . may not charge or collect future payments from a borrower for private mortage insurance” if all the conditions in Question 3 have been satisfied (Cal. Civ. Code § 2954.12(a)). However, the statute is silent as to a borrower’s specific remedies. An earlier provision requires the PMI insurer to refund the remaining portion of the unused premium to the insured (or the borrower if so designated by the insured lender) (Cal. Civ. Code § 2954.65.)
Q: 6. Are there any specific exemptions to the California PMI Cancellation laws?
A: The exemptions to the California PMI cancellation laws include mortgages and deeds of trust that are:
Executed under the California Housing Finance Agency or “CalHFA.” (Cal. Civ. Code §§ 2974.7(b)(1), 2954.12(b)(1)). (Note: CalHFA was chartered as the State’s affordable housing bank to make below market-rate loans through the sale of tax-exempt bonds. A completely self-supporting State agency, bonds are repaid by revenues generated through mortgage loans, not taxpayer dollars.)
Funded pursuant to authority granted by statute and regulations that prohibits or limits termination of payments for private mortgage insurance during the loan term. These loans are primarily Federal Housing Administration loans issued through the Department of Housing and Urban Development. (Cal. Civ. Code §§ 2974.7(b)(2), 2954.12(b)(2)).
Purchased by the Federal National Mortgage Association (”FNMA”–aka “Fannie Mae”), the Federal Home Loan Mortgage Corporation (”FHLMC”–aka “Freddie Mac”) and the Government National Mortgage Association (”GNMA”–aka “Ginnie Mae”), and any substantially similar institution to the above named institutions, whether public or private, provided that it has established and adhered to the same or substantially the same rules regarding the right of cancellation of PMI as utilized by the above-named institutions. (Cal. Civ. Code §§ 2974.7(c), 2954.12(c)).
Q: 7. Are there any exemptions under the HPA, the federal PMI Cancellation laws?
A: The termination and cancellation provisions under the HPA do not apply to the following types of loans:
FNMA/FHLMC “High Risk” loans–non-conforming loans as determined by the FNMA and FHLMC guidelines (12 U.S.C. § 4902(g)(1)(A));
Lender-defined “High Risk” loans, except that termination of these particular loans must occur on the date on which the principal balance of the loan is scheduled to reach 77 percent of the original value of the property securing the loan based on the amortization schedule (initial amortization schedule for fixed-rate loans and amortization schedule then in effect for an adjustable rate loan)(12 U.S.C. § 4902(g)(1)(B));
Finally, PMI for all high risks loans must terminate the first day of the month immediately following the date that is the midpoint of the amortization period of the loan provided that the borrower is current on the payments (12 U.S.C. § 4902(g)(2)).
Q: 8. Do lenders have any disclosure requirements, under the HPA, regarding PMI cancellation?
A: Yes. Under the HPA, lenders have written disclosure requirements at the time of the loan transaction for a new mortgage (or deed of trust) for non-exempt as well as for exempt loans. Lenders must also provide annual notices for those loans requiring PMI insurance on or after July 29, 1999 as well as loans that commenced prior to that date. (12 U.S.C. § 4903(a) and (b).)
In particular, 30 days after the date of “cancellation” or “termination” (see Question 3 for definitions) of a PMI insurance requirement, the loan servicer must notify the borrower in writing that the PMI has terminated and the borrower is no longer required to make PMI payments (12 U.S.C. § 4904(a)).
A borrower may not be charged a fee in order to receive any of these disclosure notices (12 U.S.C. § 4906).
Q: 9. Do lenders have any disclosure requirements under California law regarding PMI cancellation?
A: Yes. When PMI (or mortgage guaranty insurance) is required, the lender must notify the borrower whether the borrower has the right to cancel this insurance. If there is a cancellation right, the borrower must receive a written notice within 30 days after the close of escrow describing the conditions required for cancellation. (Cal. Civ. Code § 2954.6(a) and (b).)
An identical written notice is also required in the annual loan statement (Cal. Civ. Code § 2954.6(c)).
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(This Article is Coutesy of CAR.org)
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