United States: CFPB Cautions Industry On Private Mortgage Insurance Termination

In an effort to encourage compliance with the Homeowners Protection Act of 1998 (HPA), the Consumer Financial Protection Bureau (CFPB) sent a strong message this past month regarding the required cancellation and termination of borrower-paid private mortgage insurance (PMI) policies. In guidance issued on Aug. 4, the CFPB reminded mortgage servicers of the HPA's requirements that borrowers be released, under certain conditions, from obligations imposed by lenders to pay for PMI on their mortgages. In the words of CFPB Director Richard Cordray, "consumers should not be billed for unnecessary private mortgage insurance."

Although not introducing any new requirements, the CFPB's guidance exemplifies the increased rigor in federal oversight of consumer finance since the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act five years ago this summer. In addition, the CFPB's action sounds a cautionary note for institutions seeking to deploy capital in residential mortgage lending, as well as for investors in mortgages and mortgage-backed securities.

Prior to Dodd-Frank, the HPA was enforced by a patchwork of federal regulators depending on the regulatory status of individual institutions. For instance, the Federal Deposit Insurance Corporation was authorized to enforce the statute against depository institutions under its jurisdiction; the National Credit Union Administration Board, against credit unions; and so forth. Although the HPA purports to cover mortgage insurers themselves, the HPA prior to Dodd-Frank did not specifically provide for enforcement against insurers.

Without diminishing any existing authority of any federal agency, Dodd-Frank amended the HPA by empowering the CFPB to enforce the statute against "any person subject to" it. Although Dodd- Frank itself categorically excludes the "business of insurance" from the CFPB's jurisdiction, effectively reserving such regulation to the states, the bureau has been visible on related PMI issues. In 2013, the CFPB fined four PMI carriers a total of $15 million for making improper payments to mortgage lenders in exchange for business, including by means of captive reinsurance. Earlier this year, Director Cordray upheld a bureau decision finding that a mortgage lender's use of such a subsidiary reinsurer — which received premiums from PMI providers that insured the lender's loans — constituted a "kickback" and violated federal law. (The lender is appealing this decision in the federal appeals court for the D.C. circuit.)

The guidance outlines the HPA's three scenarios under which borrowers must be relieved of any obligation to pay for PMI:

  • A borrower meeting certain qualifications (e.g., good payment history, current on loan, etc.) may cancel PMI coverage by written request to the servicer. Cancellation must then occur on either of the following, at the borrower's election: (1) the date on which the principal balance is first scheduled to reach 80% of "original value" (as defined in the statute) or (2) the date on which the principal balance actually reaches 80% of original value (based on actual payments).
  • If the borrower is current on the loan, a requirement to pay for PMI must automatically be terminated on the date on which the principal balance is first scheduled to reach 78% of the original value of the property (irrespective of the outstanding balance for that mortgage on that date).
  • If PMI is not terminated under the two preceding bullets, PMI coverage cannot be imposed beyond the first day of the month following the midpoint of the amortization period of the loan if, on that date, the borrower is current on the loan.

Citing "substantial industry confusion" over these conditions, the CFPB's bulletin is designed to assist mortgage servicers and sub-servicers to comply with the requirements and prevent customers from "paying significant amounts of money on unnecessary premiums." It also outlines the requirements relating to PMI premium refunds and disclosure responsibilities. Finally, the guidance observes that investors imposing deal-specific or market-specific eligibility criteria for mortgages often establish their own guidelines for PMI cancellation or termination. The bureau notes that these can sometimes be inconsistent with HPA guidelines and that servicers sometimes confuse or replace HPA guidelines with those imposed by the investor in a particular mortgage. The guidance calls on investors and servicers to harmonize their standards for terminating borrower-paid PMI with those set forth in the HPA.

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