12 USCA §4903 requires certain disclosures to be given to borrowers when private mortgage insurance (“PMI”) is required in connection with a residential mortgage transaction, which explain to the borrower that PMI may be cancelled either by their initiative or automatically in accordance to the provisions of the Homeowner’s Protection Act (“HPA”).
For years, there has been no consensus among the mortgage industry as to whether these disclosure provisions apply to transactions in which PMI is paid upfront or on a single-premium basis or not. Arguments for providing the disclosures have held that the statutory provisions apply to any type of residential mortgage transaction (properly defined under Ibid. §4901), regardless of the type of PMI premium and that no exception is carved out under HPA for transactions which require borrower-paid single premium PMI. Arguments against providing disclosure have held that it is impractical to do so, because the borrower has already paid for the mortgage insurance and cancelling it would not do the borrower any good (i.e. the borrower would be cancelling something he has already paid for and he would not be receiving a refund).
Due to these conflicts, DocuTech has sought to accommodate both sides by providing disclosures for transactions with borrower-paid single premium PMI on an “upon request” basis for those who are in favor of disclosing and not providing them generically for everyone else.
However, after an extensive study of HPA, investor requirements, and the practices of mortgage insurance companies with borrower-paid single premium private mortgage insurance policies, DocuTech has determined that HPA requires the disclosure of the cancellation of PMI even for transactions in which borrower-paid single premium PMI is present and will now be providing these disclosures (Cx14292, Cx14293, and Cx14294) generically.
DocuTech agrees with the position that HPA does not carve out a special exception for transactions in which borrower-paid single premium PMI is required, either explicitly or from the official definitions for such terms as “residential mortgage transaction,” “mortgage insurance,” “private mortgage insurance,” and others under Ibid. §4901. DocuTech also disputes that borrower-paid single premium PMI is nonrefundable, due to the following provision from HPA:
“Not later than 45 days after the termination or cancellation of a private mortgage insurance requirement under this section, all unearned premiums for private mortgage insurance shall be returned to the mortgagor by the servicer.” (12 USCA §4902[f])
“Unearned premiums” are not defined under HPA, so the use of common English must be applied in determining what these are. In order for a servicer to have any premiums to return, they must have been delivered to them by the borrower and in order for them to be considered “unearned,” they would have had to been paid for some good or service that has not and will not be given in exchange.
With the exception of cases where the borrower overpays a monthly PMI, the only cases where an “unearned premium” would exist would be in connection with borrower-paid single premium PMI, wherein the borrower pays a premium for mortgage insurance coverage over a part or all of the life of the loan (depending on the insurance policy). When such coverage is cancelled before it is set to expire, it makes the portion of the premium payment applicable to the remainder of the original coverage period that has been cancelled “unearned” (since coverage, which is a service, is no longer being given in exchange for the premium) and refundable.
DocuTech will therefore be configuring their Fixed Rate (Cx14292), Adjustable-Rate (Cx14293), and Balloon Payment (Cx14294) borrower-paid single premium versions of the standard HPA PMI Disclosures to print by default for Primary Residence Conventional loans when an upfront PMI rate is entered.
This change will take effect on October 20, 2012. If you have any questions or concerns about these changes, please contact Client Support at 1.800.497.3584.
October 16, 2012