By: Timothy A. Raty; Sr. Regulatory Compliance Specialist
“mortgage insurance (1876) . . . 2. An agreement to provide money to
the lender if the mortgagor defaults on the mortgage payments. – Also
termed private mortgage insurance (PMI).” (INSURANCE, Black’s Law
Dictionary [10th ed. 2014])
Mortgage insurance, in one form or another, is a common attribute of mortgage loans within the United States. It is designed to protect creditors from losses if a borrower defaults on their loan and, more often than not, is paid for by borrowers either at consummation and/or as a part of their periodic mortgage payments. Due to this type of arrangement, Federal and state governments, Federal agencies, and government-sponsored enterprises (“GSE”) have enacted laws and rules stipulating when creditors can charge borrowers for mortgage insurance premiums – and for how long.
Prior to 1998, state laws were the chief regulators of these arrangements and their requirements varied greatly from each other. In 1998, the 105th Congress (R) and President William J. Clinton (D) passed “An Act to require automatic cancellation and notice of cancellation rights with respect to private mortgage insurance which is required as a condition for entering into a residential mortgage transaction . . .” (112 Stat 897 )
Since then, this Act – the Homeowner’s Protection Act (12 U.S.C.A. §§ 4901 through 4910; “HPA”) – has become the standard in determining when private mortgage insurance (“PMI”) can be required in connection with certain mortgage transactions.[i] However, due to the federalized nature of the United States, there are nuances between Federal and State laws governing the same matter, leading to questions concerning when and to what extent such laws apply.
Also, while the GSEs have largely adopted the HPA as their standard, they have gone a “step further” and imposed cancellation requirements on transactions not subject to the HPA. Federal agencies, which provide “functional equivalents” of PMI, are not governed by the HPA and have their own termination requirements.
Altogether, determining when PMI must be cancelled or terminated transcends the straight-line of a sprint into an exercise in mental gymnastics.
The Homeowner’s Protection Act – Part I
Despite being the “standard” for PMI termination, the HPA is limited to only certain types of transactions.
First, the HPA’s PMI termination requirements only apply to “a residential mortgage transaction” (12 U.S.C.A. § 4902), which is defined as follows:
“The term ‘residential mortgage transaction’ means a transaction consummated on or after the date that is 1 year after July 29, 1998, in which a mortgage, deed of trust, purchase money security interest arising under an installment sales contract, or equivalent consensual security interest is created or retained against a single-family dwelling that is the principal residence of the mortgagor to finance the acquisition, initial construction, or refinancing of that dwelling.” (Ibid. § 4901)
The Federal Reserve Bank (“FRB”) provides a more detailed explanation as to how this definition applies (footnotes from the original source are added in brackets):
“The act applies primarily to residential mortgage transactions, defined as mortgage loan transactions consummated on or after July 29, 1999, the purpose of which is to finance the acquisition, initial construction, or refinancing [for purposes of this discussion, refinancing means the refinancing of a loan any portion of which is intended to provide financing for the acquisition or initial construction of a single-family dwelling that serves as a borrower’s primary residence] of a single-family dwelling that serves as a borrower’s primary residence [for purposes of this discussion, junior mortgages that provide financing for the acquisition, initial construction, or refinancing of a single-family dwelling that serves as a borrower’s primary residence are covered]. It also includes provisions relating to annual written disclosures for residential mortgages, defined as mortgages, loans, or other evidences of a security interest created with respect to a single-family dwelling that is the borrower’s primary residence. Condominiums, townhouses, and cooperative or mobile homes are considered single-family dwellings covered by the act.” (Consumer Compliance Handbook, 11/07, p. HOPA · 1; emphases in the original)
Thus, the following types of transactions are excluded (this is not an exhaustive list):
- Transactions involving a multi-unit dwelling or a vacant lot;
- Transactions involving a second home or an investment property which is not primarily occupied by the borrower;
- Refinances of loans which were not used to purchase or construct the borrower’s primary dwelling; and
- Renovation loans.
Second, state laws existing on or before January 2, 1998 which limit PMI coverage are only preempted by the HPA to the extent that they provide fewer protections to borrowers than the HPA. To wit:
“(A) In general
The provisions of this chapter do not supersede protected State laws, except to the extent that the protected State laws are inconsistent with any provision of this chapter, and then only to the extent of the inconsistency.
A protected State law shall not be considered to be inconsistent with a provision of this chapter if the protected State law –
(i) requires termination of private mortgage insurance or other mortgage guaranty insurance –
(I) at a date earlier than as provided in this chapter; or
(II) when a mortgage principal balance is achieved that is higher than as provided in this chapter; or
(ii) requires disclosure of information –
(I) that provides more information than the information required by this chapter; or
(II) more often or at a date earlier than is required by this chapter.
(C) Protected State laws
For purposes of this paragraph, the term ‘protected State law’ means a State law –
(i) regarding any requirements relating to private mortgage insurance in connection with residential mortgage transactions;
(ii) that was enacted not later than 2 years after July 29, 1998; and
(iii) that is the law of a State that had in effect, on or before January 2, 1998, any State law described in clause (i).” (12 U.S.C.A. § 4908[a])
As summarized by the FRB:
“For residential mortgage transactions, the provisions of the act supersede state laws, except for those states that had PMI laws in effect as of January 2, 1998. Laws in these states are pre-empted only to the extent that they are less protective than the act. These states were permitted two years from the date of enactment (that is, until July 29, 2000) to amend their laws in light of the provisions of the act.” (Consumer Compliance Handbook, 01/06, p. HOPA · 6; emphases in the original)
According to Footnote 8 of Ibid., “Eight states (California, Colorado, Connecticut, Maryland, Massachusetts, Minnesota, Missouri, and New York) had PMI laws in effect prior to January 2, 1998. See 144 Cong. Rec. 5, 432 (daily ed. July 14, 1998; statement by Rep. LaFalce).”
Statements within the Congressional Record indicate that there was some support for giving States more leeway in formulating their own PMI requirements and to make their own laws in the future which impose stricter requirements than the HPA, but ultimately, Congress agreed to only permit certain existing laws to be partially exempt.[ii]
Finally, the HPA only governs the cancellation or termination of “private mortgage insurance”, which is defined as “mortgage insurance other than mortgage insurance made available under the National Housing Act [12 U.S.C.A. § 1701 et seq.], Title 38, or Title V of the Housing Act of 1949 [42 U.S.C.A. § 1471 et seq.].” (12 U.S.C.A. § 4901). Such a definition would exclude mortgage insurance (or its functional equivalent) provided by the FHA, VA, and RD.
Altogether, there are two basic types of “loopholes” in the HPA which permit additional PMI cancellation or termination requirements:
- Transactions subject to the HPA may be subject to more restrictive requirements under “protected State law”, which may cause PMI to be cancelled or terminated prior to the times that the HPA requires; and
- Transactions not subject to the HPA may be subject to PMI cancellation or termination requirements imposed by any State, Federal agency, or investor.
[i] An in-depth analysis of the Homeowner’s Protection Act (12 U.S.C.A. §§ 4901 through 4910; “HPA”) has been provided by the Consumer Financial Protection Bureau (“CFPB”) and is available on their website (https://www.consumerfinance.gov/about-us/newsroom/cfpb-provides-guidance-about-private-mortgage-insurance-cancellation-and-termination/). The Federal Reserve Board (“FRB”) also provides an older, but still valid, analysis (available directly at: https://www.federalreserve.gov/boarddocs/supmanual/cch/hpa.pdf).
[ii] “With regard to State preemption, again, I much preferred the House version. At least in this case the bill does protect State PMI cancellation and consumer laws in effect prior to January 2, 1998, and provides those States, eight of them, 2 years to revise and amend their laws: California, Minnesota, New York, Colorado, Connecticut, Maryland, Massachusetts, and Missouri.
I would have strongly preferred that the bill simply respect the rights of all States to enact stronger cancellation and disclosure laws, or had allowed the eight States with laws on the books to amend their laws without limitation. Nonetheless, I am pleased that we are now protecting stronger State consumer laws in States like New York, where they already do exist.” (144 Cong. Rec. H5428-02 [July 14, 1998])