Homeowners Protection Act
Background
The Homeowners Protection Act of 1998 became
effective in July 1999. The act, also known as the
PMI Cancellation Act, addresses the difficulties
homeowners have experienced in canceling pri-
vate mortgage insurance (PMI) coverage. It estab-
lishes provisions for the cancellation and termina-
tion of PMI,
1
sets forth disclosure and notification
requirements, and requires the return of unearned
premiums.
Historically, lenders have viewed an 80 percent
loan-to-value (LTV) ratio (and a corresponding
20 percent down payment) as a prudent standard
for making consumer real estate loans. This ratio
has served to ensure that the borrower had enough
of an interest in the property to continue to make
the payments and, in the event the borrower was
unable to make the payments, that the lender had
sufficient equity available to cover lender foreclo-
sure costs.
As housing prices increased (and the corre-
sponding down payment amounts increased),
saving for a sufficient down payment became
difficult for many prospective homeowners. To fur-
ther the goal of making homeownership attainable
for more Americans, lenders began to look for ways
to balance the increasing demand for home loans
with the risks inherent in providing loans that fell
outside the 80 percent LTV standard. PMI, which
is activated only if the borrower defaults on the
loan, helps address a lender’s risk by covering the
difference between the amount a borrower has
available to put down and the amount suggested
by the standard 20 percent down payment rule. In
effect, PMI helps mitigate a lender’s risk on loans
for which the down payment is less than 20 percent
of the sales price or, for a refinancing, when the
amount financed is greater than 80 percent of the
appraised value.
PMI protects lenders from the risk of default and
foreclosure. It allows prospective buyers who
cannot, or choose not to, make a significant down
payment to obtain mortgage financing at an
affordable rate. It is used extensively to facilitate
‘‘high-ratio’’ loans (generally, loans for which the
loan-to-value ratio exceeds 80 percent). With PMI,
the lender is able to recover the costs associated
with the resale of foreclosed property as well as the
accrued interest payments and the fixed costs,
such as taxes and insurance policies, paid before
the resale. Once the consumer’s loan balance falls
within the 80 percent LTV ratio, PMI is no longer
needed. Excessive PMI coverage provides little
extra protection for a lender and does not benefit
the borrower.
Before implementation of the act, many home-
owners experienced problems in canceling PMI.
In some instances, lenders may have agreed to
terminate coverage when the borrower’s equity
reached 20 percent, but the policies and pro-
cedures used for canceling or terminating PMI
coverage varied widely among lenders. Homeown-
ers had limited recourse when lenders refused to
cancel their PMI coverage. Even homeowners in
the few states that had laws pertaining to PMI
cancellation or termination noted difficulties in can-
celing or terminating their PMI policies. The act
protects homeowners by prohibiting life-of-loan
PMI coverage for borrower-paid PMI products and
establishing uniform procedures for the cancella-
tion and termination of PMI policies.
Scope and Effective Date
The act applies primarily to residential mortgage
transactions, defined as mortgage loan transac-
tions consummated on or after July 29, 1999, the
purpose of which is to finance the acquisition, initial
construction, or refinancing
2
of a single-family
dwelling that serves as a borrower’s primary
residence.
3
It also includes provisions relating to
annual written disclosures for residential mort-
gages, 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.
The act’s requirements vary depending on
whether the mortgage
• Is a residential mortgage or a residential mort-
gage transaction
• Is defined as high risk (either by the lender, in the
1. The act does not apply to mortgage insurance made
available under the National Housing Act, title 38 of the U.S. Code,
or title V of the Housing Act of 1949, including mortgage insurance
on loans made by the Federal Housing Administration and
guarantees on mortgage loans made by the Veterans Administra-
tion.
2. 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.
3. 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.
Consumer Compliance Handbook HOPA•1(11/07)