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The Homeowners
Protection Act of 1998
The Homeowners
Protection Act of 1998
What it Means For Mortgage Insurance Cancellation
In July 1998,
Congress passed legislation that clarifies homeowner rights and establishes the
obligations of lenders and mortgage insurers regarding mortgage insurance cancellation.
What follows is a summary of the important act.
Mortgage Insurance
must be automatically cancelled when the loan-to-value (LTV) ratio reaches 78 percent or
less of the original value of the property.
Borrowers with good
payment histories may initiate cancellation when the LTV ratio reaches 80 percent of the
original value, based on the initial amortization schedule or because of prepayments.
At 80 percent LTV,
it is the borrower’s obligation to show that the value of the property has not
declined by providing evidence-such as an appraisal-of property value. Ways to establish
value will be defined by the lender in advance and must be disclosed to the borrower.
There is an
exception for "high risk" loans, as defined by Fannie Mae and Freddie Mac in the
case of loans that do not exceed the conforming loan limits. (The definition of "high
risk" had not been established at the time the bill was signed into law.) In the case
of jumbo loans, the mortgagee will determine what constitutes "high risk." With
high-risk loans, mortgage insurance coverage for the loan may be required until the
midpoint of the amortization schedule.
Mortgage lenders
are required to disclose these cancellation rights to borrowers, both at closing and
annually thereafter. Disclosures must be made for both new and existing loans.
A separate
disclosure is required for lender-paid mortgage insurance (LPMI). That disclosure must
state, among other things, that the borrower cannot cancel LPMI and typically carries a
higher interest rate than borrower paid insurance.
Some states have
existing cancellation laws. These laws will not be preempted, and those states (CA, CT,
IL, MD, MN, MO, NY, TX, and WA) have a two-year period to amend their laws.
Liability for
violations of this law may include actual damages, statutory damages of up to $2,000 in
the case of individual actions, statutory damages of up to $500,000 in the case of class
actions, court costs, and reasonable attorney’s fees.
The primary
obligation imposed on the mortgage insurance company is to refund any unearned premium
within 30 days after notification of cancellation.
Effective date is
one year after enactment (Clinton signed the legislation on July 29, 1998)
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