compliance handbook

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,

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

of a single-family

dwelling that serves as a borrower’s primary

residence.

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)

case of nonconforming loans, or by Fannie Mae

or Freddie Mac, in the case of conforming loans)

• Has a fixed rate or an adjustable rate

• Is covered by borrower-paid or lender-paid

private mortgage insurance

Cancellation and Termination of PMI:

Non-High-Risk Residential Mortgage

Transactions

Borrower-Requested Cancellations

A borrower may initiate cancellation of PMI cover-

age by submitting a written request to the servicer.

The servicer must take action to cancel PMI when

• The principal balance of the loan

– Is first scheduled to reach 80 percent of the

‘‘original value’’

(regardless of the outstand-

ing balance), based on

– The initial amortization schedule (in the

case of a fixed-rate loan)

– The amortization schedules (in the case of

an adjustable-rate loan) or

– Reaches 80 percent of the ‘‘original value,’’

based on actual payments

• The borrower has a good payment history

• The borrower satisfies any requirement of the

mortgage holder for

– Evidence of a type established in advance

that the value of the property has not declined

below the original value and

– Certification that the borrower’s equity in the

property is not subject to a subordinate lien

Once PMI is canceled, the servicer may not

require further PMI payments or premiums more

than thirty days after the later of (1) the date on

which the written request was received or (2) the

date on which the borrower satisfied the mortgage

holder’s evidence and certification requirements,

described above.

Automatic Termination

A servicer must automatically terminate PMI for

residential mortgage transactions on the earliest

date that both

• The principal balance of the mortgage is first

scheduled to reach 78 percent of the original

value of the secured property (based solely on

the initial amortization schedule, in the case of a

fixed-rate loan, or on the amortization schedules,

in the case of an adjustable-rate loan, regardless

of the outstanding balance) and

• The borrower is current on mortgage payments.

If PMI is terminated, the servicer may not require

further payments or premiums of PMI more than

thirty days after (1) the termination date or (2) the

date following the termination date on which the

borrower becomes current on the payments, which-

ever is sooner.

There is no provision in the automatic-termination

section of the act, as there is in the borrower-

requested PMI cancellation section, that protects

the lender against declines in property value or

subordinate liens. The automatic-termination provi-

sions make no reference to good payment history

(as prescribed in the borrower-requested provi-

sions) but state only that the borrower must be

current on mortgage payments.

Final Termination

If PMI coverage on a residential mortgage transac-

tion was not canceled at the borrower’s request or

by the automatic-termination provision, the servicer

must terminate PMI coverage by the first day of the

month following the date that is the midpoint of

the loan’s amortization period if, on that date, the

borrower is current on the payments required by

the terms of the mortgage.

The servicer may not require further payments or

premiums of PMI more than thirty days after PMI is

terminated.

Exclusions

The cancellation and termination provisions apply

only to residential mortgage transactions for which

the borrower pays the PMI. The provisions do not

apply to those for which someone other than the

borrower makes the payments.

Return of Unearned Premiums

The servicer must return all unearned PMI premi-

ums to the borrower within forty-five days after

cancellation or termination of PMI coverage. Within

thirty days after notification by the servicer of

cancellation or termination of PMI coverage, a

mortgage insurer must return to the servicer any

amount of unearned premiums it is holding, to

permit the servicer to return such premiums to the

borrower.

4. Original value is defined as the lesser of the sales price of

the secured property, as reflected in the purchase contract, or the

appraised value at the time of loan consummation.

5. A borrower has a good payment history if he or she (1) has

not made a payment that was sixty days or more past due within

the first twelve months of the last two years prior to the

cancellation date or (2) has not made a payment that was thirty

days or more past due within twelve months of the cancellation

date.

Homeowners Protection Act

2 (11/07) • HOPA Consumer Compliance Handbook

6. The limit for 2005 was $359,650.

7. As of the date of this publication Fannie Mae and Freddie

Mac have not established such a category.

Homeowners Protection Act

Exceptions to Cancellation and

Termination of PMI: High-Risk

Residential Mortgage

Transactions

The borrower-requested cancellation at 80 percent

LTV and the automatic termination at 78 percent

LTV requirements do not apply to high-risk loans.

However, high-risk loans are subject to final

termination and

are divided into two categories—

conforming (Fannie

Mae- and Freddie Mac-defined

high-risk loans) and nonconforming

(lender-

defined high-risk loans).

Conforming Loans

Conforming loans are loans that have an original

principal balance not exceeding

Freddie Mac’s

limit for conforming

loans.

Fannie Mae and

Freddie Mac are authorized under the act to

establish a category of

residential mortgage trans-

actions that

are not subject to the act’s require-

ments for

borrower-requested cancellation or auto-

matic termination due to the high risk associated

with

them.

Such transactions are, however, sub-

ject to the final-termination provision of the act. As

such, PMI

on a conforming high-risk loan must be

terminated by the first day of the month following

the date that is the midpoint of the loan’s initial

amortization schedule (in the case of a fixed-rate

loan) or amortization schedules (in the case of an

adjustable-rate loan) if, on that date, the borrower is

current on the loan. If the borrower is not current on

that date, PMI must be

borrower does become

current.

terminated when the

Nonconforming Loans

Nonconforming loans are residential mortgage

transactions that have an original principal balance

exceeding

Freddie Mac’s and Fannie Mae’s con-

forming loan limit.

Lender-defined high-risk loans

are not subject to the act’s requirements for

borrower-requested cancellation or automatic ter-

mination.

However, if a residential mortgage trans-

action is a

lender-defined high-risk loan, PMI must

be terminated on the date on which the principal

balance of the mortgage—based solely on the

initial amortization schedule (in the case of a

fixed-rate loan) or the amortization schedules

(in the case of an adjustable-rate loan) for that

mortgage—is first scheduled to

reach 77 percent

of the original value of the property securing the

loan,

regardless of the outstanding balance for that

mortgage on that date.

Consumer Compliance Handbook HOPA•3(1/06)

Like conforming loans that are determined by

Freddie Mac and Fannie Mae to be high risk, a

residential mortgage transaction that is a lender-

defined high-risk loan is subject to the

final-

termination provision of the act.

Basic Disclosure and Notice

Requirements Applicable to

Residential Mortgage

Transactions

and Residential Mortgages

At the time of consummation of a residential

mortgage transaction, the lender must give the

borrower certain

disclosures that describe the

borrower’s rights with regard to PMI cancellation

and termination. The

requirements for initial disclo-

sures vary depending on whether the transaction is

a fixed-rate mortgage, an adjustable-rate

mort-

gage, or a high-risk loan. Borrowers must also be

given certain annual and other notices concerning

PMI cancellation and termination. Borrowers may

not be charged for any

disclosure required by the

act.

Initial Disclosures for Fixed-Rate

Residential Mortgage

Transactions

When PMI is required for non-high-risk fixed-rate

mortgages, the lender must provide to the borrower

at the time the transaction is consummated

• A written initial amortization schedule and

• A written notice that discloses

– The borrower’s right to request cancellation of

PMI and, based on the initial amortization

schedule, the date on which the loan balance

is scheduled to

reach 80 percent of the

original value of the property;

– The borrower’s right to request cancellation on

an earlier date, if actual payments bring the

loan balance to 80

percent of the original value

of the property sooner than the date based on

the initial amortization schedule;

– That PMI will automatically terminate when the

LTV ratio reaches 78 percent of the original

value of the

property, and the date on which

that is projected to occur (based on the initial

amortization schedule); and

– That the act provides for exemptions to the

cancellation and automatic-termination

provi-

sions for high-risk mortgages, and whether

these exemptions apply to the borrower’s

loan.

Homeowners Protection Act

Initial Disclosures for Adjustable-Rate

Residential Mortgage

Transactions

When PMI is required for non-high-risk adjustable-

rate mortgages, the lender must provide to the

borrower, at the time the transaction is consum-

mated, a

written notice that discloses

• The borrower’s right to request cancellation of

PMI

on (1) the date on which the loan balance is

first scheduled to

reach 80 percent of the original

value of the property based on the amortization

schedules or (2) the date on which the balance

actually

reaches 80 percent of the original value

of the property based on actual payments. The

notice must also state that the servicer will notify

the borrower when either (1) or (2) occurs.

• That PMI will automatically terminate when the

loan balance is first scheduled to

reach 78 per-

cent of the original value of the property based

on the amortization schedules. The notice must

also state that the borrower will be notified when

PMI

is terminated (or that termination will occur

when the borrower becomes

current on

payments).

• That there are exemptions to the cancellation

and automatic-termination provisions for

high-

risk mortgages, and whether such exemptions

apply to the borrower’s loan

Initial Disclosures for High-Risk

Residential Mortgage

Transactions

When PMI is required for high-risk residential

mortgage transactions, the lender must provide to

the borrower a

written notice stating that PMI will

not be

required beyond the date that is the

midpoint of the loan’s amortization schedule if, on

that date, the borrower is

current on the payments

required by the terms of the loan. The lender

must provide this notice at consummation. The

lender need not provide

disclosure of the termina-

tion at 77

percent LTV for lender-defined high-risk

mortgages.

Annual Disclosures for

Residential Mortgage

Transactions

For all residential mortgage transactions, including

high-risk mortgages for which PMI

is required, the

servicer must provide to the borrower an annual

written statement that sets forth the rights of the

borrower to cancel and terminate PMI and the

address and telephone number that the borrower

may use to contact the servicer to determine

whether the borrower may cancel PMI.

Disclosures for

Existing Residential Mortgages

For residential mortgages consummated before

the act took

effect (on July 29, 1999), if PMI was

required, the servicer must provide to the borrower

an annual written statement that

• States that PMI may be canceled with the

consent of the lender or in

accordance with state

law and

• Provides the servicer’s address and telephone

number so that the borrower can contact the

servicer to determine whether the borrower may

cancel PMI.

Notification upon Cancellation or

Termination of PMI Relating to

Residential Mortgage

Transactions

General Requirements

Not later than thirty days after PMI relating to a

residential mortgage transaction is canceled or

terminated, the servicer must notify the borrower in

writing that

• PMI has terminated and the borrower no longer

has PMI and

• No further premiums, payments, or other fees are

due or payable by the borrower in connection

with PMI.

Notice of Grounds, and

Timing of Notice

If a servicer determines that a borrower in a

residential mortgage transaction does not qualify

for cancellation or automatic termination of PMI, the

servicer must provide to the borrower a

written

notice of the grounds

relied on for making that

determination. If an appraisal was used in making

the determination, the servicer must give the

results

of the appraisal to the

borrower. If a borrower does

not qualify for cancellation, the notice must be

provided not later than thirty days following the later

of (1) the date the borrower’s

request for cancella-

tion was

received or (2) the date on which the

borrower satisfied any of the mortgage holder’s

evidence and certification

requirements. If the

borrower does not meet the

requirements for

automatic termination, the notice must be provided

not later than thirty days following the scheduled

termination date.

4 (1/06) • HOPA Consumer Compliance Handbook

Homeowners Protection Act

Disclosure Requirements for

Lender-Paid Mortgage Insurance

Definitions

• Borrower-paid mortgage insurance (BPMI)—PMI

that is

required in connection with a residential

mortgage transaction, the payments for which

are made by the borrower

• Lender-paid mortgage insurance (LPMI)—PMI

that is

required in connection with a residential

mortgage transaction, the payments for which

are made by a person other than the borrower

• Loan commitment—A prospective lender’s writ-

ten confirmation of its approval of a prospective

borrower’s application for a residential mortgage

loan (including any applicable

closing conditions)

Initial Notice

In the case of LPMI that is required in connection

with a

residential mortgage transaction, the lender

must provide a

written notice to the borrower not

later than the date on which a loan commitment is

made. The written notice must advise the borrower

of the

differences between LPMI and BPMI by

notifying the borrower that LPMI

• Differs from BPMI because it cannot be canceled

by the borrower or automatically terminated as

provided under the act,

• Usually results in a mortgage having a higher

interest rate than it would in the case of BPMI,

and

• Terminates only when the mortgage is refi-

nanced, paid

off, or otherwise terminated.

The notice must also contain

• A statement that both LPMI and BPMI have

benefits and disadvantages,

• A generic analysis of the costs and benefits of a

mortgage in the case of LPMI versus BPMI over

a ten-year period, assuming

prevailing interest

and property

appreciation rates, and

• A statement that LPMI may be tax deductible for

purposes of federal income taxes, if the borrower

itemizes expenses for that purpose.

Notice at Termination Date

Not later than thirty days after the termination date

that would apply in the case of BPMI, the servicer

must provide to the borrower a

written notice

indicating that the borrower may

wish to review

financing options that could eliminate the

require-

ment for LPMI

in connection with the mortgage.

Consumer Compliance Handbook HOPA•5(1/06)

Fees for Disclosures

As stated previously, no fee or other cost may be

imposed on borrowers for the

disclosures and

notifications that lenders and servicers

are required

to give them.

Civil Liability

Liability Dependent on Type of Action

Servicers, lenders, and mortgage insurers that

violate the act

are liable to borrowers as follows:

• Individual action—In the case of individual

borrowers,

– Actual damages (including interest accruing

on such damages),

– Statutory damages not to exceed $2,000,

– Costs of the action, and

– Reasonable attorney’s fees.

• Class action

In the case of a class action suit against a

defendant that is subject to section 10 of the

act (that is, an entity

regulated by a federal

banking

agency, the NCUA, or the Farm Credit

Administration),

– Such statutory damages as the court may

allow up to the lesser of $500,000 or 1

percent

of the liable party’s net worth,

– Costs of the action, and

– Reasonable attorney’s fees.

In the case of a class action suit against a

defendant that is not subject to section 10 of the act

(that is, an entity not

regulated by a federal banking

agency, NCUA, or the Farm Credit Administration),

– Actual damages (including interest accruing

on such damages),

– Statutory damages up to $1,000 per class

member but not to exceed the lesser of

$500,000 or 1

percent of the liable party’s

gross

revenues,

– Costs of the action, and

– Reasonable attorney’s fees.

Statute of Limitations

A borrower must bring an action under the act

within two years after the borrower discovers the

violation.

Mortgage-Servicer Liability Limitation

A servicer is not liable for its failure to comply with

the

requirements of the act if the servicer’s failure to

8. 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).

Homeowners Protection Act

comply is due to the mortgage insurer’s or lender’s

failure to comply with the act.

Federal Preemption

For residential mortgage transactions, the provi-

sions 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 permit-

ted 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.

The provisions of the act also supersede any

conflicting provision contained in any

agreement

relating to the servicing of a residential mortgage

loan

entered into by Fannie Mae, Freddie Mac, or

any private investor or note holder (or any succes-

sor

thereto).

Enforcement

The act directs the federal banking agencies to

enforce the act under 12 USC 1818 or any other

authority

conferred upon the agencies by law. The

agencies

are required to

• Notify applicable lenders or servicers of any

failure to comply with the act,

• Require the lender or servicer, as applicable, to

correct the borrower’s account to reflect the date

on which PMI should have been canceled or

terminated under the act, and

• Require the lender or servicer, as applicable, to

return unearned PMI premiums to a borrower

who paid

premiums after the date on which the

borrower’s obligation to pay PMI

premiums

ceased under the act.

6 (1/06) • HOPA Consumer Compliance Handbook

Homeowners Protection Act

Examination Objectives and Procedures

EXAMINATION OBJECTIVES

1. To determine the financial institution’s compli-

ance with the Homeowners Protection Act of

1998

(HOPA)

2. To assess the quality of the financial institu-

tion’s policies and

procedures for implement-

ing the

HOPA

3. To determine the reliance that can be placed

on the financial institution’s internal controls

and

procedures for monitoring the institution’s

compliance with the

HOPA

4. To initiate corrective action when violations of

HOPA are identified or when policies or internal

controls

are deficient

EXAMINATION PROCEDURES

1. Through discussions with management and

review of available information, determine if the

institution’s internal controls

are adequate to

ensure compliance with the Homeowners Pro-

tection Act. Consider the following:

a. Organization charts

b. Process flow charts

c. Policies and procedures

d. Loan documentation

e. Checklists

f. Training

g. Computer program documentation

2. Review any compliance audit materials, includ-

ing workpapers and

reports, to determine

whether

a. The institution’s procedures address all

applicable provisions of the

HOPA

b. Steps are taken to follow up on previously

identified deficiencies

c. The procedures used include samples

covering all product types and decision

centers

d. The compliance audit work performed is

accurate

e. Significant deficiencies and their causes

are included in reports to management and

to the

board of directors

f. Corrective action is taken in a timely and

appropriate manner

g. The frequency of compliance review is

appropriate

Consumer Compliance Handbook HOPA•7(1/06)

3. Complete the HOPA worksheet by reviewing

disclosure and notification forms and the

financial institution’s policies and

procedures.

As applicable, the forms should include

• Initial disclosures for (1) fixed-rate mort-

gages, (2) adjustable-rate mortgages,

(3) high-risk loans, and (4) lender-paid

mortgage insurance

• Annual notices for (1) fixed- and adjustable-

rate mortgages and high-risk loans and

(2) existing residential mortgages

• Notices of (1) cancellation, (2) termination,

(3) grounds for not canceling PMI,

(4) grounds for not terminating PMI, (5) can-

cellation date

for adjustable-rate mort-

gages, and (6) termination date for

lender-

paid mortgage insurance

4. Confirm that borrowers are not charged for any

required disclosures or notifications. (§ 7 of the

HOPA)

5. Obtain and review a sample of recent written

requests from borrowers to cancel their PMI on

non-high-risk

residential mortgage transac-

tions.

Verify that the insurance was canceled

on either (1) the date on which the principal

balance of the loan was first scheduled to

reach 80% of the original value of the property

based on the initial amortization schedule (in

the case of a fixed-rate loan) or the

amortiza-

tion schedules (in the case of an

adjustable-

rate loan) or (2) the date on which the

princi-

pal balance of the loan actually

reached 80%

of the original value of the property based on

actual payments, if all the applicable

provi-

sions in section 3(a) of the

HOPA were sat-

isfied (that is, good payment history and, if

required by the lender, evidence that the

value of the mortgaged property did not

decline, and certification that the borrower’s

equity was

unencumbered by a subordinate

lien). (§ 3(a))

6. Obtain and review a sample of non-high-risk

PMI

residential mortgage transactions. Verify

that PMI

was terminated, based on the initial

amortization schedule (in the case of a

fixed-

rate loan) or the amortization schedules (in the

case of an adjustable-rate loan), on the date on

which the principal balance of the loan was

first scheduled to

reach 78% of the original

value of the mortgaged

property, assuming

that the borrower was

current, or on the earliest

date

thereafter on which the borrower became

current. (§ 3(b))

Homeowners Protection Act: Examination Objectives and Procedures

7. Obtain a sample of PMI-covered residential

mortgage transactions (including high-risk

loans, if any) that have

reached the midpoint of

their amortization period. Determine whether

PMI

was terminated by the first day of the

following month if the loan was

current. If the

loan was not

current at the midpoint, determine

that PMI

was terminated by the first day of the

month following the day the loan became

current. If at the time of the examination a loan

at the midpoint is not

current, determine

whether the financial institution is monitoring

the loan and has systems

in place to ensure

that PMI

is terminated when the borrower

becomes

current. (§§ 3(c) and 3(f)(2))

8. Determine if the financial institution has made

any

lender-defined high-risk residential mort-

gage transactions. If so, select a sample of

these transactions and verify that PMI

was

canceled, based on the initial amortization

schedule (in the case of a fixed-rate loan) or

the amortization schedules (in the case of an

adjustable-rate loan), on the date on which the

principal balance of the loan was scheduled to

reach 77% of the original value of the mort-

gaged

property. (§ 3(f)(1)(B))

9. Obtain a sample of loans that have had PMI

canceled or terminated. For PMI loans

can-

celed upon the borrower’s

request, determine

that the financial institution did not

require any

PMI payments beyond 30 days of the

borrow-

er’s satisfying the evidence and certification

requirements to cancel PMI. (§ 3(d)(1)) For

PMI loans that received automatic termination

or final termination, determine that the financial

institution did not

require any PMI payments

beyond 30 days of termination. (§§ 3(d)(2) and

3(d)(3))

10. Using the samples in steps 5, 6, and 7,

determine if the financial institution

returns

unearned

premiums, if any, to the borrower

within 45 days after cancellation or termination

of PMI. (§ 3(e)(1))

Conclusions

11. Summarize all violations.

12. If the violation (or violations) noted represents

a pattern or practice, determine the root cause

by identifying weaknesses in internal controls,

compliance

review, training, management over-

sight, or other factors.

13. Identify action needed to correct violations and

weaknesses in the institution’s compliance

system,

as appropriate.

14. Discuss findings with the institution’s manage-

ment, and obtain a commitment for

corrective

action.

15. Determine if enforcement action is appropri-

ate. If so, contact appropriate Reserve Bank

personnel for guidance. Section 10(c) of the

act contains a provision

requiring restitution of

unearned PMI

premiums.

8 (1/06) • HOPA Consumer Compliance Handbook

Homeowners Protection Act

Worksheet

1. For fixed-rate residential mortgage transactions, does the lender provide, at

consummation, written initial disclosures that include the following?

a. A written amortization schedule (§ 4(a)(1)(A)(i)) Yes No N/A

b. A notice that the borrower may submit a written request to cancel PMI as

of the date that, based on the initial amortization schedule, the princi-

pal balance is first scheduled to reach 80% of the original value of

the mortgaged property, regardless of the outstanding balance of the

mortgage; or such earlier date that, based on actual payments, the

principal balance actually reaches 80% of the original value of the mort-

gaged property, and provided that the borrower has a good payment

history and has satisfied the lender’s requirements that the value of the

mortgaged property has not declined and is unencumbered by subordi-

nate liens (§§ 4(a)(1)(A)(ii)(I) and 4(a)(1)(A)(ii)(II)) Yes No N/A

c. The specific date, based on the initial amortization schedule, on which

the loan balance is scheduled to reach 80% of the original value of the

mortgaged property (§ 4(a)(1)(A)(ii)(I)) Yes No N/A

d. A notice that PMI will automatically terminate on the date that, based on

the amortization schedule and regardless of the outstanding balance

of the mortgage, the principal balance is first scheduled to reach 78% of

the original value of the mortgaged property, provided that the loan is

current (§ 4(a)(1)(A)(ii)(III)) Yes No N/A

e. The specific date the loan balance is scheduled to reach 78% LTV

(§ 4(a)(1)(A)(ii)(III)) Yes No N/A

f. Notice that exemptions to the borrower’s right to cancel PMI and

automatic PMI termination exist for high-risk loans, and whether such

exemptions apply (§ 4(a)(1)(A)(ii)(IV)) Yes No N/A

2. For adjustable-rate residential mortgage transactions, does the lender

provide, at consummation, written initial disclosures that include a notice that

a. The borrower may submit a written request to cancel PMI as of the date

that, based on the amortization schedule(s) and regardless of the

outstanding balance of the mortgage, the principal balance is first

scheduled to reach 80% of the original value of the mortgaged property;

or such earlier date that, based on actual payments, the principal balance

actually reaches 80% of the original value of the mortgaged property and

the borrower has a good payment history and has satisfied the lender’s

requirements that the value of the mortgaged property has not declined

and is unencumbered by subordinate liens (§ 4(a)(1)(B)(i)) Yes No N/A

b. The servicer will notify the borrower when the cancellation date is

reached, that is, when the loan balance represents 80% of the original

value of the mortgaged property (§ 4(a)(1)(B)(I)) Yes No N/A

c. PMI will automatically terminate when the loan balance is first scheduled

to reach 78% of the original value of the mortgaged property, regardless

of the outstanding balance of the mortgage, and the loan is current

(§ 4(a)(1)(B)(ii)) Yes No N/A

d. On the termination date the borrower will be notified of the termination or

the fact that PMI will be terminated when the loan is brought current

(§ 4(a)(1)(B)(ii)) Yes No N/A

Consumer Compliance Handbook HOPA•9(1/06)

Homeowners Protection Act: Worksheet

e. Exemptions to the borrower’s right to cancel PMI and automatic PMI

termination exist for high-risk loans, and whether such exemptions

apply (§ 4(a)(1)(B)(iii))

Yes No N/A

3. Does the lender have established standards regarding the type of evidence

requires borrowers to provide to demonstrate that the value of the mortgage

property has not declined, and

are they provided when a request for

cancellation occurs?

Yes No N/A

4. For high-risk residential mortgage transactions (as defined by the lender or

Fannie Mae

or Freddie Mac), does the lender provide, at consummation,

written initial

disclosures that PMI will not be required beyond the midpoint of

the amortization period of the loan, if the loan is

current? (§ 4(a)(2)) Yes No N/A

5. If the financial institution acts as servicer for residential mortgage transac-

tions, does it provide an annual written statement to the borrowers explaining

their rights to cancel or terminate PMI and an

address and telephone number

where the servicer can be contacted to determine whether they may cancel

PMI? (§ 4(a)(3)) (Note: This

disclosure may be included on the RESPA

annual escrow account

disclosure or the IRS interest payment disclosures.) Yes No N/A

6. If the financial institution acts as servicer, does it provide an annual written

statement to each borrower who

entered into a residential mortgage prior to

July 29, 1999, that includes

a. A statement that PMI may, under certain circumstances, be canceled by

the borrower with the consent of the lender or in

accordance with

applicable state law (§ 4(b)(1)) Yes No N/A

b. An address and telephone number that the borrower may use to contact

the servicer to determine whether the borrower may cancel the

PMI

(§ 4(b)(2)) Yes No N/A

(Note: This disclosure may be included on the RESPA annual escrow account

disclosure or the IRS interest payment disclosure.)

7. If the financial institution acts as servicer for residential mortgage transac-

tions, does it provide borrowers written notice within 30 days after the date of

cancellation or termination of PMI that the borrower no longer has PMI and

that no further PMI payments or

related fees are due? (§ 5(a)) Yes No N/A

8. If the financial institution services residential mortgage transactions, does it

return all unearned PMI premiums to the borrower within 45 days of either

termination upon the borrower’s

request or automatic termination under the

HOPA? (§ 3(e)) Yes No N/A

9. If the financial institution acts as servicer for residential mortgage transac-

tions, does it provide borrowers written notice of the grounds it

relied on

(including the

results of any appraisal) to deny a borrower’s request for PMI

cancellation no later than 30 days after the date the

request is received or

the date on which the borrower satisfies any evidence and certification

requirements established by the lender, whichever is later? (§§ 5(b)(1) and

5(b)(2)(A))

Yes No N/A

10. If the financial institution acts as servicer for residential mortgage transac-

tions, does it provide borrowers written notice of the grounds it

relied on

(including the

results of any appraisal) in refusing to automatically termi-

nate PMI not later than 30 days after the scheduled termination date?

(§ 5(b)(2)(B))

Yes No N/A

10 (1/06) • HOPA Consumer Compliance Handbook

Homeowners Protection Act: Worksheet

(Note: The scheduled termination date is reached when, based on the initial

amortization schedule (in the case of a fixed-rate loan) or the amortization

schedules (in the case of an adjustable-rate loan), the principal balance of

the loan is first scheduled to

reach 78% of the original value of the mortgaged

property, assuming that the borrower is current on that date, or the earliest

date

thereafter on which the borrower becomes current.)

11. If the financial institution acts as a servicer for adjustable-rate residential

mortgage transactions, does it notify borrowers that the cancellation date has

been

reached? (§ 4(a)(1)(B)(i)) Yes No N/A

12. If the financial institution acts as a servicer for adjustable-rate residential

mortgage transactions, does it notify the borrowers on the termination date

that PMI has been canceled or will be canceled as soon as the borrower is

current on loan payments? (§ 4(a)(1)(B)(ii)) Yes No N/A

13. If the financial institution requires ‘‘lender paid mortgage insurance’’ (LPMI)

for

residential mortgage transactions, does it provide a written notice to a

prospective borrower on or

before the loan commitment date that includes

the following?

a. A statement that LPMI differs from borrower-paid mortgage insurance

(BPMI) in that the borrower may not cancel LPMI, while BPMI

is subject to

cancellation and automatic termination under the

HOPA (§ 6(c)(1)(A)) Yes No N/A

b. A statement that LPMI usually results in a mortgage with a higher interest

rate than BPMI

(§ 6(c)(1)(B)(i)) Yes No N/A

c. A statement that LPMI terminates only when the transaction is refinanced,

paid

off, or otherwise terminated (§ 6(c)(1)(B)(ii)) Yes No N/A

d. A statement that both LPMI and BPMI have benefits and disadvantages,

and a generic analysis

reflecting the differing costs and benefits of each

over a 10-year period, assuming

prevailing interest and property

appreciation rates (§ 6(c)(1)(C)) Yes No N/A

e. A statement that LPMI may be tax deductible on federal income taxes if

the borrower itemizes expenses for that purpose (§ 6(c)(1)(D))

Yes No N/A

14. If the lender requires LPMI for residential mortgage transactions and the

financial institution acts as

servicer, does it notify the borrower in writing within

30 days of the termination date that would have applied, if it

were a BPMI

transaction, that the borrower may

wish to review financing options that could

eliminate the

requirement for PMI? (§ 6(c)(2)) Yes No N/A

15. Does the financial institution prohibit borrower-paid fees for the disclosures

and notifications

required under the HOPA? (§ 7) Yes No N/A

Consumer Compliance Handbook HOPA • 11 (1/06)