What is the Homeowners Protection Act?

The Homeowners Protection Act (HPA) is a law that protects consumers from paying excessive amounts for private mortgage insurance (PMI). The Homeowners Protection Act was passed in 1998 to address the abuse and confusion related to homeowners’ requirements to pay for private mortgage insurance (PMI). The law requires that mortgage lenders inform borrowers of their rights, including when they can cancel their insurance. The Homeowners Protection Act addresses both private mortgage insurance (PMI) and lender-paid mortgage insurance (LPMI), which borrowers must pay either as a lump sum at the start of the loan or through increased monthly interest.

What is the Homeowners Protection Act?

The Homeowners Protection Act applies to residential mortgage loans, including loans provided for single-family homes, condominiums, and other multi-family units. The law does not cover government-backed loans such as FHA loans or VA loans and treats conforming loans and high-risk loans differently. In addition to setting rules for canceling private mortgage insurance (PMI), the Homeowners Protection Act requires mortgage lenders to inform borrowers about their rights. The disclosures include advance and annual notices regarding when and how borrowers can cancel private mortgage insurance (PMI). The information includes details about the phased repayment schedule, when to request cancellation, and any features that may limit the ability to cancel private mortgage insurance (PMI).

How Does the Homeowners Protection Act Work?

Homeowners faced challenges in eliminating private mortgage insurance (PMI) fees, even when there was no longer a need for private mortgage insurance (PMI) on their loans. Borrowers and lenders were confused about how to cancel private mortgage insurance (PMI) in some cases, and some unethical lenders delayed the cancellation of private mortgage insurance (PMI) fees. The Homeowners Protection Act, also known as the Private Mortgage Insurance Cancellation Act (PMI), enacted rules when it became law:

• Establish when homeowners can cancel private mortgage insurance (PMI) and stop making payments
• Determine when lenders must automatically stop charging private mortgage insurance (PMI) to borrowers
• Require lenders to provide disclosures when a loan requires private mortgage insurance (PMI)
• Determine how to handle any unearned premiums paid by homeowners

The Homeowners Protection Act (HPA) prevents situations where homeowners pay private mortgage insurance (PMI) fees monthly throughout the loan term.

How Does Private Mortgage Insurance (PMI) Work?

Private mortgage insurance (PMI) is typically only required when homeowners make down payments of less than 20%. Lenders face the risk of losing money with a loan-to-value (LTV) ratio that is higher than that if they have to proceed with foreclosure on a home and sell it quickly. However, lenders face significantly less risk, and homeowners – in theory – should stop paying private mortgage insurance (PMI) fees monthly when their loan-to-value (LTV) ratio drops below 80%.

Some loans use lender-paid mortgage insurance (LPMI) instead of adding a fee to the homeowner’s monthly payment. Although the name implies otherwise, borrowers still pay for lender-paid mortgage insurance (LPMI), but they do not pay it monthly. Instead, borrowers may pay either:

• Amount
• A single upfront payment at the beginning of the loan
• A higher interest rate on the loan balance, leading to increased monthly mortgage payments (principal and interest)

Most borrowers with loan-level mortgage insurance (LPMI) opt for the higher interest rate, but this rate continues throughout the loan term, and there is no way to cancel loan-level mortgage insurance (LPMI) while keeping the current loan. Instead, homeowners must pay off loan-level mortgage insurance (LPMI), typically through refinancing to a new loan.

However, the Homeowners Protection Act (HPA) applies to loans that have loan-level mortgage insurance (LPMI). It requires lenders to provide disclosures to borrowers explaining how loan-level mortgage insurance (LPMI) works and highlighting the higher interest rates typically associated with loan-level mortgage insurance (LPMI). The disclosure must address the pros and cons of different options.

Requirements for Cancelling Private Mortgage Insurance (PMI)

Borrowers can cancel private mortgage insurance (PMI) by submitting a written request to lenders when the loan is about to reach a loan-to-value (LTV) ratio of 80% based on its amortization schedule.

Homeowners may also submit this request if they reduce the loan-to-value (LTV) ratio to 80% through additional loan payments. Homeowners may need to provide proof that the property has not lost value to qualify.

The Homeowners Protection Act (HPA) requires lenders to automatically cancel private mortgage insurance (PMI) when the loan is scheduled to reach 78% of the original loan-to-value (LTV). Lenders must cancel monthly private mortgage insurance (PMI) charges after the loan reaches halfway through its amortization schedule when PMI has not been cancelled at the borrower’s request or through automatic termination.

The Homeowners Protection Act (HPA) is complex, and your loan details impact your rights under the law. For example, any liens on the property may prevent you from successfully cancelling coverage. Non-conforming loans like jumbo loans may require you to wait until you reach a loan-to-value (LTV) of 77%.

Source: https://www.thebalancemoney.com/what-is-the-homeowners-protection-act-4163367