PMI, Truth in Lending, and Restitution

A common violation of Truth in Lending - failure to include PMI in the finance charge and APR calculations - results in mandatory restitution. When PMI is omitted from the finance charge, all loans with PMI are under-disclosed.

PMI always a finance charge. It is a required condition of credit and exists for the benefit of the creditor. After you have found this problem - and finished explaining to your loan staff that PMI is not like credit life and hazard insurance - it is never never excludable, regardless of how it is "disclosed" - you need to get down to the business of reimbursement.

The best approach to follow is what your examiner uses: the federal bank regulatory agencies' reimbursement guidelines. You should be able to find them in your regulatory service. The guidelines identify the type of violations that call for reimbursement, and contain instructions on how to calculate reimbursement and how to apply the tolerances to your situation.

If the bank charged for PMI but failed to include the cost of PMI in the finance charge, the practical result is that the bank has purchased the PMI for the customer. By failing to disclose the cost as a finance charge, the bank must foot the bill for most of the fee.

In addition to reimbursement for amounts already paid, you could consider canceling the PMI on certain loans to eliminate the cost in the future. For loans that exceed 80% loan-to-value, the PMI should no longer be needed. Both FNMA and FHLMC are developing procedures to identify loans that have reached or passed 80% loan-to-value to permit the loan servicers to cancel PMI.

Another thing to consider is that PMI is a hot topic with consumer's right now. Many consumer groups are challenging the need for PMI. They object to it on the grounds that it makes loans more expensive for low-income borrowers who usually don't have a 20% downpayment. They also object because it benefits the lender - not the consumer - but the consumer pays for it. Because of this attention, PMI is newsworthy and your customers may be aware of problems involving PMI.

Finally, nothing in Regulation Z or the Truth in Lending Act requires the bank to write a "sue us, we're guilty" letter. You can make your restitution letters as friendly as possible. Present the reimbursement as good news to the customer. Explain that the bank has conducted a quality service audit - or something similar -and identified a fee that the bank now believes the customer didn't need to pay. Most people should be delighted to get an unexpected check in the mail.

The goal is to meet your legal obligations under Truth in Lending without inviting lawsuits. To do this, you need to pay reimbursement to remove the monetary motives for litigation and also to forge a strong and positive relationship with the customer.

Copyright © 1997 Compliance Action. Originally appeared in Compliance Action, Vol. 2, No. 1, 1/97