We have a borrower that makes principal payments which has decreased his LTV 72 percent. I spoke with our Loan Servicing manager as to why PMI had not been canceled on this loan and she stated that while the customer is in good standing we are in our right to continue to charge the PMI premium until the DATE the loan is schedule to be at 78 percent on the original amortization schedule. I have researched this and think that may be correct however, I didn't know if anyone out there has had this issue. My feeling is that irregardless if the borrower is current and LTV is well below the 78 percent threshold we should cancel PMI as i feel charging them adversely effects the customer. Any feedback is appreciated.

Have they requested cancellation? The borrower should be getting an annual notice telling them their rights and what is required to cancel.

They have not requested cancellation. The borrower does get the annual notice however they must not be reading the information. The monthly report shows
LTV
Date Loan Reaches 80% LTV based on Original Amortization Schedule and
Date Loan Reaches 78% LTV which requires Automatic Cancel

IMO it would make a lot more since to cancel once the loan is reduced to below 78% LTV assuming everything else on the loan checks out (good payment history and value appears to be unchanged)

Any suggestions for best practices in this area?

Best practices for a consumer or best practices for a servicer? For a consumer, best practice would definitely be to request cancellation (unless they know their value has dropped). For a bank, there are a lot more complications. Are you going to require an appraisal? Who's going to pay for it? What are you going to do when the valuation comes in putting the LTV above 80%? Do you have a process that ensures you're treating all borrowers equally? There just seems to be a lot of hassle and risk for the bank without much upside, and it's not required.

Maybe a just letter to the borrower letting them know that they're under 80% and the process to get cancellation would be appreciated by the customer, but they should already get essentially the same thing annually and probably won't read it.

This topic has just come up here and I have always followed that once the LTV reached 78% and the loan is in good standing we had to cancel, regardless of whether extra principal contributed to the decrease in outstanding balance. But it appears that in order to do this we would need a new appraisal because the "original value" has not been achieved based on the amortization schedule?

We have never proceeded this way and never had an issue with exams I guess because it is favorable to the borrower.
I am also in NY which has it's own PMI rule which is the "when the unpaid principal amount of the real estate loan represents 75% or less of the real estate's appraised value at the time the loan was made.

My question is are we releasing the PMI too early?

HOPA tells you when you have to cancel PMI, I don't believe it requires you have PMI at any point. That's a risk based decision by the bank.

Another question:
HOPA states: Not later than 30 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.

I interpret this to mean even when the PMI automatically terminates at 78% we are still required to send notice. The servicing department does not agree, they believe they only need to send notice in the event of an approved cancellation at 80%.

Just looking for clarification.
Thank you

Automatic cancellation is "in accordance with this chapter". What makes them think it is not?

§ 4904. Notification upon cancellation or termination
(a) In general
Not later than 30 days after the date of cancellation or termination of a private mortgage insurance requirement in accordance with this chapter, the servicer shall notify the mortgagor in writing—
(1) that the private mortgage insurance has terminated and that the mortgagor no longer has private mortgage insurance; and
(2) that no further premiums, payments, or other fees shall be due or payable by the mortgagor in connection with the private mortgage insurance.

Not later than 30 days after the date of cancellation or termination

Just to clarify for your servicing department.

Cancellation refers to canceling PMI at 80% at the borrower's request. 4902(a).

Termination refers to automatic termination at 78%. 4902(b).

Maybe your servicing manager needs to revisit HOPA.

I'd like to piggyback on this topic if I may. We have an investment property at 85% that is a Freddie loan. I understand that no PMI Disclosure is required since an investment property is not subject to HOPA, and that the PMI may terminate at the month after the mid-point of the original amortization schedule. Fannie allows automatic termination at that point; however, Freddie does not allow automatic termination on investment properties, and instead requires the borrower to request cancellation at that point.
My first question is how do we disclose this for APR purposes? Do we disclose the PMI payments through the life of loan, or to the mid-point when the borrower may request cancellation?
My second question is how does the borrower know they are able to request cancellation at the mid-point if we do not provide a PMI Disclosure?
I would love to hear how any of you are handling Freddie investments with PMI. Thanks!

New question regarding PMI:

The Mortgage Servicing department came to me last week asking me to prepare a PMI 'Solicitation' letter for applicable borrowers who reached their mortgage insurance cancelation points. The request comes from a notification from Freddie allowing FI's to solicit borrowers that may be close to, or have reached their applicable mortgage insurance cancelation points...

Reading through HOPA, I have not come across anything that states an FI can't solicit (of course assuming we follow all of the other HOPA requirements once my FI obtains the borrower's verbal or written request to cancel)...

The Mortgage Servicing department would like to begin soliciting borrowers once they reach the 80% threshold, and have been vetted with the other requirements to drop the PMI...

Guru's, what do you think? Is this a bad idea?

They announced some changes in April with an effective date of October regarding borrower requested cancellations, but I have not seen anything about actual solicitations. What bulletin was that in?

Hi Randy - It is 2018-6 which states is from April 11, 2018-
the only verbiage I found in there states:

...allowing a Servicer to process and/or respond to a Borrower's written or verbal request to cancel Borrower-paid mortgage insurance, as well as solicit such Borrowers that may choose to, or have reached, their applicable mortgage insurance cancelation points...

Well, I guess they did sneak that in there. I find no other guidance. I am not sure what is in it for the servicer actually.

Same here...Thanks, Randy.

My first question is how do we disclose this for APR purposes? Do we disclose the PMI payments through the life of loan, or to the mid-point when the borrower may request cancellation?

Loan exempt from Reg. Z are not subject to APR disclosures.

My second question is how does the borrower know they are able to request cancellation at the mid-point if we do not provide a PMI Disclosure?

They wouldn't unless you provided them one and you are under no obligation to do so.

I would love to hear how any of you are handling Freddie investments with PMI.

We don't make rental property loans that require PMI.

May a borrower make a request to cancel their PMI between the 78-80% range? Or can PMI only be canceled (pending all requirements are met) at the time the principal balance is first scheduled to reach 80% of the original value? e.g., Borrower makes a request to cancel PMI and LTV is at 79%...

Thank you.

The borrower can request to cancel the PMI at any time after hitting 80% LTV. So, < or = 80%, they can request cancellation.

Termination (automatic) is based on when it is scheduled to hit 78%. Cancellation (borrower requested) is actual payments or scheduled hits 80%.

(2) Cancellation date The term “cancellation date” means—
(A) with respect to a fixed rate mortgage, at the option of the mortgagor, the date on which the principal balance of the mortgage—
(i) based solely on the initial amortization schedule for that mortgage, and irrespective of the outstanding balance for that mortgage on that date, is first scheduled to reach 80 percent of the original value of the property securing the loan; or
(ii) based solely on actual payments, reaches 80 percent of the original value of the property securing the loan; and
(B) with respect to an adjustable rate mortgage, at the option of the mortgagor, the date on which the principal balance of the mortgage—
(i) based solely on the amortization schedule then in effect for that mortgage, and irrespective of the outstanding balance for that mortgage on that date, is first scheduled to reach 80 percent of the original value of the property securing the loan; or
(ii) based solely on actual payments, first reaches 80 percent of the original value of the property securing the loan.

Thank you so much for the quick responses! Very much appreciated.