In August, the CFPB issued a compliance bulletin to clarify lenders’ obligations to terminate Private Mortgage Insurance (PMI) charges under 12 U.S.C. § 4902. One subject that the bulletin did not address—but which is somewhat ambiguous—is how to calculate when PMI must be terminated after a loan is modified.
Unless a borrower requests PMI cancellation (and the loan also meets certain conditions), the lender is obligated to terminate PMI charges automatically in the earlier of the following two circumstances: (1) where the loan is scheduled to reach a 78% loan-to-value ratio (LTV) pursuant to the loan’s amortization schedule (i.e. principal balance divided by original loan amount) or (2) where the loan reaches the mid-point in the amortization schedule. See 12 U.S.C. § 4901(18) (defining “termination date”); § 4902(a), (b), (c) (governing timing of PMI charge termination). Where the loan is modified, the PMI termination dates are to be “recalculated to reflect the modified terms and conditions of such loan.” See § 4902(d). Although § 4092(d) is seemingly clear, there is ambiguity as to whether the property value at the time of modification—one of the values used to calculate LTV, and therefore the PMI automatic termination date under § 4902(b)—is a “term and condition” of a loan modification that lenders are permitted to take into account to recalculate the PMI termination date.
It makes intuitive sense that the LTV (and therefore the PMI) would be “recalculated” by using the property’s value at the time the loan is modified, given that the purpose of private mortgage insurance is to ensure that the lender is protected against the borrower’s default where the property’s LTV is less than 80%. But although the property’s value is typically assessed during the loan modification review process, the newly-assessed value is typically not incorporated into the final loan modification agreement. This leaves room for courts to interpret the loan modification agreement in such a way that the newly-assessed value is not “term or condition” of the loan modification for purposes of recalculating PMI under § 4902(d). If courts apply this interpretation, then lenders must continue to use the original—and not the modified—assessed value of the property when calculating LTV for purposes of determining the PMI termination date. See 12 U.S.C. § 4901(18). This distinction is important because the newly-assessed value is likely to be substantially less than the property value at the time of loan origination. Using the lower newly-assessed value to calculate the PMI termination date may cause lenders to calculate that the PMI charge can be left in place for much longer than actually allowed by § 4902(b).
Accurately calculating the PMI termination date is important, because the penalty for failing to terminate PMI charges timely are potentially substantial, and the fact that statutory damages, costs of suit, and attorney’s fees are available make the cause of action a potentially expensive litigation risk. See 12 U.S.C. § 4907.
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