No More PMI Abuse

By Jill Terry

Every so often, Congress responds to bona fide abuse in the banking community by creating a law that eliminates the problem. Recently, one of those laws addressed Private Mortgage Insurance (PMI) abuses.

What is PMI?
Private Mortgage Insurance is mortgage insurance provided by non-government insurers that protects a lender against loss if the borrower defaults. PMI can be a one-time fee paid in escrow, paid monthly with your loan payment, or a combination of both. Industry figures indicate that the typical monthly PMI payment for the average homeowner is anywhere between $20 and $100.

PMI is applicable on low down payment loans (loans where the down payment is less than 20%). Lenders' experience had shown a strong correlation between borrower equity and default--the less money a borrower had invested in a home, the greater the probability of default--so PMI became standard on low down payment loans. Giving banks this "security blanket" allowed many people to purchase homes who normally wouldn't have been able to afford the down payments.

Note that PMI is payable by the borrower, not the bank. Note, too, that PMI is not insurance that pays off your loan if you die. This is insurance purely for the benefit of the lender.

Where's the Abuse?
Since PMI's inception many years ago, borrowers were often never told that they had the option to cancel PMI once their loan to value ratio dipped below 80%. Those who happened to learn of this option were met with all manner of roadblocks because the banks didn't want to give up this income stream. The most frequent excuse the banks gave borrowers was "You'll have to pay for a new appraisal to make sure that the new loan to value is less than 80%," but there were many others, all designed to discourage borrowers from discontinuing their PMI payments. As a result, thousands of homeowners were overpaying PMI.

In 1998, Congressman James Hansen (Representative from Utah) authored The Homeowner's Insurance Protection Act, and, with astounding alacrity, it became law (effective July 1999).

What Does the New Law Do for Borrowers?
This new law protects borrowers from having to pay PMI once the loan to value (LTV) ratio on their loans is less than 80%.

At 80%, the borrower may initiate cancellation of the insurance. When the LTV becomes 78%, the lender must drop the insurance automatically. The new law applies only to conventional mortgages--loans that are not made under any government housing program--and includes the following requirements:

For loans made after July 29, 1999:

At the time the loan is made, borrowers must receive information on how to cancel PMI (whom to contact, conditions for cancellation, the necessary LTV, whether an appraisal is needed and what kind, time line required to cancel, and other procedures the bank might require to cancel the PMI).
With each periodic statement (typically the monthly mortgage statement), there must be a clear statement that PMI may be cancelled, and the address and phone number of the person or entity servicing the mortgage.
When the LTV decreases to 80%, the loan servicer (who may not be the bank who made your loan) must send instructions on how to cancel PMI.
On an annual basis, lenders must send all borrowers who pay PMI instructions on how to cancel it and under what circumstances.

For loans made before July 29, 1999:

On an annual basis, lenders must tell all borrowers who pay PMI how to cancel it and under what circumstances.

If you've been paying PMI and haven't been informed about what it takes to cancel it, contact your lender immediately. If you do not receive satisfactory information, contact your lender's federal regulatory agency.

Note: The Homeowner's Insurance Protection Act does not apply to FHA loans since they are insured by a government agency, not a private insurance company. VA loans have no mortgage premium to cancel.