Mortgage Insurance Disclosures

QUESTION

We have an investor who is withholding approval of a loan because the file lacks a signed Mortgage Insurance disclosure for a second home in another state. Our document vendor says they do not issue such disclosure forms for second homes other than in California. Can you provide us with any insight on how we should respond to our investor?

ANSWER

There appears to be a legitimate reason to question the investor’s demand and we recommend that you ask the investor for the specific guideline or regulation on which their demand is predicated. In that regard, we assume that the “disclosure” you are talking about is not the basic disclosure of mortgage insurance premium costs on the Closing Disclosure under the TILA-RESPA Integrated Disclosure Rule (TRID or “Know Before You Owe”) but, instead, the more detailed type of disclosure required at closing under the Home Owner Protection Act (HOPA) (12 USC 4903) which describes when and how mortgage insurance premiums can be canceled, and the contents of disclosures that must be given to borrowers in connection with such insurance.

As you are probably aware, under HOPA, in any case in which private mortgage insurance is required in connection with a residential mortgage transaction “other than a residential mortgage transaction described in section 4902(g)(1),” – the section that describes and defines certain so-called “high risk” loans – at the time at which the transaction is consummated, the mortgagee is required to provide the mortgagor with the following disclosures:

                (A) If the transaction relates to a fixed rate mortgage---

                                (i)  a written initial amortization schedule and

                                (ii) written notice---

(I)

that the mortgagor may cancel the requirement in accordance with section 4902(a) of [the statute] indicating the date on which the mortgagor may request cancellation, based solely on the initial amortization schedule;

(II)

that the mortgagor may request cancellation in accordance with section 4902(a) of [the statute] earlier than provided for in the initial amortization schedule, based on actual payments;

(III)

that the requirement for private mortgage insurance will automatically terminate on the termination date in accordance with section 4902(b) of [the statute] and what that termination date is with respect to that mortgage; and

(IV)

that there are exemptions to the right to cancellation and automatic termination of a requirement for private mortgage insurance in accordance with section 4902(g) of [the statute], and whether such an exemption applies at that time to that transaction; and

                (B) if the transaction relates to an adjustable rate mortgage a written notice that—

(i)

the mortgagor may cancel the requirement in accordance with section 4902(a) of the statute on the cancellation date, and that the servicer will notify the mortgagor when the cancellation date is reached;

(ii)

the requirement for private mortgage insurance will automatically terminate on the termination date, and that on the termination date, the mortgagor will be notified of the termination or that the requirement will be terminated as soon as the mortgagor is current on loan payments; and

(iii)

there are exemptions to the right of cancellation and automatic termination of a requirement for private mortgage insurance in accordance with section 4902(g) of [the statute], and whether such an exemption applies at that time to that transaction.

In addition, in the case of a residential mortgage transaction described in section 4902(g)(1) of the statute, the mortgagee is required to provide, at the time at which the transaction is consummated, written notice to the mortgagor that in no case may private mortgage insurance be required beyond the date that is the midpoint of the amortization period of the loan, if the mortgagor is current on payments required by the terms of the residential mortgage.

For loans falling within the disclosure requirements, there are also certain annual disclosures required. But the HOPA disclosure requirements apply only to “residential mortgage transactions” which are defined under 12 USC 4901(15) to include only loans in which the security interest is created or retained against the borrower’s “principal residence” as follows:

(15)The term “residential mortgage transaction” means a transaction consummated on or after the date that is 1 year after, in which a mortgage, deed of trust, purchase money security interest arising under an installment sales contract, or equivalent consensual security interest is created or retained against a single-family dwelling that is the principal residence of the mortgagor to finance the acquisition, initial construction, or refinancing of that dwelling. (Emphasis added.)

A second home is not the borrower’s “principal residence.” Therefore, it does not appear that the disclosure sought by the investor would be required under HOPA.

That leaves the question of whether such disclosures are required under the law of the state where the “second home” is located. State laws vary on this issue. In California, for example, Civil Code 2954.6 requires certain additional mortgage insurance disclosures, similar to those under HOPA, to be made to borrowers within 30 days after closing on all loans where mortgage insurance is required as a condition of a loan secured by a deed of trust or mortgage (i.e., not just principal residences).  Thus, Civil Code Section 2954.6 provides in pertinent part:

(a) If private mortgage insurance or mortgage guaranty insurance, as defined in subdivision (a) of Section 12640.02 of the Insurance Code, is required as a condition of a loan secured by a deed of trust or mortgage on real property, the lender or person making or arranging the loan shall notify the borrower whether or not the borrower has the right to cancel the insurance. If the borrower has the right to cancel, then the lender or person making or arranging the loan shall notify the borrower in writing of [a number of additional facts regarding operation and cancellation of the mortgage insurance.]

Other states, however, may not have such stringent requirements. Therefore, it is always helpful to check the laws and regulations of the state where the property is located, in addition to Federal laws and regulations, to determine exactly what your obligations are in this highly technical area. In that regard, as always, Lenders Compliance Group can be a useful resource for you.

Michael R. Pfeifer

Director/Legal & Regulatory Compliance

Lenders Compliance Group