HPA Examination Procedures

EXAMINATION OBJECTIVES

  • To determine the financial institution’s compliance with the Homeowners Protection Act of 1998 (HPA), as amended.

  • To assess the quality of the financial institution’s policies and procedures for implementing the HPA.

  • To determine the reliance that can be placed on the financial institution’s internal controls and procedures for monitoring the institution’s compliance with the HPA.

  • To initiate corrective action when violations of HPA are identified, or when policies or internal controls are deficient.

EXAMINATION PROCEDURES

  1. Through discussions with management and review of available information, determine if the institution’s internal controls are adequate to ensure compliance with the HPA. Consider the following:

    Organization charts

    Process flowcharts

    Policies and procedures

    Loan documentation

    Checklists

    Training

    Computer program documentation

  2. Review any compliance audit material, including work papers and reports, to determine whether:

    The institution’s procedures address all applicable provisions of HPA;

    Steps are taken to followup on previously identified deficiencies;

    The procedures used include samples covering all product types and decision centers;

    The compliance audit work performed is accurate;

    Significant deficiencies and their causes are included in reports to management and/or to the Board of Directors;

    Corrective action is taken in a timely and appropriate manner; and

    The frequency of compliance review is appropriate.

  3. Review sample transactions, disclosure and notification forms, and the financial institution’s policies and procedures to ensure the institution provides:

    Initial Disclosures for (i) fixed rate mortgages, (ii) adjustable rate mortgages, (iii) high risk loans, and (iv) lender paid mortgage insurance;

    Annual Notices for (i) fixed and adjustable rate mortgages and high risk loans, and (ii) existing residential mortgages; and

    Notices of (i) cancellation, (ii) termination, (iii) grounds for not canceling PMI, (iv) grounds for not terminating PMI, (v) cancellation date for adjustable rate mortgages, and (vi) termination date for lender paid mortgage insurance.

    (Refer to Appendix A for required content of the disclosure and notices.)

  4. Using the above sample and bank policies and procedures, determine that borrowers are not charged for any required disclosures or notifications (12 USC 4906).

  5. Obtain and review a sample of recent written requests from borrowers to cancel their private mortgage insurance (PMI) on “non-high risk” residential mortgage transactions. Verify that the insurance was cancelled on either (a) the date on which the principal balance of the loan was first scheduled to reach 80 percent of the original value of the property based on the initial amortization schedule (in the case of a fixed rate loan) or amortization schedule then in effect (in the case of an adjustable rate loan) or (b) the date on which the principal balance of the loan actually reached 80 percent of the original value of the property based on actual payments, in accordance with the applicable provisions in 12 USC 4902(a)of HPA (i.e., good payment history, current payments and, if required by the lender, evidence that the value of the mortgaged property did not decline, and certification that the borrower’s equity was unencumbered by a subordinate lien) (12 USC 4902(a)).

  6. Obtain and review a sample of “non-high risk” PMI residential mortgage transactions where the borrower did not request cancellation. Select loans from the sample that have reached a 78 percent or lower LTV ratio based on the original value of the property and that are not current. Verify that PMI was terminated, based on the initial amortization schedule (in the case of a fixed rate loan) or the amortization schedule then in effect (in the case of an adjustable rate loan) on the date that the principal balance of the loan was first scheduled to reach 78 percent of the original value of the mortgaged property (if the borrower was current) or on the first day of the first month after the date that the borrower became current (12 USC 4902(b)).

  7. Obtain a sample of PMI-covered residential mortgage transactions (including high-risk loans, if any) that are at or beyond the midpoint of their amortization period. Determine whether PMI was terminated by the first day of the following month if the loan was current. If the loan was not current at the midpoint, determine that PMI was terminated by the first day of the month following the day the loan became current. If, at the time of the examination, a loan at the midpoint is not current, determine whether the financial institution is monitoring the loan and has systems in place to ensure that PMI is terminated when the borrower becomes current (12 USC 4902(c) and 12 USC 4902(g)(2)).

  8. Obtain a sample of any lender defined “high risk” PMI residential mortgage transactions that have a 77 percent or lower LTV based on the original value of the property. Verify that PMI was cancelled, based on the initial amortization schedule (in the case of a fixed rate loan) or the amortization schedule then in effect (in the case of an adjustable rate loan), on the date that the principal balance of the loan was scheduled to reach 77 percent of the original value of the mortgaged property (12 USC 4902(g)(1)(B)).

  9. Obtain a sample of loans that have had PMI cancelled or terminated (the samples obtained above can be used). For PMI loans cancelled upon the borrowers’ requests, determine that the financial institution did not require any PMI payment(s) beyond 30 days of the borrower satisfying the evidence and certification requirements to cancel PMI (12 USC 4902(e)(1). For the PMI loans that received automatic termination or final termination, determine that the financial institution did not require any PMI payment(s) beyond 30 days of termination (12 USC 4902(e)(2) and 12 USC 4902(e)(3)).

  10. Using the samples in steps 5, 6, and 7, determine if the financial institution returned unearned premiums, if any, to the borrower within 45 days after cancellation or termination (12 USC 4902(f)(1)).

CONCLUSIONS

  1. Summarize all violations and internal deficiencies.

  2. If the violation(s) and internal deficiencies noted above represent(s) a pattern or practice, determine the root cause by identifying weaknesses in internal controls, compliance review, training, management oversight, or other factors.

  3. Identify action needed to correct violations and weaknesses in the institution’s compliance system, as appropriate.

  4. Discuss findings with the institution’s management and obtain a commitment for corrective action.

  5. Determine if enforcement action is appropriate. If so, contact appropriate agency personnel for guidance. Section 10(c) of the Act contains a provision requiring restitution of unearned PMI premiums.

EXAMINER’S SUMMARY, RECOMMENDATIONS, AND COMMENTS

APPENDIX A

HOMEOWNERS PROTECTION ACT

This appendix provides guidance about the timing and required content of disclosures and notices to be made in connection with the Act.

  1. Initial disclosures at consummation for fixed rate residential mortgage transactions must include:

    a. A written amortization schedule (12 USC 4903(a)(1)(A)(i)).

    b. A notice that the borrower may submit a written request to cancel PMI as of the date that, based on the initial amortization schedule, the principal balance is first scheduled to reach 80% of the original value of the mortgaged property, irrespective of the outstanding balance of the mortgage, or such earlier date that, based on actual payments, the principal balance actually reaches 80% of the original value of the mortgaged property and the borrower has a good payment history and has satisfied the lender’s requirements that the value of the mortgaged property has not declined and is unencumbered by subordinate liens (12 USC 4903(a)(1)(A)(ii)(I) and (II)).

    c. The specific date, based on the initial amortization schedule, the loan balance is scheduled to reach 80% of the original value of the mortgaged property (12 USC 4903(a)(1)(A)(ii)(I)).

    d. A notice that PMI will automatically terminate on the date that, based on the amortization schedule and irrespective of the outstanding balance of the mortgage, the principal balance is first scheduled to reach 78% of the original value of the mortgaged property if the loan is current (12 USC 4903(a)(1)(A)(ii)(III)).

    e. The specific date the loan balance is scheduled to reach 78% LTV (12 USC 4903(a)(1)(A)(ii)(III)).

    f. Notice that exemptions to the right to cancel and automatic termination exist for high-risk loans and whether such exemptions apply (12 USC 4903(a)(1)(A)(ii)(IV)).

  2. Initial disclosures at consummation for adjustable rate residential mortgage transactions must include a notice that:

    a. The borrower may submit a written request to cancel PMI as of the date that, based on the amortization schedule(s) and irrespective of the outstanding balance of the mortgage, the principal balance is first scheduled to reach 80% of the original value of the mortgaged property or such earlier date that, based on actual payments, the principal balance actually reaches 80% of the original value of the mortgaged property and the borrower has a good payment history and has satisfied the lender requirements that the value of the mortgaged property has not declined and is unencumbered by subordinate liens (12 USC 4903(a)(1)(B)(i)).

    b. The servicer will notify the borrower when the cancellation date is reached, i.e., when the loan balance represents 80% of the original value of the mortgaged property (12 USC 4903(a)(1)(B)(i)).

    c. PMI will automatically terminate when the loan balance is first scheduled to reach 78% of the original value of the mortgaged property irrespective of the outstanding balance of the mortgage and the loan is current (12 USC 4903(a)(1)(B)(ii)).

    d. On the termination date, the borrower will be notified of the termination or the fact that PMI will be terminated when the loan is brought current (12 USC 4903(a)(1)(B)(ii)).

    e. Exemptions to the right to cancel and automatic termination exist for high-risk loans and whether such exemptions apply (12 USC 4903(a)(1)(B)(iii)).

  3. Lender has established standards regarding the type of evidence it requires borrowers to provide to demonstrate that the value of the mortgage property has not declined and they are provided when a request for cancellation occurs (12 USC 4902(a)(3)(A)).

  4. Lender provides written initial disclosures at consummation for high-risk residential mortgage transactions (as defined by the lender or Fannie Mae or Freddie Mac), that PMI will not be required beyond the midpoint of the amortization period of the loan, if the loan is current (12 USC 4903(a)(2)).

  5. When the financial institution acts as servicer for residential mortgage transactions, it provides an annual written statement to the borrowers explaining their rights to cancel or terminate PMI and an address and telephone number to contact the servicer to determine whether they may cancel PMI (12 USC 4903(a)(3)).

    NOTE: This disclosure may be included on RESPA’s annual escrow account disclosure or IRS interest payment disclosures.

  6. When the financial institution acts as servicer, it provides an annual written statement to each borrower who entered into a residential mortgage prior to July 29, 1999, that includes:

    a. A statement that PMI may, under certain circumstances, be canceled by the borrower with the consent of the lender or in accordance with applicable state law (12 USC 4903(b)(1)).

    b. An address and telephone number that the borrower may use to contact the servicer to determine whether the borrower may cancel the PMI (12 USC 4903(b)(2)).

    NOTE: This disclosure may be included on RESPA’s annual escrow account disclosure or IRS interest payment disclosure.

  7. When the financial institution acts as servicer for residential mortgage transactions, it provides borrowers written notices within 30 days after the date of cancellation or termination of PMI that the borrower no longer has PMI and that no further PMI payments or related fees are due (12 USC 4904(a)).

  8. When the financial institution services residential mortgage transactions, it returns all unearned PMI premiums to the borrower within 45 days of either termination upon the borrower’s request or automatic termination under the HPA (12 USC 4902(e)).

  9. When the financial institution acts as servicer for residential mortgage transactions, it provides borrowers written notices of the grounds it relied on (including the results of any appraisal) to deny a borrower’s request for PMI cancellation, no later than 30 days after the date the request is received, or the date on which the borrower satisfies any evidence and certification requirements established by the lender, whichever is later (12 USC 4904(b)(1) and 12 USC 4904(b)(2)(A)).

  10. When the financial institution acts as servicer for residential mortgage transactions, it provides borrowers written notices of the grounds it relied on (including the results of any appraisal) for refusing to automatically terminate PMI not later than 30 days after the scheduled termination date (12 USC 4904(b)(2)(B)).

    NOTE: The scheduled termination date is reached when, based on the initial amortization schedule (in the case of a fixed rate loan) or the amortization schedule(s) (in the case of an adjustable rate loan), the principal balance of the loan is first scheduled to reach 78% of the original value of mortgaged property, assuming the borrower is current on that date or the earliest date thereafter on which the borrower becomes current.

  11. When the financial institution acts as a servicer for adjustable rate residential mortgage transactions, the financial institution notifies borrowers that the cancellation date has been reached (12 USC 4903(a)(1)(B)(i)).

  12. When the financial institution acts as a servicer for adjustable rate residential mortgage transactions, the financial institution notifies the borrowers on the termination date that PMI has been cancelled or will be cancelled as soon as the borrower is current on loan payments (12 USC 4903(a)(1)(B)(ii)).

  13. When the financial institution requires “Lender Paid Mortgage Insurance” (LPMI) for residential mortgage transactions, it provides a written notice to a prospective borrower on or before the loan commitment date that includes:

    a. A statement that LPMI differs from borrower paid mortgage insurance (BPMI) in that the borrower may not cancel LPMI, while BPMI is subject to cancellation and automatic termination under the HPA (12 USC 4905(c)(1)(A)).

    b. A statement that LPMI usually results in a mortgage with a higher interest rate than BPMI (12 USC 4905(c)(1)(B)(i)).

    c. A statement that LPMI only terminates when the transaction is refinanced, paid off, or otherwise terminated (12 USC 4905(c)(1)(B)(ii)).

    d. A statement that LPMI and BPMI both have benefits and disadvantages and a generic analysis reflecting the differing costs and benefits of each over a 10-year period, assuming prevailing interest and property appreciation rates (12 USC 4905(c)(1)(C)).

    e. A statement that LPMI may be tax-deductible for federal income taxes if the borrower itemizes expenses for that purpose (12 USC 4905(c)(1)(D)).

  14. When the lender requires LPMI for residential mortgage transactions and the financial institution acts as servicer, it notifies the borrower in writing within 30 days of the termination date that would have applied if it were a BPMI transaction that the borrower may wish to review financing options that could eliminate the requirement for PMI (12 USC 4905(c)(2)).

  15. The financial institution prohibits borrower-paid fees for the disclosures and notifications required under the HPA (12 USC 4906).

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