Thursday, October 19, 2017

All About the Home Owners Protection Act

Posted by Tom April 9, 2014 2:17pm

Photo Credit: freedigitalphotos.net

On February 25, 2014, the FDIC has released its revised interagency consumer compliance exam procedures for the mortgage rules that became effective with Dodd-Frank Act. The focus of the issuance of the procedures is part of the FDIC's efforts to inform affected banks about bank regulatory developments in hopes of creating a better dialogue between the FDIC and the institutions it monitors. As a firm, our various department heads and Subject Matter Experts have reviewed the procedures to relay to our clients the areas of interest from the release.

An area that the procedures appear to be revamped under the “Lending Compliance Risk” section of the procedures is the Home Owners Protection Act (HOPA), also known as the “PMI Cancellation Act” because the entire Regulation is based around consumers cancelling their PMI insurance.

Personal Mortgage Insurance (or PMI) is a type of indemnity that protects lenders from the risk of default and foreclosure. PMI allows prospective borrowers who for whatever reason do not provide noteworthy down payments to obtain mortgage financing at affordable rates. PMI is used primarily to grant loans where the loan to value ratio exceeds eighty percent, thus causing a higher risk for the lending institution. With the insurance in place, a lender is better positioned to recoup some of the costs that are accrued when a property is foreclosed upon, and the lender attempts to resell it. Interest payments, taxes, insurance, and other expenses involved can be covered.

The problem (one of several noted here) arises if it is perceived the lender is charging what can be considered “excessive” PMI, as it benefits only the lender, and leaves the consumer with a higher payment. Another major issue is that if a homeowner has experienced problems in trying to cancel PMI.  Because there were wide arrays of bank and lender criteria for cancelling PMI during the recent crisis, it became a major issue.  The Act, once established, protects consumers by disallowing PMI coverage that was “life of loan” (in other words, no termination, regardless of LTV risk). It also clears the muddied waters by laying out uniform procedures for both cancellation and termination of PMI policies.

By reviewing the guidance and updated procedures, we noted several areas that are sure to be a part of any upcoming exam.

  • The examiners will be ensuring that internal controls in place to adequately monitor HOPA. This could be performed though reviewing policies and procedures, ensuring loan file documentation is accurate,  sufficient training is in place to facilitate HOPA compliance,  adequate training is in place, and any software product is up to the job of HOPA monitoring. There may be other areas that are dug into, but essentially, those practices are the life blood of any satisfactory compliance function. It may be a prudent time to review your HOPA controls to ensure you have the proper tools in place for the additional scrutiny that may be coming. 
  • A great  deal of this examination  will cover two types of sampling – those mortgages that have recently obtained PMI, and those that have had it for a while,  and  could potentially be eligible for cancellation. These samples will include those serviced by the bank, not just those within the portfolio.  The examiners will be ensuring that written initial disclosures for fixed and adjustable rate residential mortgage transactions that require PMI reflect the HOPA requirements and are properly distributed to a consumer.

The forms tested can include the following:

Initial disclosures for:

  1. fixed rate mortgage
  2. adjustable rate mortgages;
  3. high risk loans
  4. lender-paid mortgage insurance

Annual notices for:

  1. fixed and adjustable rate mortgages
  2. high-risk loans
  3. existing residential mortgages.
Notices of:
  1. cancellation
  2. termination
  3. grounds for not canceling PMI
  4. grounds for not terminating PMI
  5. cancellation date for adjustable rate mortgages
  6. termination for lender paid mortgage insurance
Field examiners will be utilizing the sample they picked to ensure that borrowers are not charged for any of the required notifications or disclosures that have to be issued because of HOPA.

Again, this is a good time to ensure that any disclosures or documents issued in regard to PMI are up to date and meet all regulatory requirements.

  • The examiners will likely review a sample of recent written requests (if any) from borrowers to cancel their private mortgage insurance (PMI).  In this area, they will ensure that the bank has an established process in place to handle such requests. A strong process is required for consumer based cancellation request, as this was the main focal point of consumer complaints in the past.  Clearly outlined procedures of what is required of a borrower (updated appraisal, etc.) in order to facilitate this in a timely manner are a must. This can save an institution from complaints of discrimination or bad business practices.
  • They will also review a sample of “non-high risk” PMI residential mortgage transactions where the borrower did not request cancellation. They will test loans that have reached a 78% or lower LTV ratio based on the original value of the property, amortization schedules and that are current.  They will then verify that the PMI was terminated according to HOPA, and in a timely manner.
  • If applicable, they will be testing any defined “high risk” PMI residential mortgage transactions that have reached a 77% or lower LTV based on the original value of the property.  They will ensure that the PMI was cancelled timely based on the appropriate amortization schedule.
  • Finally, they will review loans that have had PMI canceled or terminated.  For PMI loans canceled upon the borrowers’ requests.  In such instances, they will ensure that the lender did not collect PMI payment(s) beyond 30 days of the borrower satisfying the evidence and certification requirements to cancel PMI. This also applies for loans that were automatically terminated due to amortization. This is where an effective tickler or software system comes into play, and why the regulators require that this be monitored as an effective control.

As you can see, the examination process can be become quite detailed in its implementation. Many institutions have mitigated the risk of this area by limiting these types of high LTV ratio loans in their portfolio.  If not, a thorough review of all controls and documents related to HOPA should be performed in a timely manner, (either internally or by an appropriate third party) and periodically going forward in a effort to keep atop of an ever changing regulatory environment.

 

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