District Circular Letters
July 29, 1999
BANKING SUPERVISION AND REGULATION:
PRIVATE MORTGAGE INSURANCE
To State Member Banks and
U.S. Offices of Foreign Banking Organizations
in the Twelfth Federal Reserve District
Private Mortgage Insurance Provisions of the Homeowners Protection
Act of 1998
As you may be aware, in July 1998, the president signed into law the Homeowners
Protection Act of 1998 (the Act). The Act, which becomes effective July
29, 1999, requires lenders or servicers to provide certain disclosures
concerning private mortgage insurance (PMI) for loans secured by the consumer's
primary residence consummated on or after July 29, 1999. The Act also contains
disclosure provisions for mortgage loans that close before July 29, 1999.
In addition, the Act includes provisions for borrower-requested cancellation
and automatic termination of PMI.
For mortgage loans consummated on or after July 29, 1999, the Act requires
that borrowers receive initial amortization schedules and disclosures concerning
cancellation of PMI at the time of loan consummation, and additional disclosures
annually. The new law requires creditors to disclose the date at which borrowers
can expect automatic termination of their PMI (generally, when the loan
balance is first scheduled to reach 78 percent of the original value of
the mortgaged property). Customers may also request PMI cancellation at
80 percent loan-to-value provided certain conditions are met. Disclosures
vary depending on whether the loan has "borrower paid PMI" or "lender paid
PMI," is classified as a "fixed rate mortgage" or "adjustable rate mortgage,"
or is designated as a "high-risk loan."
If PMI was required in connection with a residential mortgage entered into
before July 29, 1999, the servicer must disclose to the borrower in an annual
written statement: (a) that PMI may, under certain circumstances, be cancelled
by the borrower with the consent of the lender or in accordance with state
law; and (b) an address and telephone number that the borrower may use to
contact the servicer to determine whether the borrower may cancel the PMI.
The new law permits lenders and servicers to use standardized forms to provide
the required disclosures, but does not mandate that specific forms be used.
In addition, the Act specifically allows the annual disclosures to be included
with other disclosures, such as the disclosure of interest payments required
by the Internal Revenue Service or on the disclosure relating to the escrow
account made as required under the Real Estate Settlement Procedures Act
of 1974.
Federal Reserve Enforcement Authority
Again, the new law becomes effective on July 29, 1999. While none of the
federal financial regulatory agencies has rule-writing authority under this
new legislation, the Federal Reserve and the other banking agencies have
been granted enforcement authority with respect to the institutions under
their supervision. Accordingly, we encourage you to notify your staff of
this new law and to establish policies and procedures to assure compliance.
Our examination staff will be reviewing your records during the course of
future examinations to ensure that you are in compliance with the new law.
Additional Information
Copies of the Homeowners
Protection Act of 1998 may be obtained from the Library of Congress
website.
If you have any questions regarding this matter, please contact Mr. Gregory
Imm, Consumer Compliance Liaison, at (415) 974-2953,
or Ms. Christiane Price, Consumer Compliance Liaison, at (415)
974-2955, both of our Banking Supervision and Regulation Department
FEDERAL RESERVE BANK OF SAN FRANCISCO
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