What Is the Homeowner’s Protection Act?
The HPA applies to residential mortgage loans, including loans for single-family homes, condos, and other multi-unit residential housing. The Act does not cover government-backed loans like FHA loans or VA loans, and it treats conforming loans and “high-risk” loans differently.
In addition to setting rules for canceling PMI, the HPA requires lenders to inform borrowers about their rights. Disclosures include upfront and annual notices regarding when and how borrowers can cancel PMI. Information includes details about the amortization schedule, when to request cancellation, and any features that might limit the ability to have PMI canceled.
The HPA became effective on July 29, 1999. Lenders must still provide disclosures to borrowers who took out loans before that date, however.
- Alternate name: PMI Cancellation Act
- Acronym: HPA
How Does the HPA Work?
Homeowners have faced challenges eliminating PMI charges, even when PMI is no longer required on their loans. Borrowers and lenders have been confused about how to cancel PMI in some cases, and some unscrupulous lenders have dragged their feet on canceling PMI charges. The HPA, also known as the PMI Cancellation Act, stepped in to establish rules when it was signed into law:
- Citing when homeowners can cancel PMI and stop paying premiums
- Determining when lenders must automatically stop charging borrowers for PMI
- Requiring that lenders must provide disclosures when a loan requires PMI
- Determining how to handle any unearned premiums that homeowners pay
The HPA prevents situations where homeowners pay monthly PMI charges for the entire life of their loan.
In addition to setting rules for canceling PMI, the HPA requires lenders to inform borrowers about their rights. Disclosures include upfront and annual notices regarding when and how borrowers can cancel PMI. Information includes details about the amortization schedule, when to request cancellation, and any features that might limit their ability to have PMI canceled.
Borrowers get an annual notice reminding them that they can request cancellation and providing their lender's contact information.
Consumers must maintain a good payment history to take advantage of the HPA.
How Does PMI Work?
PMI is typically only required when homeowners make down payments of less than 20%. Lenders risk losing money with loan-to-value (LTV) ratios that are higher than this if they have to foreclose on a home and sell it quickly. But lenders face much less risk, and homeowners—in theory—should stop paying monthly PMI charges when LTV drops below 80%.
Some loans use lender paid mortgage insurance (LPMI) instead of adding premiums to the homeowner’s monthly payment. Although the name suggests otherwise, borrowers still pay for LPMI, but they don’t pay for it month by month. Borrowers can instead pay either:
- A lump sum payment at the beginning of the loan
- A higher interest rate on the loan balance, which leads to higher monthly mortgage (principal and interest) payments
Most borrowers with LPMI opt for the higher interest rate, but that interest rate lasts for the life of the loan and there's no way to cancel LPMI and keep your existing loan. Homeowners must instead pay off their LPMI loan, typically by refinancing with a new loan.
The HPA nonetheless applies to loans with LPMI. Lenders are required to provide disclosures to borrowers that explain how LPMI works and highlight the higher interest rates typically found with LPMI. The disclosure must discuss the pros and cons of different options.
Requirements for Canceling PMI
Borrowers can cancel PMI by submitting a written request to their lenders when the loan is about to reach 80% LTV based on its amortization schedule.
Homeowners can also make this request if they bring the LTV down to 80% by making extra loan payments. Homeowners might have to provide proof that the property has not lost value in order to qualify.
The HPA requires lenders to cancel PMI coverage automatically when the loan is scheduled to reach 78% of the original LTV. Lenders must cancel monthly PMI charges after the loan reaches the halfway point of its amortization schedule when PMI isn't canceled due to borrower request or automatic termination.
The HPA is complicated, and the details of your loan affect your rights under the Act. For example, any liens against your property might prevent you from successfully canceling coverage. Nonconforming loans such as jumbo loans might require that you wait until you get to 77% LTV.
- The Homeowners Protection Act (HPA) was passed in 1998 to address abuse of and confusion regarding homeowners’ requirements to pay for private mortgage insurance (PMI).
- The law requires that lenders must inform borrowers of their rights, including when they can cancel the insurance.
- The HPA addresses both PMI and lender paid mortgage insurance (LPMI), which borrowers must pay in a lump sum at the beginning of the loan or through higher monthly interest payments.
- The HPA sets loan-to-value ratios for automatic cancellation of most PMI policies.