[House Report 105-55]
[From the U.S. Government Publishing Office]
105th Congress Report
HOUSE OF REPRESENTATIVES
1st Session 105-55
_______________________________________________________________________
HOMEOWNERS INSURANCE PROTECTION ACT
_______
April 16, 1997.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Leach, from the Committee on Banking and Financial Services,
submitted the following
R E P O R T
[To accompany H.R. 607]
[Including cost estimate of the Congressional Budget Office]
The Committee on Banking and Financial Services, to whom was
referred the bill (H.R. 607) to amend the Truth in Lending Act
to require notice of cancellation rights with respect to
private mortgage insurance which is required by a creditor as a
condition for entering into a residential mortgage transaction,
and for other purposes, having considered the same, report
favorably thereon with amendments and recommend that the bill
as amended do pass.
The amendments are as follows:
Strike out all after the enacting clause and insert in lieu
thereof the following:
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Homeowners Insurance Protection Act''.
SEC. 2. PROVISIONS RELATING TO PRIVATE MORTGAGE INSURANCE.
(a) In General.--Section 6 of the Real Estate Settlement Procedures
Act of 1974 (12 U.S.C. 2605) is amended--
(1) by redesignating subsections (f), (g), (h), (i), and (j)
as subsections (k), (l), (m), (n), and (o), respectively; and
(2) by inserting after subsection (e) the following new
subsections:
``(f) Disclosures Relating to Private Mortgage Insurance.--
``(1) Disclosure at settlement relating to existence of
pmi.--With regard to any covered mortgage loan, the lender
shall disclose, in writing at or before the settlement of such
covered mortgage loan, whether any private mortgage insurance
will be required to be obtained or maintained with respect to
such mortgage loan, including any lender-paid private mortgage
insurance, and the period during which such insurance will be
required to be in effect.
``(2) Disclosure at settlement relating to terminability of
pmi.--If the lender requires, as a condition for entering into
a covered mortgage loan, the borrower to assume an obligation
to make separately designated payments toward the premiums for
private mortgage insurance with respect to such loan, the
lender shall disclose, in writing at or before the settlement
of such covered mortgage loan any of the following notices
which are applicable with respect to such loan:
``(A) PMI obligations terminable upon request.--In
the case of a loan described in paragraph (3), that--
``(i) the borrower's obligation to make
separately designated payments toward the
premiums for private mortgage insurance may be
able to be terminated while the mortgage is
outstanding (including a cancellation permitted
before the date of automatic termination under
subsection (g)); and
``(ii) the borrower will be notified by the
servicer not less frequently than annually of
an address and a toll-free or collect-call
telephone number which the borrower may use to
contact the servicer to determine--
``(I) whether the borrower's
obligation to make separately
designated payments toward the premium
for private mortgage insurance may be
terminated while the mortgage loan is
outstanding (or before the date of
automatic termination); and
``(II) if such obligation may be
terminated while the loan is
outstanding (or before such date), the
conditions and procedures for such
termination.
``(B) PMI obligations terminable by operation of
law.--That the borrower's obligation to make separately
designated payments toward the premiums for private
mortgage insurance will be terminated by operation of
law under subsection (g).
``(C) Nonterminable pmi obligations.--In the case of
a loan not described in paragraph (3), that the
borrower's obligation to pay any amount to be applied
to any portion of the premiums for private mortgage
insurance will not be terminated at the request of the
borrower.
``(3) Disclosure with annual statements or other
communications.--If--
``(A) private mortgage insurance is required as a
condition for entering into a covered mortgage loan;
and
``(B) the borrower's obligation to make separately
designated payments toward the premiums for such
insurance may be terminated at the borrower's request,
the servicer shall, not less frequently than annually, disclose
to the borrower a clear and conspicuous statement containing
the disclosures set forth in subparagraphs (A) and (B) of
paragraph (2), including the address and telephone number
referred to in such paragraph, based on the servicer's
knowledge at the time such periodic communication is given.
Such disclosure shall be included with any annual statement of
account, escrow statement, or related annual communications
provided to the borrower, while such private mortgage insurance
is in effect.
``(4) Disclosures furnished without cost to borrower.--No fee
or other cost may be imposed on any borrower for preparing and
delivering any disclosure to the borrower pursuant to this
subsection.
``(g) Mandatory Termination of PMI Obligations at 75 Percent Loan-to-
Value Ratio.--
``(1) In general.--Notwithstanding any provision of a covered
mortgage loan, any obligation of the borrower to make
separately designated payments toward the premiums for any
private mortgage insurance in effect with respect to such loan
shall terminate, except as provided in paragraph (3), by
operation of law as of the 1st day of the 1st month which
begins after the date on which the principal balance
outstanding on all residential mortgages on the property
securing the loan is equal to or less than 75 percent of the
lesser of--
``(A) if the loan was made for purchase of the
property, the sales price of the property under such
purchase; or
``(B) the appraised value of the property, as
determined by the appraisal conducted in connection
with the making of the loan.
``(2) Disclosure upon termination.--Not later than 45 days
after the date of termination pursuant to paragraph (1) of a
private mortgage insurance requirement for a covered mortgage
loan, the servicer shall notify the borrower under the loan, in
writing, that--
``(A) the private mortgage insurance has terminated
and the borrower no longer has private mortgage
insurance; and
``(B) no further premiums, payments, or other fees
shall be due or payable by the borrower in connection
with the private mortgage insurance.
``(3) Exception for delinquent borrowers.--
``(A) In general.--Paragraph (1) shall not apply with
respect to any covered mortgage loan on which the
payments are not current as of the date that the
obligation to make private mortgage insurance premium
payments in connection with the loan would otherwise
terminate pursuant to paragraph (1).
``(B) Effectiveness once payments are current.--In
the case of any covered mortgage loan to which
subparagraph (A) applies, paragraph (1) shall apply
with respect to such loan as of the 1st day of the 1st
month which begins after the date that such payments
become current.
``(4) Return of payments toward premiums.--
``(A) Return of payments to borrower.--The servicer
for a covered mortgage loan shall promptly return to
the borrower any payments toward the premiums for any
private mortgage insurance for such loan covering any
period occurring after the date of automatic
termination for such loan under this subsection.
``(B) Return of payments to servicer.--The private
mortgage insurer for a covered mortgage loan shall
promptly return to the servicer any payments received
from the servicer toward the premiums for any private
mortgage insurance for such loan covering any period
occurring after the date of automatic termination for
such loan under this subsection.
``(h) Lenders' Conditions for PMI.--
``(1) Conditions for termination of borrower's obligation to
pay pmi.--The conditions for the termination of the borrower's
obligation to make separately designated payments toward the
premium for private mortgage insurance with respect to a
covered mortgage loan, including any changes in such
conditions, shall be reasonably related to the purposes for
which the requirement for private mortgage insurance was
imposed at the time the loan was made.
``(2) Borrower's right to terminate in accordance with
conditions.--In the case of any covered mortgage loan described
in subsection (f)(3), the borrower shall have the right under
this paragraph to terminate the borrower's obligation to make
separately designated payments toward the premiums for such
insurance if the conditions and procedures for such termination
most recently communicated to the borrower (pursuant to a
request by the borrower pursuant to notice under subsection
(f)(3) or otherwise) have been met.
``(i) Effect on Other Agreements.--The provisions of subsections (f),
(g), and (h) shall supersede any conflicting provision contained in any
agreement relating to the servicing of a covered mortgage loan entered
into by the Federal National Mortgage Association, the Federal Home
Loan Mortgage Corporation, or any private investor or noteholder (or
any successors thereto). A servicer which cancels private mortgage
insurance on a covered mortgage loan in compliance with the provisions
of subsection (g) or (h) or in accordance with investor guidelines in
existence at the time concerning the cancellation of private mortgage
insurance (regardless of whether the cancellation by the servicer was
mandated by such subsections or initiated by the borrower) shall not be
required to repurchase such mortgage loan from the investor or holder
of such mortgage loan solely on the grounds that the private mortgage
insurance was canceled in accordance with the provisions of such
subsections or investor guidelines, as applicable.
``(j) Limitations on Liability.--If the servicer for a covered
mortgage loan has complied with the requirements under subsections (f)
and (g) to provide disclosures, the servicer shall not be considered to
have violated any provision of subsection (f), (g), or (h) and shall
not be liable for any such violation--
``(1) due to any failure on the part of the servicer to
provide disclosures required under such subsections resulting
from the failure of any mortgage insurer, any mortgage holder,
or any other party to timely provide accurate information to
the servicer necessary to permit the disclosures; or
``(2) due to any failure on the part of any private mortgage
insurer, any mortgage holder, or any other party to comply with
the provisions of such subsections.
Each private mortgage insurer and each mortgage holder for a covered
mortgage loan shall provide accurate and timely information to the
servicer for such loan necessary to permit the disclosures required by
subsections (f) and (g). In the event of a dispute regarding liability
for a violation of subsection (f), (g), or (h), and upon request by the
borrower, a servicer shall provide the borrower with information
stating the identity of the insurer or mortgage holder.''.
(b) Definitions.--Subsection (n) of section 6 of the Real Estate
Settlement Procedures Act of 1974 (as redesignated by subsection
(a)(1)) is amended--
(1) by redesignating paragraphs (1), (2), and (3) as
paragraphs (2), (5), and (6), respectively;
(2) by inserting before paragraph (2) (as redesignated by
paragraph (1) of this subsection) the following new paragraph:
``(1) Covered mortgage loan.--The term `covered mortgage
loan' means a federally related mortgage loan under which the
property securing the loan is used by the borrower as the
borrower's principal residence.''; and
(3) by inserting after paragraph (2) (as so redesignated) the
following new paragraphs:
``(3) Mortgage insurance.--The term `mortgage insurance'
means insurance, including any mortgage guaranty insurance,
against the nonpayment of, or default on, a mortgage or loan
involved in a residential mortgage transaction, the premiums
for which are paid by the borrower.
``(4) Private mortgage insurance.--The term `private mortgage
insurance' means mortgage insurance other than mortgage
insurance made available under the National Housing Act, title
38 of the United States Code, or title V of the National
Housing Act of 1949.''.
SEC. 3. SCOPE OF APPLICABILITY.
(a) Notice at or Before Settlement.--Paragraphs (1) and (2) of
section 6(f) of the Real Estate Settlement Procedures Act of 1974 (as
added by section 2(a) of this Act) shall apply only with respect to
covered mortgage loans made after the end of the 1-year period
beginning on the date of the enactment of this Act.
(b) Notice of PMI Obligation Terminability.--Paragraphs (3) and (4)
of section 6(f) of the Real Estate Settlement Procedures Act of 1974
(as added by section 2(a) of this Act) shall apply beginning upon the
end of the 1-year period that begins on the date of the enactment of
this Act and with respect to any covered mortgage loan without regard
to the date on which such loan was made.
(c) Termination of PMI Obligation by Operation of Law.--Subsections
(g) and (h) of section 6 of the Real Estate Settlement Procedures Act
of 1974 (as added by section 2(a) of this Act) shall apply only with
respect to covered mortgage loans made after the end of the 1-year
period beginning on the date of the enactment of this Act.
SEC. 4. CONFORMING AMENDMENTS.
(a) Section 6.--Section 6(m) of the Real Estate Settlement Procedures
Act of 1974 (12 U.S.C. 2605) (as redesignated by section 2(a)(1) of
this Act) is amended--
(1) by inserting ``(not including subsection (f))'' before
``regarding timing''; and
(2) by adding at the end the following new sentence: ``The
preceding sentence shall not apply to any State law or
regulation relating to notice or disclosure to a borrower
regarding obtaining, maintaining, or terminating private
mortgage insurance and such State laws and regulations shall be
subject to the provisions of section 18.''.
(b) Section 10.--Section 10(b) of the Real Estate Settlement
Procedures Act of 1974 (12 U.S.C. 2609(b)) is amended by striking
``section 6(i)'' and inserting ``section 6(n)''.
(c) Section 12.--Section 12 of the Real Estate Settlement Procedures
Act of 1974 (12 U.S.C. 2610) is amended by striking ``section 6(i)''
and inserting ``section 6(n)''.
Amend the title so as to read:
A bill to amend the Real Estate Settlement Procedures Act
of 1974 to require notice of cancellation rights with respect
to private mortgage insurance which is required as a condition
of entering into certain federally related mortgage loans and
to provide for cancellation of such insurance, and for other
purposes.
Purpose and Summary
The purpose of this legislation is to establish Federal
guidelines for disclosure and termination of private mortgage
insurance (PMI). Some states already require disclosures
regarding PMI and a few states even require automatic
termination of PMI. For instance, New York requires PMI to be
terminated when a borrower reaches 75% loan-to-value ratio
(LTV). Due to the variance in states requirements, a Federal
guideline would serve as a minimum standard.
H.R. 607, as amended by the Committee, provides for three
major reforms of the private mortgage insurance industry.
First, it requires mortgage lenders and servicers to disclose
to borrowers if PMI is required and, if so, how borrowers can
terminate it. These notices are required at the time of
settlement and annually while PMI is required. Second, the bill
provides for a statutory right for borrowers to terminate PMI
once the conditions disclosed under the above-required notices
are met. Third, the bill provides for automatic termination of
PMI once the loan reaches a 75% LTV and if the borrower is
current on payments. The borrower must also be given notice
once the loan reaches the 75% LTV. The new notice requirement
at settlement takes effect one year after enactment. The annual
notice requirement also takes effect one year after enactment
and applies to existing loans. The new statutory rights to
terminate PMI when the disclosed conditions are met and when
the borrower has reached the 75% LTV are effective for loans
made one year after enactment.
H.R. 607, as amended, would not preempt State laws.
Further, the bill would not affect lender paid mortgage
insurance (LPMI), except for the disclosure requirements made
at settlement.
Background and Need for Legislation
Private mortgage insurance plays an important role in the
mortgage industry by allowing low-income borrowers or borrowers
with little cash greater access to home ownership. PMI enables
homeowners to purchase homes with as little as a 3% to 5% down
payment by insuring the mortgage lender or investor against
default. For conventional mortgages, PMI is normally required
whenever borrowers do not have 20% down payments.
Throughout the life of a mortgage, there are approximately
four key parties: borrower (homeowner); lender (originator of
loan); servicer (point of contact with the borrower); and
investor (owner of the loan). In some cases, a lender can also
serve as the servicer and/or investor of the loan. In the
majority of cases, however, once a mortgage is originated, the
loan is eventually sold to the secondary market which is either
facilitated by the private capital markets or Government
Sponsored Enterprises (GSEs), such as Federal National Mortgage
Association (Fannie Mae) or Federal Home Loan Mortgage
Corporation (Freddie Mac).
The secondary market participants provide underwriting
standards which require mortgage insurance for loans with down
payments of less than 20% of the value of the property.
Usually, a mortgage with a LTV ratio equal to or less than 80%
is considered an acceptable risk by the secondary market
participants. While PMI serves the secondary market, it should
not be confused with government mortgage insurance programs
such as the FHA (Federal Housing Administration), VA (Veterans
Affairs) and RHS (Rural Housing Service). These government
mortgage insurance programs are packaged by the government and
owned and operated by GNMA (Government National Mortgage
Association). In either case, loans with less than 20% equity
or down payment will require some type of insurance to protect
the investor from loss by default or non-payment.
Some reports estimate that approximately 10% to 45% of
current mortgages are insured by the private sector or the
Federal government. Industry sources indicate that since 1994,
PMI ``has saved home buyers $38 billion on down payments [and
over] the past 40 years, private mortgage insurance has enabled
17 million American households to become homeowners.''
Pursuant to industry's practices, including those of Fannie
Mae and Freddie Mac, investors allow termination of PMI when
(1) the LTV is less than 80%, (2) the homeowner has a good
payment history, and (3) the property value has not declined
which is usually determined by an appraisal paid for by the
homeowner of the property. Because there can be hundreds of
investors, including the GSEs, local and state retirement
funds, private capital markets, etc., no uniform termination
guidelines exist. Thus, it is possible that homeowners who use
the same mortgage servicer could be subject to different
termination guidelines.
The need for legislation exists because homeowners are not
always informed when PMI is required, and if it is, how it can
be terminated. As Fannie Mae and Consumers Union stated in
their testimonies, borrowers continue to pay PMI premiums when
such insurance is no longer needed. Congressman Hansen
testified that, on an average, $16.25 million of overpayments
are made by homeowners every month. Legislation is needed to
establish Federal standards for disclosure and termination of
PMI so that borrowers do not pay for insurance after all
parties in the mortgage process agree that such insurance is no
longer necessary.
Nothing in this bill is intended to increase the regulatory
burdens on the private sector, especially mortgage servicers
and lenders. Generally, mortgage servicers and lenders already
have to make a number of disclosures to homeowners at
settlement and during the life of the mortgage under the Truth
in Lending Act and Real Estate Settlement Procedures Act. The
intent of the Committee in drafting this legislation was to
ensure that most of the notices concerning PMI are made in
conjunction with the notice requirements of these acts. In
addition, the biggest and most reputable mortgage servicers in
the country are beginning to provide borrowers notices on PMI.
Finally, a number of states already require or are considering
requiring notices on PMI. For instance, the states of
California and New York, which comprise 20% of the home
mortgage market, require disclosure to borrowers on private
mortgage insurance. This law would provide a minimum disclosure
standard for the entire country, which may make other state
legislatures less likely to impose new state standards on this
subject.
Hearings
H.R. 607, the Homeowners Insurance Protection Act, was
introduced on February 5, 1997, by Congressman James Hansen (R-
UT). On March 18, 1997, the Committee held a hearing on H.R.
607 and issues relating to PMI.
Testifying at the hearing were: The Honorable James Hansen;
the Honorable Joseph Kennedy (D-MA); The Honorable Waters (D-
CA); Ann Logan, Executive Vice President & Chief Credit
Officer, Fannie Mae; Michael Stamper, Executive Vice President
for Risk Management, Freddie Mac; William Lacy, Chairman & CEO,
Mortgage Guaranty Insurance Corporation on behalf of the
Mortgage Insurance Companies of America (MICA); Ron McCord,
President, American Mortgage & Investment Company on behalf of
the Mortgage Bankers Association (MBA); Michelle Meier, Counsel
for Government Affairs, Consumers Union; and Margot Saunders,
Managing Attorney, National Consumer Law Center.
Committee Consideration and Votes
(Rule XI, Clause 2(l)(2)(B))
On March 20, 1997, the Committee met in open session to
mark up H.R. 607, the ``Homeowners Insurance Protection Act.''
The Committee considered as original text for purposes of
amendment an Amendment in the Nature of a Substitute which
incorporated the disclosure provisions of H.R. 607 and
requirements of automatic termination of private mortgage
insurance (PMI) at 75% loan-to-value ratio (LTV) and
termination once a borrower has fulfilled all disclosed
conditions for termination.
During the mark up, the Committee adopted three amendments
by voice vote. First, an amendment to the substitute was
offered by Mssrs. Leach, Bereuter and Gonzalez making a number
of clarifications. Second, an amendment to the Leach et al
amendment was offered by Mr. McCollum to impose an obligation
on private mortgage insurers and mortgage holders to provide
accurate and timely information to mortgage servicers on PMI.
Third, an amendment offered by Mr. Watt to require the servicer
and mortgage insurer to return to the borrower insurance
payments made after the date of automatic termination.
The Committee defeated, by voice vote, two amendments. The
first defeated amendment, offered by Mr. Vento, would have
allowed automatic termination of PMI at 80% LTV if the borrower
had a good payment history, the property value had not
decreased, and the underlying loan was not specially
structured; otherwise PMI would have been terminable at the
half-life of the mortgage. The second amendment, offered by Mr.
Kennedy, would have allowed PMI on existing mortgages to be
canceled once the borrower had complied with any conditions
established by the servicer
Additionally, the Committee approved, by a recorded vote of
22-12, an amendment offered by Ms. Waters to strike the
provisions in the Amendment in the Nature of a Substitute which
would have preempted state laws regarding the disclosure
requirements in the bill.
YEAS NAYS
Mrs. Roukema Mr. Leach
Mr. Bachus Mr. McCollum
Mr. King Mr. Bereuter
Mr. Campbell Mr. Baker (LA)
Mrs. Kelly Mr. Castle
Mr. Paul Mr. Royce
Mr. Cook Mr. Lucas
Mr. Snowbarger Mr. Metcalf
Mr. Riley Mr. Ehrlich
Mr. Hill Mr. Weldon
Mr. LaFalce Mr. Ryun
Mr. Vento Mr. Sessions
Mr. Frank
Ms. Waters
Mr. Barrett
Mr. Watt
Mr. Hinchey
Mr. Bentsen
Mr. Jackson
Ms. Kilpatrick
Mr. Maloney
Ms. Hooley
After adopting the Amendment in the Nature of a Substitute,
as amended, a motion to adopt H.R. 607, as amended, for final
passage and to be reported to the full House of Representatives
for consideration was approved 36-1.
YEAS NAYS
Mr. Leach Mr. Paul
Mr. McCollum
Mrs. Roukema
Mr. Bereuter
Mr. Lazio
Mr. Bachus
Mr. Castle
Mr. Royce
Mr. Metcalf
Mr. Ney
Mr. Ehrlich
Mr. Fox
Mrs. Kelly
Mr. Weldon
Mr. Ryun
Mr. Cook
Mr. Snowbarger
Mr. Riley
Mr. Sessions
Mr. LaFalce
Mr. Vento
Mr. Schumer
Mr. Frank
Mr. Kennedy
Mr. Sanders
Mrs. Maloney
Ms. Roybal-Allard
Mr. Barrett
Ms. Velazquez
Mr. Watt
Mr. Hinchey
Mr. Ackerman
Mr. Bentsen
Mr. Jackson
Ms. Hooley
Ms. Carson
The committee adopted, by voice vote, a motion to authorize
the Chairman to offer such motions as may be necessary in the
House of Representatives to go to conference with the Senate.
Committee Oversight Findings
In compliance with clause 2(l)(3)(A) of rule XI of the
Rules of the House of Representatives, the Committee reports
that the findings and recommendations of the Committee, based
on oversight activities under clause 2(b)(l) of rule X of the
Rules of the House of Representatives, are incorporated in the
descriptive portions of this report.
Committee on Government Reform and Oversight Findings
No findings and recommendations of the Committee on
Government Reform and Oversight were received as referred to in
clause 2(l)(3)(d) of rule XI of the Rules of the House of
Representatives.
Constitutional Authority
In compliance with clause 2(l)(4) of rule XI of the Rules
of the House of Representatives, the constitutional authority
for Congress to enact this legislation is derived from the
interstate commerce clause (Clause 3, Article I). In addition,
the power ``to coin money'' and ``regulate the value thereof''
provided for in Clause 5, Article I, has been broadly construed
to regulate every phase of the subject of currency, including
contracts for the payment of money, such as Federal regulation
of mortgage contracts.
New Budget Authority and Tax Expenditures
Clause 2(l)(3)(B) of House rule XI is inapplicable because
this legislation does not provide new budgetary authority or
increased tax expenditures.
Advisory Committee Statement
No advisory committees within the meaning of section 5(b)
of the Federal Advisory Committee Act were created by this
legislation.
Congressional Accountability Act
The reporting requirement under section 102(b)(3) of the
Congressional Accountability Act (P.L. 104-1) is inapplicable
because this legislation does not relate to terms and
conditions of employment or access to public services or
accommodations.
Congressional Budget Office Cost Estimate and Unfunded Mandates
Analysis
U.S. Congress,
Congressional Budget Office,
Washington, DC, April 7, 1997.
Hon. Jim Leach,
Chairman, Committee on Banking and Financial Services,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 607, the
Homeowners Insurance Protection Act.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contacts are Lisa H.
Daley (for federal costs), John Patterson (for the impact on
state and local governments), and Patrice Gordon (for the
private-sector impact).
Sincerely,
James L. Blum
(For June E. O'Neill, Director).
Enclosure.
H.R. 607--Homeowners Insurance Protection Act
Summary: H.R. 607 would amend the Real Estate Settlement
Procedures Act (RESPA) to institute certain reforms in the
private mortgage insurance industry. The bill would require
mortgage lenders and loan servicers to notify borrowers of
their rights to cancel mortgage insurance, along with the
procedures to do so. for loans made one year after enactment,
the bill also would provide for the automatic cancellation of
mortgage insurance (including coverage provided by state and
local governments) when the outstanding principal balance on
the loan drops to 75 percent of the value of the home at the
time the loan was issued, provided the borrower's payments are
current. The Department of Housing and Urban Development (HUD)
would issue the necessary regulations and enforce the changes
to RESPA.
Assuming appropriation of the necessary amounts, CBO
estimates that the administrative costs of implementing H.R.
607 would be less than $500,000 annually. In addition, the bill
would affect direct spending and receipts in 1998, and thus
pay-as-you-go procedures would apply. However, CBO estimates
that the net effect of H.R. 607 on both direct spending and
receipts would not be significant.
H.R. 607 would impose both private-sector and
intergovernmental mandates as defined in the Unfunded Mandates
Reform Act of 1995 (UMRA). CBO estimates that the direct costs
of complying with the mandates would not exceed the thresholds
specified in UMRA ($100 million for the private-sector mandates
and $50 million for intergovernmental mandates, in 1996 dollars
adjusted annually for inflation).
Estimated cost to the Federal Government--Spending subject
to appropriations: HUD currently is the primary regulatory
agency for RESPA. To develop regulations and enforce compliance
with the new procedures required by the bill's changes in
RESPA, CBO expects that HUD would require a small number of
additional full-time staff. As a result, CBO estimates that
enacting H.R. 607 would result in additional discretionary
spending of less than $500,000 annually, assuming appropriation
of the necessary amounts.
Direct spending and revenues: This bill would affect
insured depository institutions, including banks, thrifts, and
credit unions that hold qualifying mortgage portfolios. As a
result, the federal banking regulators--the Federal Reserve,
the Comptroller of the Currency, the Federal Deposit Insurance
Corporation, the National Credit Union Administration, and the
Office of Thrift Supervision--would have some responsibility to
monitor and enforce the statute. Spending by these agencies is
not subject to the annual appropriations process. However, CBO
expects than the additional regulatory costs for these agencies
would be small and offset by fees in most cases, resulting in
no significant net costs to the federal government.
Pay-as-you-go considerations: Section 252 of the Balanced
Budget and Emergency Deficit Control Act of 1985 sets up pay-
as-you-go procedures for legislation affecting direct spending
or receipts through 1998. Legislation providing funding
necessary to meet the government's existing deposit insurance
commitment is excluded from these procedures. CBO believes that
requiring insured depository institutions to terminate private
mortgage insurance would not meet the exemption for full
funding of deposit insurance and thus would have pay-as-you-go
implications. Spending by the federal banking regulators to
monitor and enforce the provisions of the bill is estimated to
be small, however, and in most cases would be offset by fees
charged to the depository institutions, resulting in no
significant net cost to the federal government.
Intergovernmental and private-sector impact: H.R. 607 would
impose both private-sector and intergovernmental mandates as
defined in UMRA. The bill contains mandates on mortgage
lenders, loan servicers, and private mortgage insurance (PMI)
companies in the mortgage industry. CBO estimates that the
annual direct costs of complying with mandates identified in
this bill are not likely to exceed $60 million in any of the
first five years that mandates are effective and thus would not
exceed the statutory thresholds for private-sector or
intergovernmental mandates. Inasmuch as state and local
governments finance mortgage loans and service and insure some
of the loans extended, they would bear some of the costs of
complying with these mandates. CBO estimates that at least 95
percent of all identified costs would fall on the private
sector; less than 5 percent of the costs would be borne by
state and local governments.
Private mortgage insurance protects lenders--or the
ultimate purchaser of a mortgage loan, such as Fannie Mae or
Freddie Mac--against financial loss if a borrower defaults on a
mortgage loan. Industry data show that the lower the down
payment, as a percentage of the properly value, the greater is
the risk that the loan will default. Mortgage insurance is
generally used when a borrower makes a down payment of less
than 20 percent of the value of the home--that is, when the
mortgage has a loan-to-value (LTV) ratio greater than 80
percent.
Mandates: The bill would amend the Real Estate Settlement
Procedures Act (RESPA) which currently requires that borrowers
receive disclosures at various times during the loan process.
H.R. 607 would require lenders and servicers to provide
additional disclosures to borrowers. Specifically, H.R. 607
would require lenders to disclose, at or before closing,
whether private mortgage insurance is required and how long
such insurance would have to be in effect. The bill would also
require loan servicers and PMI companies to provide for
automatic cancellation of private mortgage insurance under
certain conditions.
Beginning one year after enactment, H.R. 607 would mandate,
in cases where the lender requires private mortgage insurance
(and the insurance is paid for by the borrower through regular
installments), that the lender must notify the borrower in
writing, at or before closing, whether the PMI policy may be
canceled under certain conditions. The lender would also have
to provide information about whom to contact at the company
servicing the loans to obtain further information about
procedures for cancellation. In addition, the lender would have
to disclose the fact that mortgage insurance may be canceled
after the outstanding principal of the loan reaches 75 percent
of the original value of the house at the time of sale.
Thereafter, loan servicers would be required to notify
borrowers with PMI (including existing loans with PMI) of the
above information with the annual written statement of account.
For new loans, starting one year after enactment, the bill
would mandate automatic termination of PMI once the loan
reaches a 75 percent LTV ratio and the borrower is current with
loan payments. The loan servicer would have to notify borrowers
that their PMI has been canceled when the LTV reaches 75
percent; and servicers and PMI companies would have to refund
to the borrower any premiums paid after the LTV threshold was
reached. H.R. 607 would also provide a right to terminate PMI
for borrowers who have complied with the conditions outlined in
the most recent annual notice concerning mortgage insurance
termination supplied by the lender or mortgage servicer.
Estimated costs of mandates: In the first year after
enactment, the total costs of the mandates identified in this
bill could range from $35 million to $50 million. According to
industry experts and officials at the Department of Housing and
Urban Development, nearly 18,000 lenders and servicers would
have to modify systems to accommodate the transmittal and
storage of additional data. They would also be required to
modify software programs to provide the additional disclosures
to borrowers and to develop the procedures for automatic
termination of private mortgage insurance. After the initial
set-up period of about one year, costs would likely drop to
between $20 million and $30 million per year. The bulk of these
costs cover disclosure at or before settlement to roughly 6
million new borrowers each year and annual disclosure to 5
million or fewer borrowers who are currently paying for
mortgage insurance.
CBO estimates that costs to the mortgage industry would
start to rise again as the loss in premium income to PMI
companies and the loss of interest income to servicers start to
accumulate. (One expert in the private mortgage insurance
industry estimates that as much as 2 percent of all loans that
are currently extended to relatively high-risk borrowers would
no longer be written. In 1996, the eight PMI companies backed
nearly 1 million residential mortgage loans with PMI. The total
value of those loans was $127 billion.) By the fifth year after
implementation, the costs to the industry, measured as
expenditures to comply with disclosure and termination
requirements and the reduction in net income from lost
business, would likely be less than $60 million. Most loans to
which automatic termination would apply would not reach an LTV
ratio of 75 percent to qualify for termination until well after
the 5-year period of analysis required by UMRA.
Estimated impact on State, local and tribal governments:
Because State and local governments participate in mortgage
financing, they would bear some of the costs of complying with
the mandates imposed by H.R. 607. CBO estimates that the State
and local share of such costs would total less than $5 million
per year. All 50 States and some local governments finance
mortgages (primarily with mortgage revenue bonds), 21 States
service at least a portion of their own mortgage portfolio, and
seven States insure mortgages. (Private mortgage insurance as
defined in this bill would also include insurance provided by
State governments. Only insurance provided by the Federal
Government is excluded.) Based on data from the National
Council of State Housing Agencies and Standard & Poor's, CBO
estimates that State and local governments are involved in less
than 5 percent of mortgages that have private mortgage
insurance. Their share of the total costs described above would
thus be relatively small.
Estimate prepared by: Federal cost: Lisa H. Daley; impact
on State, local, and tribal governments: John Patterson; impact
on the private sector: Patrice Gordon.
Estimate approved by: Robert A. Sunshine, Deputy Assistant
Director for Budget Analysis.
Section-by-Section Analysis
SECTION 1. SHORT TITLE
``Homeowners Insurance Protection Act''.
SECTION 2. PROVISIONS RELATING TO PRIVATE MORTGAGE INSURANCE
Section 2(a) adds five new subsections to section 6 of the
Real Estate Settlement Procedures Act of 1974 (RESPA). Section
6 of RESPA requires the lender to disclose to the borrower
information relating to the assignment, sale, or transfer of
servicing of a federally related mortgage loan.
The new subsection (f) requires lenders and mortgage
services to make disclosure of certain information regarding
private mortgage insurance (PMI) to borrowers. The subsection
requires the lender to disclose to borrowers, in writing, at or
before the settlement of the mortgage loan, whether PMI is
required, the duration for maintaining such insurance coverage,
and information relating to how borrowers can terminate PMI
which the servicers are required to annually disclose. If the
borrower is required to obtain PMI, the mortgage servicer is
required to disclose, if applicable, annual written notices
that (i) PMI may be terminable while the loan is outstanding,
(ii) the address and telephone number a borrower can use to
inquire if and how PMI may be terminated, (iii) that PMI is
automatically terminable when the outstanding principal balance
is at 75% loan-to-value ratio (LTV), as prescribed in
subsection (g), or (iv) that certain PMI obligations are not
terminable at the borrower's request. Additionally, the
subsection prohibits the borrowers from being charged fees or
other costs for the disclosure because of the requirements
provided under subsection (f).
New subsection (g) allows automatic termination of PMI when
the principal balance outstanding is at 75% LTV or less based
on the lesser of the sales price or the original appraised
value of the property. The subsection also requires the
mortgage servicer to notify the borrower in writing not later
than 45 days after the automatic termination date that the
borrower no longer has mortgage insurance coverage and that the
borrower no longer has to pay any premiums, payments, or fees
in connection with PMI. In addition, if the borrower has made
payments related to PMI premiums after the date of automatic
termination, then the mortgage servicer, mortgage insurer, or
whoever received the payments is required to promptly return
them to the borrower.
Subsection (g) does not allow for automatic termination if
the borrower's payments on the mortgage are not current. Under
such circumstances, the borrower's right to automatic
termination under this subsection resumes on the first day of
the first month that payments become current.
New subsection (h) provides that the conditions to
terminate PMI shall be reasonably related to the purpose of
requiring PMI. Further, the subsection deems that borrowers
have met the conditions to terminate PMI when they have
complied with the conditions most recently communicated by the
mortgage servicers.
New subsection (i) provides that provisions of subsections
(f), (g), and (h) preempt any conflicting agreement relating to
the servicing of a federally related residential mortgage loan
entered into by Fannie Mae, Freddie Mac, or any private
investor. The subsection further provides that a servicer is
not required to repurchase a mortgage loan from the investor
after PMI is canceled.
New subsection (j) provides that if mortgage insurers,
holders or other parties failed to provide mortgage servicers
with accurate information or to comply with other provisions
under the Act, servicers who have complied with the
requirements of the Act are not held liable and the party
failing to provide timely and accurate information is liable.
Further, the subsection allows a mortgage servicer to provide
the borrower with information identifying the appropriate
parties in the event of a dispute regarding liability.
Section 2(b) defines the terms ``provide mortgage
insurance'', ``mortgage insurance'', and ``covered mortgage
loan'' with the latter being defined as any federally related
mortgage loan secured by a borrower's principal residence.
section 3. scope of applicability
Section 3 details when the disclosure and termination
provisions of the bill take effect. Those provisions of the
bill requiring notice regarding PMI (except for the notice
required at or before settlement) apply to existing mortgages
one year after enactment. The provisions authorizing the 75%
LTV automatic termination of PMI and the borrower's right to
terminate PMI, once disclosed conditions are met, affect
existing mortgages one year after enactment.
section 4. conforming amendments
Section 4 makes a number of conforming amendments to RESPA
including the clarification that state laws or regulations
relating to notice or disclosure to a borrower regarding PMI
are not preempted.
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3 of rule XIII of the Rules of the
House of Representatives, changes in existing law made by the
bill, as reported, are shown as follows (existing law proposed
to be omitted is enclosed in black brackets, new matter is
printed in italic, existing law in which no change is proposed
is shown in roman):
REAL ESTATE SETTLEMENT PROCEDURES ACT OF 1974
* * * * * * *
servicing of mortgage loans and administration of escrow accounts
Sec. 6. (a) * * *
* * * * * * *
(f) Disclosures Relating to Private Mortgage Insurance.--
(1) Disclosure at settlement relating to existence of
pmi.--With regard to any covered mortgage loan, the
lender shall disclose, in writing at or before the
settlement of such covered mortgage loan, whether any
private mortgage insurance will be required to be
obtained or maintained with respect to such mortgage
loan, including any lender-paid private mortgage
insurance, and the period during which such insurance
will be required to be in effect.
(2) Disclosure at settlement relating to
terminability of pmi.--If the lender requires, as a
condition for entering into a covered mortgage loan,
the borrower to assume an obligation to make separately
designated payments toward the premiums for private
mortgage insurance with respect to such loan, the
lender shall disclose, in writing at or before the
settlement of such covered mortgage loan any of the
following notices which are applicable with respect to
such loan:
(A) PMI obligations terminable upon
request.--In the case of a loan described in
paragraph (3), that--
(i) the borrower's obligation to make
separately designated payments toward
the premiums for private mortgage
insurance may be able to be terminated
while the mortgage is outstanding
(including a cancellation permitted
before the date of automatic
termination under subsection (g)); and
(ii) the borrower will be notified by
the servicer not less frequently than
annually of an address and a toll-free
or collect-call telephone number which
the borrower may use to contact the
servicer to determine--
(I) whether the borrower's
obligation to make separately
designated payments toward the
premium for private mortgage
insurance may be terminated
while the mortgage loan is
outstanding (or before the date
of automatic termination); and
(II) if such obligation may
be terminated while the loan is
outstanding (or before such
date), the conditions and
procedures for such
termination.
(B) PMI obligations terminable by operation
of law.--That the borrower's obligation to make
separately designated payments toward the
premiums for private mortgage insurance will be
terminated by operation of law under subsection
(g).
(C) Nonterminable pmi obligations.--In the
case of a loan not described in paragraph (3),
that the borrower's obligation to pay any
amount to be applied to any portion of the
premiums for private mortgage insurance will
not be terminated at the request of the
borrower.
(3) Disclosure with annual statements or other
communications.--If--
(A) private mortgage insurance is required as
a condition for entering into a covered
mortgage loan; and
(B) the borrower's obligation to make
separately designated payments toward the
premiums for such insurance may be terminated
at the borrower's request,
the servicer shall, not less frequently than annually,
disclose to the borrower a clear and conspicuous
statement containing the disclosures set forth in
subparagraphs (A) and (B) of paragraph (2), including
the address and telephone number referred to in such
paragraph, based on the servicer's knowledge at the
time such periodic communication is given. Such
disclosure shall be included with any annual statement
of account, escrow statement, or related annual
communications provided to the borrower, while such
private mortgage insurance is in effect.
(4) Disclosures furnished without cost to borrower.--
No fee or other cost may be imposed on any borrower for
preparing and delivering any disclosure to the borrower
pursuant to this subsection.
(g) Mandatory Termination of PMI Obligations at 75 Percent
Loan-to-Value Ratio.--
(1) In general.--Notwithstanding any provision of a
covered mortgage loan, any obligation of the borrower
to make separately designated payments toward the
premiums for any private mortgage insurance in effect
with respect to such loan shall terminate, except as
provided in paragraph (3), by operation of law as of
the 1st day of the 1st month which begins after the
date on which the principal balance outstanding on all
residential mortgages on the property securing the loan
is equal to or less than 75 percent of the lesser of--
(A) if the loan was made for purchase of the
property, the sales price of the property under
such purchase; or
(B) the appraised value of the property, as
determined by the appraisal conducted in
connection with the making of the loan.
(2) Disclosure upon termination.--Not later than 45
days after the date of termination pursuant to
paragraph (1) of a private mortgage insurance
requirement for a covered mortgage loan, the servicer
shall notify the borrower under the loan, in writing,
that--
(A) the private mortgage insurance has
terminated and the borrower no longer has
private mortgage insurance; and
(B) no further premiums, payments, or other
fees shall be due or payable by the borrower in
connection with the private mortgage insurance.
(3) Exception for delinquent borrowers.--
(A) In general.--Paragraph (1) shall not
apply with respect to any covered mortgage loan
on which the payments are not current as of the
date that the obligation to make private
mortgage insurance premium payments in
connection with the loan would otherwise
terminate pursuant to paragraph (1).
(B) Effectiveness once payments are
current.--In the case of any covered mortgage
loan to which subparagraph (A) applies,
paragraph (1) shall apply with respect to such
loan as of the 1st day of the 1st month which
begins after the date that such payments become
current.
(4) Return of payments toward premiums.--
(A) Return of payments to borrower.--The
servicer for a covered mortgage loan shall
promptly return to the borrower any payments
toward the premiums for any private mortgage
insurance for such loan covering any period
occurring after the date of automatic
termination for such loan under this
subsection.
(B) Return of payments to servicer.--The
private mortgage insurer for a covered mortgage
loan shall promptly return to the servicer any
payments received from the servicer toward the
premiums for any private mortgage insurance for
such loan covering any period occurring after
the date of automatic termination for such loan
under this subsection.
(h) Lenders' Conditions for PMI.--
(1) Conditions for termination of borrower's
obligation to pay pmi.--The conditions for the
termination of the borrower's obligation to make
separately designated payments toward the premium for
private mortgage insurance with respect to a covered
mortgage loan, including any changes in such
conditions, shall be reasonably related to the purposes
for which the requirement for private mortgage
insurance was imposed at the time the loan was made.
(2) Borrower's right to terminate in accordance with
conditions.--In the case of any covered mortgage loan
described in subsection (f)(3), the borrower shall have
the right under this paragraph to terminate the
borrower's obligation to make separately designated
payments toward the premiums for such insurance if the
conditions and procedures for such termination most
recently communicated to the borrower (pursuant to a
request by the borrower pursuant to notice under
subsection (f)(3) or otherwise) have been met.
(i) Effect on Other Agreements.--The provisions of
subsections (f), (g), and (h) shall supersede any conflicting
provision contained in any agreement relating to the servicing
of a covered mortgage loan entered into by the Federal National
Mortgage Association, the Federal Home Loan Mortgage
Corporation, or any private investor or noteholder (or any
successors thereto). A servicer which cancels private mortgage
insurance on a covered mortgage loan in compliance with the
provisions of subsection (g) or (h) or in accordance with
investor guidelines in existence at the time concerning the
cancellation of private mortgage insurance (regardless of
whether the cancellation by the servicer was mandated by such
subsections or initiated by the borrower) shall not be required
to repurchase such mortgage loan from the investor or holder of
such mortgage loan solely on the grounds that the private
mortgage insurance was canceled in accordance with the
provisions of such subsections or investor guidelines, as
applicable.
(j) Limitations on Liability.--If the servicer for a covered
mortgage loan has complied with the requirements under
subsections (f) and (g) to provide disclosures, the servicer
shall not be considered to have violated any provision of
subsection (f), (g), or (h) and shall not be liable for any
such violation--
(1) due to any failure on the part of the servicer to
provide disclosures required under such subsections
resulting from the failure of any mortgage insurer, any
mortgage holder, or any other party to timely provide
accurate information to the servicer necessary to
permit the disclosures; or
(2) due to any failure on the part of any private
mortgage insurer, any mortgage holder, or any other
party to comply with the provisions of such
subsections.
Each private mortgage insurer and each mortgage holder for a
covered mortgage loan shall provide accurate and timely
information to the servicer for such loan necessary to permit
the disclosures required by subsections (f) and (g). In the
event of a dispute regarding liability for a violation of
subsection (f), (g), or (h), and upon request by the borrower,
a servicer shall provide the borrower with information stating
the identity of the insurer or mortgage holder.
[(f)] (k) Damages and Costs.--Whoever fails to comply with
any provision of this section shall be liable to the borrower
for each such failure in the following amounts:
(1) * * *
* * * * * * *
[(g)] (l) Administration of Escrow Accounts.--If the terms of
any federally related mortgage loan require the borrower to
make payments to the servicer of the loan for deposit into an
escrow account for the purpose of assuring payment of taxes,
insurance premiums, and other charges with respect to the
property, the servicer shall make payments from the escrow
account for such taxes, insurance premiums, and other charges
in a timely manner as such payments become due.
[(h)] (m) Preemption of Conflicting State Laws.--
Notwithstanding any provision of any law or regulation of any
State, a person who makes a federally related mortgage loan or
a servicer shall be considered to have complied with the
provisions of any such State law or regulation requiring notice
to a borrower at the time of application for a loan or transfer
of the servicing of a loan if such person or servicer complies
with the requirements under this section (not including
subsection (f)) regarding timing, content, and procedures for
notification of the borrower. The preceding sentenceshall not
apply to any State law or regulation relating to notice or disclosure
to a borrower regarding obtaining, maintaining, or terminating private
mortgage insurance and such State laws and regulations shall be subject
to the provisions of section 18.
[(i)] (n) Definitions.--For purposes of this section:
(1) Covered mortgage loan.--The term ``covered
mortgage loan'' means a federally related mortgage loan
under which the property securing the loan is used by
the borrower as the borrower's principal residence.
[(1)] (2) Effective date of transfer.--The term
``effective date of transfer'' means the date on which
the mortgage payment of a borrower is first due to the
transferee servicer of a mortgage loan pursuant to the
assignment, sale, or transfer of the servicing of the
mortgage loan.
(3) Mortgage insurance.--The term ``mortgage
insurance'' means insurance, including any mortgage
guaranty insurance, against the nonpayment of, or
default on, a mortgage or loan involved in a
residential mortgage transaction, the premiums for
which are paid by the borrower.
(4) Private mortgage insurance.--The term ``private
mortgage insurance'' means mortgage insurance other
than mortgage insurance made available under the
National Housing Act, title 38 of the United States
Code, or title V of the National Housing Act of 1949.
[(2)] (5) Servicer.--The term ``servicer'' means the
person responsible for servicing of a loan (including
the person who makes or holds a loan if such person
also services the loan). The term does not include--
(A) * * *
* * * * * * *
[(3)] (6) Servicing.--The term ``servicing'' means
receiving any scheduled periodic payments from a
borrower pursuant to the terms of any loan, including
amounts for escrow accounts described in section 10,
and making the payments of principal and interest and
such other payments with respect to the amounts
received from the borrower as may be required pursuant
to the terms of the loan.
[(j)] (o) Transition.--
(1) * * *
* * * * * * *
escrow accounts
Sec. 10. (a) * * *
(b) Notification of Shortage in Escrow Account.--If the
terms of any federally related mortgage loan require the
borrower to make payments to the servicer (as the term is
defined in [section 6(i)] section 6(n)) of the loan for deposit
into an escrow account for the purpose of assuring payment of
taxes, insurance premiums, and other charges with respect to
the property, the servicer shall notify the borrower not less
than annually of any shortage of funds in the escrow account.
* * * * * * *
prohibition of fees for preparation of truth-in-lending, uniform
settlement, and escrow account statements
Sec. 12. No fee shall be imposed or charge made upon any
other person (as a part of settlement costs or otherwise) by a
lender in connection with a federally related mortgage loan
made by it (or a loan for the purchase of a mobile home), or by
a servicer (as the term is defined under [section 6(i)] section
6(n)), for or on account of the preparation and submission by
such lender or servicer of the statement or statements required
(in connection with such loan) by sections 4 and 10(c) of this
Act or by the Truth in Lending Act.
* * * * * * *