IBA Compliance Connection

Your go to source for compliance!

A customer obtained private mortgage insurance (PMI) in connection with the loan for his primary residence. He requested that the PMI be cancelled, but a recent appraisal determined that the loan-to-value ratio is still above 80%. In addition, he no longer lives in the house, but rents it out to tenants. Because this is now considered an investment property, can he be relieved of the PMI requirement?

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Your loan agreement will govern whether the residential mortgage loan continues to require PMI after the borrower stops using the property as his primary residence.

The federal Homeowners Protection Act (HPA) does not require PMI in any real estate transaction. Residential mortgage lenders (often driven by the secondary market) determine whether they will require a borrower to obtain PMI. The HPA simply addresses when lenders must cancel the PMI after having required its coverage. We recommend reviewing the terms of your note and mortgage to see if their provisions address whether converting the primary residence into a rental property would be an event allowing for cancelation of the PMI. Regardless, if the loan has not been sold on the secondary market and instead is being held in your bank's portfolio, your bank has the option of waiving the loan's PMI requirements and canceling the coverage.

We should note that the HOA applies only to “residential mortgage transactions.” A residential mortgage transaction is one that finances the acquisition of a mortgagor’s principal residence. If the loan met those criteria when it was made, then we would recommend treating the loan as a residential mortgage transaction, regardless of whether the borrower has subsequently stopped using the property as his primary residence. This means adhering to the cancellation provisions in the HPA, even after the property stops being a borrower’s primary residence.

For resources related to our guidance, please see:

  • Homeowners Protection Act, 12 USC 4902 (“A requirement for private mortgage insurance in connection with a residential mortgage transaction shall be canceled on the cancellation date or any later date that the mortgagor fulfills all of the requirements under paragraphs (1) through (4) . . .”)
  • Homeowners Protection Act, 12 USC 4901 (“The term ‘residential mortgage transaction’ means a transaction consummated on or after the date that is 1 year after July 29, 1998, in which a mortgage, deed of trust, purchase money security interest arising under an installment sales contract, or equivalent consensual security interest is created or retained against a single-family dwelling that is the principal residence of the mortgagor to finance the acquisition, initial construction, or refinancing of that dwelling.”)