The following opinion representing the position of the Department was issued by the Office of General Counsel on February 2, 2001.
RE: Mortgage Guaranty Insurance
Is the termination of private mortgage insurance (PMI) involving a residential mortgage transaction consummated on or after July 29, 1999 governed by the federal law standard contained in the Homeowners Protection Act of 1998, 12 U.S.C.A. § 4901 et seq. (West Supp. 2000) (hereinafter, "HPA") or the standard set forth in N.Y. Ins. Law § 6503(d) (McKinney 2000)?
In regard to "residential mortgage transactions" defined in 12 U.S.C.A. §13 (West Supp. 2000) and consummated on or after July 29, 1999, N.Y. Ins. Law § 6503 is not superseded by the HPA to the extent that the application of the standard set forth in New York Law would be more favorable to the mortgagor than that prescribed by the HPA.
The following hypothetical was suggested to argue that, in such a situation, the rule contained in the New York Insurance Law governing mandatory termination of PMI, and not the federal law, should control.
Suppose a house with a $530,000 appraised value is conveyed in an intra-family sale for $ 500,000. Applying the HPA, PMI must be cancelled when the mortgage balance reaches $390,000 ($390,000 = 78% of 500,000; the sales price, which is lower than the appraised value). Using § 6503(d), PMI must be cancelled when the mortgage balance reaches $397,500 ($397,500 = 75% of $530,000, the appraised value). Since New York Law requires the PMI cancellation upon reduction to a loan balance that is higher than the balance that would trigger cancellation under HPA stated otherwise at a point at which the mortgagor has less equity as noted in your letter, pursuant to HPA, New York law is not superseded.
It was requested that the Department concur that, in those situations where N.Y. Ins. Law § 6503(d) is not inconsistent with, and therefore not superseded by HPA, the 75% of appraised value rule of N.Y. Ins. Law § 6503(d) continues to be valid.
N.Y. Ins. Law § 6503(d) (McKinney Supp.2000), as follows:
(d) Except for loans made pursuant to the state of New York mortgage agencys forward commitment program as defined in title seventeen of article eight of the public authorities law, a mortgagor shall not be required to pay, directly or indirectly, the cost of continuing mortgage guaranty insurance on a loan secured by a first lien on real estate when the unpaid principal amount of the real estate loan represents seventy-five percent or less of the real estates appraised value at the time the loan was made or such higher percentage of such appraised value as may be established from time to time by general regulation of the banking board, which shall consider:
(1) the cost to mortgagors and the necessity of maintaining insurance;
(2) the applicable mortgage insurance requirements of the Federal National Mortgage Association, the Government National Mortgage Association and the Federal Home Loan Mortgage Corporation to be met as precondition to the sale thereto by a regulated mortgage investor; and
(3) the need in light of prevailing economic conditions for regulated mortgage investors to resell such security.
The enactment of the Homeowners Protection Act of 1998, 12 U.S.C.A. § 4901 et seq. (West Supp. 2000), affecting mortgages made on or after July 29, 1999, supersedes the New York Insurance Law (or any relevant state statute) to the extent that the state statute is "inconsistent" with the federal law. Section 4908(a) of the federal statute states, in pertinent part:
(1) IN GENERAL.-With respect to any residential mortgage or residential mortgage transaction consummated after the effective date of this Act, the provisions of this Act shall supersede any provisions of the law of any State relating to requirements for obtaining or maintaining private mortgage insurance in connection with residential mortgage transactions, cancellation or automatic termination of such private mortgage insurance, any disclosure of information addressed by this Act, and any other matter specifically addressed by this act.
(2) PROTECTION OF EXISTING STATE LAWS.-
(A) IN GENERAL.- The provisions of this Act do not supersede protected State laws, except to the extent that the protected State laws are inconsistent with any provision of this Act, and then only to the extent of the inconsistency.
(B) INCONSISTENCIES.-A protected state law shall not be considered to be inconsistent with a provision of this Act if the protected State law-
(i) requires termination of private mortgage insurance or other mortgage guaranty insurance-
(I) at a date earlier than as provided in this Act; or
(II) when a mortgage principal balance is achieved that is higher than as provided in this Act;.
12 U.S.C.A. § 4908 (West Supp. 2000). Under this provision, a state law that provides equal or greater protection to a borrower (either by requiring the termination of PMI at an earlier time or at a higher mortgage principal balance than the federal standard) is considered a "protected state law" and will continue to be valid to the extent it is not inconsistent with the HPA. Any provisions of state law that are inconsistent with the federal statute are superseded.
As pointed out in the hypothetical, the treatment of the borrower under N.Y. Ins. Law § 6503(d) in such circumstances is clearly more favorable than under the otherwise applicable provisions of the HPA. Therefore, under a fact pattern similar to that of the hypothetical, the state statute would continue to apply.
For further information, please contact Supervising Attorney Michael Campanelli of the Departments New York Office.