General Industry Letters
Mortgage Banking Letters
Disclosing the Termination of Private Mortgage Insurance, Yield Spread Premiums, and Net Branching Guidelines
June 14, 1999
To: The Institution Addressed
Re: Disclosing the Termination of Private Mortgage Insurance, Yield Spread Premiums, and Net Branching Guidelines
Private Mortgage Insurance
Private Mortgage Insurance ("PMI") insures residential mortgage lenders against default by borrowers. The United States Congress recently enacted the Homeowners Protection Act of 1998, 12 U.S.C. §§ 4900-4910 (West 1998) ("HPA" or the "Act"). In part, the provisions of HPA apply to a first lien mortgage loan on a single family dwelling that is the primary residence of the borrower that is made after July 29, 1999.
The Act contains a provision for the termination of PMI upon a borrowers request, provided the borrower meets certain conditions set forth in the statute, when a borrowers equity in the residence reaches 20% of the "original value" of the property securing the mortgage. In addition, the Act mandates the automatic cancellation of PMI when the borrowers equity reaches 22% of the "original value", provided the loan is current. "Original value" is defined, in part, as the lesser of the sales price or the appraised value at the time the mortgage transaction was consummated.
The New York State Insurance Law Section 6503(d) states, in part, that a borrower shall no longer be required to pay for PMI on first lien mortgage loans when the unpaid principal amount of the loan represents 75% or less of the appraised value at the time the loan was made. The state statute does not require that the loan be current.
HPA does not supercede "protected state law except to the extent that the protected State Laws are inconsistent with any provision of this chapter, and then only to the extent of the inconsistency." 12 U.S.C. §5908(a)(2)(A). A PMI "protected state law" is one that was in effect on or before January 2, 1998 and which is amended before July 29, 2000. A state law is not considered inconsistent if it requires termination of PMI at a date earlier than as provided under HPA.
As a result of the differences between the state and federal laws, there are instances in which PMI will be terminated at an earlier date under state law rather than under HPA and other instances when PMI will be terminated at an earlier date under federal law rather than under state law.
Accordingly, lenders should do a case by case analysis to determine when the mortgagor has the right to have PMI cancelled. Part 38 of the General Regulations of the Banking Board require that a lender disclose in the commitment that private mortgage insurance will be required (if applicable) and the conditions under which such insurance would no longer be required.
The Banking Department suggests the following language as a model disclosure:
"You may terminate your mortgage loan guaranty insurance when the unpaid principal amount of the real estate loan represents 75% or less of the real estates appraised value at the time the loan was made. However, if your mortgage is on a single family dwelling that is your primary residence, then your loan may be eligible under federal law for earlier termination. A checkmark in the box below denotes whether your loan insurance may be terminated sooner. If so, you will be provided prior to closing with additional information explaining how the federal law may affect your mortgage insurance."
Inclusion of this language is strictly optional but, if you do use the suggested language, without alteration, you will be presumed to be in compliance with section 38.4(a)(1)(x) of the General Regulations of the Banking Board. However, this should not be construed as a guarantee against civil or criminal liability.
Yield Spread Premiums
RESPA Policy Statement 1999-1 issued on March 1, 1999 by the Department of Housing and Urban Development ("HUD") established that Agencys position on lender-paid broker compensation under the Real Estate Settlement Procedures Act of 1974 ("RESPA"). Pursuant to this Policy Statement:
- Lender payments to brokers, i.e. yield spread premiums, are not per se illegal, but they must be analyzed on a case by case basis.
- A two-part test is necessary to determine if lender-paid broker compensation is permissible. This test examines: (1) whether the broker provided compensable goods, facilities, or services; and (2) if the brokers total compensation is reasonably related to the value of goods, facilities, or services it provided. Total compensation includes direct origination and other fees paid by the borrower, indirect fees, derived from the interest rate paid by the borrower, or a combination of some or all. HUD considers that higher interest rates alone cannot justify higher total fees to mortgage brokers.
- Lender-paid broker fees should be disclosed on the Good Faith Estimate and HUD 1 Settlement Statement. It also urges voluntary disclosure of brokers compensation prior to loan application.
The Policy Statement does not mandate any other additional disclosures to the borrower by the lender or mortgage broker. However, it does suggest that disclosure may be necessary where indirect fees (yield spread premium payments) will be paid.
Part 38 of the General Regulations of the Banking Board also does not make such payments illegal, but it does require that the basis for such payments must be disclosed to the borrower.
In addition, the Banking Department suggests that mortgage brokers include the following language in the pre-application disclosure. This language is taken from the National Association of Mortgage Brokers model form "Mortgage Loan Origination Agreement."
"In some cases, we may be paid all of our compensation by either you or the lender. Alternatively, we may be paid a portion of our compensation by both you and the lender. For example, in some cases, if you would rather pay less up-front, you may be able to pay some or all of our compensation indirectly through a higher interest rate in which we will be paid directly by the lender."
Inclusion of this language is strictly optional.
The Banking Departments long standing policy has been to disallow any net branching for mortgage bankers or mortgage brokers. A net branch is one for which the branch manager assumes indicia of ownership by sharing in profits and/or losses, leasing the branch premises, having control of a corporate checkbook, and/or exercising control of personnel through the power to hire or fire such individuals. The Department agrees that profit sharing, as a form of compensation, is not alone sufficient indicia of ownership so as to constitute net branching. Furthermore, the Department will no longer object to arrangements whereby a branch managers future compensation may be reduced by losses experienced at the branch, provided that the branch manager has absolutely no liability to any third party. Please note that all other aspects of the prohibition on net branching still apply.
Should you have any questions regarding any of the topics discussed above, please do not hesitate to contact Principal Examiner II Mildred Freel-Mackin at (212) 618-6688.
Very truly yours,
Richard L. Ehli
Mortgage Banking Division