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Is a servicer required to determine if there are any subordinate liens before cancelling private mortgage insurance based on a borrower’s request? If the bank is required to determine whether there are any subordinate liens and finds that there are, may it deny the borrower’s cancellation request on that basis?

Under the Homeowners Protection Act, is a servicer required to determine if there are any subordinate liens before cancelling private mortgage insurance based on a borrower’s request? If the bank, as servicer, is required to determine whether there are any subordinate liens and finds that there are, may it deny the borrower’s cancellation request on that basis?

The Homeowners Protection Act does not require the bank to determine whether there are any secondary/subordinate liens, but allows it to do so and use the presence of a secondary/subordinate lien as a basis for denying the request to cancel private mortgage insurance. However, there may be other considerations: safety and soundness considerations, bank policies, and investor requirements may compel denying a request under these circumstances.

Under 12 U.S. C. §4902(a), if a borrower makes a written request to cancel private mortgage insurance, the servicer must cancel it when:

  • The principal balance of the loan:
    (1) is first scheduled to reach 80 percent of the ‘‘original value’’ based on:
    • The initial amortization schedule (in the case of a fixed-rate loan)
    • The amortization schedules (in the case of an adjustable-rate loan) or
    (2) Reaches 80 percent of the ‘‘original value,’’ based on actual payments
  • The borrower has a good payment history
  • The borrower satisfies any requirement of the mortgage holder for:
    • Evidence that the value of the property has not declined below the original value and
    • Certification that the borrower’s equity in the property is not subject to a subordinate lien.

However, you should check your bank’s policy and requirements of investors such as Fannie Mae and Freddie to see whether they require that a private mortgage insurance cancellation request be denied if there are subordinate liens. (February 2020)

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