BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Martha M. Escutia, Chair
2001-2002 Regular Session
SB 270 S
Senator Speier B
As Amended May 3, 2001
Hearing Date: May 8, 2001 2
Civil Code 7
PH:cjt 0
SUBJECT
Mortgage Insurance Cancellation Rights: Notification.
DESCRIPTION
This bill would amend the annual disclosure statement
mortgage lenders are required to give to borrowers
notifying them of the right to cancel private mortgage
insurance (PMI), to more clearly inform borrowers that the
ability to cancel the coverage may be based on various
factors, including appreciation of the value of the
property.
The most recent amendments eliminate the requirement that
the PMI cancellation notice be provided through a separate
document and expand the disclosure requirements.
BACKGROUND
An estimated 80,000 Californians each year purchase private
mortgage insurance (PMI), at a cost of about $300 to $800
per year per $100,000 borrowed, to obtain a mortgage.
Lenders generally require home buyers who put less than 20
percent down to pay for PMI, an insurance coverage that
protects lenders against defaults by borrowers. In most
cases, these buyers cannot otherwise obtain a mortgage.
Current state and federal law generally permit borrowers to
request cancellation of PMI once they achieve a certain
level of equity in their residence. In most cases,
existing law allows this threshold to be met based on the
(more)
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current value of the residence rather than the original
value of the loan or the original value of the residence.
In times of rising real estate prices, borrowers are
generally able to meet the thresholds for cancellation of
PMI more quickly than in periods of stagnant or declining
real estate values.
CHANGES TO EXISTING LAW
Existing law (Civil Code Sec. 2954.7) allows borrowers to
request cancellation of private mortgage insurance or
mortgage guaranty insurance when:
The loan amount owed by the borrower is not more than 75
percent of either: (a) the sales price of the property,
provided the value of the property has not declined
relative to the original appraised value; or (b) the
current fair market value of the property;
The loan is at least two years old;
The encumbered property is owner-occupied, one to
four-unit, residential real property;
The borrower is current on payments and has not been more
than 30 days past due over the preceding 24-month period;
No notice of default has been recorded against the
residence during the preceding 24 month period.
The loan involved is not a California Housing Financing
Agency or low-income housing loan funded by a state
bonding authority; a loan funded under a program that
prohibits or limits termination of PMI such as a Cal-Vet
loan; a loan requiring PMI that was executed prior to
January 1, 1991; or a loan sold to an institutional third
party with alternative rules governing cancellation of
PMI, such as the Federal National Mortgage Association,
the Federal Home Loan Mortgage Corporation, and the
Government National Mortgage Association.
Existing law requires lenders to terminate private mortgage
insurance or mortgage guaranty insurance if the outstanding
loan balance is not more than 75 percent of the lesser of
the sales price of the property or the appraised value of
the property at the time of the loan, if certain other
conditions are met, for loans made after January 1, 1998
(Civil Code Sec. 2954.12).
Existing law requires lenders to notify borrowers whose
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loans are subject to PMI requirements to notify borrowers
of the right to cancel the insurance no later than 30 days
after the close of escrow and at the time of each written
annual statement. Annual notification must either specify
the conditions under which the PMI may be canceled or
provide a broader statement informing the borrower that
they may be able to cancel the PMI and whom to contact for
more information (Civil Code Section 2954.6).
Existing federal law (the Homeowners Protection Act of
1998) provides additional rights concerning PMI for loans
made on or after July, 29, 1999 (referred to as
"post-effective date" loans):
Borrowers with loans covered by the law may request
cancellation of PMI when their loan balance reaches 80
percent of the original value of the property;
Lenders are required to terminate PMI when the loan
balances reach 78 percent of the original appraised
value;
Annual disclosures to borrowers are required, which apply
to loans made both before and after July 29, 1999.
Generally, the federal law applies only to single-family
principal residences.
This bill would require lenders choosing to provide annual
notice of the right to cancel the PMI on a loan by means of
summary statement to include information to the borrower
that the right to cancel may be based on various factors,
including appreciation of the value of the property based
on a current appraisal performed by an appraiser selected
by the lender or servicer, and paid for by the borrower.
COMMENT
1. Stated need for bill
The author states that despite the fact that existing law
allows borrowers to request cancellation of private
mortgage insurance when the outstanding loan balance
reaches certain levels based on the original value of the
residence or the sales price, far more people are
potentially able to cancel their PMI each year as a
result of having gained equity in their homes through
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appreciation.
The author further states that few lenders adequately
inform borrowers of the right to cancel PMI based on the
current appraised value of the residence. In order for
borrowers to cancel their PMI based on a
loan-to-current-value ratio they must first know what PMI
is, and who it protects. This bill seeks to better
inform homeowners of their right to cancel PMI.
2. Part of bill's impact may be preempted by federal law
The federal Homeowners Protection Act of 1998 generally
provides that its PMI cancellation provisions and
borrower notification provisions supercede those of state
laws for loans secured by single-family principal
residences. Generally, the provisions of the federal law
apply to loans made after July 29, 1999 with respect to
cancellation provisions, and to all loans with respect to
PMI notification. An exception is made for state laws
that require PMI termination at an earlier date or higher
principal balance than the federal law requires or that
require disclosure of more information, or more often or
earlier, than the federal law. The latter is essentially
what SB 270 requires.
An attorney for one major bank, Bank of America, has
opined that part of
SB 270 may be preempted by the 1998 federal Act for loans
made after July 29, 1999. In order to qualify for an
exception, she believes any amendment or replacement of a
state law in effect on January 2, 1998 (which SB 270
would do), has to be enacted within two years of the date
of enactment of the federal law, or July 29, 2000, which
SB 270 cannot satisfy.
Because of the complexity of the federal Act, banking
lawyers acknowledge that "California law may not
necessarily be preempted in its entirety." (Katherine
Iverson, Attorney, Bankers Systems, Inc.)
Thus, the author believes, based on discussions with
lending representatives, that lenders will voluntarily
comply with the expanded notice provisions of SB 270.
Nevertheless, the author may wish to seek a Legislative
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Counsel opinion as to whether there is, in fact, a
federal preemption issue and if so, the scope of the
preemption, particularly in the case of single-family
residences. Other residential properties covered by the
state's PMI law would clearly be subject to SB 270's
provisions, as they are not covered by the federal Act.
3. Most recent amendments remove opposition
The most recent amendments remove the requirement that
lenders provide the notice required by the bill in a
separate document, allowing the notice to be made
annually with the annual statement that is already
required to be sent to borrowers. With the amendment the
California Bankers Association has removed its opposition
to the bill.
Support: Consumers Union
Opposition: California Bankers Association
HISTORY
Source: Author
Related Pending Legislation: None
Prior Legislation: AB 1160 (Shelley) (Chapter 62, Statutes
of 1997)
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