WASHINGTON — If you're one of the millions of American homeowners who pay "private mortgage insurance" premiums along with your principal and interest every month, you could be an indirect beneficiary of a major class-action lawsuit settlement finalized in July.
As part of the settlement, two subsidiaries of one of the largest banks in the country--Banc One Corp. of Columbus, Ohio--have agreed to automatically cancel PMI coverage on loans when the borrower's equity in the property exceeds 20%. Banc One Mortgage Corp. and Bank One, Texas also agreed to provide written disclosure statements to all new borrowers explaining how PMI coverage works and to send an annual statement to customers on how and when they can request cancellation of premium payments.
The lawsuit--one of a growing number by consumers challenging mortgage industry practices on collection of PMI premiums--directly covers 45,000 PMI-paying borrowers whose loans are owned or serviced by Banc One Mortgage Corp. About 9,000 borrowers will share $1.3 million in premium refunds, according to Richard A. Freese, a Birmingham, Ala., lawyer representing the plaintiffs. Neither Bank One, Texas nor Banc One Mortgage Corp. admitted wrongdoing in the settlement agreement.
But attorneys on both sides of the issue say the real significance of the settlement could be the message it sends to the mortgage industry as a whole:
Don't require borrowers to keep paying premiums beyond the point where the loan risk no longer requires insurance coverage. If you do, your customers just might come back and sue you.
Private mortgage insurance is used by lenders and investors to protect themselves against the higher risk of default associated with low-down-payment mortgages--generally those with less than 20% down for an owner-occupied home. The premiums vary state by state, but commonly add $50 to $100 onto borrowers' mortgage bills every month.
Once the unpaid balance on a loan drops to below 80% of the resale value of the home, the risk of loss in the event of a foreclosure is considered to be less, and large investors like the Federal National Mortgage Assn. (Fannie Mae) or the Federal Home Loan Mortgage Corp. (Freddie Mac) permit mortgage insurers to cancel insurance coverage for borrowers with good payment histories.
But the decision to cancel or not to cancel typically remains with the mortgage company. Though individual borrowers have to pay for the coverage, they can't unilaterally cancel the insurance. They can request termination, but they can't make it happen by themselves.
Several states--notably New York, California, Connecticut, Maryland and Minnesota--have enacted statutes strengthening consumers' rights to obtain cancellation of PMI, but most states provide no protection. One member of Congress, Rep. James V. Hansen (R-Utah), introduced legislation this session that would require mortgage companies to inform all borrowers of their rights to request PMI termination. Introducing his bill in June, Hansen cited the case of a Texas borrower whose equity stake in her home grew to 90% overtwo decades, but whose lender forced her to continue paying monthly premiums.
In the Banc One case, plaintiffs charged that the mortgage servicing subsidiary, Banc One Mortgage Corp., improperly collected premium payments below the 80% threshold. As part of the settlement, the bank and mortgage servicer agreed to "process cancellation of PMI on all mortgage loans . . . where such loans have a loan-to-value ratio of 80% or less" and meet other termination standards set by investors like Fannie Mae and Freddie Mac.
To calculate the loan-to-value ratio for each mortgage, the defendants agreed to compare the principal balance against the lesser of either the original appraised value of the home or the recorded sales price.
Most unusual in the settlement, said lawyers active in mortgage litigation, was the bank's willingness to agree to cancel PMI on loans "without a request" from individual borrowers. The mortgage servicer, in other words, will actively search for loan accounts with loan-to-value ratios below 80% and terminate coverage on the spot.
Freese's recommendation to lenders in the wake of the Banc One settlement: Explain PMI to your borrowers and then actively help them terminate coverage at the earliest possible opportunity.
The corollary for consumers: Don't be passive. If you pay for PMI, ask your lender or servicer for details on how and when you can bail out.
Distributed by the Washington Post Writers Group.