Application of Homeowners Protection Act of 1998 to Home Equity and Home Improvement Loans

William Summers, Vice President
Universal Assurors Agency, Inc.
12809 West Dodge Road
Omaha, Nebraska 68154-2100

Re: Application of Homeowners Protection Act of 1998 to Home Equity and Home Improvement Loans.

Dear Mr. Summers:

You have asked whether the requirements of the Homeowners Protection Act of 1998 (HOPA) apply to private mortgage insurance (PMI) on second mortgage home equity or home improvement loans. 12 U.S.C. §§4901-10. The disclosure provisions of HOPA appear to apply. However, as discussed below, we are aware that the Federal Financial Institution Examination Council is considering the scope of HOPA and, in addition, that Congress may be considering amendments that would limit its scope.

Congress enacted HOPA in light of evidence that homeowners continued to pay for PMI long after there was any need for the coverage. HOPA protects homeowners by mandating termination of PMI in certain circumstances and requiring that lenders, servicers, and insurers make certain disclosures to homeowners about their PMI rights.

The termination provisions apply to PMI "in connection with a residential mortgage transaction." 12 U.S.C. § 4902(a), (b). A "residential mortgage transaction" means a transaction consummated on or after July 29, 1999, "in which a mortgage, deed of trust, purchase money security interest arising under an installment sales contract, or equivalent consensual security interest is created or retained against a single family dwelling that is the primary residence of the mortgagor to finance the acquisition, initial construction, or refinancing of that dwelling." 12 U.S.C. §4901(13). If a home equity loan is not in connection with acquisition or initial construction of a primary residence or its refinancing, then the loan would not be part of a residential mortgage transaction. If a home equity or home improvement loan does not fall within the definition of a residential mortgage transaction, the termination provisions in HOPA would not apply.

HOPA’s disclosure provisions, however, are not limited to loans connected with a residential mortgage transaction. Several disclosure provisions also apply to PMI in connection with a "residential mortgage." 12 U.S.C. §§4903(a)(1), 4903(b), 4905(c). HOPA defines the term residential mortgage separately from residential mortgage transaction as "a mortgage loan or other evidence of a security interest created with respect to a single-family dwelling that is the primary residence of the mortgagor." 12 U.S.C. §4901(12). The program you have described involves a credit union obtaining a second mortgage on the borrower’s property. Given HOPA’s broad definition of "residential mortgage," PMI on a home equity or improvement loan would probably be considered in connection with a "residential mortgage."

We understand that Congress may soon consider legislation to clarify HOPA in the context of second mortgages. At this time, however, our view is that the disclosure provisions of HOPA apply to the program you have described.