Consumers Union appreciates the opportunity to appear today in strong support of S. 318, a consumer protection bill recently introduced by the Chairman of this panel, Senator Alfonse D'Amato. Chairman D'Amato's consumer protection proposal will help make the mortgage market fairer and home ownership more affordable by prohibiting lenders from requiring borrowers to carry private mortgage insurance (PMI) when it is no longer necessary. This consumer protection reform is a critical component of a package of reforms that are critically needed to make the mortgage market fairer and more affordable for consumers.
S. 318 Will Stop Mortgage Lenders From Using One Of Several Unconscionable Practices That Unfairly Burden American Families
In discussing this legislation with my colleagues, I have found that many are incredulous to learn that some mortgage lenders require PMI even when the borrower's ratio of loan balance to home value ("Loan to Value" ratio or "LTV") is 80 percent or less. Why should consumers pay a premium each month to protect their mortgage lender against default when the risk of default is virtually non-existent?
First, borrowers are extremely unlikely to walk away from their mortgage loan after building a 20 percent ownership stake in their homes. Second, if borrowers with a 20 percent or greater equity stake run into unexpected financial problems, they can sell their home and generate proceeds that will be more than enough to repay the outstanding mortgage debt.
If mortgage lenders have no legitimate interest in requiring PMI when their borrowers have a 20 percent or greater equity stake in their home, why do borrowers continue to pay a PMI premium even after they have reached this 20 percent threshold? According to an estimate cited in a February 22 Washington Post story by the nationally syndicated real estate columnist Ken Harney, borrowers on 4,000 loans in a 20,000 loan portfolio were still paying PMI' despite having an equity interest in the property of 20 percent or more.
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Two, according to the Harney piece, these numbers came from Lewis Hill, president of First American Tax Valuation Co, a Dallas-based firm.
We believe there are two primary reasons that consumers are being forced to fork up these unnecessary premium payments:
o Borrowers With a Right to Cancel PMI Are Not Told of Their Right: Some borrowers, it seems, currently have a right to discontinue their PMI' payments and coverage. For example, Fannie Mae guidelines say that borrowers who jump through certain hoops may cancel their PMI when their loan to value (LTV) ratio reaches 80 percent. However, many if not most consumers who could benefit from this rule are unaware of it. Additionally, this right has several conditions attached to it and only applies if the borrower's loan has been purchased by Fannie Mae.
To the extent borrowers have a right to stop making PMI payments but do not know it, a simple requirement that lenders (or servicers) notify their borrowers when the 80 percent threshold is reached would be helpful.
A far more effective and fair approach, however, would be to simply prohibit lenders and servicers from charging consumers for PMI once this threshold is reached. After all, most consumers only make the unnecessary payment because they are told to do so, in one way or another, by their mortgage lender or servicer. This is unconscionable. Lenders and servicers should not be allowed to "bill" for services that are no longer necessary.
o Borrowers Have No Right to Cancel Because Their Mortgage Agreement Requires PMI Through the Life of the Loan. Over the years, we have periodically heard of brave and savy consumers who fight losing battles with their mortgage lenders to terminate their regular PMI payments when they have built up so much equity in their home that PMI is no longer necessary. These consumers know that PMI is no longer necessary from a financia1 risk standpoint, but they learn, to their extreme frustration, that it is required by the contract their lender wrote. We believe that contract clauses requiring PMI through the life of the mortgage loan may be widespread among mortgage lenders.
This unfair practice among mortgage lenders can only be solved by prohibiting mortgage lenders from requiring PMI once the need for PMI is eliminated, which is the approach taken by Chairman D'Amato's will. Consumer notification is important so consumers are aware of their rights. However, a law notifying consumers that PMI may no longer be necessary will not help protect consumers if PMI is required as a matter of contract. These unfair contract terms must be made unenforceable as a matter of law.
Given the mortgage lending industry's sorry history in this
area, we believe it is not enough to simply prohibit lenders
from requiring PMI once the 80 percent threshold has been
reached. We encourage adding a provision to S. 318 that
would penalize lenders that charge or attempt to collect PMI
once the statutory threshold is met.
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