Document Changes: CA Mortgage Guaranty Insurance Cancellation Disclosure (Cx999)

Cx999 is provided pursuant to the provisions of Cal. Civ. Code § 2954.6 (West 2012). Among other things, this section requires a lender or broker to notify the borrower of whether the borrower has the right to cancel either private mortgage insurance or mortgage guaranty insurance.  If the borrower does have such a right, then the notification must disclose under what conditions the insurance may be cancelled.

Under California law (particularly Ibid. §§ 2954.7 & 2954.12), a complex system of cancellation and termination rights has been established for this state. California law allows the borrower to initiate cancellation of mortgage insurance when the unpaid principal balance of the loan, secured by an owner-occupied, 1-to-4 unit residential real property, is 75% of either the sales price of the property (with some restrictions) or the current fair market value of the property.

However, the Federal Homeowner’s Protection Act (12 USCA §§ 4901 through 4910 [West 2012]; hereafter referred to as “HPA”) pre-empts California law to the extent that both laws contradict each other. Generally, under HPA, the borrower may cancel mortgage insurance if the principal balance of the loan, secured by a single-family dwelling, either reaches 80% of the original value of the property or is scheduled to reach 80% based on an amortization schedule.

In such a case, the HPA pre-empts California law where the loan is secured by a single-family residence. California law, however, is applicable when the property contains more than a single-unit.

To complicate matters further, Cal. Civ. Code § 2954.7(c) holds that compliance with an “institutional third party’s” standards for cancellation will be considered compliant with California’s general cancellation rule. An “institutional third party” is defined under subsection (d) of this section as the Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC), and the Governmental National Mortgage Association (GNMA), and any other institutions with similar requirements. Each of these institutions has their own distinct standards for cancelling mortgage insurance, which need to be disclosed to the borrower as appropriate.

Furthermore, California’s cancellation notification requirements apply to cases where “mortgage guaranty insurance” applies, the definition of which under Cal. Ins. Code §12640.02(a) (West 2012) is broad enough to include government-sponsored insurance. Cal. Civ. Code § 2954.6(f) does exempt from the disclosure requirements loans insured by the Federal Housing Authority (FHA) and the Veteran’s Administration (VA), but Rural Development (RD) loans and loans guaranteed by the California Housing Finance Authority (CalHFA) are not exempt.

Finally, loans secured by second homes not sold to in institutional third party are not covered by any laws concerning mortgage insurance cancellation requirements, but the borrower must still be informed of whether he has the right to cancel such insurance and, if so, under what conditions.

Due to the many different types of requirements which depend upon the type of loan, lien position, and property of the mortgage transaction, we will be modifying Cx999 so that there will be, essentially, twelve different versions of the document. Each version will print based upon the loan data passed into ConformX, which will trigger the appropriate version. Most of the cancellation notifications are formatted in a table, showing the earliest date for borrower-initiated cancellation requests, automatic termination, evidence of property value, payment status, and minimum seasoning requirements, when applicable.

These versions are:

Please note that in the “Generic Second Home” version, the user of the document will need to manually specify the conditions for when the mortgage insurance should be cancelled, if applicable.  A new field called “MI Cancellation Conditions for Non-Primary Residence Loans” has been created for this purpose and will be prompted for under the appropriate circumstances.  If not filled in, the document will state that the borrower does not have a right to cancel mortgage insurance.

The following new fields are also available upon request:

• High Risk of Default Indicator
• MI Cancellation Conditions for High Risk of Default loans
• Other MI Cancellation Conditions

Also, for configuration purposes, the “RD Loan” version will print under a different Cx number (Cx17040).

These changes and the new RD document will take effect in ConformX on March 2, 2013. If you have any questions or concerns about these changes, please contact Client Support at 1.800.497.3584.

February 19, 2013
DR 127911