IF YOU'RE ONE of the millions of American homeowners who pay "private mortgage insurance" (PMI) 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 percent. 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. Approximately 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 percent 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 percent 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 such as Fannie Mae or 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.
Several states, notably Maryland, New York, California, Connecticut and Minnesota, have enacted statutes strengthening consumers' rights to obtain cancellation of PMI, but most states provide no protection.
Pub Date: 8/18/96