A team member asks about Homeowners Protection Act in a compliance desk review while trying to apply the requirement without relying on borrower preference. Which response should a licensing coordinator use?
Correct Answer
C) Distinguish conventional PMI from government mortgage insurance
Why this is correct: The Homeowners Protection Act (HPA) governs the cancellation and termination of private mortgage insurance (PMI) on conventional loans. Government mortgage insurance (like FHA MIP or VA funding fee) follows different, separate rules and is not subject to the HPA's automatic termination provisions. Distinguishing between them is essential for accurate disclosure and compliance. Why the other choices are wrong: "Treat all mortgage-insurance premiums as cancellable at the same point" is wrong because government and conventional MI have fundamentally different cancellation rules. "Use the purchase price as the only factor when PMI depends on LTV and program terms" is wrong because PMI requirements and cancellation are primarily based on the loan-to-value ratio (LTV), not just the price. "Assume lender-paid MI has no cost because it is not shown as a separate monthly premium" is wrong because lender-paid MI (LPMI) is typically financed into a higher interest rate; it has a cost, just not a separate monthly line item. Exam tip: HPA rules apply only to conventional loans with PMI. Government loans (FHA, VA, USDA) operate under their own insurance/fee guidelines.
Why This Is the Correct Answer
The correct response is "Distinguish conventional PMI from government mortgage insurance" because PMI options affect borrower cost and depend on loan type, LTV, and mortgage-insurance rules.
Why the Other Options Are Wrong
Option A: Treat all mortgage-insurance premiums as cancellable at the same point.
This choice is not the best answer because it applies the wrong file step for PMI and mortgage-insurance options; the governing rule is tested by the correct option.
Option B: Use the purchase price as the only factor when PMI depends on LTV and program terms.
This choice is a tempting shortcut, but it conflicts with PMI and mortgage-insurance options because the file still needs the required documentation, timing, or rule-based review before the action is taken.
Option D: Assume lender-paid MI has no cost because it is not shown as a separate monthly premium.
This choice is not the best answer because it applies the wrong file step for PMI and mortgage-insurance options; the governing rule is tested by the correct option.
Memory Technique
PMI options and mortgage-insurance costs: identify the rule being tested, then choose the action that documents or applies that rule before the file moves forward.
Exam Tip
For PMI and mortgage-insurance options questions, separate the required file step from plausible sales, timing, or documentation shortcuts.
Common Mistakes to Avoid
- -Choosing an internal exception instead of the governing rule
- -Treating preliminary or informal facts as a substitute for required documentation
- -Answering from a familiar but unrelated mortgage topic
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