A servicer’s procedure says PMI comes off only after the borrower orders and pays for a new appraisal showing 78% or better. A reviewer compares the procedure with the automatic-termination requirement. What is wrong with it?
Correct Answer
C) Automatically terminate PMI at 78 percent if current
Why this is correct: The Homeowners Protection Act (HPA) mandates automatic termination of Private Mortgage Insurance (PMI) for conventional loans when the loan's principal balance is scheduled to reach 78% of the original value, based on the amortization schedule, provided the borrower is current. This is a key borrower protection. The original explanation notes HPA has separate termination rules, with automatic termination at 78% being one. Why the other choices are wrong: "Treat government mortgage insurance as conventional PMI" is wrong because HPA applies to conventional loans, not government loans (FHA, VA), which have different insurance rules. "Ignore mortgage-insurance costs when comparing loan options" is wrong because lenders must disclose PMI costs, and borrowers should consider them; ignoring them could mislead. "Treat the HPA PMI Cancellation review as complete because the file contains a related fee tolerance note" is wrong because fee tolerance rules (e.g., under TRID) are separate from PMI termination requirements; one does not substitute for the other. Exam tip: HPA's automatic PMI termination at 78% applies only to conventional loans where the borrower is current—it's not based on an appraisal at that time.
Why This Is the Correct Answer
The correct response is "Automatically terminate PMI at 78 percent if current" because HPA has separate borrower-requested, automatic, and final PMI termination rules.
Why the Other Options Are Wrong
Option A: Treat government mortgage insurance as conventional PMI.
Treat government mortgage insurance as conventional PMI. is not correct because it does not apply the rule tested by this file scenario.
Option B: Ignore mortgage-insurance costs when comparing loan options.
Ignore mortgage-insurance costs when comparing loan options. is not correct because it does not apply the rule tested by this file scenario.
Option D: Treat the HPA PMI Cancellation review as complete because the file contains a related fee tolerance note.
This distractor shifts the issue to a different trigger, product, or timing rule instead of applying the rule tested in the stem.
Memory Technique
Homeowners Protection Act PMI rules: identify the rule being tested, then choose the action that documents or applies that rule before the file moves forward.
Exam Tip
Match the file facts to Homeowners Protection Act PMI rules; do not choose an exception or shortcut that skips the required rule.
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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