An escrow analyst notices a loan that has been at 76% of the original value on its schedule for eight months, with the borrower current throughout, and the PMI premium still collected each month. What should have happened?
Correct Answer
C) Automatically terminate PMI at 78 percent if current
Why this is correct: The Homeowners Protection Act (HPA) governs private mortgage insurance (PMI) cancellation. A key provision is that for certain residential mortgage transactions, servicers must automatically terminate PMI on the date the principal balance of the loan is first scheduled to reach 78% of the original value, provided the borrower is current on payments. "Automatically terminate PMI at 78 percent if current" accurately reflects this mandatory automatic termination rule. Why the other choices are wrong: "Treat government mortgage insurance as conventional PMI" is wrong because the HPA's automatic termination rules apply to private mortgage insurance, not to government insurance like FHA or VA. "Apply the fee tolerance timing rule even though the file is testing HPA PMI Cancellation" is wrong because fee tolerance rules are part of TILA/RESPA integrated disclosure requirements, which are separate from HPA's PMI cancellation triggers. "Apply PMI cancellation rules to a loan product outside the covered PMI rule" is wrong because applying rules to loans not covered by the HPA (e.g., certain high-risk loans) would be non-compliant. Exam tip: HPA has three paths: borrower-requested cancellation at 80% LTV, automatic termination at 78% LTV if current, and final termination at midpoint of amortization. Know the triggers for each.
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: Apply the fee tolerance timing rule even though the file is testing HPA PMI Cancellation.
This distractor shifts the issue to a different trigger, product, or timing rule instead of applying the rule tested in the stem.
Option D: Apply PMI cancellation rules to a loan product outside the covered PMI rule.
Apply PMI cancellation rules to a loan product outside the covered PMI rule. is not correct because it does not apply the rule tested by this file scenario.
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
More Federal Laws Questions
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