A transfer brings in a portfolio where the prior servicer tracked PMI by hand. Nineteen loans are already past their scheduled 78% point and current. What does the new servicer owe those borrowers?
Correct Answer
A) Automatically terminate PMI at 78 percent if current
Why this is correct: The HPA mandates specific timelines for PMI termination. One key rule is automatic termination when the loan's amortization schedule reaches 78% of the original property value, provided the borrower is current on payments. The correct answer, "Automatically terminate PMI at 78 percent if current," precisely states this mandatory requirement, which is a primary safeguard for borrowers under the Act. Why the other choices are wrong: "Use prior credit underwriting approval as a substitute for the current Homeowners Protection Act requirement" is wrong because HPA compliance is an ongoing servicing obligation separate from initial underwriting approval. "Ignore mortgage-insurance costs when comparing loan options" is wrong as it violates the duty to provide accurate loan comparisons and disclosures; MI cost is a material term. "Apply PMI cancellation rules to a loan product outside the covered PMI rule" is wrong because HPA rules do not apply to all loan types (e.g., government loans), so applying them universally would be incorrect. Exam tip: Memorize the HPA's three termination triggers: borrower-requested at 80% LTV (with conditions), automatic at 78% LTV if current, and final termination at the midpoint of the amortization schedule.
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 B: Use prior credit underwriting approval as a substitute for the current Homeowners Protection Act requirement.
This distractor shifts the issue to a different trigger, product, or timing rule instead of applying the rule tested in the stem.
Option C: 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: 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
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