The Office of General Counsel issued the following opinion on January 9, 2002, representing the position of the New York State Insurance Department.
RE: Mortgage Guaranty Insurance
In determining the point at which a borrower will no longer be required to pay for mortgage guaranty insurance (also referred to as "private mortgage insurance", or "PMI"), will the provisions of the applicable federal law always control, or would New York law control in the event that the application of New York law would lead to a more favorable result to the borrower?
If the application of New York law provided a more favorable result to the borrower, then the New York law would apply. Thus, each situation should be analyzed in light of both the applicable federal and state laws in order to determine which is applicable.
The following hypothetical loan transactions were presented to demonstrate the fact that in certain circumstances applying the provisions of the federal Homeowners Protection Act of 1998 ("HPA") would be more favorable to the borrower than following the applicable provisions of N.Y. Ins. Law §6503(d) (McKinney 2000):
A house with a $530,000 appraised value sells for $500,000. The lender loans the purchaser 90% of the purchase price.
A house with an appraised value of $240,000 sells for $260,000. The lender loans the purchaser 95% of the appraised value.
New York law and federal law both contain statutes that address the issue of the termination of PMI. N.Y. Ins. Law §6503(d) (McKinney 2000) provides as follows:
(d) Except for loans made pursuant to the state of New York mortgage agencys forward commitment program as defined in title seventeen of article eight of the public authorities law, a mortgagor shall not be required to pay, directly or indirectly, the cost of continuing mortgage guaranty insurance on a loan secured by a first lien on real estate when the unpaid principal amount of the real estate loan represents seventy-five percent or less of the real estates appraised value at the time the loan was made or such higher percentage of such appraised value as may be established from time to time by general regulation of the banking board, which shall consider:
(1) the cost to mortgagors and the necessity of maintaining insurance;
(2) the applicable mortgage insurance requirements of the Federal National Mortgage Association, the Government National Mortgage Association and the Federal Home Loan Mortgage Corporation to be met as a precondition to the sale thereto by a regulated mortgage investor; and
(3) the need in light of prevailing economic conditions for regulated mortgage investors to resell such security.
The federal statute governing PMI termination is the HPA, contained at 12 U.S.C.A §§ 4900-4910 (West 2001). Section 4902(b) thereof requires the automatic termination of PMI on the "termination date" of the mortgage. Section 4901(18) defines "termination date" as follows:
18) Termination date
The term "termination date" means:
(A) with respect to a fixed rate mortgage, the date on which the principal balance of the mortgage, based solely on the initial amortization schedule for that mortgage, and irrespective of the outstanding balance for that mortgage on that date, is first scheduled to reach 78 percent of the original value of the property securing the loan; and
(B) with respect to an adjustable rate mortgage, the date on which the principal balance of the mortgage, based solely on the amortization schedule then in effect for that mortgage on that date, is first scheduled to reach 78 percent of the original value of the property securing the loan.
The term "original value" is defined as the lesser of the contract seller price or the appraised value at the time the mortgage transaction was consummated. 12 U.S.C.A. §4901(12) (West 2001).
As indicated by the relevant statutes, under New York law, a lender cannot charge for PMI once the borrowers equity reaches 25% of the appraised value of the property at the time the mortgage is obtained. Under the federal law, PMI must terminate once the borrowers equity reaches 22% of the lesser of the sale price or appraised value of the subject property.
Under Hypothetical #1, applying the federal rule (cancellation of PMI when the mortgage balance reaches 78% of the sale price, which is lower than the appraised value) is less beneficial to the borrower. Thus, the New York rule is not superseded. However, under Hypothetical #2, application of the New York rule (cancellation of PMI when the mortgage balance reaches 75% of the appraised value) is less favorable to the borrower. Thus, application of the federal rule would be more favorable than the New York rule in that case. The inquiry is whether, in all cases, the federal rule would supersede the New York rule, even if the application of the New York rule in a given instance were more favorable to the borrower.
In general, where a federal statute is enacted regarding an issue that is also addressed by a state law, the state law will be preempted. The HPA itself contains a provision to that effect. 12 U.S.C.A. 4908 (West 2001). However, the statute also expressly provides for the protection of state laws that are not inconsistent with HPA. Section 4908(a)(2) provides as follows:
(2) Protection of existing State laws In general
The provisions of this chapter do not supersede protected State laws, except to the extent that the protected State laws are inconsistent with any provision of this chapter, and then only to the extent of the inconsistency.
A protected State law shall not be considered to be inconsistent with a provision of this chapter if the protected State law requires termination of private mortgage insurance or other mortgage guaranty insurance at a date earlier than as provided in the chapter; or when a mortgage principal balance is achieved that is higher than as provided in this chapter; or requires disclosure of information that provides more information than the information required by this chapter; or more often or at a date earlier than is required by this chapter.
(C) Protected State laws
For purposes of this paragraph, the term "protected State law" means a State law regarding any requirements relating to private mortgage insurance in connection with residential mortgage transactions; that was enacted not later than 2 years after July 29, 1998; and that is the law of a State that had in effect, on or before January 2, 1998, any State law described in clause (i).
Under the federal preemption provisions of HPA, a state law that provides equal or greater protection to a borrower (either by requiring the termination of PMI at an earlier time or at a higher mortgage principal balance than the federal rule) will continue to be valid. Any provisions of the state law that are inconsistent with the federal rule are superseded. Under the wording of the above-quoted preemption provision, HPA only supersedes state law "to the extent of the inconsistency." Therefore, as a "protected state law" under HPA, the New York statute will apply in instances where its application will result in a more favorable outcome for the borrower. Otherwise, the provisions of the HPA will control.
As the hypotheticals illustrate, there are, as a result of the differences between the state and federal rules, situations in which the federal statute will lead to a more favorable result than the New York law. Similarly, in other situations, application of the New York law would be more favorable. In light of this, lenders should analyze each loan transaction individually and apply both the federal and the state rule to determine the more favorable of the two in calculating the point at which PMI is to be terminated. This position is consistent with that of the New York State Banking Department. See Mortgage Banking Bulletin, Disclosing the Termination of Private Mortgage Insurance, Yield Spread Premiums, and Net Branching Guidelines (June 14, 1999), available at www.banking.state.ny.us/mbb90614.htm, the New York State Banking Departments web site.
For further information you may contact Supervising Attorney Michael Campanelli at the New York City Office.