LPMI disclosures not always required for mortgage loans
A decision released last month by the U.S. Court of Appeals in Richmond, Virginia (the Fourth Circuit) declared that the Homeowners Protection Act does not require disclosures of LPMI or lender-paid mortgage insurance by default. This requirement only arises if LPMI is explicitly stated as a condition of the person who avails of a loan.
This ruling, which affects all types of mortgage loans in Virginia, including the mortgage loans provided by VA home loan lenders was reached after the case Dwoskin v Bank of America, NA was brought to the appellate court. The court ruled that the bank providing the loan did not impose conditions on the plaintiff (the borrowers). The court ruled that instead, the lender is presumed to have only started buying LPMI some weeks to a number of months after the closing of the loans. Because of these, the court ruled that the compulsory disclosure provision under the Homeowners Protection Act does not apply.
The plaintiffs, in this case, were borrowers who had availed of fixed-rate loans with a 30-year term within the June 2007 to December 2008 period. These loans were provided under a program referred to as “No Fee Mortgage Plus,” which was purportedly advertised to not have fees related to closing and also did not require insurance.
The problem was when the defendant (Bank of America) started collecting LPMI on groups of funded and closed loans offered under the “No Fee Mortgage Plus” program. The lender said this was done to raise liquidity while there was an ongoing financial turmoil. This, according to the lender, gave them the choice of selling the loans on the secondary market.
The plaintiffs then found out that the bank had obtained LPMI on their loans as they were trying to refinance their loans. This was why the plaintiffs filed a putative class suit which sought a number of state remedies in relation to fraud and consumer protection law offenses. The plaintiffs lost their case as the trial court ruled (summary judgment) in favour of the bank or lender.
Court of Appeals decision
The U.S. Court of Appeals for the Fourth Circuit affirmed the decision of the trial court, saying that under the Homeowners Protection Act, disclosure is only necessary in case the lending company specifically obtained mortgage insurance that can be regarded as a requirement for the mortgage transaction. In other words, not all mortgage loans require LPMI disclosures. It rejected the plaintiff’s argument that the language of the loan agreement they had with the defendant made disclosure compulsory for every instance the bank purchases LPMI.
According to the Court of Appeals, the basic inference of the phrase “required in connection with a residential mortgage transaction” is limited to conditions only at the specific date of the closing of the mortgage. On the other hand, the line “in connection with” refers to the proximity between the time the loan was closed and the satisfaction of the requirement. Hence The Fourth Circuit rejected the assertion that it was necessary to have disclosures regardless of the time when the LPMI was obtained.
The Fourth Circuit decision took into account the congressional comments to the HPA. It also emphasized that the vital element needed to prove disclosure requirement was dependent on whether or not the lender-paid mortgage agreement insurance was one of the conditions of the loan when it closed.