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Rescission Reasons and Rescission Relief at Arch MI

In 2013, the GSEs required all mortgage insurers to draft new mortgage insurance master policies that conform to detailed GSE specifications. After the GSEs reviewed and approved the new master policies, the MIs submitted their new master policies to state insurance departments for approval. The state insurance departments have reviewed and approved the new master policies. The new master policies were effective for all MIs for all insured loans with MI application dates on or after October 1, 2014.

In particular, all new master policies are required to clarify and limit:

  1. the reasons an MI Company may Rescind mortgage insurance coverage on a Loan; and
  2. the circumstances under which an MI Company may waive its rights to Rescind coverage on a Loan (known as “Rescission Relief”).

This document summarizes these prescribed provisions as adopted in Arch MI’s new Master Policy. (Capitalized terms in this summary are defined in Arch MI’s Master Policy or related Endorsements.)

Rescission Reasons

GSE requirements, as adopted in Arch MI’s new Master Policy, permit Arch MI to Rescind coverage only for the following three reasons:

  1. "Material Misrepresentation,” which occurs only if the Borrower, lender, or one of their agents makes a false or misleading statement which, had it been known to be false or misleading, would have caused Arch MI to not insure the Loan or insure it under different terms.
  2. “Origination Error,” which occurs only if:
    • the origination of the Loan did not conform to previously agreed upon policies and procedures governing loan underwriting and approval, and
    • Absent the Origination Error, a reasonable and prudent loan originator would not have approved the Loan for funding. (Arch MI may not Rescind if the Origination Error is a Harmless Error, i.e., an error that would not have changed the underwriting decision).
  3. “Material Value Variance,” which occurs only if:
    • the opinion of value of the Property in the Origination Appraisal exceeds the opinion of value in a Review Appraisal by fifteen percent or more; and
    • the Review Appraisal demonstrates that the appraiser who prepared the Origination Appraisal misrepresented or omitted material information.

Rescission Relief

GSE requirements and, accordingly, Arch MI’s new Master Policy contain two key elements clarifying when Arch MI will provide Rescission Relief (waive its rights to Rescind coverage) on a Loan:

  1. Arch MI must grant Rescission Relief on a Loan that passes a Thirty-Six Months Test, unless there is Credible Evidence of an intentional and knowing Material Misrepresentation by a First Party fraud or Pattern Activity (e.g., a fraud ring).
  2. Arch MI may grant Rescission relief on a Loan after the First Twelve Loan Payments, if Arch MI has successfully completed an Independent Validation of Loan Quality and/or Property Value.

The above bold terms are important. Let's take a closer look at them:

Thirty-Six Months Test

A Loan will pass this test when, at 36 months from the due date of the Borrower's first mortgage payment, each of the following is true:

  1. the Loan is not in Default;
  2. each payment was made from the Borrower's Own Funds;
  3. the Borrower did not have more than two thirty-day delinquencies and also was never sixty days delinquent (servicer’s misapplication and/or non-timely application of otherwise timely Borrower payments do not count); and
  4. the Loan was never subject to a forbearance agreement, repayment plan, or otherwise modified from its original terms.

First Twelve Loan Payments

A Loan will meet this criterion when the Borrower makes twelve months of consecutive, full mortgage payments, and:

  1. each payment was paid from the Borrower’s Own Funds;
  2. no payment was received thirty days or more after its due date (servicer’s misapplication and/or non-timely application of otherwise timely Borrower payments do not count); and
  3. the Loan was never subject to a forbearance agreement, repayment plan, or otherwise modified from its original terms.

Independent Validation Necessary to Trigger Rescission Relief after First Twelve Loan Payments

To provide Rescission Relief after the First Twelve Loan Payments, the GSEs require the MI to have conducted Independent Validation of the origination file and the Origination Appraisal. Independent Validation must be more than a check that documents exist. It must ensure not only that the Borrower and Loan are eligible for mortgage insurance coverage and that no underwriting or valuation defects exist, but also that the Loan closed in accordance with the information presented in the origination file. Thus, in order to grant Rescission Relief at twelve months, each MI must develop a validation program to review what Arch MI refers to as “Loan Quality” and “Property Value.”

No Independent Validation by the MI is required to receive Rescission Relief upon satisfaction of the Thirty-Six Months Test. 

Loan Quality Validation

Validation of “Loan Quality” requires our review of the Loan origination file and closing package to validate that there was no Borrower Material Misrepresentations, that the lender’s credit decision was properly made, and that the Loan delivered meets the criteria of the Loan originally expected. After the First Twelve Loan Payments and our validation of Loan Quality, we will no longer have the right to rescind coverage on that Loan for “Material Misrepresentation” (other than knowing an intentional Material Misrepresentation by the lender or the lender’s agents) or “Origination Error” (as defined in the Master Policy and summarized above).

Property Value Validation

Validation of “Property Value” requires our review of the Origination Appraisal to validate compliance with Arch MI’s collateral eligibility requirements and to ensure that the estimate of value is adequately supported. After the First Twelve Loan Payments and our validation of Property Value, we will no longer have the right to rescind coverage on that Loan for a “Material Value Variance.”

Documents Needed for Independent Validation

Whether you are a credit union, a regional lender or a national bank, Twelve-Month Rescission Relief will be subject to our review (Independent Validation) of three sets of documents:

  1. Origination Appraisal (Property Value);
  2. Loan origination file (Loan Quality);
  3. Closing package including final HUD-1 and documents showing satisfaction of all lender approval conditions (Loan Quality).

Delegated v Non-Delegated Validation

For non-delegated submissions to our underwriting network, a validation review of Property Value is automatic since we are able to fully review the Origination Appraisal prior to Closing. Further, because we will have reviewed the full Loan origination file, validation of Loan Quality requires only that the closing package be submitted to us within 90days after the Loan has Closed. For loans submitted as EZ Apps, validation of Loan Quality will require a full Loan origination file and the closing package.

For delegated submissions under our Delegated Plus Endorsement, we must receive all three sets of documentation within 90days following the Closing date of the Loan in order to complete our Independent Validation.

Re-pricing

Importantly, Arch MI will not automatically Rescind coverage if, based on the true facts regarding a Loan, we would have insured it at a different premium rate. In those cases, we will give you the opportunity to make up the premium short-fall before taking any action on the Loan.

Our Mistakes

Under the new Master Policy, Arch MI will not Rescind a Loan based upon our own mortgage insurance underwriting mistake. If we made the mistake, we stand by the coverage.

The table below summarizes Arch MI’s Rescission Relief programs.

 

Credit Union
EZ App

Full Non-Delegated Submission

Standard Delegated

Delegated Plus

 

Relief
(mths)

Docs Required

Relief
(mths)

Docs Required

Relief
(mths)

Docs Required

Relief
(mths)

Docs Required

Loan Quality

36

N/A*

12

Closing Package

36

N/A

12

Full Loan origination file and Closing package

Property Value

12

Origination Appraisal

12

Origination Appraisal

36

N/A

12

Origination Appraisal

Fraud by Lender or Lender’s Agents

No Rescission Relief

No Rescission Relief

No Rescission Relief

No Rescission Relief

*12-Month Rescission Relief for Loan Quality requires Full Non-Delegated, or Delegated Plus submissions.

Please note that this document is a summary of the terms of the new Arch First Lien Master Policy. It is not and is not intended to be a binding insurance agreement and does not include all of the detail included in the Master Policy and related endorsements. The terms of Arch MI’s insurance coverage are contained in the Master Policy and endorsements.