After correcting policies under the Homeowner's Protection Act, at what loan-to-value (LTV) ratio should PMI coverage be dropped for eligible loans?

The correct answer is rooted in the provisions set forth by the Homeowner's Protection Act (HPA), which includes specific guidelines regarding Private Mortgage Insurance (PMI) on residential mortgage loans. Under the HPA, lenders are required to automatically terminate PMI coverage when the borrower's loan-to-value (LTV) ratio reaches 78% based on the original value of the home at the time the loan was originated. This measure is designed to protect borrowers and reduce unnecessary costs once they have gained a certain level of equity in their homes.

The act stipulates that borrowers can request the cancellation of PMI when their LTV drops to 80% or lower, but lenders are mandated to discontinue PMI automatically at the 78% threshold, providing a safeguard that ensures consumers are not overpaying for insurance once they reach a significant equity stake. This automatic termination provision helps to enhance transparency in mortgage lending and supports responsible lending practices by reducing the financial burden on homeowners as they build equity.