Lenders would be required to inform homeowners when they no longer need mortgage insurance under legislation introduced Thursday by Senate Banking Committee Chairman Alfonse M. D'Amato, R-N.Y.
His bill, sponsored in the House by Rep. James V. Hansen, R-Utah, would require lenders to tell borrowers that under certain circumstances they may cancel their mortgage insurance without penalty once they own 20% of their home.
"We've put together a package that will begin to stop the fleecing of the American homeowner," Sen. D'Amato said at a press conference. "It is wrong for people to be paying for insurance they no longer need."
The New York Republican said he favors requiring lenders to automatically cancel mortgage insurance once a borrower has built up enough equity.
Industry trade groups endorsed the legislation Thursday.
"It looks fine to us," said Joe Belew, president of the Consumer Bankers Association. "It seems to us people should be able to know when they can cancel it."
"This gives the consumer an even break and an upper hand," added Daniel A. Mica, president and chief executive of the Credit Union National Association.
The bill also was endorsed by the Mortgage Bankers Association of America, America's Community Bankers, and the Mortgage Insurance Companies of America, among others.
Investors, including the secondary mortgage agencies, require insurance for loans with down payments smaller than 20%. These loans have a higher likelihood of delinquency, and the mortgage insurance covers a portion of potential losses.