If America's Community Bankers and the Mortgage Bankers Association of America are not careful, they could be mistaken for regulators. The groups issued guidelines last week explaining how to comply with the Homeowners Protection Act of 1998, which generally requires lenders to disclose information on private mortgage insurance and to terminate policies when owners build up sufficient equity.
"The guide will help both borrowers and lenders reduce the risk of misinterpreting the law," ACB president Paul A. Schosberg said.
The groups acted because Congress did not authorize a banking agency to issue regulations implementing the law. Instead it left it up to the industry to figure out how to comply.
"This is an unusual statute," Mr. Schosberg said. "Look at it as the full employment act for Washington trade associations."
Paul Reid, the MBA's executive vice president, said the groups drafted the guidelines because they represent the bulk of the companies originating, servicing, and buying mortgages. "We wanted to develop comprehensive, consistent guidance that would cover all aspects of the owner-occupied market," Mr. Reid said.
Karen Shaw Petrou, president of the consulting firm ISD-Shaw Inc., said a self-regulatory approach may work well for consumer protection laws. Consumers and regulators retain authority to punish banks that fail to follow the law, but the industry gains the flexibility of determining how it should comply.
"This is a very constructive step," Ms. Petrou said. "It fits these circumstances really well."
Regulators praised the guidance, but said they do not expect that trade groups will put them out of business.
"The effort by the trade groups has produced a useful resource that the industry can look to," said Richard R. Riese, director of compliance policy at the Office of Thrift Supervision. "But the banking agencies will be working on an interagency set of exam procedures that will include guidance for examiners and banks."
The so-called PMI law takes effect July 29. For single-family, owner- occupied dwellings, lenders must terminate PMI if the borrower is current on the loan and has equity equal to 22% of the purchase price.
The law also lets a borrower demand that a lender terminate PMI when equity reaches 20% of the home's current value if recent payment history is unblemished and there are no outstanding second mortgages.
This option will benefit borrowers in markets such as San Francisco, where home values are skyrocketing. However, insurance will still be required for high-risk loans. Fannie Mae and Freddie Mac will define "high risk" for credits that are within their underwriting limits, and individual banks do so for jumbo loans.
For loans made before July 29, lenders must remind borrowers annually that they are paying PMI and must explain under what circumstances the customer may cancel this insurance. ACB and MBA estimated the law will save the average homeowner $50 a month.
The trade groups' guidelines stretch to 174 pages in a three-ring binder and read much like advisories issued by the banking agencies. Included are model forms covering such matters as the annual notice for consumers who borrowed before July 29, the initial disclosure that the lender is requiring PMI, and special notices for high-risk loans.
The document also defines key legal terms, provides a checklist of actions a loan officer should take to avoid compliance problems, and lists the 10 states with laws that may supersede the federal requirement.
Banks are subject to fines of up to $2,000 per violation.