As the debate over mortgage insurance cancellation rages, a lawsuit seeking class-action status has been filed against the nation's largest mortgage lender and second-largest mortgage insurer.

Norwest Mortgage Inc. and GE Capital Mortgage Insurance Co. are the targets of the suit, filed in Minnesota last month.

The complaint said that William and Rose Kochlin took out an adjustable- rate mortgage at First Minneapolis in 1983. The loan was then acquired by Des Moines-based Norwest Mortgage.

The Kochlins' down payment was $10,000, or 15% of the purchase price of the home. Since the down payment was less than 20%, they were required to buy mortgage insurance. In 1987, the balance on the Kochlins' mortgage fell to less than 80% of the original price of the home, at which point mortgage insurance should no longer have been required, the suit alleged.

Rodney A. Wilson, lawyer for the plaintiffs, said Mrs. Kochlin only became aware that she and her husband were no longer required to pay for mortgage insurance after taking a class for real estate brokers in 1996. She then inquired of Norwest how to cancel the insurance.

Norwest removed the mortgage insurance requirement, Mr. Wilson said, but refused to refund the couple's more than nine years of unnecessary payments.

It is typically the responsibility of the mortgage servicer, not the insurer, to tell customers about their rights regarding mortgage insurance. But Mr. Wilson said GE was included as a defendant because it also benefited from the Kochlins' needless premium payments. "They along with Norwest Mortgage are in our view the ones being unjustly enriched."

While neither defendant would comment about the lawsuit, Norwest has taken steps to avoid future problems. Letters were sent Feb. 17 to 1,500 Norwest Mortgage customers in Minnesota. The letter read, in part, "If you currently pay private mortgage insurance premiums, you may have the right to cancel the insurance and cease paying premiums."

Last year, Minnesota enacted a law requiring lenders to notify borrowers after two years that their insurance can be canceled. The law is effective for loans closed after Jan. 1, 1997.

Legislation introduced last month by Senate Banking Committee Chairman Alfonse M. D'Amato would require automatic cancellation of mortgage insurance premiums, and the Federal National Mortgage Association will soon require servicers of loans it invests in to notify borrowers of their right to cancel.

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