A law designed to protect homeowners against paying too much in mortgage insurance went into effect late last week, addressing an issue that has raised the ire of homeowners and has drawn fire from members of Congress.

Called the Homeowners' Protection Act of 1998, the new law, which went into effect on July 29, requires lenders to cancel private mortgage insurance when it is no longer needed - a threshold generally reached when a borrower's mortgage payments reach 22% of equity.

The law could save homeowners millions, as it ends the days of borrowers paying mortgage insurance well beyond the point that it's necessary. According to the National Association of Homeowners, around 250,000 borrowers could save between $250 and $1,200 a year in unnecessary PMI payments as a result of the law.

Specifically, the new legislation will apply to loans originated after the July 29 trigger date and will mandate that lenders automatically cancel PMI when the 22% threshold is reached.

However, as has been the law, borrowers who reach a 20% equity level on their mortgage will continue to be free to cancel their mortgage insurance themselves. Further, lenders will now be required to notify all new and existing borrowers of their rights to cancel PMI.

Private mortgage insurance has long been used by lenders as a protection against loan default, and as a way to provide mortgage financing to a broader base of consumers.

However, the industry has been criticized for not publicizing that borrowers are free to cancel PMI once the 20% equity level is reached.

The new law will work in tandem with the PMI cancellation laws already on the books in eight states, including New York and California, not pre-empting the laws in those states. However, if a state's PMI cancellation law is not as strong as the federal standards, the federal law will prevail by 2001. - JS

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