[Congressional Record Volume 143, Number 153 (Wednesday, November 5, 1997)]
[Senate]
[Pages S11789-S11790]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                       CBO COST ESTIMATE--S. 318

   Mr. D'AMATO. Mr. President, the Committee on Banking, 
Housing, and Urban Affairs reported S. 318, the Homeowners Protection 
Act on Friday, October 31, 1997. The committee report, Senate Report 
No. 105-129, was filed the same day.
  The Congressional Budget Office cost estimate required by Senate Rule 
XXVI, section 11(b) of the Standing Rules of the Senate and section 403 
of the Congressional Budget Impoundment and Control Act, was not 
available at the time of filing and, therefore, was not included in the 
committee report. Instead, the committee indicated the Congressional 
Budget Office cost estimate would be published in the Congressional 
Record when it became available.
  Mr. President, I ask that the full cost estimate and cover letter 
from the Congressional Budget Office regarding S. 318 be printed in the 
Record.
  The material follows:
                                                    U.S. Congress,


                                  Congressional Budget Office,

                                 Washington, DC, November 4, 1997.
     Hon. Alfonse M. D'Amato,
     Chairman, Committee on Banking, Housing, and Urban Affairs, 
         U.S. Senate, Washington, DC.
       Dear Mr. Chairman: The Congressional Budget Office has 
     prepared the enclosed cost estimate for S. 318, the 
     Homeowners Protection Act.
       If you wish further details on this estimate, we will be 
     pleased to provide them. The CBO staff contacts are Susanne 
     S. Mehlman and Mary Maginniss (for federal costs), Marc 
     Nicole (for the state and local impact), and Patrice Gordon 
     (for the private-sector impact).
           Sincerely,
                                        June E. O'Neill, Director.
       Enclosure.


               congressional budget office cost estimate

     S. 318--Homeowners Protection Act
       Summary: S. 318 would institute certain reforms in the 
     private mortgage insurance industry. First, the bill would 
     require mortgage lenders and loan servicers to notify 
     borrowers of their right to cancel mortgage insurance and of 
     the procedures to do so. For each loan made one year or more 
     after enactment, the bill would provide for the automatic 
     cancellation of mortgage insurance (including coverage 
     provided by state and local governments) when the outstanding 
     principal balance on the loan drops to 78 percent of the 
     value of the home at the time the loan was issued, provided 
     the borrower's payments are current. S. 318 would establish 
     disclosure procedures for the providers of lender-paid 
     mortgage insurance and would impose civil liability on any 
     mortgage servicer who failed to comply with the requirements 
     of this bill. S. 318 also would dissolve the Thrift Depositor 
     Protection Oversight Board and transfer its remaining 
     responsibilities to the Department of the Treasury. In 
     addition, the bill would reduce from four to two the number 
     of annual meetings the Affordable Housing Advisory Board must 
     hold each year.
       CBO estimates that enacting S. 318 would result in savings 
     of about $250,000 a year in outlays from direct spending. 
     Because the bill would affect direct spending, pay-as-you-go 
     procedures would apply. We also estimate that enacting this 
     bill would not result in any significant impact on federal 
     spending subject to appropriation.
       S. 318 would impose both private-sector and 
     intergovernmental mandates as defined in the Unfunded 
     Mandates Reform Act of 1995 (UMRA). CBO estimates, however, 
     that the direct costs of complying with the mandates would 
     not likely exceed the thresholds specified in UMRA ($100 
     million for private-sector mandates and $50 million for 
     intergovernmental mandates, in 1996 dollars adjusted annually 
     for inflation).
     Estimated cost to the Federal Government
       Direct spending
       Current law requires the Thrift Depositor Protection 
     Oversight Board to monitor the operations and spending of the 
     Resolution Trust Corporation (RTC). The RTC was a temporary 
     agency established to resolve thrift failures beginning in 
     1989. In late 1995 the RTC was dissolved and its remaining 
     assets were transferred to the Federal Deposit Insurance 
     Corporation. The Oversight Board now retains responsibility 
     for only two functions. The first is to oversee operations of 
     the Resolution Funding Corporation (REFCORP), which issued 
     bonds totaling $30 billion from 1989 to 1991 as part of RTC's 
     initial funding. Second, the Oversight Board retains a 
     nonvoting membership, through the end of 1998, on the 
     Affordable Housing Advisory Board. By terminating the 
     Oversight Board, the bill would eliminate the annual costs 
     for the one employee of the board who prepares periodic 
     reports required of all distinct entities of the government 
     and performs other routine functions. Based on information 
     from the Treasury, CBO estimates that transferring the 
     statutory responsibilities of the Oversight Board to the 
     Treasury would result in savings of about $250,000 annually 
     in direct spending. Because the Oversight Board has the 
     authority to pay its expenses without appropriation action, 
     these savings would be a reduction in direct spending.
       This bill also would affect insured depository 
     institutions, including banks, thrifts, and credit unions 
     that hold qualifying mortgage portfolios. As a result, the 
     federal banking regulators--the Federal Reserve, the 
     Comptroller of the Currency, the Federal Deposit Insurance 
     Corporation, the National Credit Union Administration, and 
     the Office of Thrift Supervision--would have some 
     responsibility to monitor and enforce the statute. Spending 
     by these agencies is not subject to the annual appropriation 
     process. However, CBO expects that the additional regulatory 
     costs for these agencies would be small and offset by fees in 
     most cases, resulting in no significant net cost to the 
     federal government.
       Spending subject to appropriation
       Spending by the Treasury to carry out the routine functions 
     of the Oversight Board would be subject to appropriation. CBO 
     estimates that any additional spending would be minimal. In 
     addition, reducing the number of times the Affordable Housing 
     Advisory Board must meet annually is not expected to result 
     in any significant savings. Also, CBO estimates that imposing 
     civil liability on mortgage servicers who do not comply with 
     the requirements under the bill would not result in any 
     significant costs to the federal court system because 
     the caseload is expected to be minimal and any cases 
     reaching trial would most likely be tried in state courts.
       Pay-as-you-go considerations: Section 252 of the Balanced 
     Budget and Emergency Deficit Control Act of 1985 sets up pay-
     as-you-go procedures for legislation affecting direct 
     spending or receipts. Legislation providing funding necessary 
     to meet the government's existing deposit insurance 
     commitment is excluded from these procedures. CBO believes 
     that requiring insured depository institutions to terminate 
     private mortgage insurance would not meet the exemption for

[[Page S11790]]

     full funding of deposit insurance and thus would have pay-as-
     you-go implications. Spending by the federal banking 
     regulators to monitor and enforce the provisions of the bill 
     is estimated to be small, however, and in most cases would be 
     offset be fees charged to the depository institutions, 
     resulting in no significant net cost to the federal 
     government. Eliminating the Thrift Depositor Protection 
     Oversight Board would reduce direct spending, but these 
     savings would also be insignificant.
       Intergovernmental and private-sector impact: S. 318 would 
     impose both private-sector and intergovernmental mandates as 
     defined in UMRA. The bill contains mandates on mortgage 
     lenders, loan servicers, purchasers of mortgage loans, and 
     private mortgage insurance (PMI) companies in the mortgage 
     industry. Provisions in the bill would be enforced by private 
     law suits. CBO estimates that the annual direct costs of 
     complying with mandates identified in this bill are not 
     likely to exceed the statutory thresholds for private-sector 
     or intergovernmental mandates. Inasmuch as state and local 
     governments finance mortgage loans and service and insure 
     some of the loans extended, they would bear some of the costs 
     of complying with these mandates. CBO estimates that at least 
     95 percent of all identified costs would fall on the private 
     sector, less than 5 percent of the costs would be borne by 
     state and local governments.
       Private mortgage insurance protects lenders--or the 
     ultimate purchaser of a mortgage loan, such as Fannie Mae or 
     Freddie Mac--against financial loss if a borrower defaults on 
     a mortgage loan. Industry data show that the lower the down 
     payment, as a percentage of the property value, the greater 
     is the risk that the loan will default. Mortgage insurance is 
     generally used when a borrower makes a down payment of less 
     than 20 percent of the value of the home--that is, when the 
     mortgage has a loan-to-value (LTV) ratio greater than 80 
     percent. In 1996, the eight PMI companies backed nearly one 
     million residential mortgage loans and a total of $127 
     billion in loans were covered by PMI.
     Mandates
       S. 318 would allow borrowers to request cancellation of a 
     PMI policy after paying off 20 percent of the property's 
     original value. To be eligible for policy cancellation at 20 
     percent equity, the bill would require that a borrower (1) 
     make a written request for cancellation; (2) be current on 
     mortgage payments; (3) certify that he or she holds no second 
     mortgages on the property; and (4) demonstrate that the 
     property's value has not depreciated below its value at 
     closing. S. 318 would require that private mortgage insurance 
     be canceled once a borrower has reached 22 percent equity 
     unless the insurance covers a ``high-risk'' loan. Borrowers 
     with loans deemed to be high risk according to guidelines to 
     be developed by the Federal National Mortgage Association and 
     the Federal Home Loan Mortgage Corporation would not qualify 
     for early cancellation. Such borrowers, however, would have 
     their insurance terminated at the half-life of the loan. Upon 
     termination of PMI insurance, the bill would require that 
     servicers (and PMI companies) refund to the borrower any 
     premiums already paid for the period beyond the termination 
     date.
       Beginning one year after enactment, S. 318 would require 
     lenders and servicers to provide written disclosures about 
     insurance cancellation rights to borrowers who are required 
     by creditors to obtain private mortgage insurance as a 
     condition for entering into a residential mortgage agreement. 
     S. 318 would require that the lender notify the borrower in 
     writing at or before closing of his cancellation rights under 
     PMI and give the borrower an amortization schedule. The 
     amortization schedule would be used to determine a 
     termination date at which the borrower would no longer be 
     required to pay insurance premiums. The bill also would 
     require, before closing, mandatory disclosures to purchasers 
     of lender-paid mortgage insurance indicating that lender-paid 
     mortgage insurance may not be canceled. After the initial 
     disclosure at loan origination, loan servicers would be 
     required to notify borrowers with ``borrower-paid'' PMI 
     (including existing loans with PMI) of their cancellation 
     rights in an annual written statement.
     Estimated Costs of Mandates
       In the first year after enactment, the total costs of the 
     mandates would consist of the costs to lenders and services 
     of modifying systems to accommodate the transmittal and 
     storage of additional data. Lenders and servicers would also 
     have to modify software programs to provide the required 
     additional disclosures to borrowers and to develop the 
     procedures to trigger automatic termination of PMI insurance 
     for eligible borrowers. In total, the initial ``set-up'' 
     costs should be somewhat below $100 million dollars. After an 
     initial set-up period of about one year, costs would likely 
     drop. The bulk of costs in the second year would cover 
     disclosure at or before settlement to roughly one million 
     borrowers required to purchase PMI insurance and annual 
     disclosure to about five million borrowers who already 
     have borrower-paid PMI insurance.
       CBO estimates that costs to the mortgage industry would 
     gradually start to rise again in a few years as the cost to 
     servicers of terminating PMI policies, and the loss of 
     premium income to PMI companies start to accumulate. Most 
     loans to which automatic termination would apply would not 
     reach an LTV ratio of 78 percent to qualify for termination 
     until well after the five-year period of analysis required by 
     UMRA.
     Estimated impact on State, local and tribal governments
       Because state and local governments participate in mortgage 
     financing, they would bear some of the compliance costs of S. 
     318. CBO estimates that the state and local share of such 
     costs would total less than $5 million a year. All 50 states 
     and some local governments finance mortgages (primarily with 
     mortgage revenue bonds), 21 states service at least a portion 
     of their own mortgage portfolio, and seven states insure 
     mortgages. (The definition of private mortgage insurance used 
     in this bill includes insurance provided by state 
     governments. Only insurance provided by the federal 
     government is excluded.) Based on data from the National 
     Council of State Housing Agencies and Standard and Poors, CBO 
     estimates that state and local governments are involved in 
     less than 5 percent of mortgages that have private mortgage 
     insurance. Their share of the costs would thus be relatively 
     small.
       S. 318 would also impose an additional mandate on state 
     governments by preempting certain state laws pertaining to 
     the termination or cancellation of private mortgage insurance 
     or the disclosure of certain information addressed by the 
     bill. Based on discussions with mortgage industry officials 
     and a review of certain state mortgage insurance laws, CBO 
     estimates that this mandate would impose no significant costs 
     on state governments nor would it result in the loss of any 
     revenue.
       Previous CBO estimates: On April 7, 1997, CBO provided an 
     estimate for H.R. 607, the Homeowners Insurance Protection 
     Act, as ordered reported by the House Committee on Banking 
     and Financial Services on March 20, 1997. While both H.R. 607 
     and S. 318 would require that borrowers be notified of their 
     rights to cancel mortgage insurance, these bills differ in 
     their requirements for automatic cancellation of mortgage 
     insurance. H.R. 607 would require automatic cancellation of 
     mortgage insurance when the mortgage has an LTV of 75 percent 
     (or less) while S. 318 would require automatic cancellation 
     of mortgage insurance when the mortgage has an LTV of 78 
     percent (or less).
       On September 17, 1997, CBO provided an estimate for H.R. 
     2343, a bill to terminate the Thrift Depositor Protection 
     Oversight Board, as ordered reported by the House Committee 
     on Banking and Financial Services on September 9, 1997. S. 
     318 would also eliminate the Oversight Board and would 
     transfer its remaining responsibilities to the Department of 
     the Treasury.
       Estimate prepared by: Federal Costs: Susanne S. Mehlman, 
     for private mortgage insurance. Mary Maginniss, for federal 
     deposit insurance. Impact on State, Local, and Tribal 
     Governments: Marc Nicole. Impact on the Private Sector: 
     Patrice Gordon.
       Estimate approved by: Robert A. Sunshine, Deputy Assistant 
     Director for Budget Analysis.

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