[Senate Report 105-129]
[From the U.S. Government Publishing Office]



                                                       Calendar No. 243
105th Congress                                                   Report
                                 SENATE

 1st Session                                                    105-129
_______________________________________________________________________


 
                       HOMEOWNERS PROTECTION ACT

                                _______
                                

                October 31, 1997.--Ordered to be printed

_______________________________________________________________________


Mr. D'Amato, from the Committee on Banking, Housing, and Urban Affairs, 
                        submitted the following

                              R E P O R T

                         [To accompany S. 318]

    The Committee on Banking, Housing, and Urban Affairs, to 
which was referred the bill (S. 318), having considered the 
same, reports favorably thereon with an amendment in the nature 
of a substitute and recommends that the bill (as amended) do 
pass.

                              INTRODUCTION

    On Thursday, October 23, 1997, the Senate Committee on 
Banking, Housing, and Urban Affairs favorably reported S. 318, 
the ``Homeowners Protection Act of 1997.'' This legislation 
will enable homeowners to cancel unneeded private mortgage 
insurance (``PMI'') and requires that they receive informative 
disclosures of their rights. The Committee worked from base 
text, or ``Committee Print,'' containing revisions to S. 318. 
The Committee adopted an amendment offered by the Chairman and 
the Ranking Member comprised of noncontroversial matters. In 
addition, two amendments were offered and adopted by voice 
vote.\1\ The vote on final passage was 16 to 1 in favor of 
final passage.\2\
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    \1\ The two amendments pertained to the treatment of adjustable 
rate mortgages and the exemptions contained in Section 3 of the bill 
that allow PMI coverage to be maintained until the loan is half-way 
amortized.
    \2\ Senators D'Amato, Shelby, Mack, Faircloth, Bennett, Grams, 
Enzi, Hagel, Sarbanes, Dodd, Kerry, Bryan, Boxer, Moseley-Braun, 
Johnson, and Reed voted for final passage. Senator Allard voted against 
final passage and Senator Gramm abstained.
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                          LEGISLATIVE HISTORY

    Senator D'Amato introduced S. 318 on February 12, 1997 
(Senators Bryan, Dodd, Domenici, Kempthorne, Bingaman, and 
Durbin are cosponsors of the legislation). On Tuesday, February 
25, 1997, the Committee held a hearing on the issue of PMI 
cancellation and S. 318. Witnesses included Representative 
James V. Hansen (R. Utah), who introduced PMI legislation in 
the House and has been a leader on this issue. Also testifying 
were: Michelle Meier, Counsel for Government Affairs, Consumers 
Union; R. Layne Morrill, President-elect, National Association 
of Realtors; Kenneth L. Nicholson, President, Nicholson & Co. 
and President, Appraisal Institute; Brian L. McDonnell, 
President/CEO, Navy Federal Credit Union, testifying on behalf 
of the National Association of Federal Credit Unions (NAFCU) 
and the Credit Union National Association (CUNA); Ron McCord, 
President, American Mortgage and Investment Co. and President, 
Mortgage Bankers Association (MBA); Frank Sutkowski, Senior 
Executive Vice President and Director of Lending Liberty Bank 
(Middletown, Ct.), testifying on behalf of America's Community 
Bankers (ACB); and William H. Lacy Chairman/CEO, Mortgage 
Guaranty Insurance Corp. (MGIC), testifying on behalf of the 
Mortgage Insurance Companies of America (MICA).

                    BACKGROUND/NEED FOR LEGISLATION

PMI: a helpful tool for expanding home ownership opportunity

    PMI is a property insurance line that protects lenders from 
mortgage default risk. In the most general sense, PMI provides 
middle class home buyers the same type of protection that FHA 
insurance provides lower income homeowners.\3\ PMI for 
residential real estate has been available for about 40 years, 
and today it is used extensively to facilitate ``high-ratio'' 
loans (loans in which the loan to value ratio (``LTV'') is more 
than 80 percent, i.e., the borrower makes a down payment of 
less than 20 percent). Traditional underwriting principles for 
residential mortgage lending dictate that a lender receive 20 
percent for a down payment.\4\ Such a requirement creates a 
``stake in the venture'' for a homeowner; a homeowner that has 
a 20 percent investment in a residence is unlikely to walk away 
from that investment. The requirement of an 80 percent LTV 
often prevents many cash-tight but credit-worthy homeowners 
from purchasing a home. PMI enables these would-be homeowners 
to purchase a home without the 20 percent down-payment required 
by the traditional underwriting standards of most mortgage 
lenders. PMI has also been a tool to enable cash-flush 
consumers with poor credit histories to obtain loans. In so 
doing, PMI has expanded the opportunity for home ownership, 
particularly for middle-class and first-time home purchasers.
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    \3\ Report of the State Corporation Commission on Private Mortgage 
Insurance, Commonwealth of Virginia Senate Doc. No. 13, p. 6 (1955). 
PMI is mortgage guaranty insurance that private-sector insurers issue. 
It differs from FHA insurance and VA guarantees in a number of ways. 
First, FHA insurance and VA guarantees cover only non-conforming loans, 
while PIA covers conventional loans. FHA insurance is typically 
required on the entire mortgage rather than a certain percentage of 
that loan, and is frequently required to be carried over the entire 
life of the loan. Id. (summarizing information contained in the 
Mortgage Insurance Companies of America's 1993-1994 Fact book).
    \4\ ``Private Mortgage Insurance,'' G. Canner, W. Passmore and M. 
Mittal, Federal Reserve Bulletin, vol. 80, no. 10, 1994.
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    PMI makes high-ratio lending possible by protecting lenders 
who make such loans from the risk of default and foreclosure. 
These policies can be written to cover as much of a loan as the 
lender may desire (and the insurer is willing to cover), but 
typically lenders seek PMI to insure the initial 20 percent of 
the loan value against loss.\5\ PMI enables the lender to 
recover costs associated with the resale of foreclosed property 
as well as for accrued interest payments or fixed costs, such 
as taxes or insurance policies, paid prior to resale. A 
borrower in default receives no benefits and recovers no funds 
from the PMI policy.
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    \5\ PMI is available in the secondary mortgage market. Typically, 
PMI insurers underwrite 5% of the mortgage pool underlying a mortgage-
backed security.
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PMI cancellation: a process immune from market discipline

    Hearing witnesses from both consumer groups and the 
mortgage-related industries agreed on the premise that PMI is a 
beneficial financial product that has expanded home ownership 
opportunities.\6\ While PMI protects lenders and thereby 
encourages high-ratio lending, there comes a time when the 
protection afforded to the lender (and paid for by the 
homeowner) becomes unnecessary--specifically, when the 
homeowner's equity investment in the residence gives the lender 
sufficient security. According to witnesses from the lending 
community, as a general rule this occurs when the homeowner has 
accumulated 20 percent equity.\7\
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    \6\ See, e.g., Testimony of M. Meier, testifying on behalf of 
Consumer's Union; Statement of B. McDonnell, testifying on behalf of 
the National Association of Federal Credit Unions and the Credit Union 
National Association.
    \7\ Testimony of F. Sutkowski, testifying on behalf of ACB; 
testimony of B. McConnell, testifying on behalf of NAFCU and CUNA.
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    Nevertheless, many homeowners have experienced problems 
canceling unneeded PMI. Homeowners that do not refinance or buy 
another home could continue to pay for the PMI coverage for the 
entire life of the loan. In many instances, homeowners are 
never informed of their right to cancel PMI. In other 
instances, homeowners have faced unnecessary impediments when 
they attempt to cancel PMI. Because the protections that PMI 
offers flow to parties who are not paying for it, market 
discipline does not necessarily address this problem. At the 
same time, carrying costs for unnecessary PMI can be 
significant. Since PMI costs between $20 and $100 per month, 
the costs can reach into the hundreds, or even thousands of 
dollars per year--with the possibility that these costs could 
be incurred over the entire life of a 30 year loan.\8\ In 
addition, excessive PMI coverage does not benefit the 
homeowner, and provides little extra protection to a lender. 
The Committee received testimony and evidence indicating that 
this problem is quite widespread; the mortgage insurance trade 
association acknowledge that it impacts at least 250,000 
homeowners. Other evidence indicates that the problem is even 
greater--one analysis of a 20,000 loan portfolio indicated that 
1 out of 5 homeowners were paying for PMI, despite the fact 
that they had accumulated equity in excess of 20 percent.\9\
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    \8\ ``Running its Course; Homeowners Finding it Easier to Dump 
Mortgage Insurance,'' by Andrea Gerlin, Wall Street Journal, reprinted 
in the Chicago Tribune, January 26, 1997.
    \9\ ``Legislation Targets Overcharges on Private Mortgage 
Insurance,'' Kenneth R. Harney, The Washington Post, February 22, 1997, 
Sec. E, P. 1.
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    Presently, homeowners have limited recourse when they 
cannot cancel their PMI. Like issuers of other lines of 
casualty/property insurance, PMI issuers are subject to state 
regulation, and typically file their policy forms, endorsements 
and rate schedules with the state prior to commencing sales 
within that state. A small number of states have laws 
pertaining to PMI. Nevertheless, even in these states 
homeowners have faced difficulties in obtaining a cancellation 
of their PMI policies.

                       SUMMARY OF THE LEGISLATION

    The reported version of S. 318 contains revisions to the 
bill that was introduced earlier in the session. The PMI 
language is, in turn, based on proposed language that was 
developed shortly after the bill's introduction and reflects 
concerns with S. 318 that were raised at that time.
    Two general concerns were voiced about the Homeowners 
Protection Act as originally introduced. These concerns related 
to: the creation of a new federal regulatory/enforcement 
regime, and the attendant compliance problems; and the 
inflexible 20 percent cancellation rule originally considered 
for this legislation. There was consensus among the witnesses 
that testified at the Committee hearing that mortgagees must 
have the flexibility to require PMI coverage in a slumping 
market, when depreciation may eliminate accumulated equity. 
Some witnesses expressed concern that an inflexible 20 percent 
cancellation rule would have a net effect of denying certain 
borrowers the opportunity for home ownership. Concern was 
voiced that an inflexible cancellation rule would stifle the 
development of new loan products that might require deeper PMI 
coverage, but that allow prospective buyers who cannot raise 
significant down payments to obtain mortgage financing at 
affordable rates.\10\
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    \10\ Prepared Statement of the American Bankers Association on S. 
318, February 25, 1997; Prepared Statement of Freddie Mac on the 
Homeowners Protection Act, February 25, 1997.
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    The reported bill addresses these concerns, but retains the 
essential consumer protections of S. 318. This legislation was 
introduced to address one recurring problem: homeowners have 
been unaware of their ability to get PMI coverage canceled and 
PMI was maintained long after there was any need for that 
coverage. The goal of this legislation has always been to avoid 
unneeded PMI coverage by giving homeowners an affirmative 
cancellation right. The reported language seeks to achieve this 
goal without any federal regulator and in a manner consistent 
with sound underwriting standards.
    S. 318 retains one of the most important protections that 
the original bill provided--it prohibits life-of-the-loan 
insurance coverage for traditional borrower-paid PMI products. 
Mortgage industry participants testified that such policies are 
not necessary or appropriate.\11\ The reported bill permits 
borrower-initiated cancellation when the homeowner has 
accumulated 20 percent equity in the home. The bill mandates 
that as a general rule, PMI must be terminated when a homeowner 
accumulates 22 percent equity. The reported bill would also 
prohibit borrower-paid PMI coverage for the life of the loan; 
even ``high risk'' loans that have traditionally required 
enhanced PMI protections could only be subject to PMI coverage 
until the loan was at the midpoint of the amortization period. 
These substantive protections apply prospectively--they do not 
apply to any mortgage entered into before the effective date of 
the Act. The Committee decided against retroactive application 
because of the disruptive effect this would have on the 
secondary market.\12\
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    \11\ Testimony of R. McCord, testifying on behalf of the Mortgage 
Bankers Association; testimony of F. Sutkowski, testifying on behalf of 
ACB.
    \12\ Testimony of W. Lacy, testifying on behalf of the MICA.
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    Another change in the reported bill is that it is free-
standing, rather than amendatory. (S. 318 as introduced amended 
the Truth-in-Lending Act). The reported bill also simplifies 
the disclosure requirements of the legislation. These changes 
reflect comments of hearing witnesses. For instance, the bill 
as introduced could be construed as requiring monthly 
disclosures to homeowners regarding PMI cancellation; this 
requirement would be costly and would make the disclosures so 
mundane that they would be rendered meaningless. As one witness 
stated, the ``required frequency of notices under S. 318 may 
confuse rather than help customers.'' This same witness 
recommended periodic disclosures to supplement the disclosure 
given at closing, and recommended that servicers be allowed to 
coordinate these notices with annual tax forms or escrow 
statements.\13\ The reported bill adopted these suggestions in 
the hopes of providing homeowners with disclosures that provide 
meaningful notice without imposing unnecessary compliance costs 
on servicers.
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    \13\ Statement of F. Sutkowski, testifying on behalf of ACB.
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    The bill as reported addresses lender paid mortgage 
insurance (``LPMI'') differently than traditional mortgage 
insurance. LPMI is a mortgage insurance product that the 
consumer pays for through a higher interest rate on his or her 
loan. The Committee received evidence that LPMI can provide 
homeowners with income tax benefits, if they choose to itemize 
their tax returns, by building the PMI premium into the 
interest payments that the homeowner makes. Evidence wasalso 
presented that many homeowners prefer LPMI because it allows them to 
avoid up-front, lump-sum payments that must be made at closing for 
traditional PMI.
    Payments for LPMI are built into the cost of the loan and 
capitalized over the life of the loan. As a result, the only 
way LPMI can be canceled by the borrower is if the borrower 
refinances the mortgage or pays off the mortgage. The Committee 
received evidence that the interest rate variation on LPMI-
covered loans could reduce these loans' marketability because 
the income stream from interest payments is an essential 
pricing determinant in the secondary market. If the market had 
to incorporate the interest rate variation into its pricing 
decisions, LPMI may no longer be a cost-effective alternative, 
and consumers who might be able to benefit from LPMI would not 
be able to obtain it.\14\ Based on the evidence that LPMI may 
provide benefits to certain home buyers, and because home 
buyers can choose between LPMI and borrower-paid mortgage 
insurance (BPMI), the Committee incorporated an amendment that 
exempts LPMI from borrower-initiated cancellation and automatic 
termination and provides more meaningful disclosures to allow 
consumers to make informed choices.
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    \14\ Prepared Testimony of ACB, February 25, 1997.
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                      section-by-section analysis

Section 1. Short title

    This section designates this Act as the ``Homeowners 
Protection Act of 1997.''

Section 2. Definitions

    This section provides the definitions of a number of terms 
necessary to implement this free-standing legislation.

Section 3. Termination of PMI

    Subsection 3(a) authorizes borrower-initiated cancellation 
once a consumer has accumulated 20 percent equity in his or her 
home (determined according to the amortization of the loan or 
any prepayments). This provision is substantially unchanged 
from the bill as introduced.
    A homeowner must meet a number of conditions to initiate 
cancellation. These conditions were developed in response to 
testimony received during the hearing on S. 318.\15\ First, the 
borrower must request cancellation in writing and have a ``good 
payment history'' (as defined in this bill). Second, if the 
holder of the mortgage requires it, the home owner must also 
provide evidence that the property value has not depreciated 
below the value of the property at closing. The mortgage holder 
has discretion to require the consumer to provide whatever 
evidence of current market value the holder deems appropriate. 
The Committee believes that mortgage holders should strive to 
set evidentiary requirements that, while consistent with and 
necessary for sound underwriting practices, will not impose 
undue costs on borrowers who must provide and pay for this 
evidence. Third, the holder of the mortgage may also require 
certification that the equity of the mortgagor in the residence 
securing the mortgage is unencumbered by a subordinate lien. In 
addition, the bill requires that the mortgage holder disclose 
its requirements to the borrower as soon as cancellation is 
requested. The Committee believes that this requirement will 
benefit consumers by establishing evidentiary requirements that 
will not vary during the cancellation process.
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    \15\ See, e.g., Prepared Statement submitted by ACB, February ?, 
1997.
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    Subsection 3(b) mandates automatic termination of PMI at 
the 22 percent equity level. Again, the point at which the 22 
percent equity level is reached is determined by payments made 
according to the initial amortization schedule. The only 
condition on this requirement is that the borrower must be 
current on all payments due on the loan at the time PMI is 
terminated; if not, the PMI must be terminated as soon as the 
borrower becomes current.
    The Committee expects that the cancellation and termination 
provisions contained in Subsections 3(a) and (b) will be made 
available to the overwhelming majority of home buyers. Also, it 
is the hope of the Committee that those lenders/investors that 
have adopted cancellation guidelines that permit homeowners to 
terminate PMI prior to accumulating 20 percent equity will 
continue to permit them to do so. Lenders who permit 
cancellation of unneeded PMI coverage under terms more 
favorable to homeowners than those provided in this bill should 
be encouraged to do so. The bill is not intended to create a 20 
percent minimum equity requirement for PMI cancellation; rather 
it creates a floor--lenders and investors may not impose more 
restrictive requirements than the provisions in this Act.
    Nevertheless, the Committee understands that there are 
types of loans with default risk factors or characteristics 
such that the loans could not be prudently made were PMI 
coverage not available. For these ``high-risk'' loans PMI may 
be required until the mid-point in the loan's amortization 
period.

Section 4. Disclosure requirements and Section 5. Notification upon 
        cancellation or termination:

    The substantive cancellation rights that S. 318 provides 
only extend to mortgages that are entered into after the 
effective date of the Act (i.e., one year after the date of 
enactment). The disclosures required under Sections 4 and 5 of 
this bill pertain to mortgages entered into both before and 
after the date of enactment of this Act.

Disclosures at closing

    For new loans (those made on or after 1 year after the date 
of enactment), all mortgagors must receive, at closing, 
disclosures of their cancellation and termination rights. 
Borrowers must alsobe provided with an amortization schedule 
and be advised of when they can effect their cancellation or when 
termination will automatically occur. There are mortgages that are 
exempted from the general cancellation/termination rules of Subsections 
3(a) and (b), and are subject to ``half-life'' termination. Mortgagors 
of those loans must be apprised at or prior to closing that their 
mortgage is an exempted transaction.

Annual notice

    Both non-exempted and exempted mortgagors must receive 
annual disclosure of their rights and information (telephone 
number and mailing address) that will enable them to contact 
the servicer regarding their cancellation and termination 
rights under this Act. Mortgagors, whose mortgages are in 
effect prior to the effective date of this bill, must be 
apprised, on an annual basis, of existing cancellation rights 
(i.e., under state law or at the discretion of the mortgage 
holder), and must be provided with contact information for 
determining and effecting whatever cancellation rights or 
opportunities may be available. These disclosures need not be 
separate, but can be included as part of other annual 
disclosure requirements.

Notice of cancellation/termination

    Thirty days after cancellation/termination, the servicer 
must notify the borrower whether PMI has been canceled/
terminated. If PMI has not been canceled/terminated, the 
servicer must inform the borrower of the grounds relied upon in 
making this determination. Unearned premiums must be returned 
to the homeowner within 45 days of the date the servicer 
receives the borrower's cancellation request.

Section 6. Disclosure requirements for lender paid mortgage insurance

    This section establishes the disclosures that must be 
provided to home buyers at commitment, describing, among other 
things, LPMI and the differences between the product and BPMI.
    Another notice must be provided to homeowners 30 days after 
the date on which their PMI would have been cancelable under 
Section 3 had they not chosen LPMI, and informing the homeowner 
that they might want to consider refinancing options. These 
disclosures may be made on standardized forms.

Section 7. Fees for disclosure

    Prohibits the imposition of fees on consumers for the 
disclosures required by this Act.

Section 8. Civil liability

    One of the most controversial provisions in S. 318 as 
introduced would have given rulemaking authority to the Federal 
Reserve Board. Because of concerns about regulatory burden that 
this provision would engender, this provision was removed from 
the bill as reported. The enforcement mechanism for this bill 
is private litigation. The Committee adopted language based on 
other consumer credit laws, permitting actual and specified 
statutory damages, as well as costs and reasonable attorney 
fees.
    Subsection 7(c) of the reported legislation provides that 
the failure of a servicer to comply with the requirements of 
this Act due to the failure of a holder of a mortgage or 
mortgage insurer to comply with the requirements of this Act, 
shall not be construed to be a violation of this Act by the 
servicer. This provision was included because of the unique 
role the servicer has in this bill's compliance scheme.\16\ 
Servicers are responsible for conveying information and funds 
between homeowners and mortgage insurers or mortgage holders. 
Cancellation or termination of private mortgage insurance 
requires the participation of the servicer and, with respect to 
certain activities like the remittance of unearned premiums, 
the mortgage insurer. This provision was included solely to 
protect the servicer in those circumstances where the mortgagee 
or mortgage insurer or holder of the mortgage fails to carry-
out its responsibilities to effect cancellation or termination. 
It is also not intended to impose any additional requirement or 
liability on a mortgagee or mortgage insurer or holder of the 
residential mortgage. The Committee's intention in this section 
is that each party should be held liable only for their 
respective responsibilities under this Act. However, this 
provision is not intended to exempt any party from liability 
for failure to undertake an action required of that party to 
effect a consumer's rights under this Act.
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    \16\ See, Testimony of R. McCord, on Behalf of the MBA.
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Section 9. Effect on other laws and agreements

    The reported bill creates a 2-year Statute of Limitations 
for lawsuits under this Act. The two year period begins at the 
time the borrower discovers the alleged violation. The reported 
bill also contains a preemption provision, applicable only to 
mortgages entered into on or after the effective date of this 
Act. Investors cannot require servicers to adhere to any other 
cancellation or termination guidelines than those outlined in 
this Act, nor can investors require servicers, who have 
canceled or terminated PMI according to this Act, to buy-back 
loans.

Section 10. Construction

    This Act does not impose any requirement for private 
mortgage insurance in connection with a residential mortgage 
transaction.

Section 11. Effective date

    This Act will become effective 1 year from the date of 
enactment.

Section 12. Abolishment of the thrift depositor protection oversight 
        board

    This Section would abolish the Thrift Depositor Protection 
Oversight Board (``Oversight Board''), consistent with H.R. 
2343, passed by the House on September 23, 1997. When 
theResolution Trust Corporation (``RTC'') terminated on December 31, 
1995, the Oversight Board's primary function--overseeing and monitoring 
the RTC's operations--ceased. The Oversight Board's two remaining 
responsibilities are oversight of the Resolution Funding Corporation 
(``REFCorp'') and, through fiscal year 1998, non-voting membership on 
the Affordable Housing Advisory Board. The Affordable Housing Advisory 
Board, chaired by the designee of the Secretary of Housing and Urban 
Development, advises on policies and programs related to the provision 
of affordable housing property, and sunsets on September 30, 1998. In 
addition, as long as the Oversight Board remains in existence, it has 
continuing administrative and reporting functions that will continue 
until about 2030. Under this section, the Oversight Board's REFCorp 
oversight responsibilities are transferred to the Secretary of the 
Treasury, and the Affordable Housing Advisory Board is restructured to 
eliminate the non-voting seat held by the Oversight Board. Elimination 
of the Board could save over $250,000 a year in personnel and overhead 
costs for each of the remaining 33 years of the Board's life.

                      regulatory impact statement

    In compliance with paragraph 11(b) of rule XXVI of the 
Standing Rules of the Senate, the Committee has determined that 
this legislation will not result in a significant net increase 
in the regulatory burden that the Federal Government imposes. 
S. 318 provides homeowners with the right to cancel their PMI, 
but does not impose upon any regulatory authority the 
requirement of enforcing the law. This legislation establishes 
disclosure requirements that will impose certain costs on 
servicers, but the Committee has attempted to minimize the 
costs of these disclosures by permitting these disclosures to 
be coordinated and included with existing federal disclosure 
requirements. The bill also provides broad preemptive language 
that will minimize compliance costs with respect to state laws. 
In light of these variables and the limited resources of the 
Committee, it is impracticable to provide a more specific 
estimate of the regulatory impact of this legislation, and the 
costs associated with the regulatory burden created by this 
legislation.

                          cost of legislation

    Senate Rule XXVI, section 11(b) of the Standing Rules of 
the Senate, and section 408 of the Congressional Budget 
Impoundment and Control Act, require that each committee report 
on a bill contain a statement estimating the cost of the 
proposed legislation, which was prepared by the Congressional 
Budget Office. This statement has been requested from the 
Congressional Budget Office, but it was not available at the 
date of filing this report. When the information is made 
available to the committee, it will be placed in the 
Congressional Record.

                        changes in existing law

    In the opinion of the Committee, it is necessary to 
dispense with the requirements of paragraph 12 of rule XXVI of 
the Standing Rules of the Senate in order to expedite the 
business of the Senate.