It would appear from the submissions to the Financial System Inquiry on the subject of lenders mortgage insurance that no one is particularly happy with conditions in the LMI market.Insurer QBE, which is the number two LMI provider in Australia, argued in its submission that current regulation limited LMI's role of enhancing the underlying efficiency of the housing finance market.And the Finance Brokers Association of Australia argued that borrowers were entitled to much better disclosure about the nature of the transaction between the insurer and the lender.LMI is designed to protect lenders in the event that a borrower defaults on their home loan obligations. The cost of the premium is usually passed on to the borrower.According to the RBA, about 25 per cent of home loans are covered by LMI.Under Australian Prudential Regulation Authority rules, the standardised approach for calculating capital requirements for credit risk used by most authorised deposit-taking institutions operates regardless of whether or not the loan is covered by LMI.Under the advanced (internal ratings-based) approach, ADIs deemed to have sufficiently robust internal rating systems and risk management frameworks are accredited by APRA to use their own internal modelling as inputs into determining the risk weights for housing finance. APRA has introduced a 20 per cent floor for loss given default (LGD is the estimated loss in the event that a loan defaults) under advanced methodologies. Five banks - the majors and Macquarie Bank - have approval to use the advanced modelling approach.QBE said: "Currently, lenders using the advanced methodology for calculating capital requirements for credit risk receive no capital benefit for the use of LMI, despite the fact that the LMI providers are required to hold significant capital for the risk that is transferred."APRA has set the minimum loss given default for residential mortgages at 20 per cent. To the extent that mortgage insurance reduces credit losses, LGD must still be no lower than 20 per cent. "QBE recommends that capital relief be provided to IRB lenders that utilise LMI. LMI provides an additional layer of capital that assists in diversifying risk across lenders."The Finance Brokers Association said borrowers should be provided with details of the LMI contract, including any commission paid by the insurer to the lender.It said: "Lenders may, in certain circumstances, be entitled to a refund of an LMI premium when a loan is repaid."If the borrower has paid for the LMI then the lender should make restitution to the borrower if the premium is refunded."An alternative would be to introduce portability, so that the LMI policy transfers to a new loan if the borrower refinances.