Real estate agents need to know about the Mortgage Disclosure Improvement Act (MDIA), portions of which go into effect on July 30, 2009, and which are almost guaranteed to cause delays in some settlements for buyers nationwide.

MDIA is designed to help eliminate one of the most common complaints about mortgages–the fact that mortgage lenders historically haven’t had to actually commit to the specific terms of a loan that they are offering a borrower; thanks to the Truth In Lending Act (TILA), they did have to disclose estimated numbers to borrowers, but those estimates weren’t binding, allowing unscrupulous (or just inept) lenders to send the borrower initial estimates that ended up being vastly different from the final numbers that the borrower would be confronted with at the settlement table, at which point it was often too late to re-negotiate the terms of the loan without pushing settlement back (and as a result potentially suffering legal or financial consequences).

MDIA modifies TILA to turn the estimates that lenders give borrowers into binding commitments, and requires updated versions of those estimates to be sent to the borrowers if the terms of the loan in question change by more than a set amount–specifically, if the APR for that loan (which reflects both the interest rate on the loan as well as any costs associated with the loan) changes by more than 1/8 of a percentage point. If an updated version is required to be sent out, then the loan cannot go to settlement until the borrower has had 3 days to review the updated version, and borrowers are not (under most circumstances) allowed to waive that 3 day review period, even if they want to do so.

There are three big problems with MDIA, however:

1. It requires redisclosure (and the resulting waiting period) even if the terms of the loan get better. Under the old version of TILA, an ethical mortgage loan officer’s initial disclosure to a borrower of the terms of the mortgage would use worst case numbers; that way, if the borrower were comfortable with those numbers, then the only surprise that the borrower would get on settlement day would be if they ended up having to pay less and/or having a better rate than they had thought because the final details ended up not falling into that worst case scenario. Under MDIA, on the other hand, if market rates improve and a lender is able to actually reduce their borrower’s rate and/or fees, the lender would still have to redisclose, and if that happened within 3 days of the scheduled settlement, then settlement would automatically have to be pushed back.
2. It doesn’t distinguish between mortgage brokers, direct lenders, and the loan officers who work them, so it’s not clear from whom the redisclosures have to come in order to satisfy the new regulation. We currently work with 71 lenders, and there’s no consensus among them on whether a redisclosure from the loan officer to the borrower would suffice, or if the lender who is actually funding the loan would have to provide the redisclosure directly. Most funding lenders are currently only set up to issue official documents for a loan as part of sending their “clear-to-close” authorization to the settlement company indicating that the loan has been fully approved and the funds are ready to be wired to the settlement company; funding lenders currently often don’t reach that point until the day before or even the same day as the one on which settlement is scheduled to take place, so if the lenders conclude that they need to issue the redisclosures directly, they will either need to put in place new systems to handle those redisclosures (which could potentially take months for them to do), or else their “clear-to-close” authorizations will effectively become “clear-to-close-in-three-days” authorizations.
3. In addition to the 3-day redisclosure period, it also requires that the borrower have 7 days to review their initial disclosure before settlement. This means that for many purchases involving a mortgage after 7/30/09, 7 days becomes the de facto minimum time between contract and closing. (Most lenders underwriting times are long enough that the 7 day period won’t be the bottleneck, though, and motivated buyers should be getting at least some form of pre-approval before submitting an offer, in which case the initial disclosure can often be done at that time and then a re-disclosure done w/ the 3-day period once the contract is ratified.)

We strongly recommend that, especially during the next month or two as lenders try to work out the details of how they are going to handle compliance with these new regulations, agents coordinate very closely with their lender partners to find out how they are handling the situation, and try to include at least a few days of “wiggle room” in your closing timetables in case settlement does need to be delayed as a result of these new requirements.

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