Mortgage Disclosure Improvement Act: Improvement? Yes or No?

One thing I have learned about our government is that if some law has IMPROVEMENT in its title, it probably isn't. Such is arguably the case with the Mortgage Disclosure Improvement Act of 2008, a law that took effect on July 30, 2009. It purports to help consumers by preventing them from being railroaded in a loan transaction. Unfortunately, it really doesn't help consumers.

It did clarify one rule, because the way the original Truth-in-Lending Act was written back in the 1970s, they forgot to include refinance transactions. Say what? No big deal, because for 30 years everyone ASSUMED that they were covered and acted as if they were included. Conclusion: No improvement.

Provisions in the old law required that a consumer get Truth-in-Lending, Good Faith Estimates of Closing Costs, and other disclosures three days after application. This doesn't change, but a further wrinkle is that a lender cannot order the appraisal until the three days have past. That is simply a 3-day delay over current procedures. Conclusion: No improvement

There is an assumption that disclosures are mailed and that it takes three days to get to the consumer. In this day and age we use the Internet and e-mail the application and disclosures to consumers. They get them instantly and, indeed, the law contains a provision that if e-mail is used and the lender can prove receipt, notice has been effectively given. However, everyone seems to be looking at the 3-day rule as inviolate, so you will wait anyway. Conclusion: No improvement.

There is another provision that a loan may not close until seven days after disclosure, but that is ridiculous. You have to wait three days before ordering the appraisal. If you could get it instantly, do you think a lender could underwrite it, approve it, draw loan docs, and get them signed so as to close in seven days? No way. And with a refinance transaction, there is a further three-day "right of rescission" period, Conclusion: No improvement.

The law also provides that if the APR changes more than 125 percent, EVEN IF RATES IMPROVE, the lender has to redisclose and wait an additional three days. Let's say you apply when rates are 5.5 percent. You get approved and the market improves to 5.125 percent. You lock in, but you just started another 3-day clock ticking. And most lenders, at this writing, won't draw loan docs until the fourth day. Conclusion: No improvement.

This is especially troublesome because the best pricing is on a 10-day lock. If you get a rate change as discussed above, you wait three days and if it's a refinance transaction with a three-day right-of-rescission period, remembering that there ARE weekends, there isn't enough time to get it funded before the lock expires. Thus no 10-day locks. That's bad because a 30-day lock costs at least .25 points, $1,000 on a $400,000 loan. Conclusion: Not only no improvement, but it's a giant step backward.

This is obviously ridiculous, but is shows what happens when legislators and the regulators who DO NOT UNDERSTAND what is going on at street level get involved in writing rules.

If you want to read the entire rule itself, you can find it here.

Randy Johnson – Author of How to Save Thousands of Dollars on your Home Mortgage and Savvy Borrower articles, Randy is a mortgage broker who has financed over $1 billion in properties. He writes about home buying and real estate finance topics for CreditBloggers.com.