Consumer Protection = Consumer Injury ?

The Mortgage Disclosure Improvment Act (MDIA)
that went into effect in July, 2009 was intended to
give consumers protection against new mortgage
terms being disclosed just prior to the closing of the
transaction.

The intent is good. There had been too many "bait
and switch" strategies perpetrated on borrowers by
unscrupulous mortgage originators.

Originators would encourage a loan application for
terms that were often too good to be true. The
borrowers would invest time, money, and faith into
the promise they were given. Just prior to the closing,
the bad guys would deliver the real terms to the
borrower in the form of loan documents.

The borrower, justifiably upset, disappointed and
feeling victimized, had a choice. They could either
swallow hard and accept the onerous terms or they
could cancel the loan, try to pursue another lender,
but risk losing the home because they couldn't
close within the escrow period.

Many borrowers chose to close the transaction, but
were not happy with the choice they were presented.

As part of the financial reforms instituted after the
mortgage meltdown, the MDIA prohibited quick
closings after new terms were presented that
differed very much from the initial Truth-In-
Lending (TIL) disclosures that the borrower received
at loan application.

The MDIA stipulated that before a borrower can
be charged any fees other than for a credit report,
they have to receive their inital Good Faith Estimate
(GFE) and TIL. Only after acknowledging receipt
of these disclosures, or after 3 business day from
them being sent, can a borrower be charged fees
for expenses such as the appraisal.

This allows a borrower to get a good sense of the
terms before committing funds to that particular
loan proposal.

Another part of MDIA is that an escrow cannot
close until 7 days after the GFE and TIL are pro-
vided to the borrower. Although it was unlikely
that escrow companies, lenders and title companies
could pull things together this quickly very often,
it no longer is a possibility.

Where the consumer protection intentions of the
MDIA fall short is with this next provision:

If new terms are proposed that vary more than
.125% from the Annual Percentage Rate (APR)
of the initial TIL, the borrower cannot close
earlier than three business days after receiving
the new disclosure.

This requirement is in effect whether the new
APR is higher or lower than the initial TIL.
So, a borrower cannot proceed without waiting
even if the terms are more beneficial for them.

Prior to the MDIA, we could still work to get
the borrower lower interest rates or fees very
close to the settlement date, get documents
drawn and signed, and fund the loan. With
everyone pulling together, this could all have
happened in a couple of days.

Now borrowers are being put into a position
of accepting terms that are higher so that a
change does not trigger the mandatory waiting
period and risk their settlement date, or work
toward more favorable loan terms and hope that
their seller will allow the escrow to be extended
and close after the contract date.

It is almost the opposite of the situation that
the MDIA was trying to prevent. To save
borrowers from facing higher rates and fees
being presented at the last minute and forced
to accept them or lose the home, now they may
be faced with accepting higher rates and fees
that were presented to them at inception and
forced to accept them or lose the home.

With the establishment of rigid rules, the
consumer may not be having the best opportunity
to receive the best terms possible.