This is a well written and detailed explanation of MDIA and HVCC. Required Reading for Real Estate Professionals and consumers entering into Real Estate transactions.
If you're in Real Estate and have a pulse, you've experienced, or at least heard of, the frustrations caused by the HVCC process. Well, just as you started getting used to dealing with HVCC's inefficiencies, along comes MDIA (Mortgage Disclosure Improvement Act, also referred to as HERA), HVCC's slower, meaner sister.
Ok, so before you start drowning in an alphabet soup of government legislation, let's quickly breakdown the legislations' rules, and their impact on the real estate market.
HVCC, Home Valuation Code of Conduct (effective May 1, 2009):
Promotes the accuracy of appraisals by shielding appraisers from undue influence and ensuring consumers have sufficient notice of appraisal content by requiring consumers receive a copy of their appraisal report no less than 3 days prior to the closing of their loan, absent a consumer waiver of this requirement.
Although this legislation is great in theory, its stringent (an in my opinion irrational) rules makes implementation is inefficient at best. HVCC has caused significant delays in closings, and kills sales altogether by not offering a reasonable dispute process for correcting inaccurate appraisals.
MDIA, Mortgage Disclosure Improvement Act (effective July 30, 2009):
Amends the Truth in lending Act (TILA) implemented through Regulation Z by changing the requirements surrounding disclosures to consumers and addresses the timing of when fees can be charged.
MDIA is also referred to as HERA (Housing and Economic Recovery Act), as MDIA amends HERA which was passed in 2008.
Another piece of legislation that is great in theory, but will negatively impact the real estate market as inefficiencies in the process are worked out. Until these are corrected, the real estate market will experience significant delays in closings, increasing the cost to consumers through longer ratelock periods and/or lock extension costs.
The good thing is consumers will benefit from greater transparency once inefficiencies in the process are corrected. Until then, hold on because its going to be a bumpy ride.
Four Key Elements of MDIA and HVCC
1. If the consumer is financing the property, these new regulatory and investor guidelines will impact--and could even dictate--the closing date. Historically, consumers and sellers would agree on a closing date, and then service providers--including lenders--would work as best they could toward meeting that date. Going forward, contracts can still be written with a specific closing date in mind, but all parties need to take into account that the earliest any home financing transaction can close is 7 business days after the consumer is issued his or her initial mortgage disclosures from the lender.
(Note: Saturdays, with the exception of federal holidays, do count as a business day for the purpose of disclosures only)
I don't see this rule causing too many delays as nearly all financing transactions require an appraisal. Although possible, its not very likely to receive the appraisal and provide it to borrower 3 days before closing (HVCC rule), all within the first 7days of providing disclosures.
2. Upfront fees cannot be collected by the lender (except for credit report fees) until the initial disclosures (most importantly, initial TIL) are received by the consumer.
Upfront fees include appraisal fees, and most lenders won't order the appraisal until they've received upfront payment/deposit from the borrower for the appraisal. Not ordering the appraisal immediately can cause delays in the underwriting and closing process.
The tricky part here is when the borrower is considered to have received the disclosures. Some lenders allow the initial disclosures to be emailed, and therefore, considered received immediately. Other lenders, require the loan be submitted to their investor, who then mails the initial disclosures to the borrower. If disclosures are mailed, they are considered received by the borrower on the 3rd day after mailing. Therefore, its important to ask your lender how disclosures and appraisals will be delivered to the borrower -- email or snailmail, as the answer can significantly impact your closing date (more on this in Email vs. Mail Delivery below).
3. The consumer must be provided a copy of their appraisal at least 3 days before closing. The consumer must receive the appraisal at least 3 business days prior to the mortgage closing. If the consumer believes the 3-business-day required review period is not necessary for whatever reason, he or she has the right to waive that requirement in writing.
This is an HVCC requirement, and to date I have not experienced any significant delays meeting this requirement. Delays may be experienced if an appraisal is mailed vs. emailed; in that case, a borrower is considered to have received the appraisal 3 days after mailing, and then HVCC requires a 3 day review period before they can close.
4. An increase of more than .125% in the Annual Percentage Rate (APR) from the initial Truth in Lending disclosure (TIL) requires the TIL revised and redisclosed to the consumer. The consumer must receive a revised TIL at least 3 business days before closing. A more typical contract date may be 30-45 days. Considering that many things can be changed or finalized throughout the course of the transaction, there are a number of changes that can impact the borrower's APR. Therefore, it is critical on the front end to ensure estimated fees are as accurate as possible.
Ok, this is the BIGGIE. Prior to MDIA, most lenders accurately disclosed their fees, and provided a "good faith estimate" of other third party fees. A good lender always came in close. This is no longer possible with MDIA as a hairline change in 3rd party fees could increase the APR more than .125%. If this occurs (which could be discovered right before closing), the TIL must be redisclosed, and the closing delayed at least 3 business days. Therefore, its very important buyers choose a lender before an offer is made, so the lender can collect 3rd party fees and provide an accurate TIL ASAP.
The tricky part again is when the borrower is considered to have received the redisclosed TIL. This all depends on whether the redisclosed TIL is mailed or emailed. If it is mailed, add an extra 3 day mail wait to the 3 day review period, which means your closing can be delayed 6 more days! Ouch.
Mail vs. Email Delivery
As mentioned above, whether the initial/redisclosed TIL and/or appraisal is delivered to the borrower via mail or email has a significant impact on the closing of the loan. If an email system is utilized, the borrower is considered to have received the documents immediately, and the 3 day required review period can begin. However, if a mail system is used, the 3 day review period doesn't begin until 3 days after the documents were mailed. Whether a mail or email delivery system is used depends on which investor the lender utilizes for the loan.
Currently, many investors allow for an email delivery system, however, there are many that utilize a mail system. The general trend for investors utilizing mail delivery systems is to switch to email, but until then expect delays in closings. Remember, its a learning curve for everyone. To help you visualize how MDIA and HVCC will affect a typical closing see the slides below. I've included a few calendars to help illustrate various scenarios you may encounter, including email vs. mail delivery system, and how redisclosing the TIL affects the closing date.
What you can do to make adjusting to MDIA less painful
1. Choose your lender prior to making an offer. More than ever, there are many moving parts and timelines to adhere to during the underwriting process. Therefore, you need your lender communicating with all parties involved early-on to ensure a smooth and timely closing.
Choose an experienced, competent lender prior to making an offer, and understand the consequences of switching lenders. A new lender must provide a new TIL, meaning the wait requirement periods start from the beginning, and will delay your closing.
2. Negotiate which title company you'll use quickly. Buyers and sellers choose which title company to use during the negotiation process. Real estate agents should negotiate this first, so the lender can contact the title company for their fees to begin computing the initial TIL. The sooner the initial TIL is completed and sent to the borrower, the sooner you can close. They key is to facilitate communication between the lender and title company ASAP.
How to negotiate to use your Title Company? If a buyer wants to use their title company, pull for them by letting the seller know the lender already has their fees, which means the initial TIL is almost complete (subject to the final sales price), and can be sent to the borrower sooner (i.e., close sooner). If a seller wants to use their title company, pull for them by providing the title company's list of fees and endorsements with the Seller's Disclosure.
3. Allow for a 30-45 day closing. This timeline may decrease as the industry adjusts to the new process, but minimize stress by allowing for ample closing time.
4. Lock the interest rate and fees upfront. The best way to expedite the close is to lock in the rate and fees as soon as possible. If the borrower chooses to "float" the interest rate, a TIL may need to be redisclosed when the rate is locked if the rate and fees differ from the initial TIL provided. Redisclosure automatically adds at least 3 days to your closing date.
5. Understand the MDIA and HVCC process, and the learning curve
These are new processes for everyone involved in the transaction, and the best thing you can do is understand the legislation so you can be a team player. There's nothing worse than someone who hasn't taken time to learn the new way of doing business, then blaming everyone else when things take longer than they expected.
What you can do to make adjusting to HVCC less painful1. Choose your lender prior to making an offer. Doing so allows your appraisal to be ordered quicker. Also, understand changing lenders may require you to purchase a new appraisal as some lenders don't allow you to transfer the appraisal you ordered through another lender.
2. Understand which comps appraisers are using. Appraisers use comps underwriters prefer, and currently underwriters are placing more weight on comps within the last 90 days AND pending comps. You may/may not agree with what that does to your value, but understanding this better prepares you for what may be a lower appraised value.
3. Discuss a contingency plan with buyer & seller. What happens if the appraisal comes in lower than the sales price? Try to figure out worse case scenario, and how the buyer and seller can restructure the price (or not) if it does. Don't be sideswiped by a low appraisal if you can help it.