Thats how it's always worked I believe, the loot spawns upon drop based on monster level and level of the chest. and of course your magic find % Most of the time in hell I find I don't have the time to stop mid boss and change gears though lol.
Magic Find in Diablo III
Magic Find increases the odds for found items (from monsters or objects) to be "higher quality". Higher quality items are more likely to be magical, rare, set, or legendary, with different odds for each type of item depending on the Monster Level dropping the item and the player's Magic Find percentage. Magic Find doesn't make items with higher item level to drop since monsters have a set of items they're capable of dropping (eg. the highest tier of items will only drop from monsters with Monster Level 63) nor does it increase the quantity of items dropped.
Nephalem Valor, a new system in Diablo III, gives level 60 players a stacking buff (when a rare or champion monster is killed) which increases their Magic/Gold Find and increases the drops on bosses. The buff will disappear if the player respecs. It is not yet known how high it stacks or how much Magic Find bonus it gives.
When asked about Treasure Classes and potential diminishing returns on Magic Find (like there was in Diablo II), Diablo III's Game Director Jay Wilson confirmed that Magic Find will not be capped but didn't mention diminishing returns.
Jay Wilson: I don’t really know how to answer the treasure class one, lots of areas have different treasure classes but we try to make areas relatively equal depending on challenge and monster level. MF is not capped, though.
Diablo III's Community Manager Bashiok answered a question regarding diminishing returns on Magic Find with his usual no deny nor confirm style.
Bashiok: Well I don’t think it’s a linear scale, if that’s what you mean. We might share what it is on our game guide sometime after launch.
Magic Find in Group
Since every player will have their own loot in cooperative play, the Magic Find in group situations will be averaged across the group.
Here's an example with a group of three people:
Player 1's MF: 100
Player 2's MF: 80
Player 3's MF: 0
Magic Find for each player: (100 + 80 + 0) / 3 = 60.
To recap: Every players personal Magic Find will be summarized and then divided by the number of players.
This prevents players in public games from stacking Magic Find and tagging along while doing minimal effort in killing monsters but getting the best chances of getting great drops. This might also discourage cooperative play since other people with low Magic Find percentage might lower your overall Magic Find.
The Nephalem Valor buff covers the entire group.
Magic Find with Followers
Blizzard forum moderator Rygarius clarified that 20% of the Magic Find on the Follower's gear will be added to the player's personal Magic Find bonus.
Rygarius: The amount displayed is your share of the bonus. You get 20% of your follower’s Magic Find, Gold Find, and + to XP.
In a group situation, your Follower will return to town and you will not get the Magic Find bonus from his/her gear.
Diablo III's MF Philosophy
The D3 Team has talked about how they'll balance Magic Find with other modifiers, and how they'll keep things fair, or at least fairer, for all the characters. A typical quote came from Bashiok in December 2009.
Bashiok: I think the trick with magic find, or any sort of tertiary stat that doesn't directly relate to player power, is to make sure that it's an actual trade off. A lot of times and specifically for certain classes in Diablo II you could stack magic find and still be perfectly able to fight and kill. So what it really comes down to is properly weighting stats on items and ensuring that if you do want to stack something like magic find, that it's clearly going to limit your power in downing enemies. Auto-stats to a degree also help out in this regard as you can't effectively stack stats as easily to offset the loss of stats coming from items that might otherwise help keep you alive or kill at an acceptable pace.
That said magic find isn't fully drawn up yet, there's not a complete pool of itemization where we can begin tweaking balance to a degree where we can ensure MF doesn't get out of hand. It could turn out that we need to take an alternate approach, but, if I had to guess simply weighting the stat properly would be enough.
To summarize, here's why players won't be able to just load up on MF on characters in D3:
Auto-stat allocation means a character can't put every point into vitality to make up for not wearing any +hit point gear.
Item bonuses to stats like defense, resistance, damage reduction, and more, will be (more) necessary to survive than they were in D2.
D3 adds +%spell damage mods to numerous items, and Mage characters will need to boost that stat in the same way combat characters require +%damage weapons and other gear. If MF and +spell damage seldom appear on the same items, as was the case with +%damage and +MF in D2, then mages won't have any inherent advantage to loading up on MF gear.