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Mortgage Broker News | 16 Mar 2010, 12:00 AM Agree 0
The Bank of Canada's record-low interest rates have been in place for almost a year and during that time, consumer complaints about mortgage prepayment and IRD penalties have been steadily rising.
  • LB | 18 Mar 2010, 03:51 AM Agree 0
    To effectively reduce the number of complaints regarding mortgage prepayment penalties, mortgage brokers should be explaining the terms of the mortgage to their clients prior to the clients signing at the lawyer's office. I believe it is the mortgage broker's responsibility to understand their clients needs and to fully outline the benefits and detriments of each product. Explaining the prepayment penalties that could arise from early payout is a major topic of discussion, especially if it appears that the client may be looking to refinance/renew early. Providing the appropriate product should help satisfy the client's current needs, and potentially their future needs.
  • LB | 18 Mar 2010, 03:51 AM Agree 0
    (pressing enter obviously doesn't skip down a line but submit's the message here...)
  • LB | 18 Mar 2010, 03:56 AM Agree 0
    Obviously you can't anticipate what your client is going to do in the future and you will never truly understand ALL of their needs, but explaining all of the terms of the products that you select for them will allow them to make an informed decision, prior to placing the mortgage and throughout the term of the mortgage. By educating them and providing sound advice you should be able to help alleviate some of the burden of unnecessary complaints. And, from the lender's point of view, penalties are required to make their investments attractive enough to their investors so that there are plenty of mortgage products available. Without these products mortgage brokers would have an even tougher job. Take care all, sorry about the multiple posts here.
  • A W | 18 Mar 2010, 07:11 AM Agree 0
    I agree fully to the comments from L.B., BUT, some Major Banks do not address the IRD penalty in the commitment, and refuse to tell the Broker how it is calculated by saying all of that will be done at the branch level after the fact. I have personally experienced this. And...from what I understand... Add to that, the 'new and improved' way of calculating the IRD that some of the BIG lenders developed appox 3 yrs back, by taking the original discount off the remaining rate is why penalty amounts are out of control. For an example let's use a 5yr discount of 1.35% (a posted rate of 5.25 less the discounted rate of 3.89)
    That 1.35% is then being used to reduce the current posted rate(say a two yr of 3.95% to 2.60%) Prior to the all of this the consumer would have been charged a penalty on the current discounted 2 yr which is being offered at 2.95%. The argument is the client originally received the 1.35% discount...BUT discounts on short terms are never as great as the longer fixed terms. Currently discounts on short terms are only 1%. Is this not double dipping on penaltiy calculations by some of the Big lenders?? Some 5 yr discounts were up around 1.65% off posted years ago, so today that would make that 2 yr penalty rate 2.3%... As a broker, I try my best to find out what each lender is doing, but all we can do is warn the client that this is how creative some of the BIG lenders are. Lenders that do not have posted rates, still have understandable straight forward IRD's.(discounted to discounted). Please feel free to correct me, if I am mistaken.
  • YM | 18 Mar 2010, 07:14 AM Agree 0
    The issue here is that an IRD is looked upon as a penalty, when in reality, if one understands how the financial system works, it is easy to see why those IRD fees have to be charged and that they just part of the cost of doing business. A client that borrows funds for a fixed term, receives insurance that the rates will not increase for him during that time, provided the client promises the lender that he/she will commit to them for that term. Once the lender has that guarantee, they are able to basically do the same, and borrow those funds from their investors or the Bank of Canada, and guarantee the funds for that period of time. If the borrower decides that he/she wants to walk away from the loan, the lender is still left with the responsibility of paying the loan back to its investors. So what the lender does, is he sells the loan on the borrower’s behalf to yet another borrower. The IRD is the difference in interest that the new borrower will be paying for that loan, and the rate that he/she currently has. In other words, the lender should not be looked upon as being at fault. Indeed, the responsibility is on the broker to explain these terms and reasons to the borrower.
  • Elaine | 18 Mar 2010, 07:15 AM Agree 0
    When it comes to a refinance, I can understand, Brokers and Lenders alike need to thoroughly explaine, however, a lot of these consumers are purchasing a new property because of a circumstance, a larger home with adding to the family or a move for a job transfer or other . In these particular cases, lenders should simply have the Broker or Branch lender have proof up front of a legal sale and make those exceptions.
  • Kevin Reghenas | 18 Mar 2010, 07:23 AM Agree 0
    Absolutely Brokers have a responsiblity to go over potential IRD penalties in case of early repayment over & above the prepayment privileges. However, this IRD calculation is based on the individual banks policy at the time. After 911, IRD penalties were often calculated at the rate versus the going posted rate of the remaining term, some were calculating it to the rate versus the bond yield of the remaining term. Now the banks are comparing the rate versus the current discounted rate, & with some Banks irregardless if that client received a discount or received posted rates on an equity program. There is compensating an investor for early return of their capital & just out right slamming the poor consumers for these rediculous IRD penalty calculations, especially when there is only 2 years left on a 5 year term, the penalties seem to be the worst. I can almost see charging high penalties on refinances but on bonafide sales, it looks bad on the Broker that placed the deal with that institution. It's sad that the industry cant deal & address this without having to drag in the Finance Minister to intervene!
  • Finn Larsen | 18 Mar 2010, 07:40 AM Agree 0
    It is not just the brokers responsibility to tell the borrowers of the penalties for early pay out and refi situations, I find in mors cases the borrower comes to me to help them from their own bank or credit union , the institutions usually have nevr disclosed that information, in fact alot of bank reps didnt even know about the IRD until after the rates drop to this level, I know of several causes the bank rep quoted 3 months and then a fewq days later after the borrower signed the agreements to refi, the bank rep said oops head office corrected them and there is a large IRD , the borrower ended up paying the full IRD and couldnt get out of it. Folks must understand that they must read all fine oprint as well I do agree that as professionals that we must ensure that we do our fiducary obligation and make sure the boorrowers understand what we represent, by doing so we provide that service that professional mortgage brokers must provide , otherwiuse we are just bankers reps.
  • PWE | 18 Mar 2010, 07:53 AM Agree 0
    AW is correct in that the banks have changed their calculation of IRD using the posted rather than the contractual rate. This has gone a step further for new home purchasers where the bank offered capped rates at builder sites. For example, say a bank offered 1% off the posted rate at a builder site for 2 years and in that two year period, rates increased. The client who applied for a mortgage at the original 1% off but closed 2 years later would now be subject to an IRD penalty based upon the posted rate at closing even though they contracted with the bank at 1% off. The fact that the banks are charging IRD on posted rates and not actual rates is unfair and a money grab.
  • Mark Piers | 18 Mar 2010, 09:09 AM Agree 0
    With all due to respect to mortgage professionals and clients alike this is really a mute point. I realize that in many cases the IRD is not properly explained to clients by their mortgage agent or their local bank branch (lets not forget them). As a mortgage agent we deal in this day in and day out however our clients deal with this maybe once or twice every 5yrs. Even if we discussed this thoroughly with our clients, in all likelihood it will have been forgotten when the issue arises.
  • Mark Piers | 18 Mar 2010, 09:10 AM Agree 0
    With all due to respect to mortgage professionals and clients alike this is really a mute point. I realize that in many cases the IRD is not properly explained to clients by their mortgage agent or their local bank branch (lets not forget them). As a mortgage agent we deal in this day in and day out however our clients deal with this maybe once or twice every 5yrs. Even if we discussed this thoroughly with our clients, in all likelihood it will have been forgotten when the issue arises.
  • Rebecca Awram | 18 Mar 2010, 09:25 AM Agree 0
    There should be some allowance for a bona fide sale, when the consumer is not just 'refinancing' to save interest monies. Also, there should be a universally mandated calculation among lenders for IRD, perhaps by the BPCPA... currently lenders are free to use whatever formula they wish, with no regulation of how they arrive at their calculation. On top of that, many are ALSO charging a 'reinvestment' fee of hundreds of dollars ON TOP of the IRD penalty, which I think is really just a discharge fee by another name (it's currently capped at $75 in BC) since they can't call it that
  • MP | 18 Mar 2010, 10:24 AM Agree 0
    Mark, you are totally right...As brokers we explain the IRD to clients in the simplest terms possible and they nod their heads like they understand....so you reiterate the IRD and they say "ah, Ok, I get it"....then 3 years down the road they dont' remember a thing.....I guess it just sucks to be someone who took a fixed rate....
    I do think that lenders shouldn't be able to change penalties to suit them whenever they like. Firstnational actually shows a calculation on their website on how they calculate a penalty....which is how it should be...I would like to see the penalty calculation included on the payout statement...
  • Gail | 18 Mar 2010, 11:29 AM Agree 0
    After seeing far to many IRD's calculated by the bank branchs, and then come the closing date, I have seen IRD's double and sometimes triple on payout, this happening when there has been no change to interest rates!!!! The banks simply respond that their bank officer simply made an error!!
  • Gail | 18 Mar 2010, 11:31 AM Agree 0
    The lenders should have the payout penalties calculation clearly posted on their mortgage commitment and in their mortgage documents.
  • Gail | 18 Mar 2010, 11:33 AM Agree 0
    Finance minister SHOULD intervene with legislation, all costs associated with a any borrowing, consumer credit or mortgages MUST be disclosed to the consumer.
  • John | 18 Mar 2010, 09:17 PM Agree 0
    I opened a new mortgage with Scotia Bank three years ago and assumed that the standard three year IRD then 3 month penalty was in place. I found out last week that it will cost me $24,000.00 to refinance my $225,000 mortgage!! Seems for the past three to four years this is the way things are done, IRD at anytime.

    This was never disclosed to me, or my agents, and certainly not on the committment made to me. Nor at the bank branch.

    It's foul, a money grab, a scam. Only a bank could do this and get away with it. The powers to be should forget about the payday advance people and tackle the real problem in banking.....IRD

    John
  • victor | 19 Mar 2010, 12:27 AM Agree 0
    What many of you may not have noticed is... there are a few lenders out there that have lowered the 1 and 2 yr rates. Check your rate sheets and you will notice this. they are noticeably cheaper than the others. this, i believe is to inflate the IRD that will come back to them when a client tries to re write or move their mortgage. Also note that if the client is one day less than the say 3 yr term remaining, they will charge them the IRD against the 2 yr rate term. thus inflating the IRD by thousands.
  • victor | 19 Mar 2010, 12:32 AM Agree 0
    most mortgage brokers will not sell a 1 or 2 year term as there is basically no payday in it for the broker. these lenders as mentioned above have also lowered the pay to the broker for the shorter terms. So, you won't be tempted to sell it and they can up the anty for their investors. Where did "customer first" go???? i guess it depends on your perspective of who your customer really is. I don't see any "win win" here.
  • Kevin Reghenas | 19 Mar 2010, 03:34 AM Agree 0
    Bang on Victor,that's why I mentioned about the 2 years left on a 5 year term is just wild, you cant even do blend & extends to new 5 year terms & improve your rate by very much. I did an equity deal at Maple Trust in 2007 & she got posted rates at the time. She went to sell & on a 260000.00 mortgage she was quoted $20000.00 penalty because they were comparing her rate to their discounted 3 year rate even though she never received a discount. Isnt it funny, all the Banks had a liquidity problem after the subprime meltdown, they had to charge P+1.0% on variables because of it & now we can suddenly get prime -.5%. Didnt take the banks long to slam Canadian consumers to get their liquidity back!
  • CK | 19 Mar 2010, 06:12 AM Agree 0
    There are some lenders that base their IRD's, not on the lending rate for the remaining term, but on the current investment bond rate.......on an $80k mortgage, I had a client that had to pay an IRD of $13K...was the only way he could refinance. Those types of IRD's should not be allowed. This lender was no longer actively in business so there was nothing the client could do to fight this.
  • FJ | 19 Mar 2010, 10:23 PM Agree 0
    A residential mortgage loan is a contract based on the performance of two parties - the lender and the borrower. If the borrower decides to cease performing and so informs the lender, the lender is on the receiving end of a breach of contract. At that point, the lender ought to be entitled to compensation for the breach. The compensation ought to be based around normal principles of contract law. One of those is that the lender ought to "mitigate" their own loss, as arising from the breach. Therefore, any prepayment "penalty" ought to directly correlate to the actual loss suffered and not simply be a pie-in-the-sky number. If the lender, in other words, can place the money being prematuraly returned to the lender on a similarly based risk in another investment, the penalty ought to relate to the cost of the losses incurred in so doing. Not a penny more and not a penny less.
  • David O'Gorman | 20 Mar 2010, 02:10 AM Agree 0
    1)A significant number of mortgages are CMHC insured. Until about 10 years ago, if you had a CMHC insured mortgage the maximum penalty,on an arm's length sale, after the 3rd anniversary, was 3 months interest....then GE came to town & allowed lenders to charge what ever they wanted as a penalty & CMHC changed their policy to match GE.I'm still trying to figure out how this policy change meets CMHC's motto, "Helping to house Canadians"

    2) There are several classes of MBSs insured through CMHC. One particular class allows the pool organizer( usually the original lender) to pocket all prepayment penalties...i.e. the penalty does not go to the owner of the individual securitized units, to compensate for "lost income". I think a clever under-employed lawyer could have a field day arguing that if a mortgage is in one of these pools, then lender isn't losing anything so they are not entitled to "unfair" compensation.

    3) Why are mortgage brokers obligated to explain prepayment penalties when the lenders go out of their way to hide an explanation?...Where is the first place the PPP's are disclosed to the borrower? In many cases there may be a partial disclosure on a "commitment" , but in a the large majority of cases ( in Ontario anyway) the client does not have an opportunity to see a full explanation of PPPs until they recieve a copy of the Standard Charge Terms (the real contract) which is usually when they are in their lawyer's office the day of, or the day before, closing. Why shouldn't the lender be obligated to give "full disclosure" ( a copy of the Standard Charge Terms?) upon reciept of a signed back commitment. You want the loan, here are the complete terms you are signing for, well in advance of closing. Don't cry in three years because you claim you didn't know.

    4)To my friend FJ discussing contarct law, I would ask the following: Because prepayment penalties were not fully explained by the lender, the lawyer, or the broker, was the borrower able to give informed conscent when he/she signed the mortgage document?...is that portion of the contract still valid? Can you smell a class action lawsuit in the air?.

    5) If both CMHC & the institutional lenders would be "up front" about PPP then this would not be an issue for consumers, but both parties seem to go out of their way to obfuscate the facts. The consumers of today are a different breed,deal with it.
  • FJ | 20 Mar 2010, 03:41 AM Agree 0
    Dealing with consent, contract law as it stands in most provinces requires consensus ad idem. I won't try to fully explain that, but suffice it to say that it in most mortgage situations dealing with an IRD claim against a lender, it will be likely be seen as being present. Contract law also requires that the party giving consent had capacity (mental, legal). It also that the terms of the contract were not agreed to under grossly unfair conditions. These include certain limited forms of duress and something the law refers to as "undue influence". It also requires that the terms were not "unconscionable" to one side. If the terms of the agreement were known or COULD have been known through the exercise of reasonable diligence on the part of the party claiming they did not give consent, courts are loathe to interfere.

    Class actions are generally designed to deal with situations involving relatively small amounts of money based on a large "class" of victims. Amounts in the many thousands per class claimant are not likely to be certified as a class action - ever. Certifying a class action based on such large amounts offends the principles under which the class action claim was designed in Canada.
  • LB | 20 Mar 2010, 06:39 AM Agree 0
    I think everyone agrees that lenders should be required to give full disclosure of the prepayment fees and penalties, including the calculations used, to the client/borrower (or agent). Standardizing them is the only fair way to achieve this, however, who is going to decide what a fair method of standardization is? Is the government going to be asked to determine this or will it be a consortium of professionals from all aspects of the mortgage industry? I assume that the lenders aren't going to be satisfied if it adversely affects their margins & profits. Who has more influence with the government, the average consumer or the large institutions? Do without IRD and the complex calculations and implement the simple 3-month interest penalty across the board.
  • John | 25 Mar 2010, 03:11 AM Agree 0
    I don't think it is the full disclosure issue that I have, it is the effective monopoly lenders have with this. Where do you go, they are all doing it. As soon as one finds a way to bring in the bigger $$ they all do. It should be illegal to charge this IRD. I understand that Alberta does moderate the size of the penalty, and it would be substantially less than $24,000.00.

    If a bank/financial institution came forward and did not charge the IRD, I would move all my business to them, as I think most of us would. But you won't see one of them stand up to this challenge.

    John
  • Laura | 16 Apr 2010, 06:58 AM Agree 0
    I went to a broker to arrange a mortgage for me at the end of a long and stressful divorce. I asked for and she recommended an 'open' mortgage because I was unsure of my future ability to keep my house. My understanding of an open mortgage and my understanding of what I was getting, meant that I could pay it off at any time without penalty. I think this is the common understanding. However, when it came time to pay my mortgage off, I discovered that there was indeed a prepayment penalty and that this fact had been clearly disclosed in the documents I'd signed (along with the dozens and dozens of other documents I'd been signing for weeks at that point) Fool that I am, I trusted my broker, my lawyer and the mortgage company to give me what they'd said they were giving me: an open mortgage. Why is it, that no one in the financial industry can be trusted anymore?
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