Borrowers win clarified penalty terms

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After class-action suits and a lake of client tears, the federal government moved Sunday to force banks to clarify their prepayment and penalty terms.

“The Code is to ensure that federally regulated financial institutions (lenders) provide enhanced information in respect of credit agreements secured by mortgages where a prepayment charge could apply (mortgages) to assist borrowers in making decisions about prepayment of their mortgage,” reads the Mortgage Prepayment Information section of the country’s new Code of Conduct for Federally Regulated Financial Institutions. “The information that will be provided under this Code is in addition to existing information provided by lenders to borrowers.”

Under the terms of those new requirements, when borrowers tell a lender they are prepaying the full amount owing on a mortgage or even a specified partial amount, the lender must in writing  provide the applicable prepayment charge, along with a description of how the lender calculated the prepayment charge.

That responsibility goes beyond informing clients about whether penalty calculations rely on a certain number of months' interest or an interest rate differential.

In fact, if the lender used the IRD to calculate the prepayment charge, it must inform the borrower of the outstanding amount on the mortgage, the annual interest rate on the mortgage, the comparison rate used for the calculation, and the term remaining on the mortgage that was used for the calculation.

The code also means lenders must provide borrowers an annual update on prepayment terms and possible penalties. It will not apply to several non-bank lenders operating in the broker space.

What it doesn’t mandate -- and what brokers continue to call for – is a standardized IRD formula for all lenders and not just the increased transparency law suits have faulted individual banks for failing to ensure.

Most recently, lawyers spearheading twin class-action suits against CIBC over “vague prepayment terms” have fielded interest from hundreds of the bank’s mortgage clients.  

A Case Management Judge has also been assigned – a mandatory step in moving class actions forward in British Columbia.

The twin lawsuits were filed in B.C. and Ontario last October, alleging some CIBC mortgage borrowers have been unfairly penalized by unclear prepayment terms giving rise to two substantive complaints.
 
Aside from what Bridge terms “uncertain and unenforceable language” in contracts dating as far back as 2005, he also points to the mathematical formula CIBC used to determine those prepayment charges, calling them “invalid,” or in legal speak a “miscalculation.”

It is unclear whether the government’s new code would fully address those concerns.

Click here for more on the Code of Conduct.

  • John Wright on 2012-03-06 6:18:05 AM

    This falls short of the mark in my opinion. Lenders are free to use any formula they like to calculate the penalty as long as they disclose it. I think it makes more sense to have a standardized formula. Years ago the lenders would use the 5 yr rate to calculate the penalty when paying out a 5 yr deal and they changed it to the closest term to discourage payouts. In many cases this tripled the penalty. Why didn't they address this? This is the real issue not disclosure.

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