Brokers call for standardized penalties

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It may be an exercise in futility, but brokers are once again calling for consistency in the way banks calculate mortgage penalties.
 
“We need regulation for penalties – every lender calculates them in a different way,” Paul Sidhu, president of Safe Mortgages told MortgageBrokerNews.ca. “I had one client that was hit with a $28,000 penalty at (one big bank) and we called the ombudsman and they couldn’t explain how it was calculated. TD wouldn’t explain it either.”
 
Sidhu went so far as to file a FSCO complaint against the ombudsman and eventually, the bank reassessed the penalty and dropped it to a much lower figure.
 
Penalty calculations are a perennial concern for mortgage brokers, whose clients are often hit with hefty bills. And there isn’t enough consistency across the board, most say.
 
“There are so many different ways lenders calculate penalties – certain lenders will use the posted rate and not the discounted rate that was offered to the client,” Narish Maharaj of Dominion Lending Centres Mortgage Mentors recently told MortgageBrokerNews.ca. “Others will subtract the client rate from the T BILL rate and subtract the client’s rate to determine the penalty.”
 
But is reform in the future?
 
One broker isn’t so optimistic.
 
“I think it’s wishful thinking because there isn’t enough public outcry,” Kent Farnsworth of Mortgage Alliance Simply Mortgages told MortgageBrokerNews.ca. “Interest rate differential penalties are the most frustrating – I think (a penalty of) three months’ interest is sufficient, but not all lenders calculate it that way.”
 
Still, the growing outcry – and action like Sidhu’s against the ombudsman – may make a slight difference.
  • Jake Abramowicz on 2015-07-20 9:35:17 AM

    Be careful what we wish for. Standardizing penalties can work in two ways: They can be done in the posted way which is far more expensive for borrowers. OR, if the banks and monolines have the same penalty calculation then there's even less competitive advantage to the monoline lenders -our true broker partners.

    I am also on the side FOR standardizing but only if fair to the consumer though.

  • Nick Bachusky on 2015-07-20 9:39:22 AM

    I agree with Jake. The banks have the much bigger lobbies and have the ears of several politicians. If this is done, it most likely willl not be in favour of the big banks. The number one thing we can do, and hopefully the media keeps it up, is educate, educate, educate.

  • Nick Bachusky on 2015-07-20 9:39:58 AM

    Sorry, I meant, will be in favour.

  • Jerry Quigley on 2015-07-20 10:04:47 AM

    3 months interest will certainly not be favored by those savers who buy Mortgage Backed Securities, make a contract to supply their money for 5 years, then have that contract broken because the other party ( borrower ) for whatever reason there might be, changed their mind. I don't want to honor this contract after all......

  • Karen on 2015-07-20 10:09:43 AM

    Not quite sure why the broker community is so anxious to give away a big competitive advantage......

  • Jesse D on 2015-07-20 10:17:20 AM

    No question the big banks have government support and only do what is in their favour. I agree with the comments, if brokers do succeed which is highly unlikely in changing the penalties, we will also be a the short end of that stick. This is a reason I give clients to not deal with the big banks. See little to no benefit to brokers for this change. Also, FSCO really has nothing to do with the banks anyways. What I think should happen for the benefit of consumers, the Feds should make IRD calculations standard and ensure employees are aware of how penalties are calculated.

  • Bob on 2015-07-20 10:42:11 AM

    If Brokers want to make a change, then stop sending mortgage customers to the Banks, TD & Scotia still huge players in the broker marketplace & they both have collateral mortgages as well. Maybe brokers are part of the problem

  • Rick (Mortgage Mentor) Robertson on 2015-07-20 10:55:46 AM

    Although they would make many broker's lives easier, I don't consider "standardized" penalties be part of a free enterprise marketplace.

    Every lender should have the right to determine their own penalty calculation based on their: cost of funds, lending risk level, and opportunities & costs to re-lend the pre-maturely paid back money.

    That said, there are only about 5 ways one can logically calculate a penalty and they all pretty much boil down to "What will the lender lose by getting the money back early?". I believe the actual frustrating part for most brokers is determining the present rate the lender will use to calculate that loss.

    The actual unfair, and most confusing part of many lender's penalty math is when they determine the current rate by taking the original discount off of today's comparable term. For example, some lenders determine the current rate for calculating penalty by using the original discount from posted. At most times in my 20 year career, those discounts have varied with Term. e.g 5 year terms might originally receive a 1-1/2% discount off posted. 4 year -1.00%, 3yr -3/4%, 2yr -1/2%.

    Let's look at a borrower who is 4 years into a 5 year term under conditions as above; Is it fair today to take a 1-1/5% discount off the 1 year posted rate when that lender has only ever offered a 1/4% discount off their 1 year? (CMP did have a great article on this in Spring 2013)

    Today's widely varying penalties are just another prominent example of how important it is for consumers to turn to Mortgage Brokers for to help them with their borrowing decision and it's up to the Brokers to get educated on how each lender calculates penalties.

    As much as the lender's would like us to each only deal with: on Bank, one mono-line, and one B-lender, we do hold ourselves out as brokers offering many choices and we need to get back to true brokering and not just supporting our favorite BDM & Underwriter. If we do know how the penalties are calculated and place each client with the best lender for them, this current hot button of harsh penalties will slowly go away on it's own.

    Consumer's vote with their wallets !!

  • Ron Butler on 2015-07-20 12:38:03 PM

    Standardized penalties are crazy, we live in a free enterprise society.

    Standardized, simple, easy to understand penalty calculators is what we need to have mandated. Every lender should have a calculator on their website where every consumer could EASILY calculate their penalty and on every mortgage contract the break penalty should be effortless to understand and it should give honest estimate as to what the penalty will be.

    Honestly about the penalty amount is the key not government mandated penalties

  • JR on 2015-07-20 1:02:17 PM

    FCAC takes care of this for all FRFIs. The FI must have a penalty calculator on their website.

  • Shaun Serafini (@mortgagepro10) on 2015-07-20 1:03:50 PM

    Agree Karen.

    Big Bank payout penalty calculations present a great opportunity to demonstrate knowledge, experience and most of all, care in our client meetings and demonstrations. Why would we want to remove one of the best sources of dissonance that can be relied upon when in competition with reps and branches?

  • Ron Butler on 2015-07-20 1:05:25 PM

    The calculator must be easy to find and easy to use, if using the calculator requires the input of rates that the client cannot know then what is the use of the calculator? I said easy and honest.

  • Shaun Serafini (@mortgagepro10) on 2015-07-20 1:07:36 PM

    Great point Ron! Agree that these calculations should not be shrouded in secrecy or kept behind guarded walls only to be accessed via retention sharp shooter assassins trained to steer conversations from pay to blend!

  • Rick (Mortgage Mentor) Robertson on 2015-07-20 2:47:39 PM

    Hey Ron, I think that every lender is now required to show their penalty calculation on their website and provide a calculator as well. I also believe that they are required to show the discount off posted on the annual, year-end, mortgage statement.

    (the Mortgage Mentor "Signature" tool has a comprehensive penalty calculator there as well as direct links to pretty much all the major lenders own penalty calculators)

  • Paul Whatmore on 2015-07-20 3:12:09 PM

    I agree with Jake, Karen, Ron and especially with Bob. I have just printed off TD Banks prepayment calculator. This is a marketing tool. Yes they are hosing the Canadian consumer or are they proving the value of a Mortgage Broker. The first thing I do in a discussion with a client is to apologize for placing their last mortgage with a bank, then I explain why I no longer deal with banks showing the banks own documentation an a couple of articles from the Globe and Mail. I explain how my favorite lender will provide them up front with a disclosure showing the cost to discharge if needed. This is something TD Bank does not do. The client saw the disclosure at the time of signing. Sign here, here and here with no explanation.

  • Ron Butler on 2015-07-20 3:13:17 PM

    Rick, we both know that 3 major banks require several inputs to their calculator that are virtually impossible for the consumer to learn on their own, in my office we are looking at 400 applications a month and I have yet to have one single consumer in the last 3 years tell me: "I went to my bank's easy to find, easy to use, online penalty calculator and I know exactly what my penalty is" so on my anecdotal experience of 15K applications it appears that consumers are having ZERO success using these calculators. I may be dead wrong but I don't think so.

  • LOLOL on 2015-07-21 11:12:50 PM

    I don't think so Abby,....I'm sure Maleek's post will be deleted or amended.
    BUT who cares,...I want to be Ron Butler....400 Apps a month and all the time in the world to post comments all over useless web sites and Mortgage rags like this.....

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