Monoline penalty frustrates broker and client

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One industry player is frustrated by a hefty prepayment penalty his client was saddled with – one that made his homebuyer regret choosing the broker channel over a big bank.

“The issue at hand is the customer ends up feeling like they should have gone to a bank, and if they have a bad experience they will tell 30 of their friends,” Gregory Campbell, a broker with Campbell Mortgage Brokers told “The whole thing is just bad optics.”

Campbell had a client who, recently, was selling his home to purchase a new one – and the closing date couldn’t be pushed back. The original mortgage had 32 days left on the term, and Campbell argues his client was forced to pay too much in prepayment penalties.

“The lender insisted on my client paying a full three month penalty,” Campbell said. “I called the lender and they said they charge the full three months even if there is one day left on the mortgage.”

According to his calculations, Campbell says his client owed a daily rate of $26.48 in interest which, over the 32 days left on the contract, would have meant $847.36 in earned interest for the monoline lender.

But the client was forced to pay $2,416.28.

Brokers often cite superior monoline IRD calculations, noting that the banks often use posted rates to calculate fees, as opposed to the client’s signed rate. However, in this case, Campbell believes the fee would have been waived had the mortgage been with a big bank.

And while Campbell acknowledges the lender is within its legal right to charge the full three months – since it was in the contract – he argues it’s a short-sighted tactic that harms the broker industry in the long run.

“In the borrower’s eyes it’s predatory lending; they’re being legally ripped off,” he said. “I was disgusted by it.”

IRD calculations have been a hot topic this summer – and it’s a problem among a number of lenders, including the big banks, according to industry players.

That frustration has forced several brokers to call for standardized penalties across the industry.

“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, a broker with Dominion Lending Centres Mortgage Mentors, recently told in July. “Others will subtract the client rate from the T BILL rate and subtract the client’s rate to determine the penalty.”
  • Mike on 2015-09-10 9:36:31 AM

    What about CIBC still wanting 100% of the cashback repaid on a mortgage that only has four months left and not allowing them to simply pay interest to maturity. Not a broker deal. Why don't you pay the clients penalty and make him happy or go back to the same lender and cut a deal?

  • john on 2015-09-10 9:38:53 AM

    Was the new mortgage placed with the existing lender?

  • Sharon Burke on 2015-09-10 9:39:21 AM

    Standardization of penalties is well overdue. I am surprised that consumer advocate groups have not lobbied more strongly for changes. I personally gave not seen a lender charge 90 days interest when time left to maturity was under 90 days.

  • John Greenlee on 2015-09-10 9:48:30 AM

    I think standardizing penalties can remove some competitive advantage, so I am not on that train at all.

    This issue could have been resolved prior to the borrower even signing up for the original mortgage that was coming up for renewal. They could have been made aware fully how that lender would operate with the penalty if they were to sell/buy. Conversely, if the client knew ahead of time that they had to purchase on their renewal date to avoid penalty they could have negotiated that date when making their offer to purchase. If that knowledge was known ahead of time (I'm not saying it wasn't known by the borrower, however the article makes it sound like it wasn't) it would put the borrower in the position of making the decision for themselves. IE, is this THE house we want and is it worth the known penalty to move in 8 days before the renewal because otherwise the seller won't accept our offer.

    I can see where the borrower could feel put off if they weren't armed with the knowledge ahead of time. Again, not saying they weren't as there are definitely individuals who don't pay attention to all they are told.

  • Bruce McManus on 2015-09-10 9:50:17 AM

    It would be great to know the name of the monoline. If brokers stopped using them for this reason, this practice of over charging would stop.

  • Jeremy on 2015-09-10 9:59:11 AM

    Not sure how this is news. The penalties are what they are and if the broker or the customer has questions, send them to customer service before it's too late.

    As to standardization, with all do respect, this is not necessary. It is our job to understand the various penalty structures and advise accordingly.
    As for the consumer, it is up to them to understand what they are getting themselves into. At some point they must take some's not up to Government or industry to protect consumers from themselves.

  • Ray Rochefort on 2015-09-10 10:00:00 AM

    I've had a similar situation arise and what we did is we got bridge financing for the client to buy the house they wanted and didn't close his sale until after the time period required to not pay a penalty (in my case this was 7 days). We gave the buyer of the clients house possession and closed the deal 7 days later. Client paid $325 for bridge financing and saved the penalty.

  • Bob on 2015-09-10 10:21:15 AM

    Isn't this the responsibility of the broker to know the penalty implications of the mortgage before placing the client with the lender? I completely understand why the customer would blame the broker as they did not know how strict the penalty policy was and did not come up with a creative idea to work around the penalty ( such as Ray Rochefort). Ball dropped completely by the broker in my opinion & if that happened to me I would tell as many people that I knew about the situation & to avoid that broker in the future for any mortgages

  • Faye Walsh on 2015-09-10 10:28:35 AM

    The clients should be able to dispute that penalty. I believe that the lender cannot profit from the penalty, they can only be made whole. All they were entitled to was the interest for the remainder of the term as that is the amount of interest they agreed to pay in the original mortgage contract. I would be fighting tooth and nail on this one for my client.

  • cvmortgages on 2015-09-10 10:34:55 AM

    This could have been solved with a little creativity such as bridge financing, possession date adjustments, or what about porting the mortgage / staying with the same lender? Did this broker put them into this mortgage in the first place? Maybe offer to compensate for the excess on the penalty from the new commission being made. Many ways to solve this one...

  • Jim Thornton on 2015-09-10 10:46:12 AM

    @Jermey: With all do respect but your comment, "it is up to them to understand what they are getting themselves into" is a weak argument. As brokers we hold ourselves out as more knowledgeable than the banks and that it is better to use us because of product knowledge. It is absolutely 100% our responsibility to know information like this AND inform the client. It is not their responsibility to know what they are signing on their own.

    It would be helpful to know the lender and the product. This could be a result of the broker on the deal signing the client up for a no frills mortgage without considering the consequences.

  • Gord on 2015-09-10 10:46:46 AM

    This is not news, it's the day to day life of a broker.
    Now if the facts are filled in, then it becomes news... who was the lender, did the new mortgage get placed with the same lender or a different one.

    Sounds to me like the broker in this case did not place the new mortgage with the existing lender... this likely would have eliminated the penalty but also (at least reduced) his compensation.

    We dont know because only some facts were shared and thus this is more of a complaint blog than it is news.

  • Paul Whatmore on 2015-09-10 10:58:42 AM

    My client had a mortgage with TD Bank. I placed it. Two years later he is relocated. His interest rate went from 2.99% to 3.4% on the new mortgage and his penalty was $5,611.78. TD Bank WILL NOT provide the broker community with it's disclosure at the time of the commitment. The client filed a formal complaint against me stating negligence on my part. E&O insurance came to the rescue. At the first opportunity a mortgage I had with TD Bank moved. We have not placed a deal with TD Bank in 2 full years, and if you are you are crippling your client. Last evening a client found out that to leave TD Bank now would cost them $16,000. What a way to hold business and create loyalty. Mortgage Brokers have a superior product with client friendly lenders where the penalty is much less in fact its down right friendly by comparison. It is my best selling tool why isn't it yours?

  • Stuart on 2015-09-10 11:04:41 AM

    Nothing to see here folks.

    Often overlooked is the fact that the client signed and agreed to those terms and conditions, and given that the lender is lending their money, they don't owe the client anything for breaking the contract.

    My suspicion is that these terms were in the original commitment letter, and it's not the lenders fault that the closing date couldn't be pushed back. The lender has investors (whether they are institutional or a balance sheet investor) who's money has been lent and they are accountable too.

    No mention of if this mortgage was a low rate basic or not, either, but this would be typical of a contract like that.

  • JR on 2015-09-10 11:06:31 AM

    Has no one heard of FCAC?

    Penalty interest cannot be charged beyond the maturity date of the mortgage.

  • th3uglytruth on 2015-09-10 12:25:54 PM

    who is the lender?

  • Ross Taylor on 2015-09-10 1:57:35 PM

    It's true we are all very careful not to name lenders when venting publicly. (me included)

    Is it professional courtesy or are we leery of potential repercussions?

  • Anthony on 2015-09-10 2:08:35 PM

    Stop you whining just refund the client from your fees its your fault not the Enders

  • alberta bound on 2015-09-10 3:37:54 PM

    Paul...why would your clients rate go up when they transferred...did you not port their current mortgage. Perhaps you tried getting paid on the full amount again. So is that the banks issue or yours ?

  • Walid Hammami on 2015-09-10 4:27:45 PM

    Breaking a mortgage loan is not just about the interest, there are legal fees, processing and reselling for the maturity at a loss. it takes a few days to complete the back office task. I would urge anyone in a similar situation to advise the clients that it was in the contract and that even banks will ask for the 3 months interests.

  • Jim T. Adventmortgage on 2015-09-10 4:49:43 PM

    Why did the client not just port the mortgage to the new property to avoid the penalty altogether? Oh, I forgot. If the client did this, the broker would not have been paid the full commissions. So, in reality, the broker is suspect here. Greedy broker = screwed client.

  • Gregory Campbell on 2015-09-10 5:59:58 PM

    Hi friends. Just catching up on your questions now. I won't give the name of the lender here, but feel free to contact me privately. The client did NOT have a "no-frills" mortgage, it was full feature. I placed the client's new mortgage with a different lender at his request as at the time of submission porting did not make sense as the anticipated pre-payment penalty (32 days interest) was less than the savings he would receive going with the new lender. We did not know how much the lender was actually charging until the client was reviewing the pay-out statement at the solicitor's office. By then it was too late to submit a port application and bridge financing was not available through the new lender. I appreciate the devil's advocates out there--we need to hold each other accountable--but the base issue is the lender collecting interest for a period in excess of the mortgage term. It may not be legally wrong, but it should be. Essentially, my client was charged by the lender $1,568.92 in interest that he wasn't under term for. Even if it was an IRD, IRD's are calculated only on the time left remaining under the term. I did not advise the client he would be charged the full 3 month's interest because in all my past experience where this scenario has occurred the client has always been charged only the per diem interest outstanding. Making that assumption was my mistake. I took responsibility for it and offered to reimburse the client, who to his credit would not accept it. I recommend to any broker who has a similar client file not to assume the prepayment will simply be per diem interest, but to contact the lender for a formal prepayment charge quote. In our current low interest rate environment, I am now of the opinion that some lenders have allowed themselves to sink so low as to view prepayment penalties as a way to pad revenues, as opposed to simply recouping costs, as they have always claimed. I believe that such an attitude, if it continues, will have a pernicious effect on the broker industry and could ultimately mean the death of those very lenders. Talk about short-sighted!

  • Matt on 2015-09-11 12:53:18 AM

    Alot of talk about porting the mortgage. Can you port a mortgage that has 32 days left in the term? Seems a little pointless.

  • Jim T. Adventmortgage on 2015-09-11 1:03:43 PM

    Greg, I believe there might be something in the Bank Act that might talk to this where the lender cannot charge more than the interest to maturity. Just an FYI

  • Gregory Campbell on 2015-09-11 4:30:24 PM

    Thanks Jim, I'm going to look into that!

  • Kevin R on 2015-09-14 11:28:18 AM

    Wow! Am I missing something??? Hasnt anyone seen the IRD calculations of the Big Banks? I have seen Firstline/CIBC, Scotia Bank, TD(in fact it is right in the TD document) where they calculate IRD based on amount of discounting from posted. We all know the Bank Of Canada has set the posted 5 year rates at some goofy level to ensure the qualifying for variable & less than 5 year terms is prudently difficult. Most people take 5 year closed to get the nice rates we have been enjoying but also by necessity to maximize the amount of mortgage a buyer can qualify & ability to buy a nicer property.

    So if you went through TD or Scotia or BMO or CIBC & probably Royal 3 years ago & got 2.89%, the posted 5 year rate was around 4.94%, give or take, it's 4.64% today. They would then say you received a discount of 2.05%. The current posted 2 year rate today is 2.84%, so the rate they calculate the IRD penalty to the 2.89% you currently have for 2 more years is .84%. If your mortgage is $450K the IRD penalty would be around $17800.00. If you had the RMG LRB with the 3% penalty, the penalty is $13500.00.

    This is reality & Justin, you should be researching before writing & I'm surprised a Broker was not aware of the theft the Big Banks have been getting away with on triple AAA Canadian consumers. Wake up people.

  • steve on 2015-09-15 12:47:23 PM

    I think Caamp and local broker associations need to be more involved in advocating for consumer protection legislation that indirectly benefits brokers.
    fair penalties, standard penalties and penalty caps would all be helpful to me when refinancing clients, switching clients or assisting clients with a move.
    And anyone else notice fees creeping into renewal contracts and discharges? ie. reinvestment fees, document fees, etc...
    and some lenders no longer offer a 6 month open term at the end of a 5 yr mortgage term.
    All this means banks make more $.
    My fear - Banks watch each other and if they see that a certain bank is cleaning up with extra cash, they will switch their business model to a penalty/ fee model as well.

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