Prepayment penalty debate heats up

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It’s an age-old debate, but one that is increasingly on the minds of brokers who are sometimes overwhelmed by the various calculation methods used by lenders.

“It’s absolutely overdue to have a standardized penalty,” Paul Sidhu, president of Safe Money Mortgages, says. “There’s so much confusion in the industry around penalties and different lenders calculating penalties differently – even the brokers get confused sometimes.”

While some argue for a clear-cut rules across the industry, others argue it’s just not feasible.

For her part, Sally Kwan of ETC Mortgage argues there are just too many types of lenders – from monolines to federally regulated banks – and various regulatory rules they each follow to properly implement a standard.

“But I do agree that lenders have to be transparent and upfront, and tell the clients how the early payout penalty will be calculated,” Kwan tells CMP. “Lenders, without having to be asked by the client, should automatically give clients a step-by-step calculation of the penalty.

“Few banks do this for the client. Most of the time, the branch says they don’t even know how the penalty is calculated. Clients are quite at a loss, and they’re not happy.”

That lack of clarity is the problem, according to a number of industry players.

“The lack of transparency is a problem. If the five big banks are going to charge these penalties and then bury them on page 13 of the mortgage commitment, that’s totally unfair,” Geoff Del Grande, an agent with Rock Capital Investments says. “Banks need to be more transparent with how penalties are calculated.”
  • John Greenlee on 2015-09-16 9:41:06 AM

    Standardized penalties would be a mistake and would erode some of the broker advantage.

    As agents/brokers, we are responsible for knowing our lenders products and then pass that information along to the client.

  • james on 2015-09-16 9:42:25 AM

    Why is this even debated? it should be outlawed! It is a "sanctioned" swindling of the consumers.

    A consumer with good covenant who can qualify for a mortgage almost NEVER pays posted rates. So, why is it added to the prepayment calculation? There are NO logical explanation to this.

  • Najeeb on 2015-09-16 9:48:07 AM

    I am surprised that how banks are doing this unfair practice and why no one have taken any notice or has their any intervention by regulatory authority who are supposed to check unfair practices including the central bank?
    Its a million dollar question, I hope that someone will come up and address this issue.

  • John Martin on 2015-09-16 10:06:58 AM

    Unfortunately the banks don't have to do anything to accommodate anyone. They run themselves and they run the government. And they for good measure control the borrowers also. Every single one of them. So don't expect banks to do any thing favorable for anyone except themselves. If there is a way to get some how even one extra buck out of a borrower. They will find it and implement it. That is reality for all to know.

  • Jordi on 2015-09-16 10:07:45 AM

    The lobbying of the banks will never allow this.

    Some of these rule changes that have come down the pipeline is because the lobbying of the banks to make their position stronger and to slow the growth of the lenders outside the big 5.

    In the end the Government won't go up against the banks......but we can hope

  • David Marchman on 2015-09-16 11:29:51 AM

    Please. This article points the finger solely at lenders. Why is there no role for brokers here? They should do their homework, ask questions, communicate properly with their client, etc. the broker does none of this, then blames the lender, passing the buck. MBN, too often you hold the broker totally innocent in these articles and yet again it's the case here. Balance, please.

  • Richard Kitts on 2015-09-16 11:31:41 AM

    One less service a Broker has to provide..EDUCATION.. Lets have standardized rates, payouts, prepayments,discharge fees, all mortgages the same.. there goes my business.
    This is a major part of being a Broker and you want to take this away..I really don't get the debate?
    I do agree Banks have to be more transparent on the penalties and perhaps their clients may start shopping for a better mortgage and not just rates.

  • Ad Lakhanpal,Mortgage Alliance on 2015-09-16 11:33:11 AM

    I totally support the view point that penalties can be different for each lender but the method of calculation must be clearly defined and disclosed to the borrower. It should be made mandatory to include a segment in the disclosure document that the lenders provide that shows in simple terms,ideally with examples, as to how the penalty will be calculated in case of early pay out. If a regulation is required to accomplish that,so be it. This is for direct benefit of the the consumer whom we are all committed to serve, and should protect.

  • Ottawa Broker on 2015-09-17 10:26:58 AM

    It is any lenders choice to calculate fee's, interest or penalties however they want.
    It is our job to know our products and be an advisor to our clients. So many brokers lack knowledge, chase BPS and rate, then boo hoo when the client needs to break the mortgage. Take responsibility, you are the idiot that put them in that lender. Bank reps, you the same, stop being misleading, but that may not be intentional since you think your product is the only feasible product because you told by management.

  • steve on 2015-09-17 3:11:44 PM

    Brokers do not always set up these mortgages, so somebody should be protecting consumers. I end up seeing it on refis, renewals and house sales. It affects my business when a client gets a fee surprise a couple days before closing.
    penalties, extra renewal fees, document fees, reinvestment fees, discharge assignment fees, registry office charges etc. are all eating away at consumers equity and consumers rarely understand these charges.
    In BC, banks can only charge $75 for a discharge, so they have invented a bunch of new fees to make up for it.

  • Ottawa Broker on 2015-09-17 3:12:04 PM

    Some people say it should be against the law on how they calculate penalties, they don't all use the same equation, so pick your lender wisely. a law can't be passed telling a publicly traded company, or private company how to administer fee's or penalties. IF you do think this, then you also agree that a bunch of government analysts will pass laws stating how much we are allowed to charge if fees are also required. That is just ridiculous think the government will get involved in the process of passing a law pertaining to penalty calculations.

  • Semira Causevic on 2015-09-17 6:07:25 PM

    This is very interesting. I am sure, as a Broker, that other brokers go through the Commitment and explain the the penalties to ensure clients fully understand. I am sure this Broker did the same, but the frustration is in the fact that the Banks/Lenders are charging interest for more than the remaining term of the mortgage. I had a client in the same situation 10 days left to maturity. Client could not move the possession date. I explained to my client the Lender may still charge the full 3 months interest. I begged the Lender to compromise, but that did not work.
    They charged my client the full 3 month interest penalty and they can do it because it is in the contract. Who has the power to change this? There must be a law against charging interest beyond maturity.If the maturity was 3 months and 1 day no one would complain. It's a standard penalty but because it is less than the remaining term is the issue here.

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