“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,” Jake Abramowicz of Mortgage Edge wrote on MortgageBrokerNews.ca. “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.”
The conversation was sparked by a recent MortgageBrokerNews.ca post about a call for standardization for calculating early exit penalties for mortgages.
“We need regulation for penalties – every lender calculates them in a different way,” Paul Sidhu, president of Safe Mortgages told MortgageBrokerNews.ca at the time. “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’s belief is that standardized penalties would benefit clients.
However, some industry players argue that standardization could mean forcing all lenders to use the posted rate to calculate interest rate differentials – a practice popular among the banks but is not used by monoline lenders; thus eroding one of the competitive advantages for monolines.
“The banks have the much bigger (lobbying groups) and have the ears of several politicians,” Nick Bachusky of Verico
The Mortgage Advisors wrote. “If this is done, it most likely will be in favour of the big banks.”
Bachusky, who used to work for a bank, provided more details on how employees are advised to handle penalties.
“The banks know what they’re doing and they know the rules,” Bachusky told MortgageBrokerNews.ca. “When I worked at the big banks they never brought us in and explained how to calculate penalties – they know it’s a problem but they also know they make them a lot of money.”
Standardizing mortgage penalties may be good in theory, but some brokers argue that the practice could end up hurting clients and broker business while benefiting the big banks.