Time to standardize penalty calculations, say brokers

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Lenders should be limited to a standardized menu of penalty calculations to avoid the kind of client confusion leading to a class-action suit against CIBC, said one veteran mortgage professional.

“MBLAA (Mortgage Brokerages, Lenders and Administrators Act, 2006) requires brokers to disclose the penalties to borrowers, but does not require lenders to provide this info to the brokers efficiently,” said Ad Lakhanpal, a broker with Mortgage Alliance in Oakville. “The ideal situation would be to develop a few standard options for penalty calculations and let the lenders select one of them to give them flexibility of product design. Until that happens, at least they should be required to state their method of calculating penalties, very clearly, in their commitment letters.”

As it is now, the penalties clients face in switching or paying out fixed-rate mortgages before the term’s end may be anything but clear.

That may pose more of a problem three to five years down the road given renewed interest in fixed rate mortgages, now at historic lows. Those mortgages are subject to IRD penalties and not just the three-month equivalents of variable rate mortgages.

More clearly defined penalties would benefit the overwhelming majority of new buyers expected to enter the market this year, lured by those same low fixed rates.

That interest may have a downside.

Lawyers spearheading twin class-action suits against CIBC over “vague prepayment terms” have already fielded interest from hundreds of the bank’s mortgage clients -- that as a case management judge in B.C. gets assigned to the legal action.

“There have been hundreds of inquiries about these cases to our office and that of our co-counsel in Ontario,” Kieran Bridge, a Vancouver lawyer with the Construction Law Group, told MortgageBrokerNews.ca, pointing to borrowers who paid out CIBC mortgage from April 2005 onward.
Firstline clients are among those concerned that they may have been adversely affected by the lender’s prepayment policy.

A Case Management Judge has also been assigned, what Bridge calls a key, mandatory step in moving class actions forward in British Columbia.

“We applied in November for a judge to be appointed, in order to move the case ahead, and are pleased this has happened,” he said.

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.

  • GTA Broker on 2012-01-20 6:47:56 AM

    The explanation of IRD penalties, on many mortgages funded through mortgage-backed securities is,in my opinion, a fraud on the borrowers.
    There are different series of MBSs. One of the larger series allows for the individual investor in MBS units to get P&I back, but if the mortgage is paid off prior to maturity & there is a penalty, the MBS investor does not share in the penalty, the penalty is pocketed 100% by the “lender”. How is the lender harmed to the financial extent of most IRD penalties?
    There used to be, and still is, an excuse for an IRD if the lender is matching GIC/Debenture money in, with fixed term mortgages going out. However lenders don’t lose a dime if they fund the mortgage through the right series MBS. Every MBS funded mortgage can be traced back to a specific pool. Who benefits from the penalties earned by that pool?
    Since MBSs are the realm of CMHC, they have a significant role to play in resolving this issue as well. It was their change about 12 years ago, to their rules, which is now causing unnecessary pain amongst Canadian homeowners & unearned profits to lenders.
    In Ontario, borrowers never see the Standard Charge Terms (the real contract), where the terms, such as they are, of any prepayment penalty are laid out, until they go to their lawyer/closing office, and they are usually there for 15 minutes & gone. Where is the “informed consent” to contract?
    Lenders & CMHC have to get their stuff together on this, soon.

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