Consumers hate mortgage prepayment penalties, largely because they don’t understand them. How can they when the exercise amounts to ‘smoke and mirrors’, when they are simply given the penalty amount without explanation, when it is not fully disclosed/discussed at their bank or even at the lawyer’s office on closing? The wording (found in the ‘Standard Charge Terms’) which relates to the penalty a bank can charge has, over the last several years becomevague and confusing.
Recent new clients of ours left their banks after having to pay penalties of $8,000 and $15,000 both with less than one year left on the term. They were shocked and angry and in disbelief how the penalties could be so high. It seems the three month interest rarely applies anymore and that penalties have somehow evolved instead into an IRD or Interest Rate Differential charge and beyond.
A recent class action lawsuit filed against CIBC Mortgages Inc., started with a single parent in B.C. whose marriage ended. That individual had to sell the family home and was stuck with a $47,000 interest rate differential penalty from CIBC. The lawsuit claims that CIBC improperly calculated penalties for customers who broke their mortgages from 2005 to present. The claim alleges “CIBC applied terms and conditions to certain mortgage contracts to allow it ‘unfettered’ discretion for calculation of mortgage prepayment penalties. Lead counsel for the lawsuit says that “prepayment penalties applied by CIBC are in breach of the mortgage contracts” and that thecontract language is “Invalid and unenforceable.”
It is estimated that CIBC bank branches and bank affiliates FirstLine Mortgages and President’s Choice have about 500,000 mortgages on the books of which 5-10% or some 25,000 – 50,000 people break their mortgages every year. The lawsuit is “into tens of millions of dollars”.
This is a huge issue which could potentially involve all the big banks and other lenders who operate in similar fashion. Mortgage penalties continue to be a ‘top consumer banking complaint’, and industry wide standardization of penalties urgently needed. Our industry has been calling for ‘new penalty calculation and disclosure regulations’ for some time. It is time for the government (The Finance Department) to stop dragging its feet on this and take action. Please note that it has not yet been established that CIBC has done anything wrong. The lawsuit may signal the advent of changes that better protect consumers in this regard.*
We are here to protect you and we use every effort to place you with lenders whose policies on penalties are both clear and fair. Call us for your next mortgage need. We’ve got you covered.
*The above are the opinions of The Price Team/DLC and are not necessarily shared by Forest City Funding Inc., or Dominion Lending Centres.