MCAP is one of Canada’s biggest non-bank lenders, and it recently made a welcome improvement to its early termination policy.

Prior to this year, a firm sale was required to break an MCAP mortgage in the first 36 months. This was meant to prevent losses that occur when a borrower breaks his/her mortgage early.

It wasn’t too popular, however, because it kept people from refinancing elsewhere for three years. (It was the main reason we didn’t send them much business ourselves.)

Now that this “sales-only” clause is history (as of January 26, 2010), MCAP’s products and prompt turnaround times will return to center stage.  As a result, its business should increase.

We’ve always been curious, though, why MCAP’s fees and standard penalties were not enough to make MCAP whole if a client breaks early. So we asked this question to Ron Swift, President of MCAP Service Corporation.

“The answer depends on a couple of key factors…” Ron said. “The total cost of acquisition (broker compensation, hedging, underwriting, etc.), time of pay out (near the beginning of the term or near the end of the term) and the lender’s method of funding the mortgage (balance sheet versus securitization).”

“For certain, the closer a mortgage is paid out from when it was funded, the more likely the lender will not be made whole with the penalties.”

In order to eliminate its sales-only clause, MCAP said it may need to claw back part of the broker’s commission if the client breaks the mortgage before three years and goes elsewhere. The reason: Longer-term MCAP’s mortgages are sold to investors on the basis that they will not be paid out in the first 3 years, barring a sale.

Ron conceded that clawbacks “are not common practice” in the industry. He says this is only being done to “provide an option for a (prior) customer who is choosing to pay us out of their sale-only mortgage in the first 3 years, versus us saying no to allowing them to pay out the mortgage.”

Two key points about clawbacks:

• They will not apply to new MCAP mortgages.
• Nor will they apply if the client remains with MCAP after breaking a current MCAP mortgage before three years.

All of the above is a net positive for MCAP and its customers going forward.  It seems that, more and more, lenders are re-evaluating their policies to benefit customers (we just saw Home Trust get rid of their IRD penalty on variables, for example).  As the Internet makes homeowners more knowledgeable, the trend towards consumer friendliness will hopefully strengthen.

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About MCAP: MCAP is Canada’s largest independent mortgage and equipment financing company, with more than $25 billion in assets under administration. MCAP originates, underwrites, securitizes, and services mortgages and has over 100 institutional investors and over 130,000 borrowers.

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Note: The “sales-only” clause has not been removed from mortgages that funded when it was in place (March 2008 to January 25, 2010).