Improved Penalty Disclosures On The Way

mortgage-penalty-disclosure5Two years ago to the day, the Finance Department promised to “bring greater clarity to the calculation of mortgage pre-payment penalties.”

Later this year, that promise will become realized.

The government has just announced a brand new mortgage “code” that requires federal financial institutions to:

“…provide more information on how prepayment charges are calculated.

…explain the differences between mortgage products, including ways to pay off a mortgage faster without incurring penalties.”

These improved disclosures have been eagerly anticipated by consumer groups, who charge banks with:

  • Obscuring penalty descriptions with legalese and vagueness
  • Failing to provide understandable formulas for calculating prepayment charges
  • Failing to provide consumers with easy access to the inputs (e.g., posted rates at origination, comparison rates, etc.) that must be plugged into the prepayment penalty formulas.

FCAC3Indeed, the Financial Consumer Agency of Canada (FCAC) says it “has observed a significant increase in the number of complaints it has received related to mortgage prepayment penalties,” especially interest rate differential (IRD) charges.

That’s not surprising given that many mortgage “advisers” themselves don’t even understand them fully.

The FCAC has also found cases where lenders’ actual IRD charges are different from (presumably higher than) the charges disclosed to consumers.

In short, the FCAC says that some lenders’ disclosures “hinder consumers’ ability to decide on mortgage prepayment.”

mortgage-penalty-formula70Going forward, federally regulated financial institutions must disclose the following to borrowers:

  1. The method (formula) for calculating the exact prepayment charge in language that is clear, simple and not misleading
  2. Where the penalty formula is complex (e.g., uses present value), a simple way to estimate penalties
  3. A description of all inputs used in the penalty formula (including things like posted rates at originations, future value, outstanding balance, all applicable interest rates, bond yields, etc.)
  4. Information on how to obtain each of those formula inputs (or the actual values themselves)
  5. An example and/or worksheet to help consumers figure out their own prepayment penalty

November-2012-Calendar3Federally regulated lenders must be in full compliance with the above by November 5, 2012. The Financial Consumer Agency of Canada will monitor that compliance on an ongoing basis.

In addition to better penalty disclosure, lenders must also provide the following to customers annually:

  • A description of the borrower’s available prepayment privileges
  • The dollar amount of available prepayment options
  • Explanation of factors that could cause penalties to change
  • Specific information needed for the borrower to calculate his/her own penalty (e.g., the rates used to calculate the penalty, balance, etc.)
  • A list of all other fees for early repayment
  • Contact information for lender staff knowledgeable about penalty calculations.

Upon request, the lender will have to furnish a written statement with the prepayment penalty (and other amounts) to be charged, with a full description of the formula used and the timeframe for which the penalty quote is valid.

Lender will also need to provide guidance on what triggers a penalty, how to avoid penalties, and how pay down principal quicker without incurring penalties.

mortgage-penalty-calculator4And lastly (and here’s the best part in our view), lenders must post calculators on their public websites to help determine “reasonable” estimates of penalties. No more guestimators that spit out ballpark penalty quotes that are thousands of dollars off.

We don’t make a habit of celebrating government regulation, but this set of guidelines has been badly needed. Despite the lengthy implementation, the Finance Department and FCAC deserve a salute on this one.

Note: These guidelines do not apply to commercial mortgages or mortgages that don’t fall under federal regulation.

Robert McLister, CMT

  1. Great article folks and yes this is a huge win for consumers! Question, does this new regulation only apply to institutions covered under the bank act? If so, will this not apply to monoline lenders and credit unions who operate provincially and often deal exclusively through the broker channel?

  2. February TREB data is out:
    Toronto, March 5, 2012 – Greater Toronto REALTORS® reported 7,032 sales in February 2012 – up 16 per cent compared to February 2011. New listings were also up over the same period, but by a lesser 11 per cent to 12,684. It is important to note that 2012 is a leap year, with one more day in February. Over the first 28 days of February, sales and new listings were up by ten per cent and six per cent respectively.
    The average selling price in the TREB market area was $502,508 in February – up 11 per cent compared to February 2011. The Composite MLS® Home Price Index for TREB, which provides a less volatile measure of price growth compared to the average price, was up by 7.3 per cent compared February 2011.

  3. Sounds great!
    Wondering about RBC, I’m paying out a mortgage at maturity and going wiith a different lender. My mortgage matured March 1st and they’re trying to hit me with a $250 “admin” fee.
    Garbage! I’d like to see a breakdown of that fee!

  4. Rob, Thank you for always show casing the relevant facts for all of us in the Mortgage Industry. I have been counselling my clients on IRD and the many ways that it was being calculated for years, this is just the best news the government can give our Industry.
    darkselling said…the $250 fee is likely to switch your mortgage to another lender from RBC. When margins tightened we saw all the major lenders adding or increasing these types of fees- other lenders have $300 reinvestment fees in their documents on top of the Penalty and discharge fee.
    RBC has to prepare a one page discharge to move to another lender, for this they are charging you more than a lawyer would!

  5. You might consider getting your own blog.
    Your hijacking of the comment threads on this site with reposts of data entirely unrelated to the article is not productive.

  6. Wow.
    Can I trouble you to list some of the lenders that charge a reinvestment fee on top of their penalty and discharge fee? I’ve never heard of that.

  7. It will be interesting to see the results. Currently, a few lenders who disclose have formulas that require an actuarial degree, while others have formats that can be guestimated quite closely. Be nice to have, as we have with rates and fees the effective rate- an end result that was an “effective penalty” in comparison to one standard format.
    But anything is better than the historical abuses of some banks and lenders that have been hiding extra charges for cancelling your mortgage to go elsewhere

  8. Isn’t it the $200 discharge fee and $70-something e-Registration fee? Most (all?) lenders charge that at maturity. Your new lender might be willing to take care of that fee.

  9. Statement said
    $250 admin fee. Discharge fees aren’t legal in Alberta.
    Didn’t see an e-Reg fee. . .

  10. I wish that IRD could be shelved forever … it’s a very unfair way to hit the customers and those penalties tend to be really crazy … and this is coming from a guy who works for one of the 5 major banks. It is quite unfortunate .. specially when the rates drop and consumers want to take advantage of the lower rates… they are faced with huge penalties. What a sorry state of affairs.

  11. It is long overdue that consumers had better IRD penalty disclosure but it’s going to be interesting to see if anyone will understand it? After all, few appreciate that a fixed closed mortgage contract is just that, “FIXED & CLOSED”. Break the contract, pay the penalty.
    Finally, there will be proper disclosure to what inputs the F.I. uses to calculate the penalty. The problem I see is that many of those inputs will continue to float up or down as interest rates change. Also, it’s disappointing that we will still not see a standardized penalty formula anytime soon.

  12. As Ivory says, the issue is not whether there is a penalty being charged, but clarity and consistency being offered by all, so that proper comparison can be done at the outset when choosing between Lender A and lender B. Since there is a large array of choice in the market to save the penalty, or have reduced penalties, a lender charging penalties on a “closed” mortgage to recover re investment charges is not “bad”; what is wrong is that one lender may charge $ 3,000 and another $8,000 on the same circumstances, and the upfront knowledge of that situation is not (currently) readily available (and still unfortunately may NOT be available under new rules if there is no standardization required.)

  13. I used to work at TDCT. TDCT only recently started to disclose the true rate on mortgages showing the actual discount received on a mortgage. Over two years ago, they is not. So if you took a five year
    mtg out at TD five years ago, the documents would only show your five year rate. Not your rate showing the actual discount you may have received. Fast forward three years later you break your mortgage. When you do the calculation for penalty, it may show a three month interest penalty. However when the bank does it, it may show a penalty 4 times
    as much. Ie $1200 vs $5800 The bank will say you must take the discount you received at the beginning of your term and use that same discount on today’s posted rate of the remaining term. HOWEVER…no where in your previous docs show if you received a discount. The bank makes you pay it but all you need to do is contact FCAC as the bank is wrong. They needed to disclose the discount in rate in your docs. I know someone who was charged just under $6000 when the calculation we did showed a $1200 penalty. I advised him to call FCAC and also TDs customer
    complaint deprt. He received the money back. My
    guess is the bank has taken millions in unauthorized ird from non disclosure. Do your homework, call FCAC if your calculation doesn’t make sense. I was let go from the bank for telling the client he didn’t have to pay the ird. Code of conduct. Nice, eh for looking after clients. Post if you want me to touch base with you.

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