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Collateral Charge Undercover – Chapter 2

CBC’s Marketplace is out with a new undercover report on collateral charge mortgages.

The consumer affairs program found some bank reps who were not disclosing the pitfalls of collateral charges. That’s despite banks pledging to present collateral mortgages in language that’s “clear, simple and not misleading.”

CBC’s hidden camera catches one bank rep explaining collateral charges so poorly, he really has no business selling mortgages at all.

Marketplace then tapes another rep who misleadingly suggests that it’s easy to switch lenders with a collateral charge. That rep goes on to admonish the customer for “shopping around on rates.”

CBC says the mortgage specialists it targeted didn’t have any documentation to offer on collateral charge mortgages, despite the mystery shopper’s request and despite the “voluntary commitment” of banks to provide such information.

The segment picked on TD, but really the producers could have chosen any lender that sells collateral charges. There are so many lender reps who don’t understand collateral mortgages. Heck, for that matter many mortgage brokers can’t succinctly explain them.

Personal finance blogger Rubina Ahmed-Haq tells CBC that mortgage conversations with lenders who sell collateral charge mortgages “should start with the word collateral.”

“Tell me what I’m not familiar with [as a customer],” she says.

In reality, mortgage contracts have other elements that are more impactful on one’s overall borrowing costs. Examples include penalty calculations, refinance flexibility and the interest rate. But the collateral charge debate is worthwhile nonetheless since it benefits many to steer clear of this mortgage type.

At the same time, collateral charges shouldn’t be portrayed as a supreme evil of the mortgage universe when in fact they offer advantages to some. Their foremost benefit is readvanceability (i.e., the ability to borrow more money, or re-borrow paid-off principal) with no legal fees. Hence, as with so many other mortgage contract terms, this is an issue that boils down to education and disclosure.

Related: Collateral Pitfalls Disclosed