Keep out of the Mortgage Penalty Box
The economic stressors of the COVID-19 pandemic have led many Canadians to consider selling their homes and exiting their mortgages ahead of schedule.
It is any homeowner’s right to sell their home at the time of their choosing; but exiting a mortgage early can come at a significant and unexpected cost due to something known as a “mortgage prepayment penalty”. Based on recent news reports, a “penalty” is an appropriate description. On June 1, 2020 CBC Go Public reported the circumstance faced by a real estate agent who is selling her home and facing a $30,000.00 prepayment penalty to exit her mortgage. The story also referenced the example of a family whose prepayment penalty climbed $4,000 over the course of just 2 months with decreasing interest rates.
The problem for borrowers in this situation is that properly calculating a mortgage prepayment penalty can be a complex and daunting financial exercise. Within that exercise, the lender will have far more expertise with the process than the borrower. Common problems can emerge where borrowers are overwhelmed by the complicated legal and financial language used to properly calculate the prepayment penalty.
In order to protect themselves, borrowers need to be vigilant. They must start by having a general awareness of the rules that apply. First, borrowers must appreciate that there should be an actual financial formula in their mortgage contract to calculate the required penalty. Second, there are also Provincial and Federal laws that apply to mortgages and loans (Trust and Loan Companies Act, RSC 1991, c 45, Mortgage Brokers Act, RSO 1990, c M-39, Cost of Borrowing (Trust and Loan Companies) Regulations, SOR/2001-104, Cost of Borrowing and Disclosure to Borrowers, O Reg 191/08). Those laws are crucial because they require the lender to make detailed disclosure to the borrower in advance showing the amounts that will be charged, including the calculation of prepayment penalties.
If the lender does not follow the applicable rules, either under the mortgage contract or as required by statute, the borrower may have the right to contest the penalty and even to seek recovery of any penalty that was paid based on an incorrect calculation. Further, if the lender fails to comply with these laws, some or all of the mortgage contract may be deemed invalid.
To that end, there are two recent class action cases winding their way through the courts in Ontario and in British Columbia ( Jordan v CIBC Mortgages Inc, 2019 ONSC 1178, Sherry v CIBC Mortgage Inc, 2020 BCCA 139) concerning claims by borrowers against a major Canadian bank. The actions allege that the Bank failed to comply with legal requirements in connection with prepayment penalties. Both cases were “certified” to proceed to trial as a class action. The British Columbia Court of Appeal summarized the issue of meeting both the contract and the legal requirements as follows:
“In my view, a discretionary prepayment clause in a mortgage contract may be sufficiently certain to be legally binding and a lender may be entitled by the terms of the contract to calculate the prepayment charge in a particular manner, but its disclosure regarding its calculation methodology may nonetheless fail to meet statutory requirements”.
These cases provide an example of the power that can be exercised by vigilant borrowers. Together, they can collectively access the courts and reclaim the alleged overcharges for themselves and all other similarly situated borrowers.
Borrowers facing an expensive mortgage prepayment penalty deserve clarity and confidence that they have not been overcharged. When in doubt, legal advice should be sought.
Foreman & Company is a leading plaintiff side class actions firm based in London, Ontario. We have experience litigating class action cases on behalf of borrowers and investors involving a wide range of financial products and investments. We welcome inquiries from the public about lending and investing problems.
This post is for informational purposes only and does not constitute legal advice.