Questionable prepayment penalties
Ever wonder about penalties when breaking a mortgage? Have you ever questioned the amount or how the bank actually comes up with the number? Well it doesn’t harm to question it sometimes.
Leslie Penney
Basically, in the suit, the lawyers are claiming that:-‘CIBC applied terms and conditions to certain mortgage contracts to allow it unfettered discretion for calculation of mortgage payment privileges.’-‘The quantification of prepayment penalties applied by CIBC are in breach of the mortgage contracts.’Essentially, back in 2005 they used language in their contracts concerning their penalties was quite vague and hardly enforceable.
These terms were used in contracts at the CIBC branches, PC Financial locations, as well as through brokers via FirstLine Mortgages.
According to the lawyers involved, they estimate that the value of the case is in the tens of millions of dollars – that’s quite a large sum of money. However, they have also said that these cases get settled out of court quite often, remaining low profile.
Out of all this, the big question that comes to mind is how are the banks getting away with it and what can be done about it. Well, first of all, the big banks and Government are so close that you can’t fit a pin between them. Secondly, the only way to curb this would be to use standardized calculations.
As of right now, on a fixed mortgage a client is charged a penalty based on an interest rate differential penalty (IRD), which pretty much varies from lender to lender. On a variable it’s usually a penalty of three months interest.
In the case of fixed rate products, there should be a standardized calculation used by all lenders and easily calculated by mortgage holders so they can determine what their penalty would be.
Just last week I had a client that was doing a refinance and with their payout statement from their lender the IRD calculation was there. I calculated it and was out by only a few dollars, which was due in the discrepancy in the bond yield between when they done it and I done it. They should all be that easy.
As mentioned in my article a few weeks back, regulators are keeping a closer eye on banks’ practices and are fielding a large number of complaints, many specific to prepayment penalties when breaking mortgages. Banks are in the business to make money and they have the power to do so.
However, regulators also need to be aware of what banks are charging in penalties and unwarranted fees. If you look closely at most contracts with banks, they have wording that allows them to change fees or change additional fees without notice. Hardly fair to the consumer.
What are your thoughts on prepayment penalties and calculations used by banks and other mortgage lenders?