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Canada’s convoluted rules for prepayment penalties cause issues for consumers, lawyer says

Posted:Jun 19, 2017 5:00 AM ET

National mortgage news

Nadim Kara says he feels his mortgage lender did not give him all the information he needed to know about breaking his mortgage. Craig Chivers/CBC

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A Toronto man is warning people to take a close look at the penalties they’ll face for breaking a mortgage before they lock in, after his paperwork didn’t include important information that would have saved him more than $10,000 in fees.

“I was frustrated that a key piece of information hadn’t been disclosed to me,” Nadim Kara says.

“Particularly as that piece of information wasn’t in the mortgage contract so I had done what I thought was my due diligence and you know, I read the papers. I read the contract, I called them, I check in online.”

Mortgage contracts have to disclose all information on penalties for ending a mortgage early and how they will be calculated.

Kara didn’t know it then, but missing from his mortgage contract was information about a little known rule — homeowners with a fixed term longer than five years can only be charged a penalty of three months’ interest if they break their mortgage after the fifth year, not the much higher interest rate differential fee.

In Kara’s case, if he had waited just 60 more days, his penalty would have shrunk from $13,000 to $3,000.

National mortgage news

Nadim Kara and Tori Ingram live in Toronto with their daughter. (Craig Chivers/CBC)

While Kara’s issue has now been resolved, he’s frustrated no one is taking responsibility and worries other Canadians may be paying higher penalties than they should be.

In 2012, Kara and his wife moved from Ottawa to Toronto, renting out their Ottawa house, hoping it would increase in value over the years.

By February, that hadn’t happened and they were losing money, so Kara started looking into the cost of selling — reviewing his mortgage documents and contacting his mortgage company, First National Financial, to ask about penalties for breaking his mortgage early.

By the time the Ottawa house sold, Kara was less than two months away from the five-year mark on his mortgage — and that big reduction in penalty costs.

The fees associated with paying out mortgages early top the list of Canadians’ complaints to the country’s banking ombudsman, according to numbers provided by the independent investigator.

Experts say the rules, which apply to some lenders but not others, are so convoluted they leave Canadians who break or renegotiate mortgages confused and suffering from “sticker shock” when they are dinged with massive fees.

“If I had all the information in front of me, I would have made a different decision and I think that’s the key,” Kara says.

‘Duty of care’ not met, says homeowner

He found out he could have saved thousands only after the sale closed; the information was in the mortgage discharge papers provided by First National.

“I think there’s a duty of care to your client, to walk them through the options and to be transparent. And I don’t feel that’s what happened here,” he says.

The next day, May 2, he asked the company to refund the $13,000 penalty and charge the three-month interest fee of $3,000 instead. It initially refused and repeatedly told Kara it was “case closed.”

“I mean we’re not buying a sweater, right? This is a multi-hundred-thousand-dollar purchase,” Kara says. “There is an inherent conflict in financial institutions, between disclosure and maximizing profit.”

National mortgage news

Nadim Kara says he contacted First National twice to confirm how the prepayment penalty would be calculated. (CBC)

More than a month later, and just hours after First National learned Go Public was involved, the company changed its mind and agreed to charge Kara the $3,000 penalty.

Refund offered

Go Public put the issue to both First National Financial and the brokerage, Integrated Mortgage Planners.

“After taking all circumstances into consideration, and in the interests of maintaining goodwill with this borrower, we made the decision to decrease the prepayment fee and a refund was made to Mr. Kara,” Robert Inglis, chief financial officer of First National Financial, tells Go Public in an email.

“We concluded that our calculations had been made in accordance with his mortgage terms. Notwithstanding, we noted that written disclosure of his prepayment privileges and fees could have been made clearer by his mortgage broker at the time he entered into his mortgage,” Inglis wrote.

The broker, Dave Larock, tells us he did verbally inform Kara and his wife of the five-year repayment rule when they signed the original mortgage documents in 2012, but couldn’t include the information in the mortgage documents because they are “system generated” and “cannot be modified.” He also says the documents meet “every standard required by the regulator.”

Larock took the extra step of following up with Kara near the five-year anniversary of the mortgage to talk about options, but was unaware Kara had already sold the house.

Convoluted rules cause problems

What happened to Kara is an example of how Canada’s convoluted rules around the disclosure of prepayment penalties are causing problems, according to civil litigation lawyer Kieran Bridge.

Most federal rules, he says, apply to banks but not private lenders like First National, which fall through the cracks.

Bridge also says bank mortgages aren’t without problems. He’s argued successfully in cases where banks incorrectly applied complicated mathematical formulas to calculate penalties or failed to clearly disclose penalty information to homeowners.

National mortgage news

Lawyer Kieran Bridge is leading a class action lawsuit against CIBC over mortgage prepayment penalty disclosure. (Ken Leedham/CBC)

Under federal legislation, banks should disclose how mortgage break penalties are calculated and how they will change over time.

Homeowners also have certain responsibilities, he says. Many don’t pay attention to what ending their mortgages early will cost them at the time they lock in. The other issue, he says, is with the technical language used in the documents they sign.

For example, in Kara’s case he was told his penalty would be calculated according to a method called the interest rate differential (IRD). Typically, penalties on fixed mortgages are calculated using whichever is higher, three months’ interest or IRD. With today’s interest rates, the IRD is always a much higher fee.

“That is one of the things I looked for — what was in the paperwork that the customers were given when they entered into their mortgage? What did it say about what prepayment penalty they might have to pay and how it will be calculated?” Bridge says.

‘Clear direction’ needed, lawyer says

In 2010, the federal government’s budget included a promise to standardize the calculation and disclosure of mortgage prepayment penalties. Despite those promises, not much has changed, Bridge says.

“I think that the government does have a role here in providing very clear direction through regulation on what disclosure is required prior to these types of transactions taking place,” Kara says.

National mortgage news

Nadim Kara says he was not told he should wait two months before selling a house in Ottawa in order to save more than $10,000. (Craig Chivers/CBC)

He has some advice for consumers looking to break their mortgages.

“I think the number 1 thing I want them to know is that the first question to ask is . What are all of my options today and in the near future with respect to breaking my mortgage and how does the penalty that I will have to pay change today versus whether I wait months or years?” he says.

“I don’t want this to happen to anyone and I really, above all, I just want other people to have this information so that they can protect themselves.”

Submit your story ideas

Go Public is an investigative news segment on CBC-TV, radio and the web.

We tell your stories and hold the powers that be accountable.

We want to hear from people across the country with stories they want to make public.


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Comparing bank mortgage rates

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National Mortgage Company acquires the shares of AFM, 16th March 2015. Australian First Mortgage has announced it will merge.

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    National mortgage news

    Canada’s convoluted rules for prepayment penalties cause issues for consumers, lawyer says

    Posted:Jun 19, 2017 5:00 AM ET

    National mortgage news

    Nadim Kara says he feels his mortgage lender did not give him all the information he needed to know about breaking his mortgage. Craig Chivers/CBC

    Related

    Related Stories

    A Toronto man is warning people to take a close look at the penalties they’ll face for breaking a mortgage before they lock in, after his paperwork didn’t include important information that would have saved him more than $10,000 in fees.

    “I was frustrated that a key piece of information hadn’t been disclosed to me,” Nadim Kara says.

    “Particularly as that piece of information wasn’t in the mortgage contract so I had done what I thought was my due diligence and you know, I read the papers. I read the contract, I called them, I check in online.”

    Mortgage contracts have to disclose all information on penalties for ending a mortgage early and how they will be calculated.

    Kara didn’t know it then, but missing from his mortgage contract was information about a little known rule — homeowners with a fixed term longer than five years can only be charged a penalty of three months’ interest if they break their mortgage after the fifth year, not the much higher interest rate differential fee.

    In Kara’s case, if he had waited just 60 more days, his penalty would have shrunk from $13,000 to $3,000.

    National mortgage news

    Nadim Kara and Tori Ingram live in Toronto with their daughter. (Craig Chivers/CBC)

    While Kara’s issue has now been resolved, he’s frustrated no one is taking responsibility and worries other Canadians may be paying higher penalties than they should be.

    In 2012, Kara and his wife moved from Ottawa to Toronto, renting out their Ottawa house, hoping it would increase in value over the years.

    By February, that hadn’t happened and they were losing money, so Kara started looking into the cost of selling — reviewing his mortgage documents and contacting his mortgage company, First National Financial, to ask about penalties for breaking his mortgage early.

    By the time the Ottawa house sold, Kara was less than two months away from the five-year mark on his mortgage — and that big reduction in penalty costs.

    The fees associated with paying out mortgages early top the list of Canadians’ complaints to the country’s banking ombudsman, according to numbers provided by the independent investigator.

    Experts say the rules, which apply to some lenders but not others, are so convoluted they leave Canadians who break or renegotiate mortgages confused and suffering from “sticker shock” when they are dinged with massive fees.

    “If I had all the information in front of me, I would have made a different decision and I think that’s the key,” Kara says.

    ‘Duty of care’ not met, says homeowner

    He found out he could have saved thousands only after the sale closed; the information was in the mortgage discharge papers provided by First National.

    “I think there’s a duty of care to your client, to walk them through the options and to be transparent. And I don’t feel that’s what happened here,” he says.

    The next day, May 2, he asked the company to refund the $13,000 penalty and charge the three-month interest fee of $3,000 instead. It initially refused and repeatedly told Kara it was “case closed.”

    “I mean we’re not buying a sweater, right? This is a multi-hundred-thousand-dollar purchase,” Kara says. “There is an inherent conflict in financial institutions, between disclosure and maximizing profit.”

    National mortgage news

    Nadim Kara says he contacted First National twice to confirm how the prepayment penalty would be calculated. (CBC)

    More than a month later, and just hours after First National learned Go Public was involved, the company changed its mind and agreed to charge Kara the $3,000 penalty.

    Refund offered

    Go Public put the issue to both First National Financial and the brokerage, Integrated Mortgage Planners.

    “After taking all circumstances into consideration, and in the interests of maintaining goodwill with this borrower, we made the decision to decrease the prepayment fee and a refund was made to Mr. Kara,” Robert Inglis, chief financial officer of First National Financial, tells Go Public in an email.

    “We concluded that our calculations had been made in accordance with his mortgage terms. Notwithstanding, we noted that written disclosure of his prepayment privileges and fees could have been made clearer by his mortgage broker at the time he entered into his mortgage,” Inglis wrote.

    The broker, Dave Larock, tells us he did verbally inform Kara and his wife of the five-year repayment rule when they signed the original mortgage documents in 2012, but couldn’t include the information in the mortgage documents because they are “system generated” and “cannot be modified.” He also says the documents meet “every standard required by the regulator.”

    Larock took the extra step of following up with Kara near the five-year anniversary of the mortgage to talk about options, but was unaware Kara had already sold the house.

    Convoluted rules cause problems

    What happened to Kara is an example of how Canada’s convoluted rules around the disclosure of prepayment penalties are causing problems, according to civil litigation lawyer Kieran Bridge.

    Most federal rules, he says, apply to banks but not private lenders like First National, which fall through the cracks.

    Bridge also says bank mortgages aren’t without problems. He’s argued successfully in cases where banks incorrectly applied complicated mathematical formulas to calculate penalties or failed to clearly disclose penalty information to homeowners.

    National mortgage news

    Lawyer Kieran Bridge is leading a class action lawsuit against CIBC over mortgage prepayment penalty disclosure. (Ken Leedham/CBC)

    Under federal legislation, banks should disclose how mortgage break penalties are calculated and how they will change over time.

    Homeowners also have certain responsibilities, he says. Many don’t pay attention to what ending their mortgages early will cost them at the time they lock in. The other issue, he says, is with the technical language used in the documents they sign.

    For example, in Kara’s case he was told his penalty would be calculated according to a method called the interest rate differential (IRD). Typically, penalties on fixed mortgages are calculated using whichever is higher, three months’ interest or IRD. With today’s interest rates, the IRD is always a much higher fee.

    “That is one of the things I looked for — what was in the paperwork that the customers were given when they entered into their mortgage? What did it say about what prepayment penalty they might have to pay and how it will be calculated?” Bridge says.

    ‘Clear direction’ needed, lawyer says

    In 2010, the federal government’s budget included a promise to standardize the calculation and disclosure of mortgage prepayment penalties. Despite those promises, not much has changed, Bridge says.

    “I think that the government does have a role here in providing very clear direction through regulation on what disclosure is required prior to these types of transactions taking place,” Kara says.

    National mortgage news

    Nadim Kara says he was not told he should wait two months before selling a house in Ottawa in order to save more than $10,000. (Craig Chivers/CBC)

    He has some advice for consumers looking to break their mortgages.

    “I think the number 1 thing I want them to know is that the first question to ask is . What are all of my options today and in the near future with respect to breaking my mortgage and how does the penalty that I will have to pay change today versus whether I wait months or years?” he says.

    “I don’t want this to happen to anyone and I really, above all, I just want other people to have this information so that they can protect themselves.”

    Submit your story ideas

    Go Public is an investigative news segment on CBC-TV, radio and the web.

    We tell your stories and hold the powers that be accountable.

    We want to hear from people across the country with stories they want to make public.


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    National Mortgage Settlement: Who Benefited

    The National Mortgage Settlement of 2012 required that certain banks (Ally/GMAC, Bank of America, Citi, JPMorgan Chase, and Wells Fargo) provide extensive relief to borrowers in the form of loan modifications, refinancing, and even cash payouts. Read on to learn more about the National Mortgage Settlement.

    State and federal investigations into mortgage foreclosure activities revealed extensive mortgage servicing misconduct by certain banks, including:

    • robosigning (where foreclosure documents were signed by people who had no knowledge about whether the information contained in the documents was correct)
    • inaccurately notarized documents
    • improper foreclosure procedures, and
    • deceptive practices in the loan modification process (such as telling borrowers that a loan modification was imminent while simultaneously foreclosing).

    As a result of these investigations, in February 2012, 49 state attorneys general and the federal government reached a historic settlement with five of the nation s largest banks. The settlement held them accountable for the servicing violations that contributed to the mortgage crisis in this county.

    The National Mortgage Settlement provided up to $25 billion in relief to current and former homeowners.

    Who Benefited From the Settlement

    The settlement benefits were for those borrowers whose loans are owned or serviced by the following five major loan servicers:

    • Ally/GMAC/Residential Capital LLC (known as the “ResCap” parties)
    • Bank of America
    • Citi
    • JPMorgan Chase, and
    • Wells Fargo.

    To find out who your mortgage servicer is, look at your mortgage payment coupon. The company that you make your monthly mortgage payment to is your mortgage servicer (which may be different than the owner of your loan).

    Settlement applied to owner-occupied homes. The settlement applied if the loan was for an owner-occupied property that is the primary residence of the borrower.

    Fannie Mae and Freddie Mac loans were not a part of the settlement. Loans serviced by one of the servicers above, but owned by Fannie Mae or Freddie Mac, were not eligible for benefits under the settlement.

    Borrowers in Oklahoma were not covered. Borrowers from Oklahoma were not entitled to any of the relief provided for in the settlement because that state elected not to join the settlement. (Oklahoma made its own agreement with the five servicers.)

    Mortgage Relief Provided by the Settlement

    As of March 2014, all five settling banks have satisfied their consumer relief and financing obligations under the settlement. Here are some of the remedies that were provided.

    Loan Modifications for Struggling Homeowners

    The settlement provided assistance for struggling homeowners in need of a loan modification, including first and second lien principal reductions. (Lower principal balances result in lower payments, thus allowing homeowners a chance to retain their property.)

    Refinancing for Underwater Homeowners

    Homeowners who were current on payments, but whose property value was underwater (where the amount owed to the lender is more than the home s fair market value), were granted refinancing relief.

    Cash Payouts for Borrowers Who Lost Their Homes

    Homeowners who lost their homes because they were not properly offered loss mitigation options or were otherwise improperly foreclosed on between January 1, 2008 and December 31, 2011 were eligible for cash payouts from a $1.5 billion fund.

    Amount of the payout. Borrowers who submitted a valid payment claim form through the National Mortgage Settlement received a check for approximately $1,480. Checks first went out between June 10, 2013, and June 17, 2013. The initial deadline to make a claim was January 18, 2013, and the final deadline to submit a claim has now passed.

    Funding to the States

    The states that were part of the settlement received $2.5 billion to help distressed homeowners who were wronged by the banks. However, much of the money that was allocated to the states for this purpose has been redirected. Approximately 44% has been redirected to rainy day funds, budget balancing efforts, and economic development funds rather than on homeowners.

    Nationwide Reforms Required by the Settlement

    The settlement required, among other things, that the banks:

    • appoint a single point of contact for loss mitigation efforts
    • have adequate staffing levels and training
    • honor trial and permanent loan modification agreements by a prior loan servicer
    • maintain better communication with borrowers
    • comply with the Servicemembers Civil Relief Act
    • implement appropriate standards for executing documents in foreclosure cases
    • end improper fees, and
    • end dual tracking (where the bank proceeds with foreclosure while simultaneously working with the borrower on a loan modification).

    The servicing standards under the settlement were in effect until the later part of 2015, though they are now largely duplicated by the Consumer Financial Protection Bureau s servicing rules.