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Client Update: Lender Code of Conduct Prepayment of Consumer Mortgages

GOVERNMENT ACTION

In the Economic Action Plan 2010, the Harper Government committed to bring greater clarity to how mortgage prepayment penalties were calculated. As part of the commitment, on February 26, 2013 the government released a voluntary code of conduct to ensure that federally regulated financial institutions provide enhanced information to consumers in respect to their mortgages and where a prepayment charge could apply.

MORTGAGE PREPAYMENT INFORMATION

Purpose
Under the federal regulations, which include items such as the federal cost of borrowing disclosure regulations and credit business practices regulations, lenders currently provide substantial amounts of information relevant to mortgage prepayments. Disclosure of this information allows borrowers to see the available options for prepayment of their mortgage loan and assist in helping the borrower make a more informed decision regarding the options that best suit his or her current needs. This new voluntary code of conduct is designed to provide borrowers with further information regarding prepayment charges and where they could apply.

Application and implementation
Lenders are to implement the policy elements of the code, with respect to new mortgages, no later than six months from date of adoption of the code for element 3 and element 4. Similarly, they are to implement these changes no later than 12 months from adoption of the code for elements 1, 2 and 5. Lenders are to apply the code to existing mortgage loans where it is feasible to do so. This code will not apply to mortgages that are entered into for business purposes by borrowers who are not natural persons.

Compliance
The code is voluntary; however, the Financial Consumer Agency of Canada has been tasked with monitoring and reporting on compliance with the code.

Presentation of the information
Lenders are to provide the information in language and in such a manner that is clear, simple and not misleading.Policy elements

  1. Information provided annually. Lenders will provide the following mortgage prepayment information to borrowers:
    1. Prepayment privileges that the borrower can use to pay off the mortgage faster without having to pay a prepayment charge;
    2. The dollar amount of the prepayment that the borrower can make on a yearly basis without having to pay a prepayment charge;
    3. Explanation of how the lender calculates the prepayment charge;
    4. Factors that could cause prepayment charges to change over time;
    5. Customized information about the mortgage for the purposes of the borrower estimating the prepayment charge. The customized information can include, the following:
      1. The amount of the loan that the borrower has not yet repaid;
      2. The interest rate of the mortgage and other factors that the lender uses to calculate the prepayment charge;
      3. The remaining term or maturity date of the borrower’s mortgage:For mortgages where the prepayment charge may be based on the interest rate differential; and
      4. How the lender determines the comparison rate to use to calculate the interest rate differential; and
      5. Where the borrower can find the comparison rate;
    6. Location of the lender’s financial calculators;
    7. Any other amounts the borrower must pay to the lender if the borrower prepays the mortgage and how the amounts are calculated; and
    8. How the borrower can speak with a staff member of the lender who is knowledgeable about mortgage prepayments.
  2. Information provided when the borrower is paying a prepayment charge. If a prepayment charge applies and the borrower confirms to the lender that the borrower is prepaying the full or specified partial amount owing on their mortgage, the lender will provide the following information in a written statement to the borrower:
    1. The applicable premium and charge;
    2. The description of how the lender calculated the prepayment charge;
    3. If the lender used the interest rate differential to calculate the prepayment charge, the lender will inform the borrower of:
      1. The outstanding amounts on the mortgage;
      2. The annual interest rate on the mortgage;
      3. The comparison rate that was used for the calculation; and
      4. The term remaining on the mortgage that was used for calculation;
    4. The period of time, if any, for which the prepayment charge is valid;
    5. The description of the factors that could cause the prepayment charge to change over time;
    6. Any other amounts the borrower must pay to the lender when the mortgage is prepaid, as well as how the amounts are calculated.
  3. Enhancing borrower awareness. To assist borrowers in better understanding the consequences of prepaying a mortgage, lenders will make available to consumers information on the following topics:
    1. The differences between:
      1. Fixed rate mortgages and variable rate mortgages;
      2. Open mortgages and closed mortgages; and
      3. Long-term mortgages and short-term mortgages;
    2. Ways in which a borrower can pay off a mortgage faster without having to pay a prepayment charge;
    3. Ways to avoid prepayment charges;
    4. How prepayment charges are calculated with examples;
    5. Actions by a borrower that may result in the borrower having to pay a prepayment charge, such as the following actions:
      1. Partially prepaying amounts higher than allowed by the borrower’s mortgage;
      2. Refinancing their mortgage; and
      3. Transferring their mortgage to another lender.

    Lenders may make this information available on their publically accessible websites and upon request by consumers at the lender’s place of business. In addition, each lender will provide on its website links to information on mortgages provided on the website of the Financial Consumer Agency of Canada.

  4. Financial calculators. Each lender will post calculators on its website for borrowers and provide guidance to borrowers on how to use the calculators to obtain the mortgage prepayment information they want.
  5. Borrower access to actual prepayment charge. Each lender will make available a toll-free telephone line through which borrowers can access staff members who are knowledgeable about mortgage prepayments.

The foregoing is intended for general information only. If you have any questions, or for more information on our practice group, visit our Commercial Real Property & Lending page.

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