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13 Oct

Shocked by your prepayment penalty? Did the mortgage person at your bank explain how to calculate the penalty? Call your broker


Posted by: K.C. Scherpenberg

Class Action Lawsuit Filed Against CIBC Mortgages on Prepayment Penalties

Consumers hate mortgage prepayment penalties, largely because they don’t understand them.

CIBC-BankNow, there is about to be a high-profile challenge of how mortgage penalties are calculated.

CIBC Mortgages Inc., a subsidiary of CIBC bank, has just been named the subject of a pending class action lawsuit.

The intended suit claims that CIBC improperly calculated penalties for customers who broke their mortgages from 2005 to date.

The claim alleges that:

“CIBC applied terms and conditions to certain mortgage contracts to allow it unfettered discretion for calculation of mortgage prepayment penalties.”

“…the quantification of prepayment penalties applied by CIBC are in breach of the mortgage contracts.”

“Starting in 2005, CIBC started using language in its standard charge terms that was extremely vague regarding how its prepayment penalties would be calculated,” says Kieran Bridge, lead counsel on the case, in partnership with Siskinds LLP.

“That language, in legal terms, is called unenforceable. The net result is that they cannot collect penalties with a clause like that.”

(If you’re interested, you can see some the penalty language CIBC Mortgages has used here—on page 13)

“Even if [part of the language] is enforceable,” says Bridge, the penalties should be “capped at three months interest.”

In addition to the above, the suit claims that CIBC charges the future value of monies owed in its interest rate differential calculation, whereas it should “adjust for present value,” asserts Bridge. “They ‘present-value’ all of their own assets and liabilities. Any actuary or accountant will tell you, you have to present value or you’re not talking about actual value received.”

Bridge says the lawsuit applies to most CIBC mortgages, including many of those originated in CIBC branches and through its related entities, such as FirstLine Mortgages and President’s Choice Financial.

CIBC Mortgages Inc. is one of the largest residential lenders in the country. Bridge estimates it has about 500,000 mortgages on the books, of which 5-10%—25,000 to 50,000 people—prepay every year. (We’re unable to confirm those stats.)

In terms of value, Bridge estimates this case is worth “into the tens of millions (of dollars).” These types of cases are usually settled out of court, however, and don’t usually make it to full trial.

He adds that there is plenty of precedent with respect to mortgage prepayment contracts and “uncertain contract provisions.”

“You don’t start a class action lightly,” states Bridge, adding that his firm has “literally spent hundreds of hours” researching this case before filing it. (Funny enough, we noticed a Siskinds lawyer collecting evidence on Ellen Roseman’s blog back in July.)

Bridge is not a rookie in class actions. He says he brought another prepayment-related class action against RBC where the class members were “paid 100 cents on the dollar” for their claims, plus legal fees.

“That was a very favourable settlement. It’s about the best you could possibly do.” (Although, that case had a very different fact pattern than this one.)

This particular class action all started with a single parent in B.C. whose marriage ended. That individual had to sell the family home and was stuck with a $47,000 interest rate differential penalty from CIBC.

Bridge has reviewed other banks’ practices and hasn’t yet found other lenders that are calculating IRD penalties improperly.

Our take: Mortgage penalty language is notoriously cryptic at the Big 6 banks. It would be interesting to see if a court ruled that CIBC is calculating its IRD penalties in a materially different way than its peers. One thing is for certain, few banks go out of their way to make penalty calculations intuitive. Maybe this lawsuit will change their thinking.

(Incidentally, RBC is one of the best big banks when it comes to IRD disclosure. They outline the formula they use, try to explain it and base their penalty calculations on present value, according to sources at the bank.)

Mortgage penalties remain a top consumer banking complaint, according to the Financial Consumer Agency of Canada. The Finance Department was expected to have new penalty calculation and disclosure regulations in effect by now, but they have continually been delayed. Most would agree, it’s time for the government to stop dragging its feet and move the ball on that.

Note: As a reminder, it has not been established at this point that CIBC has done anything wrong with respect to how it calculates mortgage penalties. Also, the defendant in this case is CIBC Mortgages Inc., not CIBC. “CIBC” is used in a standalone capacity above only as an abbreviation.