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5 Mar

Mortgage Prepayment Information Federally Regulated March 2012

General

Posted by: Kimberly and Cindy Walker

Code of Conduct  for Federally Regulated Financial Institutions

Mortgage  Prepayment Information

Purpose

The purpose of the Code is to ensure that federally  regulated financial institutions (“lenders“)  provide enhanced information in respect of credit agreements secured by  mortgages where a prepayment charge could apply (“mortgages“) to assist borrowers in making decisions about  prepayment of their mortgage.

Lenders currently provide substantial amounts  of information relevant to mortgage prepayments to consumers in accordance with  the requirements in the applicable federal regulations, including but not  limited to federal cost of borrowing disclosure regulations and credit business  practices regulations. The information  that will be provided under this Code is in addition to existing information  provided by lenders to borrowers.

Application  and Implementation

  Lenders will implement the policy elements of  the Code with respect to new mortgages no later than six (6) months from date  of adoption of the Code for Element 3 and Element 4; and no later than twelve  (12) months from adoption of the Code for Element 1, Element 2 and Element 5. Lenders will apply the Code to existing  mortgages where it is feasible to do so.  The Code does not apply to mortgages that are entered into for business  purposes or to mortgages entered into by borrowers who are not natural persons.

Compliance  with the Code

  The Financial Consumer Agency of Canada will  monitor and report on compliance with the Code.

Manner  of Presenting Information

Lenders will provide the information in  language, and present it in 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 annually: 

  • Prepayment  privileges that the borrower can use to pay off their mortgage faster without having  to pay a prepayment charge. Examples  include making lump-sum prepayments, increasing the regular payment amount, and  increasing the frequency of the payment to weekly or bi-weekly.
  • The dollar  amount of the prepayment that the borrower can make on a yearly basis under the  terms of their mortgage without having to pay a prepayment charge.
  • Explanation of how the lender calculates the       prepayment charge for the borrower’s mortgage (for example, a certain       number of months’ interest or the Interest Rate Differential (IRD).
  • Description of the factors that could cause       prepayment charges to change over time.
  • Customized  information about the mortgage, valid as of the date the information is produced,  for the purposes of the borrower estimating the prepayment charge. The customized information will include,  depending on the type of mortgage product held by the borrower:  
    • The  amount of the loan that the borrower has not yet repaid
    • The  interest rate of the mortgage and other factors (for example, rate discount or  posted interest rate) that the lender uses to calculate the prepayment charge
    • The  remaining term or maturity date of the borrower’s mortgage     For  mortgages where the prepayment charge may be based on the IRD:
    • How the lender  determines the comparison rate to use to calculate the IRD
    • Where the  borrower can find the comparison rate (for example, on the lender’s website)
  • Where the  borrower can find the lender’s financial calculators that the borrower can use,  along with the information above, to estimate the prepayment charge.
  • Any  other amounts the borrower must pay to the lender if the borrower prepays their  mortgage and how the amounts are calculated.
  • How the borrower  can speak with a staff member of their lender who is knowledgeable about mortgage  prepayments. For example, borrowers may  contact a staff member through a toll-free number as described in section 5.

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 a  specified partial amount owing on their mortgage, the lender will provide the  following information in a written statement to the borrower:

  • The applicable  prepayment charge.
  • Description  of how the lender calculated the prepayment charge (for example, whether the lender  used a certain number of months’ interest or the IRD).
  • If the lender  used the IRD to calculate the prepayment charge, the lender will inform the  borrower of : 
    • the outstanding amount on the mortgage
    • the annual interest rate on the mortgage
    • the comparison rate that was used for the calculation
    • the term remaining on the mortgage that was used for the  calculation
  • The  period of time, if any, for which the prepayment charge is valid.
  • Description of the factors that could cause the prepayment  charge to change over time.
  • Any  other amounts the borrower must pay to the lender when they prepay their mortgage  and 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:

  • Differences  between: 
    • Fixed-rate  mortgages and variable-rate mortgages
    • Open mortgages  and closed mortgages
    • Long-term  mortgages and short-term mortgages
  • Ways in  which a borrower can pay off a mortgage faster without having to pay a  prepayment charge. Examples include  making lump-sum prepayments, increasing the regular payment amount, and  increasing the frequency of the payment to weekly or bi-weekly.
  • Ways to  avoid prepayment charges (for example, by porting a mortgage).
  • How  prepayment charges are calculated, with examples of the prepayment charges that  would apply in specific circumstances.
  • Actions  by a borrower that may result in the borrower having to pay a prepayment  charge, such as the following actions: 
    • partially  prepaying amounts higher than allowed by the borrower’s mortgage
    • refinancing  their mortgage
    • transferring  their mortgage to another lender

Lenders may make this information available  on their publicly accessible Canadian website where products or services are  offered and upon request by consumers at the lender’s places of business in  Canada, including when consumers are pre-approved for a mortgage. Â In addition, each lender will provide on its  publicly accessible Canadian 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 publicly  accessible website for borrowers, and provide guidance to borrowers on how to  use the calculators to obtain the mortgage prepayment information they want. Borrowers will be able to enter information  about their mortgage into the calculator to get an estimate of the current prepayment  charge. Borrowers will also be able to  change the information they enter, such as the amount of the mortgage that has  not yet been repaid or the remaining term, so that they can see how the payment  choices they make affect the prepayment charge.

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. These staff  members will be able to orally provide a borrower with the actual prepayment charge  that would apply to the borrower’s mortgage at that point in time. These staff members will also be able to provide  to a borrower, on request, a written statement of their prepayment charge,  accurate as at the time the statement is produced. A lender will not proceed to take steps to  pay out a mortgage until the borrower has confirmed that the borrower’s  intention is to pay out the mortgage.