The Financial Consumer Agency of Canada (FCAC) began rolling out new rules for financial institutions in 2012 designed to make mortgage prepayment penalties more transparent to consumers. The initial set of rules was pretty tame, with directives to banks to provide more online educational tools and mortgage prepayment calculators. But the new set of amendments is what consumers really need for prepayment penalties to make sense to the average mortgage holder.
What is a Mortgage Prepayment Penalty?
Before getting into what the amendments are, lets look at what a prepayment penalty is. A mortgage prepayment penalty is what a financial institution will charge you for paying off your mortgage earlier than the term of the mortgage.
The problem with mortgage prepayment penalties was that consumers were not being informed of them properly when they got a mortgage and were being hit with surprise fees if they wanted to move or pay off their mortgage. Why the secrecy by omission? Like any marketer, a financial institution doesn’t exactly want to highlight the faults of the product, but many feel they have to include prepayment charges in order to make the mortgage profitable for the bank should the mortgage holder happen to pay off their mortgage way ahead of term, costing the bank the long-term interest. The problem was that the facts were too buried for FCAC’s taste.
New Measures Greatly Improve Transparency
The Financial Consumer Agency of Canada stepped in and introduced measures to improve the disclosure of these penalties, the latest of which are annual statements that list information to help the borrower calculate a prepayment charge, prepayment charge quotes on request, and toll-free phone support when needed. The last item had to be included because front-line customer service reps at financial institutions were not given the tools they needed to accurately calculate prepayment charges.
Where the New Rules Go Wrong: Lack of Enforcement
The new rules only apply to institutions under FCAC’s purview. Non-federally regulated lenders, such as credit unions, are not required to abide by these rules. Financial institution members of the Canadian Banker’s Association have agreed to adopt the new code of conduct for mortgage prepayment penalties.
There is also a major drawback in that the code of conduct is voluntary, and there are really no consequences for a member association that does not implement the new rules under the code of conduct beyond not being in FCAC’s good graces. A concerned client can lodge a complaint with FCAC and FCAC can investigate that complaint and make recommendations to the offending institution, but ultimately has no regulatory or legal teeth despite being a part of the Government of Canada.