Decision #56531-409Q106

File: 56531-409Q106

Compliance issue

Cost of borrowing — Failure to disclose whether the borrower had the right to repay the amount borrowed before the maturity of the loan
Trust and Loan Companies Act, paragraph 438(1)(a)
Cost of Borrowing (Trust and Loan Companies) Regulations, paragraph 8(1)(l)

Two consumers contacted the Agency to question a prepayment charge in order to terminate a mortgage loan before maturity. The trust company required the consumers to pay the total amount of interest due for the remainder of the mortgage term. The consumers alleged that the prepayment charge had not been fully disclosed in the mortgage documents.

On reviewing the disclosure documents, FCAC determined that the trust company had not disclosed whether the consumers had the right to repay the amount borrowed before the maturity date, as required by the Trust and Loan Companies Act.

Although its usual practice is to allow consumers to repay a mortgage in full before the maturity date, the trust company did not specify this as a right in its mortgage contract. The Trust and Loan Companies Act, as well as the Cost of Borrowing (Trust and Loan Companies) Regulations, clearly indicates that a company must disclose whether or not such a right exists under the loan agreement.

Decision taken

A notice of decision was issued against the trust company, noting two violations and a penalty of $30,000 ($15,000 per violation).

Compliance considerations

The regulations require a trust company to expressly disclose whether a borrower has a right to repay the amount borrowed before the maturity of the loan. A right to repay the entire loan may be a criterion for some consumers in choosing a lender. Where such a right is given, the lender is under a requirement to set out the manner in which any charge or penalty is calculated. A lender who offers a mortgage loan that cannot be repaid before maturity must disclose this fact. A lender who makes no disclosure may have an unfair competitive advantage by not disclosing this information to the consumer. Such non-compliant actions foster an uneven playing field among financial institutions, which the regulations specifically sought to address.

Measures taken by financial institution

The trust company corrected its mortgage documents and is now fully compliant with respect to this matter.

Outcomes

It is important that consumers receive all the necessary information before making a decision to purchase a financial product. In this case, it was important that consumers be provided with information pertaining to a borrower’s right to repay the entire amount of the loan. Where such a right is given, the lender is under a requirement to set out the manner in which any charge or penalty is calculated. Informed consumers are in a better position to choose the financial institution and financial product or service that best suits their needs. Facilitating comparison-shopping encourages healthy competition between financial institutions and promotes growth and innovation in the marketplace.